BF.B (BF.B) Q3 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Brown-Forman Corporation Third Quarter and year-to-date Fiscal 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Sue Perram, Director of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown-Forman's third quarter and year-to-date fiscal 2022 earnings call. Joining me today are Lawson Whiting, President and Chief Executive Officer; and Leanne Cunningham, Senior Vice President and Chief Financial Officer. This morning's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward-looking statements, and except as required by law the company undertakes no obligation to update any of these statements, whether due to new information, future events or otherwise. This morning, we issued a press release containing our results for the third quarter and nine months ended January 31, 2022, in addition to posting presentation materials that Lawson and Leanne will walk through momentarily. Both the release and the presentation can be found on our website under the section titled Investors, Events and Presentations. In the press release, we have listed a number of the risk factors you should consider in conjunction with our forward-looking statements. Other significant risk factors are described in our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures are reconciliation to the most directly comparable GAAP financial measures and the reasons management believes they provide useful information to investors regarding the company's financial conditions and results of operations are contained in the press release and investor presentation. As of the third quarter of fiscal 2022m we've changed certain non-GAAP financial measures that we've used historically in our public disclosures, in our analysis of results of operations and our SEC filings as well as in our earnings release documents. We'll no longer report underlying measures of change for any P&L line items. Instead, we will being reporting organic measures of change for certain P&L line items. This change to our non-GAAP financial measures is in response to comments from and discussions with the staff of the Securities and Exchange Commission. Organic includes all of the non-GAAP adjustments that we've historically made in adjusting GAAP to underlying results except that organic does not include an adjustment for estimated net change in distributor inventories. We'll continue to adjust for acquisitions and divestitures, foreign exchange and unusual or non-recurring transactions. For comparability purposes, the presentation and amounts of our non-GAAP financial measures for all prior periods presented in today's release and presentation and discussed on today's call have been restated to reflect these changes to our non-GAAP financial measures. We've posted schedules covering historical periods on our website. Our business can be affected by changes in distributor inventories, particularly in our largest market, the United States where the three tier system includes suppliers, distributors and retailers. We'll not adjust our non-GAAP P&L measures for estimated fluctuations in distributor inventories. Yet, we'll continue to provide meaningful qualitative and quantitative information so that you can understand how estimated fluctuations and distributor inventories may affect our results from operations. We've added Schedule E to our earnings release which contains supplemental information that presents separately the estimated net effect of distributor changes on our results. In addition to explaining our results, when we expect that fluctuations that in distributor inventories could impact our trends significantly in future periods, we plan to disclose that to you as we have endeavoured to do previously. Specifically to our outlook, in the past when we've provided guidance, whether in qualitative or quantitative terms, we have communicated our expectations for key measures on an underlying basis. Going forward, when we provide such guidance, we will do so on an organic basis. Therefore, the current outlook is not directly comparable to our previously presented outlook. Accordingly, we have provided our updated fiscal 2022 outlook in our third quarter earnings release and Form 10Q using the organic basis. With that, I would like to turn the call over to Lawson.

