The operator introduces the Brown-Forman Corporation First Quarter Fiscal Year 2025 Earnings Conference Call and hands it over to Sue Perram, Vice President, Director of Investor Relations. She is joined by Lawson Whiting, President and CEO, and Leanne Cunningham, Executive Vice President and CFO. The call contains forward-looking statements and risks and uncertainties that may affect actual results. The company has issued a press release and posted presentation materials on their website, which include risk factors to consider.

In the second paragraph, the speaker mentions that there are other risk factors mentioned in the company's Form 10-K and 10-Q reports. They also mention that during the call, they will be discussing certain non-GAAP financial measures and provide a reconciliation to GAAP measures. The speaker then introduces Lawson Whiting, who will discuss the company's first quarter fiscal 2025 results and reaffirm their full year growth outlook. Whiting mentions that the first quarter results are in line with expectations and provides an overview of the topline, gross profit, and margin. The call will then be turned over to Leanne, who will discuss geographic performance and other financial highlights. The company's reported net sales declined 8%, with organic net sales decreasing 4% after adjusting for divestitures, foreign exchange, and changes in managing the Jack Daniel's Country Cocktail business.

In fiscal 2021, Brown-Forman entered into a partnership with Pabst Brewing Company for the distribution of Jack Daniel's Country Cocktails in the US. This resulted in lower sales for Brown-Forman produced products. In the first quarter of fiscal 2025, Diplomático Rum and Old Forester saw strong growth, while Gin Mare had a slight decrease due to timing of ordering patterns. Old Forester's growth can be attributed to increased volume and pricing strategy.

The Old Forester brand remains popular with consumers, as evidenced by the high demand for their special release and the increase in available bottles. Woodford Reserve also saw growth in sales, despite overall declining trends in the distilled spirits industry. Jack Daniel's Tennessee Honey and Tennessee Apple also saw growth in sales, particularly in Brazil and Turkey. The company continues to invest in strategic expansion efforts in these regions.

Organic net sales for the company declined by 6% due to lower volumes in the United States, the United Arab Emirates, and the United Kingdom. This was expected as these markets had experienced shifts in ordering patterns in the previous year. However, the company remains confident in the long-term growth potential of Jack Daniel's and is investing in various marketing strategies and partnerships, such as the global campaign, McLaren Formula 1 sponsorship, and collaborations with popular music artists. The company's sponsorship of McLaren Racing has also been successful, with the team featuring increased branding for Jack Daniel's and achieving top three finishes in 12 out of 15 races in 2024.

The company is expanding its geographic reach and introducing new products, such as Jack and Coke Cherry, to drive interest and sales in their ready-to-drink category. They have seen success in markets such as the United Kingdom, Australia, Poland, Mexico, and Brazil and plan to launch in India and other Latin American markets. They are also focusing on premium and super premium brands.

In the first quarter of fiscal 2025, the reported gross profit and organic gross profit decreased due to timing and transition service agreements with buyers. Overall costs also had a negative impact on gross margin, but there were some positive factors such as favorable product mix and a recent business model change for Jack Daniel's Country Cocktails. The company expects the first half headwinds to become tailwinds in the second half of the year and is confident in achieving their full year guidance.

The company's portfolio is strong and its team is dedicated to long-term growth, allowing them to navigate volatility and uncertainty. In the first quarter, organic net sales for developed international markets declined due to decreases in the United Kingdom and Germany, but growth in Japan offset some of the decline. The U.K. and Germany saw lower volumes of Jack Daniel's Tennessee Whiskey, while the United States experienced a decrease in net sales due to lower volumes of Jack Daniel's but growth in Woodford Reserve and Old Forester.

The paragraph discusses the inventory levels and consumer environment for Brown-Forman brands, highlighting the impact of inflation and interest rates on distributors and consumers. It also mentions the trend of premiumization in the spirits market, with higher priced tiers growing in value and maintaining share. The company's emerging international markets saw a decline in sales due to economic conditions, but they continue to outperform and gain market share. The decline in sales was mainly driven by Mexico, where consumers are trading down. Additionally, the company had lower volumes of Jack Daniel's Tennessee whiskey in the United Arab Emirates due to strong shipments in the previous year.

