Q1 2024 Brown-Forman Corporation Earnings Call
Okay. Yeah.
Yeah.
Operator: Good morning. Welcome to Brown Forman first quarter fiscal year, 'twenty 'twenty four earnings conference call. This time, all participants are in a listen only mode.
Welcome to Brown Forman first quarter fiscal year, 'twenty 'twenty four earnings conference call.
This time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session. I asked the question during the session you will need to press star one on your telephone you would then your automated message advising your hand is rice. Withdraw your question. Please press star one again.
I asked the question during the session you will need to press star one on your telephone you would then your automated message advising your hand is rice.
Withdraw your question. Please press star one again.
I would now like to hand, the conference over to Sue Brown, Vice President Investor Relations Ma'am you may begin.
Thank you and good morning, everyone I would like to thank each of you for joining us today for Brown Forman first quarter fiscal year 'twenty 'twenty four earnings call. Joining me today are locked in Whiting, President and Chief Executive Officer, and Leann Cunningham Executive Vice President and Chief financial.
Cancel officer.
This morning's conference call contains forward looking statements based on our current expectations Newmar.
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, 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 first quarter fiscal year 2024. In addition to posting presentation materials that Lawson and Leann will walk through momentarily.
The release and the presentation can be found on our website under the section titled investors events and presentations.
In the press release, we have listed a number of the risk factors you should consider in conjunction with our forward looking statements. Other significant risk factors are described in our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. During this call we will be discussing certain non-GAAP financial measures. These.
A reconciliation to the most directly comparable GAAP financial measures and the reasons management believes they provide useful information to investors regarding the company's financial condition and results of operations are contained in the press release and Investor presentation.
With that I would like to turn the call over to Lachlan.
You Sue and good morning, everyone. It's a pleasure to be able to speak to you today about brown <unk> first quarter results for fiscal 2024 before we get into the details of the quarter. There are a few key drivers of our first quarter results that youll hear about repeatedly throughout this call first the rebuilding of distributor inventories primarily in the United States in the prior year.
Period had a significant impact on our first quarter results as you will recall this rebuilding in the prior year occurred as a result of supply chain disruptions. If you referenced schedule D. In today's earnings release. It will provide you with additional information to put this quarter into better context.
The timing and phasing of our operating expenses had an impact on our first quarter operating income as we launched and acquired new brands. While also investing in our existing portfolio as you can surmise from our full year guidance. We expect this to moderate as we continue throughout the rest of the fiscal year.
And finally, and most importantly, we believe the health of our brands and our business remains strong as evidenced by consumer takeaway trends. We continue to be confident that we have the best portfolio and the best people in the market and it's this confidence that allows us to reaffirm our full year outlook for fiscal 2024 with this backdrop, let me quickly walk you.
Through our high level results for the first quarter from a top line perspective, our reported and organic topline results were below our longer term historical trends much.
Much of this is being driven by the comparisons to the strong double digit topline growth in the first quarter of last year, you will recall, our glass supply significantly increased in the spring and summer of 2022, which allowed us to rebuild distributor inventories, which created a strong comparison for the first quarter of this fiscal year, our gross margin expanded with Fei.
Verbal price mix and the removal of the UK tariffs.
These gains more than offset increased input costs foreign exchange headwinds and the impact of our recent acquisitions and.
In the first quarter, we also made significant investments behind our brands and our people, which resulted in a year over year decrease in reported and organic operating income now let's go into each of the P&L items, a little bit more I'll briefly provide a few more details on the topline from a brand perspective, and then I'll turn it over to Leann, who will share additional insights on our <unk>.
Geographic performance as well as other financial highlights before closing with some comments on our fiscal 2020 for outlook. Our reported net sales growth increased 3% with organic net sales growth increasing 2% after adjusting for the recent acquisitions and the negative effect of foreign exchange organic net sales growth in the quarter was driven by the.
<unk> growth for Jack Daniel's, Tennessee, Whiskey, Jack Daniel's, Tennessee, Apple and <unk>. This growth was partially offset by declines related to the estimated net decrease in distributor inventories, particularly for brands such as Woodford Reserve, Jack Daniel's, Tennessee fire and gentleman, Jack as we cycled against the significant inventory rebuild in the first quarter.
Of last year in total we estimate that the net change in distributor inventories had a 6% impact on our overall topline results. If you were to factor in the net change in distributor inventory are net sales growth would have actually been above our long term growth expectations as I mentioned earlier, we believe our business is strong.
Jack Daniel's, Tennessee Whiskey led our growth is organic net sales increased 2% after lapping organic net sales increase of 21% in the prior year period. We believe the consumer demand is normalizing and estimate that the growth rate on Jack Daniel's, Tennessee whiskey in the first quarter was lower by approximately two percentage points due to the net change in distributor inventory.
<unk> growth continues to benefit from our pricing strategy as well as our revenue growth management initiatives second Jack Daniel's, Tennessee, Apple grew organic net sales more than 50% as we lapped the impact of the glass supply constraints in the year ago period, and we're better able to meet consumer demand, particularly in markets such as Brazil. The brand also.
<unk> from a strong launch in South Korea.
And for Tequila, particularly in the U S remains strong El Humidor was the third largest contributor to overall company organic growth increasing organic net sales 26%.
We continue to see strong momentum in our ready to drink portfolio, which grew organic net sales 5%. This was led by the launch of Jack Daniel's and Coca Cola and the continued growth of new mix, which performed well as the RTD category in Mexico is growing and the brand is increasing share.
