Q4 2023 Brown-Forman Corporation Earnings Call

Speaker 2: Good day and good day and thank you for standing by. Welcome to the Brown-Torman Corporation fourth quarter and fiscal 2023 earnings call. At this time all participants are in a listen only mode.

Speaker 2: 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded.

Speaker 2: I would now like to hand the conference over to your speaker today, Sue Parham, Vice President, Director, Investor Relations. Please go ahead. Thank you.

Speaker 2: Thank you and good morning. Everyone. I would like to thank each of you for joining us today for Brown Foreman's 4th quarter and fiscal year 2023 earnings call. Joining me today are Lawson Whiting, president and chief executive officer. And Leanne Cunningham, executive vice president and chief financial officer.

Speaker 2: This morning's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements.

Speaker 3: 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.

Speaker 3: whether due to new information, future events, or otherwise.

Speaker 3: website under the section titled investors events and presentations.

Speaker 3: 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.

Speaker 3: During this call, we will be discussing certain non-GAAP financial measures.

Speaker 4: With that, I would like to turn the call over to Lawson. Thank you Sue and good morning everyone. It's my pleasure to speak with you today regarding Brown Foreman's fiscal 2023 results. Piscult 2023 was another very strong year for Brown Foreman. And importantly, we built on the 17% organic top line and 27% organic bottom line growth we deliver in the previous fiscal year.

Speaker 4: If we take a step back and consider the headwinds we face throughout fiscal 2023, it helps to appreciate the quality of our performance even more. As you'll recall, we face numerous headwinds throughout this fiscal year, including supply chain challenges, higher input costs due to inflation, the significant impact of negative foreign exchange, and the impact of the current economic recovery. For more information, please visit www.fema.gov

Speaker 4: that our brands are healthy, our people are resilient, and our company is able to navigate the challenges that come our way. Consider, for example, since fiscal 2019, or the last year before the pandemic, we've grown organic net sales at an 8% compound annual growth rate through fiscal 23, demonstrating our strong track record of consistent and sustainable results of the long term. Alternatively, if you look back at fiscal 23 alone, you'd see we significantly exceeded our top-line growth ambition, which anticipates reported net sales in the mid-signal digits.

Speaker 4: Now, as we dig into the full results of the fiscal year, I'll start with our top-line performance and share some highlights from our portfolio of brands. Leanne will then provide additional details for the fiscal year before providing our outlook for Fiscal 24. In fiscal 2023, our reported net sales increased 8% or 10% on an organic basis.

Speaker 4: driven by broad-based reported net sales growth across all geographic clusters and the travel retail channel, including double-digit organic growth in our international markets.

Speaker 4: Through our revenue growth management initiatives, we continue to execute our long-term pricing strategy for our portfolio brands, which aims to increase prices consistently year after year, and to grow net sales to a balance of both volume and value. In fiscal 2023, our organic net sales growth benefited from three points of favorable price mix. This was driven by higher prices across much of our portfolio, but led by Jack Daniels Tennessee Whiskey, partially offset by a portfolio shift toward our ready-to-drink brands.

Speaker 4: Our top-line growth was broad-based and reflected the continued strength of our portfolio brands, strong consumer demand, and the return of inventories to more normalized levels. As expected, the estimated net change in distributor inventory did not have an impact on our fiscal year results.

Speaker 4: Turning to our portfolio brands, Jack Daniels Tennessee whiskey fueled the company's performance. The brand had another remarkable year and increased organic net sales by 8%. This growth is particularly impressive, given that the brand is over 15 million nine-liter cases and delivered a 23% organic net sales increase in the last fiscal year. The growth of Jack Daniels Tennessee whiskey in fiscal 2023 was driven by strong consumer demand and higher pricing.

Speaker 4: It's often easy to lose sight of the size and scale of this brand when speaking in quarterly results, but it is indeed an impressive brand with massive appeal around the globe. We believe these latest results reinforce its health and position as the largest global premium spirits brand by volume in the world. The rest of the full strength exact annual family brands also delivered strong results.

Speaker 4: growing organic net sales high single digits during the fiscal year as the consumer premiumization trend drove demand for our super premium products such as gentleman jack which are

Speaker 4: here by Whiskey Advocate Magazine. It's a great complement when Jack Daniel's authenticity, craftsmanship, and quality is recognized with such a coveted award. These brands, along with our specialty launches, such as Jack Daniel's single barrel, special release heritage barrel, and Jack Daniel's 10 and now 12-year-old Tennessee Whiskey, enable us to premiumize the Jack Daniel's family of brands, continue to highlight our Whiskey credentials, and give both long time and new friends of Jack Daniel's the opportunity to explore.

