Release Date: August 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Brown-Forman Corp (BF.A, Financial) reaffirmed its full-year growth outlook for fiscal 2025, indicating confidence in achieving its targets.
- Diplomatico Rum, Old Forester, and Woodford Reserve showed strong performance, contributing positively to organic net sales.
- The company is seeing positive results from its strategic geographic expansion efforts, particularly in Brazil.
- Brown-Forman Corp (BF.A) continues to benefit from its premiumization strategy, with brands like Woodford Reserve and Old Forester outperforming the American whiskey category.
- The Jack Daniel's and Coca-Cola RTD product is expanding into new markets and innovating with new flavors, showing promising growth potential.
Negative Points
- Reported net sales declined by 8%, with organic net sales decreasing by 4%, indicating a challenging start to the fiscal year.
- Jack Daniel's Tennessee Whiskey experienced a 6% decline in organic net sales, driven by lower volumes in key markets like the United States and the United Kingdom.
- Gross profit decreased by 13%, with a significant contraction in gross margin due to higher costs and lower production volumes.
- The company faced headwinds from transition service agreements and higher input costs, particularly affecting its tequila brands.
- Emerging international markets saw a 5% decline in organic net sales, driven by economic deceleration and consumer trade-down in markets like Mexico.
Q & A Highlights
Q: Can you speak to the confidence or visibility you have in achieving the full-year target despite a challenging start to the year with organic sales down 4%?
A: We expect this to be a year of two halves, with sequential improvement through the rest of the fiscal year. The second quarter should more closely reflect total distilled spirits trends, and the second half will benefit from the full-year impact of Gin Mare and Diplomatico. We also anticipate cost benefits from lower agave prices and the absence of unusual one-time items from last year.
Q: How are inventory levels flowing through, and what are you seeing from an on-premise and off-premise perspective?
A: Distributors are targeting the low end of their normal range, and retailers have adjusted inventory levels in response to consumer takeaway trends and high-interest rates. Our depletions are in line with shipments, and we are not forecasting significant changes in trade inventories. In Europe and Latin America, stock levels are normal.
Q: Can you provide more color on the progress in reducing finished goods and raw material inventories and its impact on gross margins?
A: We have reduced finished goods, whip, and raw material inventories year-over-year. The higher cost inventory impacting gross margins is largely related to our tequila brands. We expect this impact to be more pronounced in the first half, with benefits from lower agave prices and the end of transition service agreements in the second half.
Q: What are the underlying drivers of the weak implied underlying net sales growth, and how do you expect this to develop over the fiscal year?
A: Factors include the timing of price increases in the US and UK last year. The US consumer is weaker, but we expect sequential improvement. In markets like France and Germany, we have completed lengthy price negotiations, and in markets like Brazil and Mexico, we are gaining share despite economic challenges.
Q: How are you planning for demand for the holiday season given last year's weak performance?
A: The comps will be much easier this year, and we expect the second half to be stronger. While we are cautious about making specific predictions, we believe our portfolio is well-positioned for the premiumization trend, which should benefit holiday demand.
Q: Can you break down the cost impact on gross margins and the expected timing of margin expansion?
A: The 440 basis points cost impact is largely due to timing and higher cost inventory, particularly for tequila brands. We expect this impact to continue into Q2, with margin expansion more weighted to the second half as we benefit from lower cost inventory and the end of transition service agreements.
Q: How are the marketing efforts for Jack Daniel's progressing, and are they strong enough to offset shifts to premium offerings?
A: Jack Daniel's remains a strong brand, and our marketing efforts, including partnerships and pop culture relevance, are aimed at recruiting new consumers. Over the last five years, the Jack trademark has delivered 4-5% sales growth, and we aim to replicate this in the future.
Q: What metrics do you follow to track the engagement of younger consumers with the Jack Daniel's brand?
A: We have a full set of consumer insights and data that we track monthly, including age-specific metrics. Our new campaign and partnerships are aimed at staying relevant in pop culture and recruiting new consumers.
Q: What is your perspective on the impact of cannabis beverages on the spirits market?
A: We do not see significant cannibalization between cannabis beverages and spirits. Spirits remain the preferred alcoholic beverage among cannabis users, and we believe the impact on the spirits market is limited.
Q: How are you thinking about the risk of inventory build unwinding in the second quarter or the remainder of the year?
A: Our comments are about year-over-year comparisons. We believe the trade and consumer behavior will remain similar to current trends, and we are not forecasting significant changes in inventory levels.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
