The operator introduces the Brown-Forman third quarter and year-to-date fiscal 2024 earnings call and informs participants that the call is being recorded. Sue Perram, Vice President and Director of Investor Relations, thanks everyone for joining and introduces Lawson Whiting, President and CEO, and Leanne Cunningham, CFO. Perram cautions that the call contains forward-looking statements and that numerous risks and uncertainties may affect future results. The company has issued a press release and posted presentation materials on their website, which includes a list of risk factors to consider.

In the call, Lawson Whiting discusses the third quarter and year-to-date results for Brown-Forman and the current dynamics and trends in the spirits industry. He mentions the volatility and complexity in the industry over the past few years and how the pandemic has affected consumer behavior, leading to a shift in spirits consumption from bars and restaurants to at-home consumption. He also notes the recent normalization in demand for spirits and the impact of consumers prioritizing vacations and experiences over at-home entertaining. This has been referred to as the "COVID super cycle" in the industry.

In 2023, consumers were returning to normal spending patterns after the pandemic, but were faced with high inflation and interest rates. This led to weakening takeaway trends in the spirits industry. However, Brown-Forman believes this is temporary and does not reflect a long-term change in consumer behavior. The company also faced challenges related to the pandemic, such as supply chain disruptions and increased competition. Despite these challenges, Brown-Forman remains confident in the long-term health of the spirits industry. The company has also seen improvement in its gross margin through pricing strategies and revenue growth management.

The company has seen growth in their super premium brands, leading to favorable price mix and improved gross margin. However, their net sales growth has only increased 1% in the first nine months of the fiscal year, compared to strong results in the previous year. The growth was driven by Jack Daniel's Tennessee Apple, New Mix, and Glenglassaugh. The rollout of Jack Daniel's Tennessee Apple was initially slowed by the pandemic, but as supply and logistics challenges eased, the brand saw strong growth in markets like Brazil, Chile, and South Korea. Despite challenges in Mexico, New Mix continues to see double-digit growth due to higher pricing and gaining value share in the RTD category.

Glenglassaugh, a brand owned by Brown-Forman, has gained recognition and prestige among whiskey enthusiasts. It was named the 2023 Whiskey of the Year by Whiskey Advocate Magazine, making it the second year in a row that a Brown-Forman brand has received such a prestigious award. The brand has also seen strong sales growth in its super-premium expressions, such as Jack Daniel's Bonded and Single Barrel Rye. This growth is a result of the company's efforts to elevate the Jack Daniel's family of brands through innovation and special launches. The Jack Daniel's and Coca-Cola RTD has also been successful, winning awards and becoming the number one RTD SKU in several markets.

The Jack Daniel's RTD portfolio had minimal impact on organic net sales, as the transition to Jack & Coke is expected to support long-term growth. Woodford Reserve returned to growth, driven by luxury expressions, while Old Forester reached a milestone of 0.5 million cases sold. New super and ultra-premium brands, Gin Mare and Diplomatico, saw strong growth. Jack Daniel's Tennessee Whiskey had a decline in volume due to route-to-consumer transitions and inventory rebuild, but the brand remains strong with positive long-term performance and brand health.

Jack Daniel's Tennessee Whiskey has been named the most valuable spirits brand for the eighth year in a row. The brand has strong consumer awareness and is supported by various marketing campaigns. The company has plans in place to continue growing the brand. Despite the impact of the pandemic on the spirits category, the company's gross margin has improved due to increased prices, absence of supply chain costs, and lower tariffs.

In the year-to-date period, the company has experienced dynamic operating conditions that have impacted short-term results. However, they are confident in their long-term strategies and are well-positioned in the spirits category with premium brands. The company also recognizes the efforts of their employees in achieving their goals. From a geographic perspective, emerging international markets have been the main driver of growth, with Jack Daniel's Tennessee Apple and Tennessee Whiskey leading the way. In Mexico, New Mix has also seen strong growth due to pricing strategies and gaining share in the RTD category.

In the travel retail channel, organic net sales grew 1% in the nine months of the fiscal year, driven by strong double-digit growth in super premium American whiskeys. In the United States, organic net sales decreased 2%, but this was partially offset by higher prices and strong consumer demand for U.S. whiskey, particularly in the super premium category. The ready-to-drink category is also experiencing significant growth, with the Jack Daniel's and Coca-Cola RTD continuing to gain share after its launch one year ago.