Speaker 4: One of the strongest performers in our portfolio this year was Woodford Reserve. Since it's founding more than a quarter century ago, Woodford Reserve has grown volume at a double-digit compound annual growth rate. This trend continued in fiscal 2023 as consumer demand remained very strong and organic net sales grew 27%. Making Woodford Reserve our second largest contributor to the company's growth. The brand continues to grow in the US and is being discovered internationally as we continue to position this brand for future growth. Last month, Kentucky Derby was held in our hometown of Louisville and Woodford Reserve as the presenting sponsor stood tall on a global stage. Also in connection to the most exciting two minutes in sports, the brand released its 2023 Derby bottle with artwork that honored the 50th anniversary of Secretary at winning the 1973 Derby.

Speaker 4: This collectible bottle featured a painting entitled Still the Greatest.

Speaker 4: Jack Daniels RTDs were also a significant contributor to overall company growth in fiscal 2023 driven by the consumer trends of convenience, flavor and premiumization. Jack Daniels RTDs grew organic net sales double digits fueled by the launch of the Jack Daniels and Coca-Cola RTD in the US, along with continued growth of the RTD portfolio in Germany and Australia. As you might recall, in fiscal 2023 we launched the Jack Daniels and Coca-Cola RTD in nine markets.

Speaker 4: seeing cans in your local markets, and I hope that you've had the opportunity to enjoy this great tasting new product. We're only a few months into the launch, but similar to the initial feedback we received from Mexico, the early results from the markets are very positive.

Speaker 4: In the US, Jack and Coke is taking share across the category. Our distributors are meeting distribution expectations, and we're seeing stronger than expected reorder rates. Jack and Coke Zero has also performed our initial plans. We're seeing stronger than expected reorder rates.

Speaker 4: In our European markets, we're exceeding our launch expectations. Specifically in the UK, the rate of sale for Jack and Coke is already matching Jack and Cola. And just a couple of weeks ago, the Jack Daniels and Coca-Cola RTD began appearing on the biggest advertising site in Europe at Piccadilly Circus. The buzz and enthusiasm for the product is certainly high and growing.

Speaker 4: Globally, we exceeded one billion consumer impressions before any paid media ever aired. The potential growth of this product is exciting, but our TV's also serve as a consumer recruitment vehicle.

Speaker 4: They bring new consumers of legal drinking age into the Jack Daniels family, which we believe will have a positive impact on the full strength family of brands. We will continue the product launch in additional markets around the globe throughout the 2023 calendar year, and I look forward to continuing to provide updates on the growth of this iconic product.

Speaker 4: While RTDs have been experiencing accelerated growth, including our new mixed brand, which reached nearly 10 million liter cases in fiscal 2023, and delivered very strong double digit organic net sales growth, I also want to acknowledge the continued strength of Tequila, which remains one of the fastest growing spirit categories, particularly at the premium plus price.

Speaker 4: 14% respectively, even as Aredero faced significant supply chain challenges during the first quarter and both brands lacked a very strong double digit growth the prior year.

Speaker 4: We believe the strong consumer interest in the Keele will continue for the foreseeable

Speaker 4: Waste to energy efforts with a new water recycling and treatment plant. Over the past decade, Cosser Dura has been a pioneer in establishing a water recycling and treatment plant and is one of ground form and zero waste to landfill sites. We believe this sustainable technology and this investment will ensure we have access to clean...

Speaker 4: and divesting various businesses and brands.

Speaker 4: We believe this portfolio evolution, alongside product innovation, gives us the best opportunity for long-term growth and value creation. In fiscal 2023, we completed the latest efforts in our portfolio reshaping efforts with the act of...

Speaker 4: Positions of Jinmari, the number one ultra premium Jin, and Diplomatico, the number one super and ultra premium rum according to the latest IWSR data. Given the timing, the brand's only impacted reported net sales in fiscal 2023 by approximately half a point.

Speaker 4: However, as we continue to integrate these brands and teams into our organization, we expect them to be meaningful contributors to our growth of the long term. We're delighted, Jin Maura and Diplomatico, are now part of our Brown Foreman family.

Speaker 4: Brown Foreman now owns one of the top five brands globally in four strong growth categories.

Speaker 4: Super Premium American Whiskey, Super Premium Tequila, Ultra Premium Gin, and Ultra Premium Rum. As I close, I wanna thank our brown forming colleagues around the world that navigated the numerous challenges throughout fiscal 2023, and worked hard to deliver the strong, broad-based results that we're sharing with you today. When we started fiscal 2023, we had confidence at the strength of our portfolio.

Speaker 4: And we're able to deliver very strong results that we're at or above our long term ambitions. I'm very pleased with the performance of the business and the continued strength of our portfolio and of our people. Nan l will turn things over to you to provide more detail on our fiscal 2023 performance and our expectations as we look forward to fiscal 2024. Thank you Lawson, and good morning everyone.

