The operator welcomes participants to the Brown-Forman Corporation's fourth quarter and fiscal year 2024 earnings call. The call will be recorded and there will be a question-and-answer session after the speakers' presentation. The host, Sue Perram, introduces the company's President and CEO, Lawson Whiting, and CFO, Leanne Cunningham. The call will contain forward-looking statements and the company will not be held responsible for any discrepancies between projected and actual results. The company has posted presentation materials and a press release on their website, which includes a list of risk factors to consider.

The paragraph discusses the significant risk factors outlined in the company's Form 10-K and Form 10-Q reports, as well as the non-GAAP financial measures that will be discussed during the call. Lawson Whiting, CEO, then gives an overview of the company's performance and highlights their resilience and ability to navigate challenges. He also mentions that the fiscal year has been challenging due to industry and macroeconomic headwinds, but the company has remained focused on long-term growth. Despite some complexity in their results, the company is pleased with their performance when considering their depletion based results. The past fiscal year was greatly impacted by changes in consumer, retail, and distributor inventories.

The company is confident in the health of their brands and their business outlook. However, their fiscal 2024 results were below expectations due to changing market conditions, including higher inflation and interest rates. The estimated net change in distributor inventory had a significant impact on their results, reducing organic net sales and operating income. This was driven by a convergence of factors, including tough comparisons against the previous year's challenges and changes in ordering patterns to adjust for market conditions.

Brown-Forman believes their performance is best measured by taking into account the estimated net change in distributor inventories, which reflects the sale of their brands from distributors to retailers. They believe this gives a more accurate representation of their longer-term trends and their bottom line results were strong. Over the past five years, their organic net sales growth rate has been in line with their long-term growth algorithm, showing consistent and sustainable results. They also saw a 150 basis points increase in reported gross margin, driven by favorable price mix and the growth of their super premium brands. In the next fiscal year, they expect to continue on this path and will share more details about their performance and outlook for the future.

The main drivers of growth for organic net sales were Jack Daniel’s Tennessee Apple, Jack Daniel’s Super-Premium expressions, New Mix, and Glenglassaugh. These brands demonstrate the success of the company's portfolio evolution and innovation strategy, as well as their global expansion and route-to-market strategy. Despite challenges during the pandemic, Jack Daniel’s Tennessee Apple saw strong growth in markets like Brazil and Chile and has been successfully launched in South Korea. The Jack Daniel’s super-premium expressions also saw strong growth, including the newest member of the bonded series, Jack Daniel’s Bonded Rye. The company has purposefully elevated their whiskey credentials through innovation and specialty launches to meet consumer preferences.

In fiscal year 2024, Jack Daniel's saw growth in its ready-to-drink beverages, with new mix serving as the second largest contributor to organic net sales. The brand also saw success with Glenglassaugh, which was named "the 2023 Whiskey of the Year" by Whiskey Advocate Magazine. However, these gains were offset by declines in organic net sales from Jack Daniel's Tennessee Whiskey, which was impacted by lower volumes in Japan, slowing consumer demand in the United States, and strong comparisons in the United Arab Emirates and Sub-Saharan Africa. Despite these short-term challenges, the company remains confident in the long-term growth potential of Jack Daniel's.

The Jack Daniel's brand has shown consistent growth over the past five, ten, and 30 years, with a diverse portfolio and strategies in place to appeal to new and existing consumers. The global expansion of the brand, along with investments in marketing and partnerships, such as the Make It Count campaign and McLaren Formula 1 sponsorship, have contributed to its success. The transition to the Jack & Coke RTD has also been positive, with 4.5 million depletions and positive consumer response.

In fiscal year 2024, Brown-Forman saw significant growth with the addition of Jack & Coke, Gin Mare, and Diplomatico to their portfolio. These brands have helped the company gain scale in Europe and expand their route-to-consumer strategies. They now own top brands in four key categories, positioning them for long-term growth and value creation. The company credits their success to the commitment of their employees and the strength of their portfolio and global reach. Despite a dynamic operating environment, Brown-Forman remains confident in the growth potential of the spirits category and their own brand portfolio. They have maintained high margins and strong cash flows, and are well-positioned for future investments and growth.

The paragraph discusses the geographic performance of the company for the fiscal year, with emerging international markets and travel retail channel showing growth while the United States and developed international markets showing decline in organic net sales. The decline in the United States is largely due to lower volumes caused by changes in distributor inventory. The company expects distributor inventory levels to remain consistent in the future, but their portfolio of brands is holding share in a market with below-average consumer demand for distilled spirits.