The Jack Daniel's RTD brand, particularly the Jack & Coke variant, remains a top 10 brand in Nielsen's value ranking. The company's portfolio is well positioned to benefit from the trends of premiumization and convenience. In developed international markets, organic net sales declined 6% due to lower volumes, primarily driven by a decrease in distributor inventories. However, the growth of Jack Daniel's Tennessee Apple and Glenglassaugh's old and rare cash sales offset these declines. The company is also making progress in launching its own distribution in Japan and will establish its own distribution organization in Italy, one of the top five spirits markets in the European Union. This change is expected to strengthen their capabilities and increase consumer focus. The company's gross margin expanded in the nine months of fiscal 2024 and further details on operating expenses and income will be shared.

In the early months of fiscal 2024, the company invested more in brand-building for the launch of new products in the United States. This resulted in moderate growth in operating expenses and a 7% increase in organic advertising expenses. SG&A expenses also increased by 8% due to higher compensation and benefit expenses. Reported operating expenses decreased by 11% due to the absence of certain charges and expenses from the previous year. Overall, operating income increased by 25% and diluted earnings per share increased by 32%. The company also completed a share repurchase program.

Lawson, the CEO of the company, discusses the normalization of global trends after two years of strong sales growth. The company experienced weaker consumer trends during the holiday season, resulting in a flat organic net sales growth for fiscal 2024. However, the company expects to benefit from pricing strategies and recent brand acquisitions. Gross margin is expected to expand despite higher input costs, and operating expenses will increase due to advertising and transition to own distribution in Japan. The anticipated organic operating income growth for the full year is 0% to 2%. The effective tax rate and capital expenditures have also been revised.

Brown-Forman CEO discusses recent capital allocation actions, including the sale of their cooperage in Alabama and the pending divestiture of Sonoma-Cutrer. They have also committed to a long-term strategic relationship with Independent Stave Company for their wood supply chain and will continue to own and leverage their cooperage in Kentucky. The divestiture of Sonoma-Cutrer to Duckhorn portfolio and the assumption of an equity ownership position is expected to close in fiscal year 2024. Brown-Forman has also committed to a $22.5 million investment in the Brown-Forman Foundation and Dendrifund in fiscal year 2024.

The Dendrifund, a nonprofit seed fund created by Brown-Forman and the Brown family, promotes sustainability in the whiskey industry by focusing on wood, water, and grain. Brown-Forman also values environmental sustainability, responsibility, diversity, and community involvement. They are adjusting to consumer demand and a challenging operating environment, but believe their long-term strategies and strong brand portfolio will lead to consistent and reliable performance. They will share more at their upcoming Investor Day.

The speaker is responding to a question about the company's recent performance and explains that they think about their business in decades and generations. They mention their growth rate and how it is above their long-term goal. They also mention that they have confidence in their business and have had a strong gross margin expansion and cash flow.

The company did not anticipate the slowdown in consumer trends during the holiday season, which has affected their top line growth. The UK and France experienced a decline in consumer demand, and there was also a slowdown in emerging international markets. However, the company's depletions are now ahead of shipments, indicating a positive trend. In the second half of the year, the company will have to overcome the launch of Jack Daniel's and Coca-Cola RTD in the US, but overall, they will have to comp a plus 5%.

The company is expecting to see benefits from their newly acquired brands and strong gross margin expansion due to pricing and revenue growth management. However, there was a surprising weakness in Christmas sales which impacted shipments and resulted in higher operating expenses. The company is making investments in Japan and their guidance takes these factors into account. Overall, the company is working to improve inventory levels and move towards better results.

Leanne Cunningham and Lauren Lieberman discuss the lower-than-expected orders during the holiday season and the impact on inventory levels. They mention that consumer takeaway has been lower than expected, but distributor inventory is coming back in line. Bonnie Herzog asks about the impact of consumer pantry destocking on the category and when it might reverse. Lawson Whiting believes the category growth will return to mid-single digits, but it is unclear how quickly this will occur.

The speaker discusses the issue of consumer inventory and its impact on the company's growth. They believe that the high organic growth rate in the past few years is partially due to consumers stocking up on spirits, which is not a fast-moving consumer good. They estimate that this inventory should be cleared soon and sales rates will align with consumer takeaway.