Speaker 3: As Lawson reviewed the top-line growth and performance of our brands for the fiscal year, I will provide additional details on our geographic performance, other business results, and our outlook for fiscal 2024. First, from a geographic perspective, our top-line growth in fiscal 2023 was broad-based.

Speaker 3: with reported and organic net sales growth in each geographic cluster and the travel retail channel compared to the same prior year period. Collectively, emerging international markets delivered strong, double-digit organic net sales growth, increasing 24% for the fiscal year.

Speaker 3: This strong performance was driven by Jack Daniels Tennessee whiskey, notably in the United Arab Emirates, Turkey and Brazil, and supply chain disruption EES, which improved product availability and pricing increased.

Speaker 3: RTDs also may meanfully contributed to the growth with new mix and jack dangles RTDs growing strong double digits in Mexico, where the RTD category is growing and we are gaining share while increasing price. In addition, Airdrera and Alhimador delivered double digit organic net sales growth in Mexico, largely driven by strong pricing.

Speaker 3: This growth is especially notable as it includes the absence of business in the Russia market as we suspended our commercial operations there in March 2022. Prior to the suspension, this market represented approximately 2% of our total reported net sales.

Speaker 3: Our developed international markets collectively grew organic net sales double digits in fiscal 2023. Jack Daniels Tennessee whiskey was the largest contributor to this growth led by Germany where the brand is growing double digits and gaining share within the whiskey category and Japan, which is continuing to benefit from strong consumer demand.

Speaker 3: in both the on and off trade. Japan is one of the world's largest spirits markets with a significant footprint and a leading position in premium plus whiskey. Earlier this week, we announced our plan to transition to own distribution in this market effective April 1st, 2024. Rep.

Speaker 3: Sessfully growing our portfolio in Japan. We believe this change will drive long-term growth through the continued development of our Jack Daniel's family of brands and the broader super premium brand portfolio. This is an important milestone for Brownforman and follow successful launches of

Speaker 3: than doubled is organic net sales in fiscal 2023 led by a significant acceleration in growth from the Jack Daniels family of brands as well as Woodford Reserve. This is just one of the many examples of why we continue to believe that own distribution transition creates opportunities to fuel share growth. Strengthen our portfolio.

Speaker 3: Capture more of the value chain and unlock future potential for our full portfolio of brands. Focusing back on our developed international results. Jack Daniels RTDs represented the second largest contributor to growth, also growing organic net sales, double digits driven by Germany and Australia.

Speaker 3: where we are gaining share. We are excited about the growth of brands such as El Himador, Woodford Reserve, Gentleman Jack, and the Glenn Droneck, where each delivered double digit organic net sales growth. These results continue to reflect our strategic priority of increasing focus on our premium and super premium

Speaker 3: In Europe , we continue to closely monitor the impact of inflation on consumer behavior. While the data is beginning to show some evidence of down trading, such as growth and private labels, our brands have gained share in Germany and the UK.

Speaker 3: Spirits remain an affordable luxury for consumers, even as we have continued to increase price through our revenue growth management strategies.

Speaker 3: The US business delivered 3% organic net sales growth reflecting a normalization of our business in the market. As we have shared with you throughout this fiscal year, supply chain disruptions impacted the seasonality of our fiscal 2023 shipments due to the abnormal seasonality of the fiscal 2022 shipments.

Speaker 3: In the first half of fiscal 2022, distributor inventories did not increase ahead of the holiday season as is typical, and we experienced stronger shipments in the second half of fiscal 2022 as supply challenges began to ease.

Speaker 3: As expected, in the first half of fiscal 2023, we increased our shipments as supply chain disruption continued to ease and distributed inventories were returning to more normalized levels, which benefited the US net sales growth. In the second half, net sales were negatively impacted as we left the increase in shipments in the prior year period related to

Speaker 3: contributed to organic net sales growth driven by strong consumer demand and an estimated net increase in distributor inventories as glass supply and capacity constraints continue to ease. Innovation contributed significantly to the U.S. growth with the launch of Jack Daniels and Coca-Cola RTD.

Speaker 3: which was the second largest growth driver. Organic net sales also benefited from higher prices across the portfolio, led by the Jack Daniels family of brands, as well as premiumization with the successful launch of the Jack Daniels Bond and Series. This growth was partially offset by lower volumes of Jack Daniels Tennessee whiskey.

Speaker 3: and Corbell California Champaign largely due to our focus on rebuilding inventory levels across the supply chain in the second half of fiscal 2022, which created a strong

Speaker 3: Prior year comparison, resulting in an estimated net decrease in distributor inventories. From a takeaway perspective, the disconnect between Nielsen Takeaway and our actual results continue to narrow as we lap many of the factors that created the gap.