Growth was partially offset by planned declines in Jack in Cola is the market's prepared for the Jack Daniels and Coca Cola launch I know theres been tremendous energy and curiosity around our new Jack Daniels and Coca Cola TD, So I thought I'd share a bit more detail on the continued launch impressively. The global volume has already grown to $1 8 million cases across 11 markets.
Led by the U S and Japan as we've shared before some markets are being led by Brown Forman, whereas others are being led by the Coca Cola Company. Therefore, this total case volume is not reflected in our nine liter depletion results. We expect that this total vol and we will continue to grow as we plan to expand from 11 to 30 markets by the end of calendar 2024.
In the U S. The Jack Daniels in cocoa RTD launch it's been the most successful launch in Brown Forman history, having achieved the second highest level of off premise distribution across the portfolio only behind Jack Daniel's, Tennessee Whiskey today has reached over 2% of the RTD categories value share and overall, we're pleased with the initial launch of this iconic <unk>.
<unk> and believe our success is driven in part by the strong investment behind the launch including significant investments in broad reach media events and trade execution is the launch of <unk>. We would naturally expect this investment to normalize. We're also excited by the brand visibility the market share gains and the positive feedback from distributors retailers and <unk>.
Most importantly, consumers I must say, you're doing something right when consumers start wearing your spirit brands and I just saw a picture of the first reported Jack and Coke RTD tab to the.
The loyalty of our Jack Daniel's fans strong and impressive the Jack Daniel's <unk> Coca Cola <unk> TV has been a strong addition to the portfolio, which as you know we have been very strategically reshaping over the last couple of decades to focus on premium and Super premium brands. We continue to believe this premium amortization provides us with the best opportunity for long term growth and value.
<unk> the integration of our newest brands Genmar and diplomatic co continues to go well the brands increased reported net sales in the first quarter by 2% and we continue to expect these brands will be meaningful contributors to our long term growth.
It's a part of this portfolio evolution, we announced the sale of Finlandia vodka earlier in the quarter. Finlandia has played an important role in the global growth of Brown Forman since it joined our portfolio of fully in 2004, and we appreciate the many talented employees who worked hard over the two decades to build the brand. We know this brand will continue to evolve in the capable hands of Coca Cola <unk>.
When the sale closes in the second half of the 2023 calendar year before turning the call over to Leann I'd also like to add some additional perspective on our gross margins and operating expenses in the first quarter of 2024, our reported and organic gross profit increased 5%. Both ahead of the respected topline growth rates, while we experienced some headwind.
<unk> in the form of higher input costs and the negative effect of foreign exchange they were more than offset by the tailwind of favorable price mix lower supply chain disruption related costs and lower tariff related costs due to the removal of the UK tariffs on American Whiskey. This resulted in 90 basis points of gross margin expansion in the quarter, we continued to.
Focused on the execution of our long term pricing strategy and believe the health and relevance of our brands supported by our continued brand building investments will allow us to continue to achieve our strategic priorities. Our brand building investments were evident in our first quarter as organic advertising expenses grew 14%. This was largely due to the timing of our income.
<unk> spend to support the launch of the Jack Daniel's and Coca Cola RTD, which as I mentioned earlier is significantly skewed to the first few months of our fiscal year as well as increased investment for Jack Daniel's, Tennessee Whiskey. We also continued to invest behind our people our organic SG&A investment increased 12% driven primarily by higher compensation related expense.
Related to organizational changes, including our route to consumer expansions, which we believe will support Brown Forman as long term success in summary, we're off to a good start in fiscal 2024 and remain optimistic that we can achieve our full year goals, while consumer demand for our brands begins to reflect a normalization back to our more historical trends, we expect to <unk>.
To benefit from our long term pricing and revenue growth management strategies as well as a more normalized cost environment. We're still operating in a highly dynamic world. Yet we have remained agile focused and committed to the long term growth of our people our brands and our business, we take pride in our ability to deliver consistent and reliable growth year after year.
<unk> decade after decade, and we believe this tradition of excellence will continue in fiscal 2024 with that I'll turn the call over to Leann and she'll provide more details on our first quarter results.
Thank you Lawson and good morning, everyone as Lachlan mentioned I will provide additional details on our geographic performance other financial highlights as well as our fiscal 2024 outlook from a geographic perspective collectively our emerging international markets continued to deliver very strong double digit organic net sales growth.
Driven by Jack Daniel's, Tennessee, Whiskey, particularly in the United Arab Emirates, due to increased distribution and strong consumer demand and Turkey, where the premium whiskey category is accelerating Jack Daniels, Tennessee, Honey led that Turkey, as well as Brazil, where the brand is returning to normal levels of supply.
And new mix, which continues to grow strong double digits in Mexico, where the RTD category has accelerated and we are gaining share as the international airline travel and cruise business continued to return to more normalized growth levels. The travel retail channel grew organic net sales 9% led by.
Higher volumes of Woodford Reserve our business in this channel continues to remain above pre pandemic levels organic net sales for our developed international markets collectively were flat for the first quarter as growth in the United Kingdom, South Korea, and Germany was offset by declines in Australia, and Japan Jack.
Tennessee, Apple was the largest contributor to growth driven by the successful launch of the brand in South Korea. This growth was offset by year over year declines for Jack Daniel's RTD is driven by Australia, where macroeconomic pressures negatively impacted volume growth and the United Kingdom, where we are transitioning from Jack Daniels and co.