Whiskey, particularly super-premium, has been a strong contributor to the growth of U.S. distilled spirits, with brands like Jack Daniel's and Old Forester seeing double-digit sales growth. While there was a decline in Jack Daniel's Tennessee Whiskey volume, the brand's premium offerings like Jack Daniel's Single Barrel Rye Barrel Proof and Jack Daniel's Sinatra saw strong growth. In developed international markets, there was a decline in organic net sales, but Germany saw a 7% growth in sales. There were also positive developments in other markets, such as the launch of Jack Daniel's Tennessee Apple in South Korea and the integration of Diplomatico. The company has successfully transitioned to owning distribution in Japan, which is a key market for premium whiskey. Although there may be short-term impacts on the company's profits, they believe these investments will lead to future growth for their portfolio brands.

The travel retail channel has returned to its pre-COVID level and delivered 6% growth, driven by strong performance from super-premium brands. Emerging international markets also saw an 8% increase in organic net sales, despite a 12% headwind from changes in distributor inventories. Gross profit and margin also saw growth due to successful pricing strategies and cost reduction efforts.

The company's reported operating expenses increased by 1%, with organic growth of 7%, driven by increased SG&A and advertising expenses, as well as the negative effect of foreign exchange. The increase was offset by the absence of certain charges from the previous year. Operating income increased by 25% and diluted earnings per share increased by 32%. The company expects to return to its longer-term norms after facing disruptions in the supply chain and high demand for the past two years, as well as the current impact of inflation and interest rates on consumers and trade.

The company is confident in its portfolio and expects to see growth in net sales due to consumer trends and its pricing strategy. They anticipate a volatile operating environment, but believe they have already experienced most of the inventory movements. The company expects organic net sales growth of 2-4% in fiscal year 2025, with the second half of the year being stronger. They also expect to benefit from price mix and revenue growth management, but costs may be impacted by inflation and lower production volumes. The company plans to continue investing in its brands and employees to support growth.

The company expects organic operating income growth of 2-4% and an effective tax rate of 21-23%. They plan to invest in their business to meet future consumer demand and estimate capital expenditures of $195-205 million in fiscal 2025. They will also begin reflecting their equity share of Duckhorn Portfolio's earnings or losses in their P&L. Despite temporary issues impacting topline growth, the company is confident in achieving their fiscal 2025 outlook and long-term ambitions. The call concludes with questions from analysts.

Leanne Cunningham, a representative from the company, discusses the inflationary costs for the upcoming year. The main factors contributing to these costs are the fluctuation of agave prices and higher grain prices. Additionally, there will be a 2-3% increase in glass costs and low-single-digit increases in transportation costs. The company is also expecting higher costs due to lower production volumes and high commodity costs, despite efforts to offset them. The analyst, Bryan Spillane, asks about the outlook for American whiskey, and Lawson, another representative, states that they expect the current soft trend to continue.

Lawson Whiting, CEO of Brown-Forman, addressed concerns about the current state of the spirits industry in the US. He noted that while the industry has been bouncing along at around 1% growth for the past nine months, whiskey and tequila continue to be the healthiest categories. Whiting also discussed whether the slowdown in demand is a structural issue or a result of difficult comps and inventory issues. He believes that the current state of the consumer and the spirits business is not due to long-term headwinds such as GLP-1s, cannabis, and Gen Z, but rather driven by inflation.

The speaker discusses the current state of demand for alcohol and addresses concerns about oversupply in the whiskey industry. They believe that any weakening in demand is not due to the COVID pandemic, but rather a result of consumers working through their stockpiles at home. They also mention that while there has been growth in the whiskey industry in recent years, it is not out of line with expected demand. The speaker also notes that the majority of inventory in the industry comes from larger suppliers, rather than smaller craft producers.

The speaker responds to a question about inventory levels and the state of the spirits industry in the US. They mention that large players are behaving rationally and there is no significant disconnect between supply and demand. They also address the depletion-based results and how they align with expectations. The speaker notes that retailers have adjusted their inventory levels due to lower consumer demand and higher inflation.

