The Brown-Forman Corporation held an earnings call for their fourth quarter and fiscal year 2023. Sue Perram, Vice President, Director, Investor Relations, welcomed everyone to the call and introduced Lawson Whiting, President and Chief Executive Officer, and Leanne Cunningham, Executive Vice President and Chief Financial Officer. The call contains forward-looking statements and the company cautions against placing undue reliance on these statements. The press release and presentation materials can be found on the company's website under the section titled Investors, Events and Presentations. The call also discussed certain non-GAAP financial measures.

In fiscal 2023, Brown-Forman experienced strong top line and bottom line growth despite facing numerous headwinds such as supply chain challenges, higher input costs, negative foreign exchange, and the impacts of the Russian invasion of Ukraine. Despite these headwinds, the company was able to grow net sales at an 8% compound annual growth rate since fiscal 2019, and significantly exceeded their top line growth ambition of mid single-digit growth.

In fiscal 2023, the company reported 8% net sales growth, driven by broad-based growth across all geographic clusters and the travel retail channel. Price/mix was up 3 points due to higher prices across the portfolio, led by Jack Daniel's Tennessee Whiskey. The brand had another remarkable year, increasing organic net sales by 8%. This growth was driven by strong consumer demand and higher pricing.

Jack Daniel's has been successful in the premium spirits market, with strong organic net sales growth during the fiscal year and recognition from Whiskey Advocate Magazine for its Jack Daniel's Bonded Tennessee Whiskey. The company has also recently become an official global sponsor of McLaren Racing, a British Formula One racing team, in order to reach a global fan base and expand Jack Daniel's relevance in pop culture.

Woodford Reserve grew significantly in 2023, with its Kentucky Derby bottle commemorating the 50th anniversary of Secretariat winning the 1973 Derby. Jack Daniel's RTDs also experienced double-digit growth, driven by the launch of the Jack Daniel's and Coca-Cola RTD in the U.S. and other markets.

Jack & Coke has been receiving positive feedback in the markets it has been launched in, and is taking share across the category in the US. It has exceeded 1 billion consumer impressions before any paid media aired, and is continuing to launch in additional markets. The RTD product has been experiencing accelerated growth, and Casa Herradura's tequila brands are also performing well in the premium plus price points.

In fiscal 2023, Herradura and El Jimador saw strong organic net sales growth, even in the face of supply chain challenges. Brown-Forman is investing $200 million at Casa Herradura to expand distillery operations, bottling, maturation, and processing areas, as well as to advance their waste-to-energy efforts with a water recycling and treatment plant. Additionally, they have reshaped their portfolio by acquiring Gin Mare and Diplomatico, which only had a small impact on reported net sales.

Brown-Forman achieved strong broad-based results in fiscal 2023, with organic net sales growth in each geographic cluster and the travel retail channel. This was due to consumer demand for their brands, despite stronger-than-expected inflation and supply chain challenges. They have also invested significantly in their brands and people, and are looking forward to fiscal 2024 with confidence. Leanne Cunningham will provide additional details on their geographic performance, other business results and their outlook for fiscal 2024.

In fiscal 2023, emerging international markets delivered strong double-digit organic net sales growth, driven by Jack Daniel's Tennessee Whiskey, RTDs, Herradura, and El Jimador. Developed international markets also grew double digits, with Jack Daniel's Tennessee Whiskey leading the way in Germany and Japan, where the brand is gaining share and benefiting from strong consumer demand. Jack Daniel's will transition to own distribution in Japan effective April 1, 2024, with the support of Asahi and their team.

Brown-Forman has had success with launching distribution organizations in Asia, and is transitioning to own distribution in Belgium. Jack Daniel's RTDs and other premium and super-premium brands like El Jimador, Woodford Reserve, Gentleman Jack, GlenDronach, Diplomatico, and Gin Mare have seen double-digit organic net sales growth in Europe. Despite inflation, their brands have gained share in Germany and the UK and spirits remain an affordable luxury for consumers.

