Brown-Forman Corporation Q2 FY2024 earnings call

• Consumer demand is normalizing back to historical trends after two years of strong growth.
• Portfolio reshaping with sale of Sonoma-Cutrer and acquisitions of Diplomatico and Gin Mare.
• Premium innovations like Jack Daniel's Bonded Rye and Jack & Coke RTD expansion.
• Gross margin expanded 280 basis points in first half due to favorable price mix, absence of supply chain costs, and lower tariffs.
• Operating expenses moderated in second quarter but affected first half operating income.

In the first half of fiscal 2024, reported net sales grew 2% with organic net sales up 1% after adjusting for acquisitions. Jack Daniel's Tennessee Apple grew organic net sales over 50%, New Mix up 22%, and Glenglassaugh contributed due to cask sales and relaunch. Diplomatico and Gin Mare added 2 percentage points to reported net sales. Geographic segments: Emerging international markets had strong double-digit organic net sales growth; Travel Retail was flat; Developed international markets were down 2%; US organic net sales decreased 5% due to lower volumes offset by higher prices. Revenue contribution: Jack Daniel's brands, Glenglassaugh, Diplomatico, Gin Mare were key contributors.

• Organic net sales growth expected to be in the 3%-5% range for fiscal 2024.
• Organic operating income growth expected in the 4%-6% range.
• Effective tax rate expected to be 21%-23%.
• Capital expenditures预计 to be $250M-$270M.
• Finlandia divestiture expected to be accretive to fiscal 2024 diluted EPS by an estimated $0.12 per share.

• Macroeconomic volatility and inflation impact on consumer spending.
• Uncertainty around EU tariff negotiations and potential return of retaliatory tariffs.
• Consumer demand slowdown affecting sales in certain markets and product categories.
• Supply chain disruptions and input cost pressures.

Q: So obviously, a tougher first half given the inventory dynamic. And I recognize if you back that out, organic would have been relatively solid in the first half. But to kind of hit the low end of the range, it does imply a return to kind of mid-single-digit growth in the back half of the year. So can you maybe just walk us through the confidence in the outlook at this stage? Should we expect growth to be more at the low end rather than the high end? And just -- any thoughts on phasing as we look out to the back half of the year? Maybe specifically, obviously, I'm not -- it might be hard to guess, but is there any kind of shipment dynamic if that's kind of occurring as we kind of work through this EU tariff situation?

A: Thanks, Peter. I'll start with that. Our guidance does imply that we're going to have sequential improvement in the second half. And as we shared in our Q1 call, we continue to remain cautious with changes in trends such as the impact of inflation on consumer spending and the current macroeconomic volatility and as you heard in our prepared remarks, we do expect kind of all of our markets and channels to continue to grow, but it's about the tempering of our expectations. And when we were specific to the United States, when we were on our call, in our first quarter, we were looking at U.S. 3-month value growth trends for TDS with acceleration and trends kind of in that mid-single digits. And the environment that we're in today has -- we've had a change or a shift in trends where we're looking at TDS decelerating in low single digits. So that's been included as we look out. But the drivers that we see for our acceleration is that you can see on Slide 5, we've now lapped and are growing on top of just a really exceptionally high first half of last year, which was a plus 17%. So like we said in our prepared remarks, that average is 8%. And one thing we've also talked about is we did launch Jack Daniel's and Coca-Cola in the second half of last year, and we will have to comp that as we go through the fourth quarter of this year. But again, generally speaking, the back half of the year, our -- we have significantly easier comps in the back half. And we continue to believe that we're going to be able to benefit from our long-term pricing strategy. We're really leaning on our revenue growth management strategies. We'll talk about that probably in a bit. What else is going to drive our acceleration is that Gin Mare and Diplomatico, our recent super ultra-premium acquisitions are going to come into our organic results in the back half of the year which will help us. And we continue to see that our cost trends are heading in the right direction, and we're on a path to gross margin recovery, which is going to continue to help deliver some of that acceleration in the second half as well as you heard us say in the first quarter call as well as this quarter, in the support of the launch of Jack Daniel's and Coca-Cola in the U.S., we just had a lot of operating expenses loaded into the first quarter of this year. We saw a moderation in the second quarter, and we're going to continue to see that moderation as we go through the rest of this year. So those are kind of the components that are built into our outlook.

Q: Hoping to follow up on your commentary around more cautious outlook on the U.S. also, maybe you can just unpack it a little bit. Are we more concerned around price elasticities? Is this more tempered outlook, a function of more down-trading than you were anticipating? Or is there something kind of more structural in terms of per capital consumption within spirits?

A: Oh, no. It's definitely not the last. Look, I think it is simply a -- the consumer has weakened a bit over the last 3, 4, 5 months, that's kind of what's changed since where we would have been last quarter. As Leanne went through it, I mean, if you just look at TDS, which as you know, has been running at 4% to 5% for 20 years or something like that, certainly stepped up over the COVID, which I know some of you called it a super cycle. Went up quite a bit over those years. And it's come back down. And I would have said most of 2023 -- calendar 2023, we were in that mid-single-digit range, and then it really fell off over the last, as I say, 3 or 4 months. And so I think there's just been a bit of weakness in consumer confidence that has hit the entire market and brought the number down a little bit, but it's still growing, I should say, too. It's still at a sort of plus 2% range. And so it just made us get a little bit more cautious on the outlook for the U.S.