Speaker 3: such as the impact of our brand and market prioritization work in fiscal 2022 related to supply chain challenges. As the industry began to normalize, total distilled spirits delivered value growth in the low-to-mid single digits. As we left the impact of supply chain constraints,

Speaker 3: that previously suppressed our performance, our takeaway performance is normalizing. Although, with our recent innovation, Brown Foreman is outpacing total distilled spirits growth. We work diligently to rebuild Finnish goods inventory levels across the three-tiered system and believe that distributor inventory levels are now back to normal.

Speaker 3: and the cruise industry recovered from the impacts of the pandemic related.

Speaker 3: Gross margin. For the full fiscal year, reported gross profit increased 4%, with organic growth of 9%, which was slightly below our organic top-line growth. Reported growth...

Speaker 3: A Kingdom of Terror of South America, Whiskey, were more than offset by higher inflation on input costs and supply chain disruption costs largely related to global logistics constraints, along with the negative effect of foreign exchange. Turning to operating expenses, total reported operating expenses increased 15% with organic increasing 11%.

Speaker 3: in line with our expectations. As we have shared, we have been committed to reinvesting a portion of the terror relief back behind our brands once removed. In fulfilling this commitment and support of sustainable long-term growth, this resulted in our brand investment for the fiscal year at a rate above our top line growth with our reported and organic advertising.

Speaker 3: 8% on a reported and 9% on an organic basis driven primarily by higher compensation related expenses and higher discretionary spend as the return to a normalized environment enabled in-person events and activities to resume.

Speaker 3: Cost related to the acquisitions of the GenMari and Diplomatic O'brand impacted the reported results. Reported operating income decreased 6% for the full year, reflecting lower gross margin, higher non-cash impairment charges largely related to the Finlandia brand name, and higher operating expenses, including certain post-closing costs and expenses.

Speaker 3: earnings per share decreased 7% to $1.63 due to the decrease in reported operating income for the reasons I have just previously stated and a pension settlement charge partially offset by the benefit of a lower effective tax rate.

Speaker 3: Before moving on to our fiscal 2024 outlook, I'll provide a few updates related to our capital deployment. As a reminder, our capital allocation philosophy is deferred fully and best behind our business. Second, to pay increasing regular dividends. Third, we opportunistically look for acquisitions that we believe create long-term value for the next generation of growth.

Speaker 3: stockholders through regular dividends. We believe our investment grade credit ratings, A1 by Moody's and A1 by Standard Imports, provide us with financial flexibility when accessing the global debt capital markets and allow us to reserve adequate debt capacity for investment opportunities.

Speaker 3: and unforeseen events. Related to the investment opportunities on March 21, 2023, we issued $650 million 10-year senior unsecured notes due April 15, 2033. We utilize the net proceeds from the offering.

Speaker 3: To refinance our existing $600 million of outstanding debt under a senior unsecured 364-day term loan credit agreement that helped fund our acquisition of GenMari and Diplomatico. We believe our long-held capital allocation philosophy coupled with our strategic priorities.

Speaker 3: will continue to drive superior returns for the long term. And now to our fiscal 2024 outlook. We are optimistic as we look ahead. We have now cycled through the largest impacts of the pandemic, and after the global macroeconomic and geopolitical volatility experience in fiscal 2023, we believe trends are beginning to normalize around the world.

Speaker 3: After two years of strong growth, which were well above our long-term trends, we continue to believe that the strength and increasing pre-memization of our portfolio of brands, the resilience of our people and the strategic investments we have made, will deliver continued growth on this elevated base.

Speaker 3: While consumer demand for our brands begins to reflect a normalization back to our more historic trends, we expect to continue to benefit from our long-term pricing and revenue growth management strategies, partially offset by a portfolio-mixed shift to RTDs, largely related to the launch of Jack Daniels and Coca-Cola RTD.

Speaker 3: In what has been a highly dynamic operating environment, we remain cautious due to the current macroeconomic volatility and the potential impact of inflation on consumer spending. But believe that the collective strength of our U.S. and international markets, along with the Travel Retail Channel,

Speaker 3: should reflect our longer term growth algorithm and therefore we expect organic net sales grows for fiscal 2024 in the 5% to 7% range. It is important to note that in fiscal 2024, on a year over your basis, we will still be comparing against the strong shipment related to our rebuilding of distributor inventories that began in the second half of the year.

Speaker 3: are reflected in our guidance. We believe inflation will continue to negatively impact our input cost, which will be partially offset by lower year-over-year cost associated with the supply chain disruption we occurred in fiscal 2023. Our outlook reflects a normalization of incremental advertising spend.

Speaker 3: after lapping a year of significant and criminal investment in fiscal 2023. As a reminder, our long-term philosophy for advertising spend is to be aligned with our top line growth. S-GNA growth is likely to remain higher than historical averages as we continue to expect higher compensation-related expenses and transition Japan to own distribution in fiscal 2024.

