Brown-Forman Corporation Q1 FY2025 earnings call

Brand Performance

• Diplomático Rum had strong Q1 results. Old Forester showed double-digit organic net sales growth. Woodford Reserve's organic net sales grew with US volume. Jack Daniel's Tennessee Honey and Apple had mid-single-digit growth. Jack Daniel's Tennessee Whiskey declined 6% due to lower volumes. Jack Daniel's and Coca-Cola RTD expanded markets and launched new products. Gin Mare was impacted by ordering patterns.

Gross Profit and Margin

• Reported gross profit decreased 13% and organic decreased 8% to 59.4%. Impacted by transition service agreements with lower gross margin than finished goods sales, and input cost fluctuations. Favorable product mix contributed 200 basis points, and Jack Daniel's Country Cocktails business model change positively impacted 70 basis points.

Geographic Performance

• Developed international markets: Organic net sales declined 6% with Japan's growth offset by UK and Germany declines. US organic net sales decreased 4% with Woodford and Old Forester outperforming the category. Emerging international markets: Organic net sales declined 5% due to Mexico and UAE declines, partially offset by Türkiye and Brazil growth. Travel Retail channel organic net sales decreased 8%.

In the first quarter of fiscal 2025, reported net sales declined 8% with organic net sales decreasing 4% after adjusting for divestitures, foreign exchange, and Jack Daniel's Country Cocktail business changes. Diplomático Rum had strong results. Old Forester saw double-digit organic net sales growth. Woodford Reserve's organic net sales grew due to US volume, being one of two growing top 20 US distilled spirits brands. Jack Daniel's Tennessee Honey and Apple had mid-single-digit growth. Jack Daniel's Tennessee Whiskey declined 6% due to lower volumes in key markets. Jack Daniel's and Coca-Cola RTD expanded into new markets. Gin Mare faced a slight decrease in organic net sales. Divestitures of Finlandia and Sonoma-Cutrer affected gross margin.

Full-Year Outlook

• Reaffirmed full-year growth outlook for fiscal '25. Expect sequential improvement in the second half. Anticipate organic net sales growth in 2%-4% range driven by international markets. Expect reported gross margin expansion with sequential improvement. Organic operating income growth expected in 2%-4% range. Effective tax rate expected 21%-23%. Capital expenditures expected $195 million-$205 million. Second quarter of fiscal 2025 will reflect equity shares of The Duckhorn Portfolio's earnings/losses.

Risks

• Global macroeconomic and geopolitical uncertainties impacting the operating environment. Inventory levels and input cost fluctuations affecting gross margin. Consumer and trade impacts from higher inflation and interest rates. Competition in the spirits market, including from RTDs and cannabis beverages potentially impacting market share.

Q: Peter Grom asked about confidence in achieving full-year target and second quarter performance.

A: Leanne Cunningham reiterated it's a year of 2 halves, expecting sequential improvement. Second quarter to more closely reflect total distilled spirits trends, with second half benefiting from full year growth of Gin Mare and Diplomático and lapping soft total distilled spirits trends.

Q: Andrea Teixeira inquired about trade inventory levels and consumer takeaway.

A: Leanne Cunningham said distributors target low end of normal range, retailers adjust inventories. Depletions in line with shipments, consumer demand is key.

Q: Eric Serotta asked about inventory reduction and industry stockpiles.

A: Leanne Cunningham said they reduced finished goods, WIP, and raw material inventories year-over-year, with some finished goods up due to tariff preparation. Lawson Whiting discussed industry supply situation, saying whiskey supply not a big risk currently.

Q: Nadine Sarwat asked about underlying net sales weakness and consumer health.

A: Lawson Whiting mentioned timing of price increases and promotions impacting sales. Leanne Cunningham noted premiumization trends and share gains in some international markets despite consumer challenges.

Q: Filippo Falorni asked about gross margin cost impact and transition service agreements.

A: Leanne Cunningham said cost impact was timing-related, with second half expected to benefit from lower inventory impact. Transition service agreements planned to end in second half.

Q: Robert Moskow asked about Jack Daniel's marketing to younger consumers and metrics.

A: Lawson Whiting said they track consumer insights monthly, with new campaigns like 'Back in Black' showing progress in resonating with younger consumers.

Q: Nik Modi asked about industry trade drop and cannabis beverage impact.

A: Lawson Whiting said he couldn't comment on trade drop source, and doesn't see cannabis beverages significantly impacting spirits.

Q: Stephen Robert Powers asked about tequila softness and future outlook.

A: Lawson Whiting discussed tequila category growth, price pushing in Mexico and US, and el Jimador's international positioning as growth opportunities despite recent softness.