The speakers discuss the return of TDS to normal levels of 4-5% after recent volatility. They believe this will happen next year as the inventory conversation resolves. In the US, there is no evidence of trade down or value seeking, and the $30 and above market is growing at a better rate than the lower-priced market. This is considered good news.

The speaker discusses the current pricing environment in the alcohol industry and notes that despite concerns about consumer weakness, pricing has remained stable. They mention that tequila and US whiskey have seen improved pricing, contrary to speculation that prices would decrease. The speaker also briefly mentions the on-premise market, stating that there has been some acceleration in growth compared to previous data.

The speaker answers a question about buying patterns and the impact of the current environment on retailers and wholesalers. They mention changes in traditional seasonality and difficulties in planning due to interest rates and uncertainty. They also discuss the Japanese market, which was heavily affected by destocking and has seen changes in inventory and supply.

The speaker clarified that the market in the US could potentially reach a 4-5% value growth in the next year, and there is speculation among investors that the decline in US spirits and alcohol consumption could be due to factors such as younger consumers drinking less and the introduction of GLP-1s. However, it is uncertain if this trend will continue permanently.

The speaker discusses the recent decline in Total Distilled Spirits (TDS) sales and the potential impact of factors such as wellness trends, cannabis legalization, and GLP-1s. However, they do not believe these factors are the main cause of the decline and instead attribute it to short-term challenges in the US and Europe. They also mention that they will continue to monitor these trends in the future.

Lawson Whiting, CEO of a company, discusses the current state of the business and predicts a return to normal growth within the next 12-24 months. He mentions that the consumer is currently weakened and it is difficult to predict when the turnaround will happen. His colleague, Leanne Cunningham, adds that history has shown a pattern of strong growth following periods of economic strain. During a Q&A session, Lawson is asked about pricing and promotions, and he confirms that there has been a recent price increase in the US, but it is too early to see the impact on data. However, there have been reports of discounting, but they seem to be isolated incidents.

Lawson Whiting, CEO of Diageo, discusses the company's strategy of slow and steady price increases, which has helped improve their gross margin. He states that they have no interest in giving back these increases and have not seen any significant trade down or changes in consumer behavior due to increased promotions from competitors. He also notes that some brands that have lowered prices have not seen a significant increase in volume, suggesting that higher pricing may not be the core issue for consumers at this time.

The speaker discusses pricing changes in the spirits industry and states that they have not driven consumers away from their products. They also mention the industry's approach to managing barrel whiskey inventories, which involves constantly adjusting to future demand and making long-term growth expectations. They note that other companies in the industry also use similar methods.

During a recent earnings call, Eric Serotta asked a question about the top line trajectory of the company. The operator then introduced Peter Grom, who asked about the commentary on the top line growth. Grom was confused about the company's outlook, as they had mentioned a normalization of category growth but also expected a challenging year in 2025. The company clarified that they expect the distributor inventory headwind to be largely complete after the fourth quarter, and that depletions (sales) are better than shipments. They are looking forward to providing more details about their outlook in their next call. Grom also asked about gross margin, but the company did not provide a response.

The speaker asks a question about the decline in gross margin in the third quarter and the speaker responds by explaining that it is due to supply chain disruption and inventory costing. They also mention that the full year guidance takes this into account and that they are happy with the gross margin expansion so far. The next question is about the ready-to-drink spirits category in the US, which has been performing better than the overall spirits category.

The speaker discusses the growth of ready-to-drink spirits and its impact on their company's volumes and margins. They mention that without the boost from RTDs, the figures would be closer to flat, which is the worst it has been in their career. They also acknowledge the challenges in the TDS takeaway US figure and the potential for booms and busts in the RTD market. The speaker believes that while RTDs meet consumer trends and needs, it is a volatile space with examples of past brands that have risen and fallen.

Leanne Cunningham addresses a question about the liquid and margin aspects of RTDs. She explains that there is less liquid in RTDs compared to full-strength drinks, but they plan to supply it to a wider geographic area. The gross margins for RTDs are lower, but the Jack and Coke brand should have higher margins due to joint advertising with Coca-Cola. Additionally, the addition of super and ultra premium brands will also contribute to higher margins. The call concludes with a reminder about the upcoming Investor Day in March.

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