Speaker 3: expenditures. As I mentioned, we remain committed to investing fully behind our business and based on the expectation for continuing strong consumer demand for our brands, additional expansions are required to support this growth, particularly for the Jack Daniels family of brands and our erudura faquilla brand, as Lawson shared earlier in his comments.

Speaker 3: Therefore, in fiscal 2024, we estimate our capital expenditures will be in the range of $250 to $270 million for the full year. In summary, we are proud of our second consecutive fiscal year of strong, broad-based growth from both a brand and geographic perspective.

Speaker 3: In fiscal 2023, we delivered double digit organic top line and high single digit organic bottom line growth despite the significant disruptions and challenges we encountered throughout the year. As trends and inventories are normalizing, we are optimistic about the fiscal year ahead. We believe the strengths of our premium and iconic brand portfolio, along with the talent and diversity of our team members.

Speaker 3: will enable another year of consistent growth in brown format history of delivering sustainable and consistent long-term performance. This concludes our prepared remarks. Please open the line for questions. Thank you. As a reminder to ask a question, please press store 1-1 on your telephone.

Speaker 2: and wait for your name to be announced. To withdraw your question, please press star 11 again.

Speaker 2: Please stand by, will we compile the Q&A roster? Our first question comes to the line of Vivian Azir from TD Cowan.

Speaker 5: Hi, good morning.

Speaker 5: Good morning. Good morning, Vivian. So thank you so much for all the perspective on your inventory levels. I'm sure you've been hearing it. We certainly have a lot of concern from investors around overall alcohol inventories in the US in particular looking at the census data. So Lawson or Leanna, I was wondering if you had any comments that you could offer on broader, the broader inventory situation for spirits or US alcohol across the board.

Speaker 3: Any perspective on that would be helpful. Thanks. Thanks, Vivian. I'll take that one. And as we have shared with you over the last seven quarters, we've been in a little bit of a different position than some of our peers in the industry. We have similarly had really strong consumer demand. We've added some great innovations to our portfolio. But we've been faced with the global supply chain challenges first related to glass, then follows that.

Speaker 3: the logistics and constraints that we've had. So we've been working for us diligently to rebuild that inventory. And as we shared with you last quarter, we believe that our distributor, we believe that our distributor and retail inventories would return to more normalized levels at the end of this fiscal year. And so for us in the US, we're happy to report that our distributor inventory levels are now back to normal.

Speaker 3: We do continue to have some rebuilding of some brands and some smaller sizes that are shipments and depletions now are largely black and balanced across our full strength portfolio. And similarly in Europe , our stock levels are also largely back to normal after we have the supply chain challenges in fiscal 22. So for us...

Speaker 5: on the broader inventory situation across distilled spirits. Is there excess inventory? That seems to be a concern. I'm hearing pretty consistently. Thank you.

Speaker 3: I think what we would say is we're probably all reading and hearing the same things that you are, but we don't have a comment on the general position.

Speaker 5: Okay, fair enough. Thank you.

Speaker 2: Okay, sure enough. Thank you. Thank you. One moment for our next question.

Speaker 2: Our next question goes on a line of air, Saroto from Morgan Stanley .

Speaker 6: Great, thanks. I'm hoping you could give some color on your visibility in terms of gross visibility and outlook in terms of gross margins for fiscal 24. I know you've called out the continued input cost inflation offset by the

Speaker 6: absence of some of the extraordinary supply chain charges, but maybe you could give us a little bit of color in terms of your visibility and some of the components there like a gabe and wood and other inputs.

Speaker 3: First, I'll start with kind of what we said right there at the end of our prepared remarks, just as it relates to our operating income guidance includes brand expenses in line with top line growth, SG&A that's going to be still a bit above our historical norms, just related to higher compensation and the addition of our Japan RTC.

Speaker 3: So then with that, leaving our gross margin, our gross margin assumes that we're going to continue to benefit from our long-term pricing and revenue growth management strategies. I'll go into a little bit more detail on that in a moment. Then as it relates to our cost, and we said last quarter, from a supply chain disruption....

Speaker 3: it will continue to negatively impact our input costs. Though, on a year-over-year rate increase, it will be lower, though still just a bit above our historical trends.

Speaker 3: So you're specific question on some of our key input costs. For agave, we've released a similar of what we've shared the last several quarters that the external prices continue to be beyond and below their peak. Stable at the 28 to 30 Mexican pesos per kilo.

Speaker 3: For us, it's a little bit of a headwind in F-24 as we have a bit of a next shift between our internal and external purchases just because our consumer demand is so strong for agave.

Speaker 3: As it relates to wood, the cost of the commodity continues to be high due to the strong demand, but the changes that we have made in our wood supply chain are beginning to yield benefits that we will see as we go forward into the longer term.

