Brown-Forman Corporation Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Spirits Industry Dynamics: Post-pandemic consumer behavior normalized, with inflation and interest rates impacting spending. The industry experienced softening takeaway trends in late 2023 due to changing consumer patterns post-COVID.
• Gross Margin Improvement: Enhanced pricing strategy, driven by super premium brands, offset higher input costs. Gross profit increased 5% (reported) and 6% (organic) in 9 months of fiscal 2024.
• Net Sales Performance: Reported net sales grew 1% in 9 months of fiscal 2024, with flat organic net sales. Distributor inventories had a 5 percentage point impact on organic net sales.
• Brand-Specific Highlights: Jack Daniel's Tennessee Apple, New Mix, Glenglassaugh, Jack Daniel's super-premium expressions, Woodford Reserve, Old Forester, Gin Mare, and Diplomatico all contributed to growth or notable performance.
• Geographic Performance: Emerging international markets saw 11% organic net sales growth; U.S. organic net sales declined 2%; developed international markets had 6% organic net sales decline.
• Supply Chain and Investments: Sold cooperage in Alabama, pending divestiture of Sonoma-Cutrer, and announced investment in own distribution in Japan (effective May 1, 2025).

Segment Performance

• Jack Daniel's Tennessee Apple: Grew double-digit, driven by strong demand in Brazil, Chile, and South Korea. Contributed to organic net sales growth.
• New Mix: In Mexico, delivered double-digit organic net sales growth due to pricing strategies and RTD category share gain.
• Glenglassaugh: Saw growth from old and rare cask sales, including being named 2023 Whiskey of the Year by Whiskey Advocate Magazine.
• Jack Daniel's super-premium expressions: Sinatra, Single Barrel Rye Barrel Proof, and Bonded Rye achieved double-digit growth.
• Woodford Reserve: Returned to growth with luxury expressions like Batch Proof and the Masters Collection.
• Old Forester: Whiskey Row series expanded, crossing the 0.5 million 9-liter case milestone.
• Gin Mare and Diplomatico: Entered organic results in Q3, collectively delivering double-digit organic net sales growth.
• Jack Daniel's Tennessee Whiskey: Largest offset to growth, lapping high prior-year comps, with volume decline in some regions but remains a valuable brand (e.g., named most valuable spirits brand by Interbrand for 8th consecutive year).

Guidance

• Organic Net Sales: Expected to be flat for fiscal 2024.
• Gross Margin: Anticipated to expand as price mix offsets input costs.
• Organic Operating Income: Expected to grow 0%-2% for the full fiscal year.
• Tax Rate: Range of approximately 20%-22%.
• Capital Expenditures: Range of $230 million to $240 million.
• Share Repurchase: Completed the $400 million share repurchase program as of December 31, 2023.

Risks

• Consumer Takeaway Fluctuations: Softness in consumer takeaway during holiday seasons impacted top-line results.
• Macroeconomic Factors: Inflation, interest rates, and consumer discretionary spending pressures affecting spirits consumption.
• Competitive Environment: Intense competition impacting market share and pricing strategies.
• Wellness Trends: Potential long-term impact of wellness trends (e.g., GLP-1s, cannabis) on spirits consumption.

Question and Answer

Q: Confusion on shortfall in quarter and Q4, soft holiday demand globally A: Leanne Cunningham noted softer consumer trends during the important holiday selling season, particularly in U.S., U.K., and France, limiting top-line acceleration. Lawson Whiting added Christmas was surprisingly weak globally.

Q: Consumer behavior, trade down, on-premise in U.S.

A: Lawson Whiting stated no trade down seen in U.S. pricing data, with 30+ and above price segments growing, and on-premise data not immediately available but TDS accelerating.

Q: Buying patterns, Japan market A: Leanne Cunningham discussed changed buying patterns due to inventory rebuilding and route-to-market change in Japan, with own distribution model set to launch in April 2025, and Japan remaining a top market long-term.

Q: Wellness trends impact on spirits, return to mid-single-digit growth A: Lawson Whiting believed wellness trends are short-term challenges, with return to mid-single-digit growth expected in next 12-24 months as inventory issues resolve.

Q: RTD spirits, margin implications A: Lawson Whiting discussed RTDs boosting TDS but volatile category, while Leanne Cunningham mentioned RTDs have lower gross margins but joint advertising with Coca-Cola helps, and inclusion of high-margin brands like Gin Mare and Diplomatico.