In the first half of fiscal 2023, Brown-Forman experienced a 3% organic net sales growth due to increased shipments as supply chain disruptions eased and distributor inventories returned to normal levels. This growth was driven by strong consumer demand for Woodford Reserve, the launch of Jack Daniel's and Coca-Cola RTD, and higher prices across the portfolio. The second half of the year saw a decrease in net sales due to the prior year's increase in shipments related to inventory rebuilding.

Brown-Forman's sales in fiscal 2023 grew partially offset by lower volumes of Jack Daniel's Tennessee Whiskey and Korbel California champagne due to focus on rebuilding inventory levels. The gap between Nielsen takeaway and actual results is narrowing as the industry begins to normalize. Total distilled spirits delivered value growth in the low to mid-single digits, and Brown-Forman is outpacing this growth with recent innovation. Distributor inventory levels are now back to normal, and the travel retail channel has returned to pre-COVID levels with organic net sales growth of 43%. Gross profit and gross margin increased 4% and 9% organically, respectively, with a slight contraction of 180 basis points on the gross margin.

The price mix of American whiskey was offset by higher inflation on input costs and supply chain disruption costs due to global logistics constraints, as well as negative foreign exchange. In order to reinvest in their brands, the company increased their brand investment, primarily for Jack Daniel's Tennessee Whiskey, the launch of Jack Daniel's Bonded, Herradura and Woodford Reserve. SG&A expenses increased due to higher compensation-related expenses and higher discretionary spend. Reported operating income decreased due to lower gross margin, higher non-cash impairment charges and higher operating expenses. Organic operating income, which excludes the impact of foreign exchange, impairment charges and acquisitions and divestitures, grew 8%.

The company has a capital allocation philosophy of investing in their business, paying increasingly regular dividends, and looking for acquisitions that create long-term value. In 2023, they generated strong cash flow, which enabled them to meet their operating needs, fund capital expenditures, and return $378 million to their stockholders. They also issued $650 million 10-year senior unsecured notes to refinance their existing debt and fund their acquisition of Gin Mare and Diplomatico. The company believes their long-held capital allocation philosophy and strategic priorities will drive superior returns for the long-term.

After two years of strong growth, the company expects organic net sales growth for fiscal 2024 to be in the 5-7% range. This growth is partially offset by a portfolio mix shift to RTDs, largely related to the launch of Jack Daniel’s and Coca-Cola RTD. The company is cautious due to macroeconomic volatility and inflation, but expects to benefit from pricing and revenue growth management strategies. Inflation will negatively impact input costs, but will be partially offset by lower costs associated with supply chain disruption.

Brown-Forman is expecting a normalization of incremental advertising spend in fiscal 2023, with SG&A growth remaining higher than historical averages. Organic operating income growth is expected to be in the 6-8% range, and the effective tax rate is expected to be in the 21-23% range. Capital expenditures are estimated to be in the range of $250-270 million. Despite disruptions and challenges in fiscal 2023, the company delivered double-digit organic top line and high single-digit organic bottom line growth. Brown-Forman is optimistic about the fiscal year ahead, believing that the strength of their premium and iconic brand portfolio, along with the talent and diversity of their team members, will enable another year of consistent growth.

Leanne Cunningham of the company addressed Vivien Azer's concern about alcohol inventories in the U.S. She reported that the company's distributor and retailer inventories are back to normal in the U.S., and in Europe, their stock levels are also largely back to normal after supply chain challenges in fiscal '22. The company has been updating investors on the situation every quarter as they have faced global supply chain challenges with glass and logistic constraints.

Leanne Cunningham discussed the company's outlook on gross margins for the fiscal year 2024. She stated that the operating income guidance includes brand expenses in line with top line growth and SG&A that is still a bit above the historical norms due to higher compensation and the addition of the Japan RTC. The gross margin assumes that the company will continue to benefit from their long-term pricing and revenue growth management strategies.