Speaker 3: From a grain perspective, as you know, global grain price increased significantly after the Russia invaded Ukraine and kind of got things out of balance. We have been seeing this ease in recent quarters, yet our plan for 2024 still remains above kind of what we would see as normal trends.

Speaker 3: Just a few more items from a glass perspective that's produced in the U.S. We again believe we will see less of an increase in 24 than we did in 23. That's related to the lower natural gas prices. And then as it relates to wages, the cost of labor is still $2.

Speaker 3: fairly high driven by the wage inflation that we've seen. A few other items as we get into F24, we have now lapped the benefit of the EU removal of tariffs on American whiskey, but we will have a slight impact, positive impact for the UK tariffs that were removed June 1st of 2022.

Speaker 3: Then, two other things I would like to share with you as it relates to our gross margin related to the reshaping of our portfolio is I know there's focus and there has been focus around the impact of RTDs on our business and we've been in the RTD business and have had a sizable RTD business for 30 plus years.

Speaker 3: So as we do add Jack Daniels and Coca-Cola to our portfolio, it's also important to remember at the same time we are adding two super and ultra premium brands to our portfolio with GenMari and Diplomatico. And they have very attractive financial metrics, including gross margins that are above our current company average.

Speaker 3: So, I know there was a lot in that answer, but we've got kind of a lot moving this year. But, NetNet, I hope all of that helps you understand the components of our gross margin for 24.

Speaker 6: Yes, really helpful. Thanks for all the detail. Maybe just taking a step back your gross margins going back to kind of Pre coded fiscal 19 were in the mid 60s going a few years. Before that they were in the high 60s, I guess maybe could you talk about visibility in terms of a path?

Speaker 6: to getting back to pre-COVID levels. Are you looking at this in terms of percentage margin? Are you looking at growing the GP dollars? You know, any sort of long-term perspective versus your history would be helpful. 0go to carb 2 goals at dragon rhythm

Speaker 3: Yeah, I mean, everything that I've just talked about as far as the company is focused on growing our value share, and that is reflected in our long term pricing strategy. We've significantly increased, I think, our capabilities as it relates to revenue growth management. So that is beginning...

Speaker 3: to contribute positively to our gross margin, as well as we're in an aged product business. And when you look at our portfolio, the historically high levels of agave cost as it relates to our portfolio and wood as it relates to our portfolio kind of has had an outsized impact. We all continue to watch the change in the external.

Speaker 3: impacts our barrel costs, which is all about some of the changes that we've made in our supply chain. So it's an aged product, so we will see those benefits as the years ahead of us unfold.

Speaker 3: our barrel costs, which is all about some of the changes that we've made in our supply chain. Though it's an age product, so we will see those benefits as the years ahead of its unfold. Great. Thanks so much, El Pasadon.

Speaker 2: Thank you. One moment for our next question. Our next question goes to the line of Bonnie Herzog from Goldman Sachs. Thank you. Good morning, everyone.

Speaker 5: I just had a quick question on your top line guidance. You know, how much of your top line, I guess, organic growth do you expect will be driven from price mix versus volume growth this year? And then maybe what the breakdown of rate versus mix might look like.

Speaker 5: And then I'd be curious to hear from you, you know, are there any concerns or signs of promotional intensity building, you know, really essentially any changes to your pricing strategy in light of, you know, the strains on the consumer globally? Thanks. Yeah, I'll try that one, Bonnie. So the pricing strategy, which we started a couple of years ago, which we've been pretty transparent about, was in the low single digits, sort of in that two to 3% range, kind of.

Speaker 4: globally everywhere, so US and international, and trying to get it across all our grants. And we've been pretty successful at that over the last couple of years, and we're gonna continue that. So our strategy has been a little bit different than either some other consumer products sectors, or even within our own industry, that have been more aggressive. And there are pluses and minuses to doing that, but we feel comfortable that the best long term plan on now.

Speaker 4: is to keep that sort of in that same low single digit range, but trying to do it every single year without shocking consumers or chasing them away in any way. And so that balance of volume and pricing is what we're looking to achieve. Now, as far as like more recent times, have we seen like discounting go up or anything like that? We really have not.

Speaker 4: I mean, I think the pricing environment in US spirits, but also in Europe , is about as good of a place as it's been in a while. We find the industry is starting to take regular price increases again after, as we've said, for almost a decade of not doing it. That seems to be back again. So hopefully it stays that way and we'll continue to...

Speaker 5: Keep our heads down and go for that 2 to 3% a year. Okay, thank you. Thank you. One moment for our next question. Our next question goes on the line of Nick Modi from RBC. Yeah, good morning, everyone. There's some chatter still in the industry regarding glass supply.

