The Operator welcomes participants to the Brown-Forman Corporation Second Quarter and First Half of Fiscal Year 2024 Earnings Conference Call. After the speakers' presentation, there will be a question-and-answer session. The conference call contains forward-looking statements and numerous risks and uncertainties may cause actual results to differ. The Company will not update these statements unless required by law. The press release and presentation materials can be found on the Company's website. Risk factors are listed in the press release and in the Company's SEC filings.

Lawson Whiting, the CEO of the company, is discussing the non-GAAP financial measures during the call. He thanks everyone for joining the call and shares the key drivers behind the company's second quarter and first half results for fiscal 2024. These include a normalization of consumer demand, growth on top of a strong prior year, contributions from new brands, and the sale of Sonoma-Cutrer. He also mentions higher input costs, but they were offset by favorable price and mix. The operating expense growth rate moderated in the second quarter, but the timing and phasing of expenses had an unfavorable impact on the first half operating income. Overall, the company saw a 2% increase in reported net sales and a 1% increase in organic net sales after adjusting for recent acquisitions.

Despite a slowdown in consumer spending and a normalization of demand for their brands, the company has seen consistent growth in the first half of fiscal years 2023 and 2024. This growth has been supported by the company's strong brand portfolio and their ability to navigate dynamic and challenging times through their global reach and focus on premium and super premium brands. The impact of distributor inventory changes has also been a factor in their organic net sales, but the company believes their fundamental health remains solid.

The first half of the fiscal year saw organic net sales growth driven by Jack Daniel's Tennessee Apple, New Mix, and Glenglassaugh. This was partially offset by volume declines due to an inventory rebuild in the previous year. Jack Daniel's Tennessee Apple saw significant growth in South Korea, while New Mix gained value share in the RTD category in Mexico. Glenglassaugh, a single malt scotch brand acquired in 2016, has shown strong potential through its old and rare program. A single cask from 1967 recently sold for a high value, making Glenglassaugh the 3rd largest contributor to organic net sales growth. The brand has also been relaunched with a 12-year old expression, new packaging, and creative assets.

Brown-Forman has seen strong growth potential in their single malt scotch brands, including their newest acquisitions of Gin Mare and Diplomático. They have also made deliberate decisions to sell certain brands, such as Finlandia Vodka and Sonoma-Cutrer, in order to focus on their strategic ambitions and portfolio priorities. The sale of these brands will allow them to continue participating in the premium and ultra-premium wine category through an equity ownership stake in the Duckhorn Portfolio. They have confidence in the future growth of Sonoma-Cutrer under the ownership of the Duckhorn Portfolio.

The company has also focused on premium innovations, including the release of Jack Daniel's Bonded Rye and the expansion of the Jack and Coke ready-to-drink beverage into multiple markets. This has led to positive feedback and market share gains. The company expects this premiumization to drive long-term growth and value creation. Additionally, the company's gross profit and operating expenses have both increased ahead of top line growth, thanks to their pricing strategy and brand investments.

In the first half of fiscal year 2024, Brown-Forman has seen a 280 basis point gross margin expansion due to favorable price mix, absence of supply chain disruption costs, and lower tariff-related costs. Operating expenses have also moderated, with organic advertising expense growing by 12% and SG&A investments increasing by 9%. The company is also working to prevent the return of EU tariffs on American whiskey through ongoing negotiations between the U.S. and EU.

The author believes that both the U.S. and EU governments are working towards finding a solution to avoid the return of tariffs on spirits. They are confident in their long-term strategic plans and thank their employees for their efforts. The company's emerging international markets showed strong growth, with Jack Daniel's Tennessee Whiskey leading the way. The author also provides additional details on the company's financial performance and updates their outlook for fiscal 2024.

The company's new mix and Jack Daniel's Tennessee Apple are seeing strong growth in Mexico and other international markets. They have launched their own distribution in Slovakia to expand their portfolio, including recently acquired Diplomático Rum. The travel retail channel saw flat sales due to a high growth period last year, but their super premium American whiskeys are performing well. Developed international markets saw a decline, but Jack Daniel's Tennessee Apple and Glenglassaugh drove growth in South Korea and Singapore. El Jimador is also performing well and helping to grow the premium tequila category outside of the U.S. and Mexico.