Sure Jack Daniels, and Coca Cola, partially offset the growth in Germany, and Jack Daniel's, Tennessee, Whiskey, which had strong growth in the United Kingdom, but was negatively impacted by Japan due to an estimated net decrease in distributor inventory, while we remain on track for our transition to owned distribution on April one.
At this fiscal year and for the United States organic net sales decreased 9% as a result of lower volumes due to an estimated net decrease and distributor inventories of 11%, partially offset by higher prices across our portfolio.
Wilson highlighted in the first quarter, we cycled against a significant inventory rebuild during the same period last year, which was particularly impactful to the United States market as we focused on rebuilding distributor inventory for our brands with substantial volume in the U S, including Woodford Reserve Gentleman Jack Jack.
Daniel's, Tennessee, Honey and Jack Daniel's, Tennessee fire with the rebuilding of finished goods inventory across the three tier system. We accomplished in fiscal 2023, we believe that distributor inventories have returned to more normal levels. The consumer premium innovation trend continued to drive demand for our Super premium Jack.
Daniel products and partially offset the decline. This included growth from Jack Daniel's Sinatra or specialty launches such as Jack Daniels single barrel Rye barrel praise and the newest member of our bonded series, Jack Daniel's bonded right.
These products highlight our whiskey credentials and give consumers the opportunity to explore and discover within the Jack Daniels family, while premium I think the Jack Daniel's family of brands. The Tequila category also continued to experience growth in the United States with our Hema door, leading the growth of our tequila portfolio delivering double.
Digit organic net sales growth and the launch of Jack Daniel's and Coca Cola RTD drove a high single digit organic net sales increase for the Jack Daniel's ready to drink portfolio from a takeaway perspective, the data reflects a normalization as total distilled spirits as well as brown forman delivering value growth.
In the mid single digits, driven by growth in RTD Tequila and U S. Whiskey as Wilson shared the details of our gross margin expansion and operating expenses for the quarter I will now turn to our operating income and total reported and organic operating income decreased 4% and 6% respectively.
Actively in the first quarter of fiscal 'twenty 'twenty, four largely driven by the phasing of our operating expense growth, partially offset by our gross margin expansion.
These results combined with a decrease in our effective tax rate and an increase in interest expense resulted in a 7% diluted EPS decreased $2 48 per share and finally to our fiscal 2024 outlook, which we are reaffirming and what has been a highly dynamic.
Operating environment, we continue to be optimistic we continue to believe global trends will normalize after two years of very strong growth and while consumer demand for our brands is also starting to reflect more historical trends. We expect to continue to grow on this elevated base as a result of our.
Long term pricing and revenue growth management strategies as well as the addition of two Super premium brands, Jim Murray and Depomed. It go to our portfolio, partially offset by portfolio mix shift to Rtd's I will also note that due to the timing of the genmar and diplomat ago acquisitions.
Which were in the third quarter of fiscal 2023, the contribution of these brands in the first half of fiscal 2024 will only appear in our reported results as the operating activity in this period will be non comparable year over year.
Once we lap the acquisition. The results will then be included in our organic results, while we remain cautious due to the current macroeconomic volatility and the potential impact of inflation on consumer spending we maintain our belief that the collective strength of our U S and international markets along.
And with the travel retail channel should reflect our longer term growth algorithm and therefore reiterate our organic net sales growth expectation for fiscal 2024, and the 5% to 7% range. Today, we have intentionally highlighted the impact of our results from the strong shipments in the year.
Go period related to the rebuilding of distributor inventories as a reminder, we began rebuilding distributor inventories in the second half of fiscal 2022 through the first half of fiscal 2023, I also want to remind you of the stronger shipments associated with the launch of Jack Daniel's and Coca Cola.
RGD in the United States in the back half of fiscal 2023, we will have to be lapped in the second half of fiscal 2024.
Both are reflected in our guidance, we believe inflation will continue to negatively impact our input cost, which will partially be offset by lower year over year costs associated with the supply chain disruption, we incurred in fiscal 2023 on the topic of input cost I'd like to take a moment here to share some thoughts.
On the recent changes in agave pricing as we have discussed with you over the last few quarters given the increase in tequila demand. There was a significant increase in the number of planting several years ago. We have long believed that this would lead to an eventual increase in supply and subsequent decrease.
<unk> and cost assuming the tequila category remains strong in the last three months, we have seen a significant decrease in agave costs from 28 to 30 Mexican pesos per kilo to 16 to 18 Mexican pesos per kilo, depending on the quality of the agave, while we are very encouraged that price.
Are finally coming down the benefits to our cost of goods sold will not be immediate for three reasons.
First we have finished goods inventory produced prior to the reduction in agave prices that need to be sold secondly, more than half of our tequila is ages liquid for expressions, such as <unk> and NDA Ho, which will require some time before it is bottled and sold for our Blanco expression, we will begin.
To see a benefit more quickly in addition, and as we have shared we both grow agave internally and source. It externally and this mix can vary based off our needs and the volume growth by expression. So while the overall agave pricing trend is increasingly favorable we still believe that inflation.
<unk> will be a headwind for our overall input costs in fiscal 2020 for turning our attention to the full year operating expenses. Our outlook continues to reflect a normalization of incremental advertising spend align with our long term philosophy for advertising spend to be aligned with our top line.
Rose.