Speaker 6: And so I just wanted to kind of get your update there and if there is an issue, what is actually still the problem or driving the driving issue? And then the second question is just back on the tequila question. So we've been seeing some of the data looks like promotional activities picking up anything notable there that you guys are monitoring.

Speaker 3: Thanks for the perspectives. Also, also our solar glass supply. So as we have navigated glass supply challenges, which was the first constraint that we hit post pandemic and trying to get our glass supply back to where we needed it to be.

Speaker 3: I think we've spoke to on this several quarters in the fact that beginning this would have been in F-22. We were working closely with our partners to ensure we had the capacity and that they were also getting the quality and quantity of glass that we needed produced.

Speaker 3: successfully to the point that we really aren't seeing any glass supply challenges for us as we've gone through the back half of F23. And that's our plan as well for F24. And then on the tequila question, you asked if we've seen any more discounting or anything like that. No. So any questions?

Speaker 4: I'm actually kind of surprised to hear that a little bit, although I do know some of the big brands have slowed down a little bit, but some of that I'm just convinced is more about comping against.

Speaker 4: a couple of years, there were some of these brands were growing in a 100% growth rate. And so they kind of hit that wall a little bit. And as Leigh and said, Eridur, Eridur is a little bit different. I mean, we are expecting better growth looking ahead as the last constraints led up. That was the last brand. Really the last brand in our portfolio that struggled. And then it, it, it,

Speaker 4: We came out of the box in fiscal 23 last summer with very high expectations and then couldn't deliver. And that was frustrating. But now we've sort of got that all fixed and want to see substantially better growth rates looking ahead. And as far as discounting though in the category, I mean given the costs still remain very elevated although I...

Speaker 4: I want to say we're sort of peeking out. I've said that before and been wrong. But it does look, I think the outlook is a little bit better that we have hit the top and should expect.

Speaker 4: better cost position going forward, but I have no intention of increasing discounting at this stage, at least not on our brand. Great, thank you so much.

Speaker 4: but I have no intention of increasing discounting at this stage, at least not on our brand. Great, thank you so much.

Speaker 2: Thank you. One moment for our next question. Our next question comes in the line of Kevin Grundy from Jeffries.

Speaker 7: Great. Thanks. Good morning, everyone. Morning. So my question was on the on the Jack and Coke rollout, which sounds like it's going quite well. Just a few questions if I could. Maybe just provide enough data. How many more markets remain for the rollout?

Speaker 7: What are some, I can appreciate its early innings here, but what are some of the early learnings about the consumer and where you're sourcing occasions for the product? And then just lastly, anything that you can share around trial and repeat purchase rates would be appreciated, thank you. Yeah, we don't have a lot of that data yet. So we'll talk about the launch, but.

Speaker 4: where we are today, because they're the rest of the world is still open. So we're in nine markets, Mexico, the US, Japan, Philippines, the UK, Poland, Hungary, and Netherlands, and Ireland. So I'm not sure what percentage of the world that would be, but it's not particularly high. So we got a ways to go, and it will continue throughout this fiscal year and even into the following year after that too. So...

Speaker 8: and

Speaker 4: Look, the Coca-Cola company and Brown Foreman are working very well together on this rollout. They've got some pretty cool programming out there in the world. We talked a little bit about Piccadilly Circus and some other sort of iconic landmark types of things. And so we're coming out big. And this is a good thing for the Jack Daniels brand, even if it is modest profit.

Speaker 4: tremendous amount of consumer interactions that we're getting with this brand. So it's all also a good start. It'll probably be another quarter or so before we really have a lot of that sort of turned out, I think we're all looking to see.

Speaker 7: I'm sorry, Liam, are you going to say something? No. But you can go ahead with your follow-up. Thank you. A quick follow-up for you. Perhaps you went as far as you'd like to go on commenting on margin implications here. I appreciate your comment on Jim Markey and Diplomatica. But –

Speaker 7: What can you say about the phasing of this and how investors should think about this rollout, what the margin delta is relative to the base portfolio, how would you think about this as you try to scale this product in a number of markets. So anything that you can provide further there, I think would be useful and then I'll pass it on. Thank you.

Speaker 3: Okay, great. Thanks. What we would say is, generally speaking, gross margins on our RTDs is below our company average. But as we think about Jack Daniels and Coca-Cola as it relates to our operating margin, it's a little bit different in the fact that, as Lawson just mentioned, our

Speaker 3: So we have consistent strategy and we can maximize scale. The Jack Daniels and Coca-Cola RTD launches are supported by both Brown Forman and the Coca-Cola Company. So based on our current expectation, this joint funding should result in higher operating margins for Jack Daniels and Coca-Cola related to the rest of our RTDs. And remember, in most of our big markets, this is a transition from existing.