In the United States, Brown-Forman experienced a 5% decrease in organic net sales due to lower volumes and higher prices. This was mainly due to a decrease in distributor inventories, which had been artificially inflated in the previous year. The company expects this trend to continue as consumer demand for premium spirits has slowed. However, their portfolio is still benefiting from the popularity of RTDs, U.S. whiskey, and tequila. The launch of the Jack Daniel's and Coca-Cola RTD and demand for their super premium products are offsetting the decline in volume. The Jack and Coke RTD is gaining share and bringing attention to the entire Jack Daniel's brand family. Additionally, new specialty releases like Jack Daniel's Bonded Rye and Barrel Proof are experiencing strong growth.

The innovations in the Jack Daniel's family of brands have led to an increase in gross profit and operating income, but a decrease in diluted earnings per share due to higher interest expense. The company has also announced a share repurchase program and a 6% increase in quarterly cash dividend. Brown-Forman remains cautious in uncertain market conditions but confident in the long-term potential of their brand portfolio. Their capital allocation philosophy has resulted in a strong balance sheet and superior returns.

The company remains optimistic about their capital allocation philosophy and strategic ambitions delivering strong results for investors. They expect to continue growing due to long-term pricing and revenue strategies, as well as the addition of two premium brands to their portfolio. However, they remain cautious due to macroeconomic volatility and potential impact of inflation on consumer spending. They have revised their fiscal 2024 outlook to reflect slower growth in the first half of the year, particularly in the United States and Mexico. They now expect organic net sales growth to be in the 3% to 5% range. The company also highlighted the impact of strong shipments in the previous year due to supply chain disruptions easing.

The paragraph discusses the impact of stronger shipments due to the launch of Jack Daniel's and Coca-Cola RTD in the United States, as well as the potential negative effects of inflation on input costs. The company expects a normalization of advertising spend and higher SG&A expenses, resulting in a projected organic operating income growth of 4% to 6% for the fiscal year. The effective tax rate and capital expenditures for the year are also mentioned. Additionally, the paragraph mentions the sale of the Finlandia brand and the customary closing process for divestitures.

The adjusted sale price and absence of Finlandia’s operating income in the second half of fiscal 2024 are expected to result in a $0.12 per share increase in diluted earnings per share. The company has now lapped historically high first half net sales growth rates and will begin to compare against a more normalized environment in the second half of fiscal 2024. The company is confident in its outlook and expects to benefit from its strong brand portfolio, pricing strategy, and gross margin recovery. Despite facing disruptions and challenges, the company remains focused on executing its strategy and delivering sustainable long-term performance. During the Q&A session, the company was asked about its confidence in the outlook and the possibility of growth being more towards the low end of the range.

In response to a question about the shipment dynamic during the EU tariff situation, Leanne Cunningham explains that their guidance implies sequential improvement in the second half of the year. However, they remain cautious due to inflation and macroeconomic volatility. Trends have shifted in the US, with TDS decelerating in low single digits. The company expects growth in all markets and channels, but their expectations have been tempered. They have easier comps in the back half of the year and will benefit from their long-term pricing strategy and revenue growth management.

In the second half of the year, the recent acquisitions of Gin Mare and Diplomático will contribute to the company's growth. The company is also seeing positive trends in cost and gross margin recovery. There were a lot of operating expenses in the first quarter due to the launch of Jack Daniel's and Coca-Cola in the U.S, but these are expected to moderate in the rest of the year. The company has not been shipping additional cases to Europe ahead of potential tariffs and believes that the situation will be resolved without major impact on their business.

Lawson Whiting, CEO of Brown-Forman, explains that even if the deadline for negotiations is reached, there is still a possibility for negotiations to continue. He also discusses a more cautious outlook for the U.S. market due to recent consumer weakness, but notes that it is still growing. The company's recent acquisitions of Gin Mare and Diplomático are expected to contribute to organic growth.

In the paragraph, Leanne Cunningham discusses the company's outlook for growth for two of their brands, Gin Mare and Diplomático, which have performed well in European markets. She also mentions that distributor inventories have normalized, and that the impact of the change in inventories is related to a year-over-year comparison. She notes that the company's shipments and depletions are largely aligned.

The company has resolved supply chain challenges and inventories are returning to normal. Recent acquisitions are not yet reflected in the schedule. The U.S. and Europe are back to normal, while Brazil and Mexico show strong business and normal inventories. The company is monitoring changes in trends and adjusting accordingly. The company also addresses potential risks in the tequila business due to high agave costs and a slowdown in consumption levels.