SG&A growth is still likely to remain higher than historical averages as we continue to expect higher compensation related expenses and expenses related to the transition to owned distribution in Japan based off these expectations. We continue to anticipate organic operating income growth in the six.
Percent to 8% range for the full fiscal year.
We also expect our fiscal 2024 effective tax rate to be in the range of approximately 21% to 23% and our capital expenditures to be in the range of $250 million to $270 million for the full year.
In summary, we have had a good start to fiscal 2024. The results reflect the continued normalization of consumer demand as well as the comparison against the very strong shipments related to the rebuilding of distributor inventories in the year ago period. They also include the benefit of our pricing strategy and the phasing of.
Of our brand investments, while our short term organic results in the quarter were below our historical trends, we believe our brands and our business are healthy we remain optimistic as we look ahead to the full fiscal year and are confident in our ability to deliver our near term goals and our long term strategy. This concludes.
Our prepared remarks, please open the line for questions.
Thank you.
Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and wait to hear your name announce to withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question comes from the line of <unk> <unk> with Bernstein. Your line is open.
Hi, Thank you for taking my questions I'd like to zoom in on the distributor inventory in two parts. The first could you just quantify how much of the change in distributor inventory was due to the tough comp you highlighted versus how much is due to actual distributor destocking.
And if there is a fair amount of factual destocking what is driving that.
And secondly are you happy with current distributor stock levels or should we be expecting some destocking in the next quarter. Thank you.
Good morning, <unk>. Thank you all.
I'll start with the first part of your question, which is we.
<unk> talked about that the comp that we had in the first quarter compared to the comp that we had in the last the first quarter of last year, which was when we had very strong shipments and if you go back two or what does that point in time was a schedule C. You would've seen the impact that we had there. So it is partially that we are comping a very.
China is also we don't see it as Destocking, we have finally gotten our inventory levels back up to what we believe is normal we've been working on that for a year and bringing you along in that story along the way what we see now is a change in distributor buying patterns in that other part.
Youre asking about and it really comes back to we continue though with left everything related to the pandemic. We now have.
Comp the things related to supply chain disruption and as we got into supply chain disruption before the before that we had a very consistent cadence and seasonality of our shipments.
But due to the various ways that we determined that we needed to rebuild our distributor inventories first prioritizing Jack Daniel's, Tennessee, Whiskey, which would've started in the second half of 2020, and then moving into the first half.
2023, where we were able to prioritize Woodford reserve gentleman, Jack and Jack Daniel's flavors.
So.
<unk> markets for the U S first and then Europe and emerging international as we worked our way through the rebuilding of the inventory so the cadence and timing of our shipments are abnormal from what we would our historic norms. So once we're back into a stable inventory positioned for long enough. We believe it will become less volatile.
And we will be kind of back to our historic norms, but again for US we have been working for a year to kind of get back up to that normal level of inventory across the world and we now believe that we are there so I hope that helps.
Yes, let me try to add on to that entity and a little bit too because I do want to make sure everybody Jamie.
This is really confusing.
And I do make sure reiterate really what we answered that this is a comparison issue, though it is not a destocking.
Let me give you the why it is not a destocking because I know that would sort of steel normal at this point.
So if you've got literally you can go back three years the summer of 2020 into the fall really into the spring I'm talking calendar years here or not.
Yes.
That was kind of the boom years, we can post COVID-19 Nielsen numbers, we're up at like 30% for everyone.
It was just an enormous uplift in the entire industry you get to the summer of 'twenty, one and it begins to show up in terms of glass shortages really for brown forman seemingly worse than anyone else, but we really begin to have those challenges in the summer of 'twenty, one and it was a challenge for about eight months, where we ran.
Global inventories down so low and that would be going so far as to say the consumer inventory of the retail inventories layers of distributors. It got very low and we had out of stocks all over the place we were at that time working very hard.
Diversifying our glass supply, we're moving bottling lines were doing all sorts of things to try to alleviate the glass shortage and it starts to come back right in the spring of 'twenty two so.
As we answered we prioritize Jack because at that point the on premise is opening around the world.
And we did not want to Miss that Jack Daniel's really begins to move and had a huge year.
In fiscal 'twenty, two and had a big year in fiscal 'twenty three also.
So Jack gets replenished in the spring and into the early summer, but now you get into the summer of 'twenty, two which is one we're comparing against as we said earlier Woodford gentleman, Jack all three flavors and basically our whole portfolio really begins to come back on.
Now the reason theres not a destock here this is ware.
It takes it doesn't you wouldn't think this at first but what was happening because retail inventories were so low that those cases are Woodford and then gentleman Jack.
The entire portfolio, we got to the distributor warehouses and they were outside the back door and about 20 minutes because they.
Retail environment was so desperate for the product so our days never crept up.
And so we haven't had to take them down I mean, so so it's not a days of inventory issue and it's not a destocking issue. It's just these comparisons against some crazy quarters at all.
And I'll finish this off and I don't want to spend that much more time on this Q1 of last year J D. Jack Daniel's, Tennessee Whiskey was post 'twenty one.
Total company was plus 17, so you're comping against some numbers like that Q2, just some sort of foreshadow everyone is a big quarter. Two so we have another one as we continued to replenish these inventories in through Q2 of last year, and then the comps get much much easier but.
It's been a volatile ride.
Total Roger five years, but the business is solid I think if you look at the Nielsen numbers in particular right now they're kind of there is normalized.
But as we said last quarter normal is good.
Got this business I think rolling in the right direction and momentum is good and the volatility.