The company has been closely monitoring distributor inventories throughout the fiscal year, but in the fourth quarter, there was an unexpected drop in the U.S. market. They are working closely with their distributors to address this issue. As for the long-term outlook, it is difficult to predict when the U.S. market will recover, but the upcoming easier comps and the expected consumer inventory correction may help in the next few months. It is estimated that it will take about a year for the consumer inventory to be worked through.

The speaker is asked about the company's prediction for consumer spending and the expected improvement in the fall or winter. They emphasize that the company has been able to maintain market share in the volatile environment. The questioner then asks about the company's goal to double operating income by fiscal 2032 and how they plan to achieve this given the current challenges. The speaker acknowledges the difficulty but believes in the portfolio's growth potential and mentions efforts to improve gross margin leverage.

The speaker discusses the need for continued work and a slow approach to achieve growth, with pricing as a key factor. Despite current challenges, there is potential for gross margin improvement and expense control. The speaker also acknowledges the normalization of consumer demand and potential inflation in the future, but remains confident in the long-term outlook for the spirits industry.

The speaker addresses a question about the completion of inventory cleanup in the industry and explains that the company has been in a different position due to glass supply challenges, prioritizing brands and markets, and comping against previous year's inventory levels. They feel closely aligned with partners in the U.S. distribution system.

The unexpected drop in inventory levels in the fourth quarter was the main reason for the miss in the company's performance. The majority of this issue has been resolved, but there is still some uncertainty regarding the health of the consumer and when they will start spending again. The company's outlook assumes that current inventory levels will continue into the future. This may still be a headwind for growth in the next quarter or two, but overall, the inventory levels are at an appropriate level.

The speaker asks two questions to Lawson, one about the Jack Daniel's brand and its various line extensions and how the company plans to maintain brand equity and avoid cannibalization, and the other about promotional activity from competitors that may not be reflected in data from Nielsen or Circana.

Lawson Whiting, CEO of Brown-Forman, discusses the recent decline in sales for Jack Daniel's Tennessee Whiskey and assures investors that it is not indicative of a long-term trend. He explains that the decline is mainly due to changes in distributor inventories and that the brand has maintained a steady growth rate over the years. He also mentions the success of the brand's in-line extensions and the positive impact they have on the overall franchise. Whiting is confident that the sales for Tennessee Whiskey will normalize in the next year and highlights the brand's successful marketing strategies, including partnerships with McLaren in racing.

The company is comfortable with its current spending and expects the brand expense to grow in line with sales. They plan to continue innovating with new products and remain positive about the pricing environment in the U.S., especially for American Whiskey. They are not seeing any impact from agave costs on promotions yet.

The speaker discusses the pricing strategies of tequila brands, stating that some are taking hefty price increases while others are struggling and discounting. They hope the industry will maintain rational pricing. The speaker also mentions the repositioning of el Jimador brand into a higher price tier and a new package to support this. The questioner asks for updates on the developed international and emerging markets, particularly in Europe and Mexico. The speaker expresses confidence in the second half of the year, citing improvements in inventory and potential category growth.

Leanne Cunningham discusses the company's performance in various international markets. In the U.K., they have maintained their value share despite a decrease in consumer spending. Germany is a strong market with an improving consumer climate, while Poland is still growing despite cautious spending. France continues to see a trend of downgrading and promotional activities, but the upcoming Olympics may change this. In Mexico, consumer spending is slowing, affecting the performance of el Jimador and Herradura. However, Brazil is seeing double-digit growth thanks to the success of Jack Daniel's Tennessee Apple, although consumer takeaway is also slowing. Lawson Whiting adds that the decrease in sales in the U.K. is largely due to the shift of handling Jack & Coke and Jack & Cola from the company to The Coca-Cola Company.

The speaker discusses the impact of pulling Jack & Cola off the shelves and selling it as concentrate, resulting in lower sales numbers in the UK market. They also mention the decline in gross margin in Q4 and the expectation for gross margin expansion in 2025, driven by the addition of new brands and price increases. They also mention the normalization of working capital on the balance sheet.

Peter Grom asks Leanne Cunningham about the company's growth rates and the outlook for the first half versus the second half of the year. Leanne explains that the first half will be more subdued due to tougher shipments, but the second half will see improvement driven by developed and emerging international markets. She also mentions that the company is on a path back to its long-term growth algorithm and will continue to monitor consumer and trade indicators for any changes.

Sue Perram thanks everyone for joining the Brown-Forman earnings call and acknowledges the company's recent anniversary. She also invites any additional questions and concludes the call.

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