The cost of supplies such as agave, wood, grain, glass, and labor have been affected by various factors, such as global logistics, inflation, strong demand, and wage inflation. The prices of agave and grain have been easing, while the cost of wood and labor remain high. The EU removal of tariffs on American whiskey has had a positive impact, and the UK tariffs that were removed June 1, 2022 will have a slight positive impact in F '24.

Leanne Cunningham explains that the company is focused on growing their value share, which is reflected in their long-term pricing strategy. They have also increased their capabilities in terms of revenue growth management, which is beginning to positively impact their gross margin. Additionally, the historically high levels of agave and wood costs in their portfolio have had an outsized effect. The company is also monitoring the external agave price.

Lawson Whiting explains that the pricing strategy has been low-single digits, ranging from 2-3%, and has been successful across all of their brands. They plan to continue this strategy, which is different from other consumer products sectors and even within their own industry, which have been more aggressive.

Glass supply has been a challenge for the company since the start of the pandemic, and they have been working closely with their partners to ensure they have the capacity and quality of glass needed. They have also spoken about it in multiple quarters. There is some chatter in the industry about promotional activity in tequila picking up, which the company is monitoring.

Lawson Whiting discussed the tequila industry, noting that some of the big brands have slowed down, likely due to their high growth rates in the previous years. He also mentioned that glass supply constraints have been fixed and the outlook for growth in the category is better. Lastly, he stated that he has no intention of increasing discounting on their brands given the elevated costs.

Lawson Whiting from Brown-Forman provided an update on the Jack & Coke rollout, which is currently in nine markets including Mexico, the U.S., Japan, Philippines, the UK, Poland, Hungary, the Netherlands, and Ireland. The turn rates have been on plan or slightly better than planned, and the Coca-Cola Company and Brown-Forman are working together to promote the product through programming and advertising. Even though the profits may be modest in the early years, the visibility and advertising spending are providing a benefit to the Jack Daniel’s brand.

Leanne Cunningham explains that the gross margins on their RTDs are lower than their company average, but the Jack Daniel's and Coca-Cola RTD launches are supported by both Brown-Forman and the Coca-Cola Company which should lead to higher operating margins. This is due to the transition from existing Jack Daniel's and cola business to Jack Daniel's and Coca-Cola.

In the 30 years that Jack Daniel's has been producing Ready-to-Drinks (RTDs), they have proven to be a great marketing and connectivity tool for their full-strength brand. An example of this is in Germany, where Jack Daniel's is the number one American whiskey and has seen growth and share gains. The company believes that the premiumization of their business with the Jack Daniel's and Coca-Cola RTD will have a positive effect on their entire family of brands. For the fiscal year of 2024, Jack Daniel's is expecting increased consumer demand and a return to their historical trends, setting on top of the elevated base created by the pandemic.

Lawson Whiting and the speaker discussed the company's long-term pricing strategy and revenue growth management. They mentioned that there will be some bumps in the road in F '24 due to the lapping of the Jack Daniel's and Coca-Cola launches and the absence of their Russia business. However, they also noted that Nielsen figures are back in the 4-5% range for TDS and the U.S. market had an overall 3% growth in '23. They cautioned against extrapolating their story to a statement about consumer health around the world and noted that overall, the market is back to normal.

Brown-Forman is expecting mid-single digit sales growth in the US market, and higher growth outside of the US. However, there is evidence of down-trading in Europe. In the US, the super-premium and ultra-premium price points continue to grow at a faster rate than standard or just premium, though the gap has closed a bit. Brown-Forman is also seeing growth in Germany, the UK and Poland.

At the conclusion of the call, Lawson Whiting offered his condolences on behalf of Brown-Forman to the family and Diageo community for the passing of Diageo's CEO, Ivan Menezes. The operator then thanked everyone for participating and concluded the call.

This summary was generated with AI and may contain some inaccuracies.