Yeah.
We don't love the volatility, but it is there we've got a little bit longer to go but I still argue we're not argue that I'd still venture to say that our underlying business is in pretty good shape.
Alright, Thats very helpful. So just to clarify I know in the release you called out that it was partially due to the comp issue are you, saying that there is no destocking whatsoever, there isn't a change in distributor buying patterns more caution. This is purely a comp cadence issue and then if you could just clarify what we should expect for Q2.
Thank you.
Yes, so just for clarification, we said partially.
Comping the rebuilding and it's also partially a change in the distributor buying patterns because.
We are off our normal cadence of shipments our historical trends because of how we chose to power. It has how we've rebuilt our brands and what markets. We were rebuilding those so over the longer period of time that will begin to normalize.
Okay.
Thank you Eric Thank you.
Please standby for our next question.
Our next question comes from the line of Bryan Spillane with Bank of America. Your line is open.
Hey, Thanks, operator, and good morning.
Lawson Leann. So thanks for all of that commentary on on inventory and I guess, if I were to sum. It up if you deplete 10 cases Youll ship 10 cases right. That's what the plan is built on.
Pretty much.
Okay.
And then what's and maybe could you just give a little perspective on depletions in the quarter volume Depletions were up 1%.
And.
So could you just kind of put that in context of.
No.
Is that.
More or less in line with what you were expecting maybe what that looks like relative to the industry. There is a lot of focus right now on.
Volume and volume growth than just what's happening with consumption not just for brown Forman just more broadly across.
I know our entire coverage.
My coverage universe, so just trying to get a sense of.
If you could put that into perspective of just what youre seeing in terms of volume consumption trends and whether kind.
Kind of a 1% to 2% type.
Depletion as maybe what we should be thinking about in terms of brown Forman and maybe just.
The industry for the year.
Yes.
I'll add some color to that and if you look at schedule B you can see that really for the most part shipments and Depletions are aligned except for where you will you get down to the Jack Daniel's ready to drink and that's all about the launch of the Jack Daniel's and Coca Cola in the U S.
So where we are right now is there they're in line over a longer period of time as shipments over the last few years have been stronger than depletions as we've been working to rebuild inventories. We do expect that depletions would need to come back in line and will exceed.
Our shipments in this year is what is built into our guidance.
So.
As we think about that we will continue to update you as we go through the quarters, but right now we still believe our depletions will be a bit ahead of our shipments as we go through this fiscal year.
I mean, I think to tear it apart a little bit by geography. The U S market. If you look at Tds Nielsen, it's sort of a fight between five and six.
We're right there too so the U S market I mean, there's so much noise in the sales numbers I know, but the U S market pretty decent shape, it's definitely being elevated by the RTD piece of things.
It's fair to say the full strength has to compare some of its comparisons but the full strength market has softened a little bit.
But it's being made up for us for the most part in our international markets, which continue to be really strong and in particularly the emerging markets, which really is in its third year of pretty outstanding growth.
That growth is coming from a very wide variety of markets, which is always nice also is one of the while we are so dependent on Jack Daniel's when you talk about the international markets. There is so much geographic diversification that.
For instance, South America, and Mexico, We've had an outstanding run in there.
There are markets in eastern Europe that are on really strong runs right. Now so we've got really strong pockets of growth coming out of some of our most important markets UK is actually in pretty good shape right now too and is delivering well so.
No the business is not turning into a 1% growth.
No one is thinking that.
Very helpful. Thanks Austin.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of Eric <unk> with Morgan Stanley . Your line is open.
Great. Thanks, everyone.
With regards to the comment that you made in the press release and on the.
Prepared remarks about declines in.
The old Jack in coal.
Offsetting growth and.
Jack and Coke launch.
If I remember correctly the previous comments that you made were that Jack and Coke was nicely incremental so just looking for some color as to why they largely offset in the quarter was there a timing issue.
Getting some of the old Jack in Cola out of the channel.
Or was some of this a lot of this growth reported on coax books and not yours any color into that dynamic would be great really helpful.
Yes sure.
Because this is one of those topics that also is a little bit confusing. So as I mentioned in my prepared remarks, the global volumes, it's about $1 8 million cases across the 11 markets now the part I think most people know, but reminder, I guess.
Some markets are led by Brown Forman and others are being led by the Coca Cola company. So that is what is fueling some of our volume numbers often in the spreadsheet and I think thats, what youre, referring to there are markets, where Coca Cola is taking the lead and I'll use the U K is a good probably the clearest example.
We had a big Jack and pull a business there and now we are evolving that over to Jonathan Cohen. The sales of the accident sales to the test goes or the world will not be on our books anymore, it's going to be honest Coca cola's books, but it doesn't mean the business is going away, it's just where we.
We are taking out the cola and replenishing, our replacing it with Jack and Coke and so that's why the numbers look like they're going down but.
That's not really the case.
System wide theyre not its just the way it is being reflected on our financial statements. So and I think look I would also reiterate.
This has been a great launch is an iconic product.
Really investing highly behind this launch as it is with Coca Cola company and so there's been a lot of broad reach media theres events as trade executions and it's gone it is off to a very strong start. So the increased visibility I think is important and the market share gains we're getting we've done a lot of positive factors. So.
And it's got two 2% of the category in the U S. It's got 2% share already and it's only been three or four months. So.
It's off to a good start and we feel pretty good about it and I think the long term potential is exciting and a lot of things that it does for the health of the brand along with the actual business proposal itself. So it's off to a good start.
