Brown-Forman Corporation Q3 FY2024 earnings call

• Industry Trends: Last few years have been volatile with consumer consumption shifting post-pandemic, normalizing now but facing high inflation and interest rates. - Supply Chain: Adjusting back to normal demand, facing inflation, rates, and competition. - Gross Margin: Improved due to pricing strategy, premium brand growth, absence of prior year supply chain disruption costs offsetting higher input costs. - Brand Performance: Jack Daniel's Tennessee Apple, New Mix, Glenglassaugh, Woodford Reserve, Old Forester, and new brands like Gin Mare and Diplomatico showed varied growth and strength.

In the 9 months of fiscal 2024, organic net sales growth was flat. The largest growth contributors included Jack Daniel's Tennessee Apple (driven by international rollout, especially Brazil, Chile, and South Korea), New Mix (double-digit growth in Mexico), and Glenglassaugh (growing awareness and prestige, with CASK sales and being named Whiskey of the Year). Jack Daniel's super-premium expressions (Sinatra, Single Barrel Rye Barrel Proof, Bonded Rye) had strong double-digit growth. Woodford Reserve returned to growth due to luxury expressions. Old Forester crossed the 0.5 million 9-liter case milestone with its Whiskey Row series. Gin Mare and Diplomatico, new super and ultra premium brands, delivered strong double-digit organic net sales growth in Q3. Jack Daniel's Tennessee Whiskey was a significant offset to growth, lapping high comps and facing volume declines in certain markets.

• Organic net sales growth expected to be flat for fiscal 2024. - Gross margin expected to expand as higher input costs from inflation offset by price mix and absence of supply chain disruption. - Organic operating income growth expected in the range of 0% to 2% for full fiscal year. - Effective tax rate range revised to approximately 20% to 22%. - Capital expenditures expected to be in the range of $230 million to $240 million for the full year.

• Consumer demand normalization could impact short-term results. - Inflation and increased interest rates pose challenges. - Intense competition in the spirits industry. - Supply chain disruptions and logistics challenges remaining a potential issue.

Q: Still confused about where the shortfall stemmed from in the quarter and going into Q4, especially with softer holiday demand globally.

A: Leanne Cunningham and Lawson Whiting explained that softer consumer trends during the holiday selling season in key markets like the U.S., U.K., and France limited top line acceleration. Christmas was surprisingly weak globally.

Q: Thoughts on inventory levels in Q4, consumer pantry destocking, and category growth getting back to mid-single-digit range.

A: Leanne and Lawson discussed that consumer takeaway was lower than expected during the holiday season, inventories are in line but consumer pantry destocking is affecting. Lawson believes category growth will return to mid-single-digit range next year as inventory issues resolve.

Q: Changes in U.S. consumer behavior, trade down, and on-premise perspective.

A: Lawson stated no significant trade down in the U.S. as $30 and above products are growing. Pricing environment is holding up, and on-premise data wasn't immediately available but TDS shows acceleration.

Q: Buying patterns, impact of interest rates, and Japan business.

A: Leanne said buying patterns are affected by prioritizing inventory replenishment, and Japan's business is being rebuilt with own distribution model set to launch in April, with brands still healthy.

Q: Fiscal next year growth, macro factors like GLP-1s, and Japan business scale.

A: Lawson and Leanne discussed that return to 4%-5% growth is expected over 12-24 months, macro factors are short-term challenges, and Japan's business is set to be a growth driver.

Q: Pricing, promotions, and barrel whiskey inventories.

A: Lawson talked about steady pricing strategy, not seeing significant discounting impact data. Leanne discussed barrel whiskey inventories are adjusted semiannually to future demand.

Q: RTD spirits impact, structural growth, and margin implications.

A: Lawson noted RTDs boost TDS but are volatile. Leanne said RTDs have less liquid per case but are planned for broader reach, with margin implications considering lower gross margins for RTDs but higher for some joint-funded brands.