Tequila has been growing in popularity among young adults and has been performing well in the ultra-premium price point. The speaker expects the big players in the market to reap the benefits of higher margins and does not anticipate significant changes in promotional pricing. The next question asks about the expected growth rate for the U.S. spirits market, and the speaker responds that they are currently seeing low-single-digit growth and hope to get back to mid-single-digit growth in the future, but it is uncertain when this will happen. The question also asks for any updates on the current month's performance in the U.S., but the speaker does not provide any specific information.

Lawson Whiting, CEO of Brown-Forman, discusses the current state and potential future of the spirits market in the United States. He notes that it is difficult to predict when the market will rebound, but believes it is a resilient category and will likely return to its previous growth rate in 6 to 12 months. He also mentions that he has not seen any significant changes in the spirits market since the end of the quarter. Leanne Cunningham, Chief Financial Officer, confirms that the divestiture of Finlandia is included in the company's guidance.

During a recent financial call, Leanne Cunningham and Lawson Whiting from Brown-Forman discussed the impact of Finlandia on their guidance for the year. They clarified that the guidance is based on an organic outlook, which excludes the benefits from Finlandia. They also addressed concerns about potential slowing in the U.S., global travel retail, and Mexico, stating that the company expects these areas to return to their historical rates of growth. Mexico has been a strong market for Brown-Forman, led by the success of the brand New Mix.

The company is expecting a slowdown in the Mexican market for tequila and whiskey, but they are still gaining market share. They also mention that their GTR is comping at plus 67%. The Sonoma-Cutrer deal was a creative solution and the company is still focused on reshaping their portfolio to focus on spirits.

The speaker discusses the company's portfolio of wine brands and how they have focused on premiumization in recent years. They mention the sale of Sonoma-Cutrer to the Duckhorn Group, which they believe will create more value for the brand. They also mention their presence in Latin America, specifically Brazil, which is facing some challenges, and the UK and Western Europe, where sales have been down.

The speaker discusses the impact of supply chain constraints on the consumer environment in Brazil, where the Jack Daniel's flavor portfolio has seen improved supply and increased market share. They also mention a transition in the UK market from Jack and Cola to a market led by Coca-Cola, and challenges in the French market due to declining consumer sentiment and high inflation.

The company believes that Diplomático rum will have a strong impact on the French market in the mid to long term. They also mention the success of Jack Daniel's Tennessee Apple in Brazil and Korea, but acknowledge that its launch during COVID did not meet expectations. They are optimistic about the potential of Jack Daniel's Tennessee Apple and expect it to be a significant addition to their product line. The Jack and Cola business in the UK will no longer be included in their results, and they expect a significant drag on growth for the next three quarters until they fully lap it. In regards to the lowered growth expectations in the US, they do not specify which product category (whiskey, tequila, etc.) is affected.

In the paragraph, Leanne Cunningham discusses the impact of rebuilding inventories and growing on top of that in the year-ago period. She also mentions that Gin Mare and Diplomático will have a positive impact on the U.S. market. Lawson Whiting adds that American whiskey and tequila are still the strongest categories in the U.S. spirits business, with the delta being more on the tequila side. He also points out that Jack Daniel's Tennessee Whiskey saw a significant increase in volume last year.

The paragraph discusses the performance of the Jack Daniel's brand over the first half of the year and addresses concerns about its decline in sales. The company reassures that the brand is still healthy and has been a strong source of growth for Brown-Forman in the past. They also mention the success of their new product, Jack Daniel's and Coca-Cola, in the ready-to-drink market. The company revises their expectations for tequila growth, which will result in a decrease in overall growth. The caller asks about potential price increases in the U.S. and the company's distribution strategy.

The speaker is discussing pricing and execution in the wine and spirits industry, specifically in the U.S. market. They mention that they have a solid pricing strategy and are not planning on changing it. They also mention that there has been consolidation in the distribution space, but they are comfortable with their current distributors and have good relationships with them.

The speaker does not anticipate any major changes in the near future and thanks everyone for joining the earnings call. She also notes that it is the 90th anniversary of Repeal Day and Brown-Forman becoming a publicly traded company, and wishes everyone a happy holiday season. The operator then concludes the call.

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