Great and then just to follow up on the inventory dynamic hopefully this is one of the one of the last questions on it but you did mention you did flag.
So I think some.
Tough comp again in <unk>.
The second quarter.
My recollection is the.
We build last year in the second quarter was somewhat less than it was in the first quarter am I remembering that correctly and should we expect some sort of moderation in that year on year headwind in the second quarter before.
All things being equal should be.
Neutral in the second half.
Youre remembering that correctly and what we're talking about as far as comp as the entire company because we had a really strong shipments in the first half of last year, but you are correct that as we get into the second quarter this shipments and depletions more normalized.
The one thing we have to remember as planned and we will share. This with you every quarter as we get into the fourth quarter of fiscal 2024, then we will have to lap the launch of Jack Daniel's and Coca Cola.
In the U S.
So it is less with Q2 as I said a minute ago, Jack was still up 14% in Q2. So it's still we still got high comps, but.
Is normalizing.
Perfect I'll pass it on thanks for your help.
Thank you.
Please standby for our next question.
Yes.
Our next question comes from the line of Andrea with Jpmorgan. Your line is open.
Hey, Good morning. This is drew Levine on for Andrea Thanks for taking our questions. So I wanted to pick up on the U S. So it looks like underlying trends were up around 2% in the quarter and a loss and you mentioned Tds.
Tds was up sort of mid single digit in the tracked channels. It looks like even brown Forman was up stronger than that so just curious.
If you can elaborate maybe on what the disconnect. There is and if we should see that sort of delta between the underlying growth rate and what we're seeing in tracked channels narrow it going ahead.
Well I mean, those numbers never tick and tie exactly.
Thanks.
The 5% growth number which includes Jack and Coke.
It's a pretty solid sort of.
Result, the U S.
For like a decade has been between four and 5% with the exception of the.
Sort of post Covid years wanted to really blew up.
Yes, the difference between the mines are getting from minus nine on an organic basis, even adjusting for the distributor inventories is what gets you to the two.
I don't know if I can explain that there is between the two and five necessarily I don't think it's it's not.
Yes.
It's really about the launch of the Jack Cogan, how it and it is and the buying power.
Patterns that are in there so that's creating a lot of noise in the difference between what you would see in our takeaway trends and what's happening in our net sales. So its just it is.
Again, as we were we were coming through and the gap was narrowing over the last few quarters, but then as we launched Jack and Coke and it's not all the way through into those takeaway numbers, yet that's creating the gap for us.
Alright fair enough.
And then if I could ask a follow up on gross margin. So it looks like costs were about.
About 100 bps headwind this quarter moderated from the fourth quarter, which I think was around 350 bps.
And you mentioned, you'll be lapping a lot of those supply chain mitigation efforts from last year. So can you maybe offer some more color on gross margin expectations. Looking ahead should we think about gross margins potentially over 60% here going forward.
And then on the <unk>.
Margo.
Got it.
Situation.
Is there any sort of way to think about internal versus external.
A supply there so thank you for that.
Okay, great. Thanks, So I'll start with our gross margin for the first quarter, which was as you as you know to expanded 90 basis points, and it's where our price mix more than offset the inflation on our input cost and it was really driven by our price mix, which was plus 250 basis points that was driven by kind of the price increases.
Across our portfolio that was led by Jack Daniel's, Tennessee Whiskey, We also still and I'll just point. This out is last time, we will have the opportunity to say it is.
The last of the benefit from the removal of the UK tariffs on American whiskey, because they they rolled out June one of 2002 and as you pointed out the impact of inflation on our input cost has been partially offset by supply chain disruption costs and then so that's a good segue for me to go into the full year.
Year, and again everything I say here is built into our operating income guidance.
But we do expect price mix to continue to be a leader for us this year with our long term pricing and revenue growth management strategies.
We'll have the app from a cost perspective, we'll have the absence of this supply chain disruption cost that will be significantly less to zero.
In F 'twenty, four and we'll still have inflation that will negatively impact our input cost in total, but though at a lower level.
And to your question I'll talk to you about a couple of our key input items, starting with agave and it really is about what we said we've been talking about this for a very long time, and we're really excited that it's finally, starting to come down we've been looking out there for such a long period of time seeing those large number of plantings and waiting for supply to <unk>.
Catch up with the demand and we are approaching and arriving to that now.
Just wanted to be clear, though with everybody, though like we said in our prepared remarks, we do have finished cases in the supply chain and the supply chain in our inventory that need to be sold through.
And it varies by skew how much inventory, we have but generally speaking that would be three to four months, depending on skus well need to work through that and then like we talked about for our portfolio of Tequila is represented in EMEA and some of our other expressions are aged liquid so we need to continue to let them go through.
They're aging cycle before they are modeled in the inventory sell through but as we get to the expressions like blanco or any non aged.
Expression, we'll see that benefit more quickly so.
It's really more about the inland that moving through the age liquid in the finished goods inventory, though they are a bit of it will be the mix between what do we need to meet our needs. So we do.
Grow our own internal agave and but we're we have needs we source on the spot market as you know we've been clear with that over time.
So balancing all those things I think I'll, just say that.
In a number of months from now we're going to continue we're going to see a meaningful benefit that will come towards the end of our fiscal 'twenty, four and well into F. 'twenty five which continues to.