Despite declines in some markets, Brown-Forman saw growth in Turkey and Brazil driven by higher prices and the launch of new products. However, the travel retail channel saw a decrease due to strong growth in the previous year. Operating expenses decreased due to lower advertising and SG&A expenses. This led to a decrease in operating income and diluted earnings per share in the first quarter of fiscal 2025. The company is maintaining its outlook for the fiscal year.

The company is expecting a return to growth in fiscal 2025, driven by gains in international markets and normalization of inventory trends. However, they anticipate a challenging and volatile operating environment due to global uncertainties. The first quarter may be weaker due to comparison with strong shipments in emerging markets and pricing strategy, but the second half is expected to be stronger. The company remains confident in their portfolio and pricing strategy and expects organic net sales growth of 2-4% driven by international markets.

In fiscal 2025, the company expects to see gross margin expansion due to price mix improvements from portfolio changes and revenue growth management. The end of transition service agreements and lower agave prices for Tequila brands will also contribute to margin growth. Operating expenses will be in line with top line growth and operating income is forecasted to grow 2-4%. The effective tax rate will be 21-23% and capital expenditures will be around $195-205 million to meet future consumer demand.

In the second quarter of fiscal 2025, the company will start reflecting equity shares of Duckhorn portfolio's earnings or losses on their P&L. The first quarter results were as expected, with lower organic sales due to current consumer demand and unusual comparisons from the previous year. However, the company remains confident in achieving their full year target and thanks their team for navigating the changing operating environment. The first question in the Q&A session focused on the company's confidence in achieving their goals and the key factors that will contribute to their growth.

Leanne Cunningham, speaking on behalf of the company, reiterates that they expect this to be a year of two halves, with sequential improvement in the second half. The first quarter results were as expected, and the second quarter is expected to more closely reflect the overall trends in the distilled spirits market. The company will benefit from the full year impact of Gin Mare and Diplomático, and will also start to compare against the softening of the market in the previous year. They will also see benefits from moving through higher cost inventory and falling agave costs in their Tequila business.

The speaker discusses the absence of some unusual one-time items in fiscal years 2024 and 2025, such as the transition of Jack and Cola out of their system and the return of organic growth in Japan. They also mention the impact of their innovation pipeline on growth in international markets. The speaker notes that all of these factors are below their long-term growth algorithm. In response to a question about inventory levels and consumer behavior, the speaker mentions that wholesalers have been more cautious in keeping inventory levels low and that there has been a buildup of inventory in pantries. They expect these dynamics to continue in the second quarter and the rest of the fiscal year.

The company believes that its distributors are targeting the lower end of their normal range due to consumer demand remaining below historical levels and high interest rates. The company is closely working with its distributors in the US and does not expect any significant changes in trade inventory levels. In Europe and Latin America, the company's stock levels are normal. The company has made progress in reducing its inventory levels on a year-over-year basis. In the US, total still spirits are currently flat, compared to a 5.7% increase last year, which contributed to a weak holiday season for the company and the industry.

The paragraph discusses the decline in sales for Brown-Forman and the reasons behind it, including consumer spending and inventories. The launch of Jack & Coke last year had a significant impact on sales, while Woodford and Old Forester are performing well in the on premise market. This is surprising and positive, as overall sales for distilled spirits in the on premise market are down. A question is then asked by Andrea Teixeira from Morgan Stanley.

Leanne and Lawson have made progress in reducing finished goods and raw material inventories year-on-year. They expect further reduction in the second half and are considering the impact on gross margins. There is also a discussion about the industry's maturing stocks and how the market will absorb them in the future.