Speaker 3: is Germany, which is one of our largest RTD markets. And our RTDs there are strong contributors to our growth and our share gains. And also in that market, Jack Daniels is the number one American whiskey and is also growing and outperforming the total category. So we believe that as we continue to premiumize our.

Speaker 2: Our next question comes in the line of Filippo Filorni from Citi.

Speaker 9: Hey, good morning everyone. Question on your guidance, fiscal 24 guidance, particularly on top line. At the macro level, you mentioned you remain a little bit cautious on the global macro. What kind of expectations are you embedded in guidance? Are you assuming...

Speaker 9: continuation, the current trends, worsening of consumer globally and specifically also in the U.S. market. Thank you.

Speaker 3: Yeah, so what I'll add to that is again, just to reiterate what we said in our prepared remarks. From a top line perspective, we just completed two consecutive years of double digit top line growth with F22 at 17% and F23 at 10%. So now, as we move into F24, we've lacked most of the significant impacts of the pandemic. We're moving more towards a normalized environment.

Speaker 3: But in that normalized environment, we continue to expect increased consumer demand and for our premium portfolio, just more back in line with our historical trends setting on top of that elevated base. Again, we've lots of us talked about, I've talked about our continued reliance on the long term pricing strategy and our revenue growth management. And we will, as we get into F24, it'll be, there'll still be a little bumpy.

as we relate to comparing against the strong shipments of rebuilding our inventory that we had that carried over into fiscal 23 and then with the recent.

with the recent laughing of the Jack Daniels and Coca-Cola launches. So again, it's still, and one thing we also have to factor into our guidance that we lived with, with all of Cisco 23 that will be absent in 24, is the impact of not having our rush of business. So that's in there as well. So, but again, as you said, we keep a close eye on all of the problem taken.

consumer behavior, macroeconomic trends, but in our plan, we still have very strong consumer demand. Yeah, me add, on the US part of your question, I mean, as I look at Mielsen figures right now, just using that as an example, it's back in that four to five percent range for TDS, which is kind of where it was for about a decade before the pandemic actually happened, and feels about where I think the market's gonna settle out.

We're a little bit ahead of that. That's a good marker for us to shoot for every year to be a little ahead of TDS and say, the US market is pretty good. It had an overall only a 3% growth in 23. Remember, the first half was 11, which had some of that inventory rebuilt built into it. The slowing down to three did recognize bringing some of those inventories back down, which has got us kind of where we are today, which is what we described earlier as in line. So, but the other thing I would caution everyone, be careful extrapolating us to some...

you know, statement about consumer health around the world. Our story is more about shipment comparisons to last year than it really is about, you know, change in consumer demand. So, but I think overall, look, it's back to normal. We've said normalize about 10 times already today. But normal's pretty good.

In the US market, if you can get continually get mid single digit sales growth and we expect higher growth outside of the United States, that algorithm works pretty well for ground form.

Got it. Thank you. That's helpful. And just a quick follow up. You mentioned your prepare remarks, some evidence of down trading in Europe . Any other market where you're seeing this phenomenon or is it just isolated to Europe ? Thank you.

Well, the US is the one people seem to go at the most. And I, obviously, when you, if you went back to the Neilson thing again, if you look at the less than $10, that's the spirit-based RTDs that are flying. But that bends the numbers if you try to look at the overall thing. So you've got to look at the different price points. And I mean, the important thing is the super premium and the ultra-premium price points continue to grow at a faster rate than say, you know, standard or just premium. You want to check there really out some things, though? So we could assume that the cost would be about half 100. symptoms. And so, I know those are compared to the future.

That has been true for a long time. The gap has closed a little bit, but still premiumization is live and well in the US business. And yeah, so we feel like the portfolios in a pretty good place. It is a little bit tougher in Europe , TDS numbers are not quite as strong as they are in the US. France, I know it's a challenging market, but we're growing share in Germany, the UK and Poland, three of the most important international markets that we have around the world. So ...

We feel pretty good that the take away of our brands particularly developed international assault. Thank you guys, out of touch at all. Thank you. At this time, we have run out of time for questions. I would now like to turn the conference back over to two pair for closing remarks.

Thank you, and thank you Lawson and Leanne, and thank you to everyone for joining us today for Brown-Forman's fourth quarter and fiscal year 2023 earnings call. If you have any additional questions, please feel free to contact us. Before wrapping up today's call, though, I would like to hand the call back over to Lawson for a few additional comments.

Yeah, just briefly, and I know everyone knows by now, Merge heard of the passing of Diagio, CTO Ivan Menonensis. His influence can be felt really around our industry and in every market we're beverage alcohol sold. He was an admired leader and well respected across the industry.

On behalf of all of us at Brown-Florman, we send our deepest condolences to his family and the entire Diageo community. That concludes our call. This concludes today's conference call. Thank you for participating. You may now disconnect.

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