To make us excited about as we look ahead, because we know agave and wood cost it would have been our two biggest challenges over the last number of years as it relates to our cost and just to give you a quick update on wood, while I'm here excuse me.
A lot of the costs for wood continues to remain high but we have made a lot of strategic changes to our wood supply chain that is beginning to benefit us any of those benefits and we continue to believe we're going to continue to see those benefits as we move through 'twenty, four and then well into the <unk>.
<unk> as well so with that that position will just a real quickly here just in case anybody is curious green for us which is largely corn, it's below its peak.
We're expecting it to be stable, but well below.
The prior year's prices and with the reduction of Natura natural gas and diesel prices, we will still see a bit of in as small a slight increase in our glass costs, but less than what we've had so all in all this is built into our guidance and in total our cost trends are moving.
And appear to be moving in a favorable direction for us. So I hope that helps as you think about gross margin, where we were for the quarter and kind of where we're thinking for the full year.
Thanks for the color.
Thank you.
Please standby for our next question.
Our next question comes from the line of Vivien <unk> with Cowen Your line is open.
Hi, good morning.
I was hoping to ask about advertising spending a little bit understanding that the growth. This quarter is really a phasing and we heard you loud and clear lyanne on kind of longer term aspiration to grow at E&P in line with sales but.
Lawson I was just curious how you're viewing the evolution of the competitive dynamic in TBA in the United States for a whole host of reasons a number of large public beer companies are stepping up their A&P for the remainder of the year and just wondering how youre thinking about the potential impact on the self spirits sales is.
Our result in the potential to potential need for you guys to spend more.
Yes.
I had not heard that the beer companies were really stepping up that much but I do think as you said the long term philosophy is to keep it in step with sale, we have significantly increased our pockets of spending in the last two years by well over $100 million and so.
I think we feel pretty good that we have got ourselves.
Comfortable place and I think we can manage the P&L from there.
Beer companies are struggling.
And so they are.
Quite sure they are trying to figure out ways to.
As we turn their brands around some brands are in real trouble and theyre going to find a way to try to spend the spend their way out of that but.
I don't see us doing that and I don't really think at least in the short term I don't see much of a reaction out of us because of that their challenges are sort of unique to them and we will continue to offer the way we have.
I don't mind, Vivien I'll kind of scoped back out and also and I'll just kind of talk about our full year, because I think we need to put what happened in Q1 into context with with how we're thinking about the full year. So I'm going to go a little bit broader first just to say like I've shared.
Lastly impacts of the pandemic.
More normalized level and we are on that elevated base.
We're still lapping impacts such as supply chain disruption.
But the reasons, we believe that we're going to deliver our full year guidance is we've lapped those strong shipments of the rebuilding of our distributor inventories and like we've talked about here today. Once we adjust for the estimated net change in distributor inventories that you stay on schedule D. We believe our brands and our business are really healthy so of how that back to how we're in.
Investing in at the investment really kind of came with the launch of.
Jack Daniels and Coca Cola in the U S. We're getting ready to launch that in September which is just a few days away in Germany. So when Lawson said in his prepared remarks that the majority of that hit in the first few months of the year is to support those launches and we're going to get back to that normal trend, but I think it's important to.
Go ahead, and say you know for our full year, we've got our pricing and our revenue strategies. We've got the addition in the back half of the year, that's not in the first half of the year, which is the impact of Gen Moray and diplomatic that'll be moving into our organic results. So.
We feel good about our top line guidance. We also feel good about the absence of supply chain disruptions and the cost associated with that we feel good that from a full year perspective, we will.
First in our brands in a way that lands with how we have planned it which is in line with top line growth that was heavily skewed to the front end and that what we've said this already but from an operating expense perspective, SG&A. We continue to invest in our route to consumers, we know thats true that Japan and assets of <unk> for fiscal 2020.
And with that all of this built into our guidance so even with all the noise that we're talking through today, we believe we're going to.
Land our operating income.
Growth at that 6% to 8%.
One more comment on the beer versus spirits thing more to the RTD World I think it's just.
And their need to advertise because the multi start td's, obviously have gone through a huge amount of our people in the last few years related exploded and then they've taken a sharp dive.
Most a lot of it is coming at the expense of the Arctic Spirit based our Tvs, which I've just I've found interesting I don't think any of us predicted that to happen, but I think at the end of the day.
The consumer is willing to pay more substantially more for spirit based RTD that are mall based RTD because they taste better.
And that is making the numbers get a little bit wild in the world of Nielsen and all the rest of it but.
I think we have.
Pro forma but I mean, the industry is showing that the.
The consumers willing to pay a little bit more for something that tastes really good and that's.
It's been interesting to watch those dynamics.
Absolutely. Thank you for that color if I can just squeeze in a quick follow up on Japan, specifically we've observed.
<unk> format.
Evolve the route to market process, and a number of different markets. Historically I've never seen this much dislocation. So can you just help us think through the 80% decline in Japan, and how that evolves over the course of the year. Thanks.
Yeah. So again, we've been working against scoping out working on our increasing our route to consumer and to own distribution models for quite some time, we've had prior to 2020 fiscal 2024, we've had 14 markets move into owned distribution, we've seen a lot of success they deliver a lot of things.
Like they fuel our growth strengthen our position they do unlock value for us and we're continuing to move forward in that so specifically and this year as it relates to Japan, we are in the process of transition.
Know that if you were to look at a year ago period.
We were.