Lawson Whiting, CEO of Brown-Forman, discusses the company's gross margin guidance for the year and the impact of inflation and lower production volumes on their input costs. He also addresses concerns about industry and Brown-Forman's supplies, stating that while the conversation has shifted from having enough supply to now having too much, the company is not overly concerned. Whiting believes they have the experience and ability to manage supply and are not seeing any negative effects on pricing or promotions. Lastly, Whiting is not worried about the upcoming holiday period, despite last year's disappointing Christmas sales.

The speaker asks about how the company is planning for holiday demand and the CEO responds by acknowledging the uncertainty and difficulty in predicting sales, but notes that the comps will be easier than last year and premiumization trends are continuing. The next questioner asks about the recent weak net sales growth compared to previous years.

The speaker addresses the weakness in the first quarter and attributes it to factors such as price increases and timing of inventory. They also mention the impact of weaker consumer demand and predict sequential improvement in the coming quarters. Additionally, they mention the impact of price negotiations in France and Germany on their performance.

The company is facing challenges in certain markets, such as the U.K. and Europe, where consumers are seeking value and waiting for promotions. However, they have been gaining share in other markets like Brazil, Mexico, and Australia through strategic shifts and product launches. The company remains optimistic about growth in their international markets and is confident in their ability to overcome challenges and negotiate for better pricing.

The speaker discusses the impact of gross margin on the company's financials and explains that the increase in cost is largely due to timing and higher inventory costs for their tequila brands. They expect this to continue in the second quarter, but anticipate improvement in the second half of the year when the impact of the higher cost inventory will be reduced.

The company believes that their marketing efforts for Jack Daniel's are strong, but they are still facing declines in sales. They are focusing on partnerships and pop culture to reinvigorate the brand and compete with the trend towards premium offerings.

The speaker discusses the challenges of staying relevant in pop culture and recruiting new consumers for their brand, but remains confident in the long-term growth of the Jack Daniel's brand. They also mention the success of their super-premium extensions and anticipate improvements in sales in the near future.

Lawson Whiting, CEO of Jack Daniel's parent company Brown-Forman, discusses the company's efforts to attract younger consumers and measure their engagement with the brand. They track monthly data and break it down by age to monitor recruitment and retention. The company's new campaign, featuring the song "Back in Black," is showing progress in changing consumer perceptions of the brand. Whiting also notes that the slowdown in trends for the biggest brands in the U.S. is likely due to consumers already having those brands in their cabinets from the COVID-19 boom years.

The operator introduces a question from Nik Modi of RBC, who asks about the steep drop in industry trade in August and whether cannabis beverages are infringing on beverage alcohol occasions. Lawson Whiting, the speaker, says he has not heard about the drop and cannot comment on it, and he does not believe that cannabis beverages are affecting the current trends in the beverage alcohol industry. He also mentions that studies have shown that beer is more at risk for cannibalization from cannabis beverages than spirits.

The speaker discusses the increase in distributor inventories in the U.S. and developed international markets and how it may impact the consumption run rate. They clarify that their comments are focused on a year-over-year perspective and that they do not anticipate significant changes in distributor inventory levels in the future.

The speaker, Stephen Powers, expresses concern over the current and future state of trade and consumer behavior. He questions the increase in inventory levels despite a decrease in consumption and asks for clarification on the impact of recent negotiations and new products on the company's outlook. He also brings up the underperformance of tequila, which contrasts with previous discussions of its potential for growth.

Lawson Whiting, CEO of Brown-Forman, explains that the recent softness in their tequila sales is due to a combination of factors. One interesting statistic is that tequila is expected to surpass vodka as the largest value category in the US by 2024. Additionally, the growing popularity of tequila among 22-24 year olds has contributed to this trend. Brown-Forman has been pushing prices down in Mexico and the US, which has affected their sales. However, tequila remains a strong category in the spirits market and Brown-Forman has had double-digit or high single-digit growth rates in recent years.

The speaker discusses the growth of the tequila market and how it has positively impacted the company's growth. They also mention the potential for international growth, particularly in markets such as the U.K., Australia, and Brazil. The speaker concludes by thanking everyone for joining the call and mentioning an upcoming event at the Barclays Global Consumer Staples Conference.

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