With our distributor partner, we had inventory in that market to supply the sales and we're going through the just the transition and so as we again all of this is built into our full year plan, but again F. 'twenty fiscal 2024 for us is going to be a year of transition in Japan and with that we.
SG&A costs associated with it and we have.
Bit of volatility in our inventory levels as we make that transition.
Understood. Thank you.
Yes.
Thank you.
Please standby for our next question.
Our next question comes from the line of Bill Kirk with Roth MKS.
Hi, Good morning, everyone I wanted to ask about your inventory levels not necessarily the distributor levels naturally they are up from the glass shortage are you highlighted that however, if I go back further I have the days up about 25% over fiscal 19. So.
How do you feel about the amount of inventory you hold.
So what I would say and you can pricing some of this on our cash flow statement is that.
Again, as we compare to the prior year period, where we were working really really hard to get all of the supply chain replenished with finished goods inventory. We now have what we've talked about all of the all of the parts of the chain replenished, including our own inventory.
Rory.
We go into probably the important holiday selling period ready to supply that.
So we believe by the time, we it's a bit high right now if you again, if you look at for our own inventories, but as we go through the holiday period, we will by the end of the year. Our plan is that we have that work down and then our own inventories to our back in the normal that's the last piece of the chain that we will be normalizing.
And we are ready to make those shipments for the holiday season.
Okay excellent and then there were two comments I wanted to try to tie together I think Lawson you made both of them.
One was you mentioned is that absent distributor inventory changes net sales would have been above long term growth expectations.
But you also suggested that 1% depletions are below what people should expect going forward. So I guess, how are the net sales ex shipment timing above long term, but the completions below long term I'm, having a little trouble with those those two comments.
Well, that's just going straight to that schedule D. So that's where we would I think Liam said, if you adjust the distributor inventory topic, we'd be running it at 8% top line. So.
The reference to the.
Higher than sort of higher than historical norms in terms of sales growth and that's the part that gets honestly gives us feeling confident.
Because that number is pretty healthy, although 1% I think we've talked about that a few minutes ago. There's a lot of RTD movement in there that suppressing it.
But.
The other part of it is volumes, we've taken a lot of pricing I think that contributes to the two it too because we're getting more and more of our sales growth now is coming from pricing than it has over the historical periods.
So it's a little bit of a balance.
Thank you that's helpful.
Thank you please standby for our next question.
Our next question comes from the line of Stephen Powers with Deutsche Bank. Your line is open.
Yes, Hey, good morning.
I have two follow ups on two different questions. The first one just quickly on the agave topic, yes.
Is there a way to <unk>.
Summarize or quantify the percentage of the company's agave needs that you currently have the capacity to self grow versus sourced externally.
We haven't we've never shared that then it changes over time, depending on the category demand our finished goods inventory or liquid inventory. So it does ebb and flow and.
We do grow our own and we supplement it with external as we see demand above what we are able to grow ourselves and in our sourcing strategy. That's implied in there so again.
We are excited that the that is finally coming down that supplies coming on we continue to think that that's going to be a tailwind for us as we move through F. 'twenty, four and well through F. 'twenty five.
Okay. Okay fair enough. Thank you and then probably lost them for you.
Jack and Coke.
I'm wondering if you could talk at all about sort of the incremental distribution gains.
New launches that are planned over the balance of the fiscal year.
That should I think at least.
Partially offset.
The tougher comp in the fourth quarter as you lap the U S launch any perspective, there would be helpful. Also love if you have it.
Details on.
On consumer consumer repeat rates or what have you. What's the trial has been great, but just curious as to how much of the demand. We're seeing is incremental like first time first time trial versus.
Repeat repeated consumption. Thank you very much.
Alright, let me answer the second one first a little bit because it is we were obviously getting prepared for this and knew that question will come is very difficult to get sort of turns a repeat purchase rates. It's just too early we're getting massive distribution flow.
And that has been impressive and very good and so we've essentially reached most of our goals in a pretty short period of time.
Just don't have that I will have that I assume by next quarter, we'll probably have some indications on that there'll be a little bit better but it is just plain too early now.
Excuse me as.
As the year goes on the highlights.
Highlights I guess.
We've launched in the U K, we've launched in Spain and Poland.
Also I'm pretty well and I think we've talked about that.
Were really the big one that's coming is Germany, so that's going to happen in September and that.
Germany is a very large RTD market for brown Forman and so.
Sort of getting that right is obviously going to be very important but that will be exciting to watch and we'll see how that goes so.
And then Coca Cola is taking it in a lot of other getting bigger and a lot of other markets.
Places like Japan, we talked about the Philippines, the U K, Poland, Hungary, Netherlands, Ireland. So.
The international rollout continues.
Throughout this fiscal year.
Okay very good thank you so much.
Thank you.
Ladies and gentlemen, due to the interest of time I would now like to turn the call back over to Sue for closing remarks.
Thank you and thank you to Boston and Leann and thank you to everyone for joining us today for Brown <unk> first quarter fiscal year 2024 earnings call. If you have any additional questions. Please contact us.
We do look forward to presenting at the Barclays Global Consumer Staples Conference next week, and we hope to see many of you. There for those of you that are unable to attend the presentation will be made available as a webcast accessible via the brown Forman corporate website under the section titled investors events and presentations.
We also want to wish everyone, an enjoyable weekend, particularly those in the United States that will be celebrating the labor day holiday and on September 2nd We hope you will join us in raising a glass as we say happy birthday to our founder George Garbin Brown cheers, everyone with that this concludes our call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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