Well, thank you, Sue and good morning, everyone. I'm proud to share our results with you today, as we deliver double digit organic top and bottom line growth for the first nine months of our fiscal year. But before I do, I did want to take a moment to acknowledge that the entire Brown-Forman community is extending our thoughts to those impacted by the war in Ukraine, particular, our employees and their families. We will continue to hope for a peaceful resolution. I also want to thank our 4,700 Brown-Forman employees around the globe, many of whom have stepped up to help their Ukrainian colleagues just as they've stepped up in every way the last two years. They've made it possible for us to deliver these strong business results. We have an immensely talented team that remains committed to our strategic priorities and our company values and it is this resolve and determination that has allowed us to navigate numerous uncertainties and challenge over the years while delivering sustainable and consistent long-term growth. So turning to the results, we continue to see strong, broad-based top line growth across our major geographic clusters, driven by many of the same themes that we've shared with you throughout this fiscal year. First, our top line growth accelerated in the third quarter, due to the gradual reopening of the on-premise channel, their turn of some travel and tourism and the cycling of lower comparisons, notably in emerging markets in the travel retail channel. Second, we continue to see strong consumer demand in both the American whiskey and tequila categories, where our brands are well positioned. Our portfolio is also continuing to benefit from the premiumization trends across our industry. Finally, we continue to face challenges from supply chain disruptions, largely related to glass supply. These disruptions reduced our finished goods inventories along with the inventories of both the distributor and retailer levels, while we are seeing some signs of improvement that supply chain challenges negatively impacted our our net sales and increase our costs in the year to date performance. Leanne will talk more about this in just a couple of minutes. These drivers led to an overall reported net sales increase of 11% year to date and 14% on an organic basis, despite the supply chain problems negatively impacting our results. This was led by a double-digit or organic net sales increase for the Jack Daniels family of brands fueled by a 20% organic net sales increase for Jack Daniel's Tennessee Whiskey. As a reminder, last quarter, we shared that we had prioritized Jack Daniel's Tennessee Whiskey, as we navigated the supply chain challenges. You can see that prioritization in the results as they demonstrate the strong and consumer demand for the brand, particularly in the on premise, as well as our focus on rebuilding inventories across the supply chain. Given the size of the brand, this growth is particularly impressive, adding almost 1.6 million nine liter cases compared to the same period last year. The strength of the Jack Daniels trademark extends to the full family of brands. Year to date Jack Daniels, RTDs grew organic net sales mid-single digits, even against strong double-digit comparisons in the prior year. The consumer trends of flavor and convenience are continuing to drive demand for RTDs as well as flavored whiskey globally. Collectively the Jack Daniels flavors delivered double-digit organic net sales growth year to date. The continued international launch of Jack Daniels Tennessee Apple, along with solid volume growth in the United States delivered double-digit organic net sales for the brand and while Jack Daniel's Honey and Jack Daniel's Fire grew organic net sales year to date. Both brands growth rates have been adversely impacted by the supply chain disruptions, which includes our decision to prioritize Jack Daniel, Tennessee Whiskey. The same supply chain challenges had a significant impact on Gentleman Jack, which led to a year to date decline in organic net sales for the Jack Daniel super premium brands. The tequila category remains very strong benefiting our full strength tequilas year to date Herradura and el Jimador grew organic net sales 29% and 20% respectively, which reserves organic net sales grew high single digits year to date, but given the prioritization of Jack Daniels' Tennessee Whiskey, the brand experienced a decline in distributor inventories, adversely impacting its results. Importantly, we believe consumer momentum for Woodford Reserve remains strong and similar to Jack Daniels' Tennessee whiskey should benefit from increased supply as we work through and resolve the supply chain disruptions. Finally, as I mentioned, our portfolio of super-premium brands continues to benefit from the consumer premiumization trends as well as our investment behind our emerging brands teams. Brands, such as Old Forester, Chambord, our single malt scotches GlenDronach, Benriach and Glenglassaugh as well as Fords Gin have also benefited from the reopening in the on-premise, particularly in the US where this channel is an important part of our brand building model. In Europe, the recent investment in our emerging brands model has enabled us to increase our footprint for the Woodford Reserve family of brands, Chambord, our single malt scotches as well as our tequilas with dedicated teams focused on these brands, we're able to deliver very strong growth and believe there is considerable opportunity for continued international expansion and growth. As I close, I want to reiterate my continued confidence in our people, our brands and our strategic priorities. We believe we are uniquely and strategically positioned to capitalize on consumer's preference for premium and super premium spirits, their appreciation for American whiskey and tequila, and the continued desire for convenience. This has created strong demand for our portfolio of brands around the world and a healthy runway for future growth as we to invest behind these brands. These strengths are the foundation for our continued strong business results even amongst continued headwinds in the form of tariffs, high input costs and supply chain disruptions. And thankfully, I still continue to believe that many of these headwinds we have experienced over the past few years are soon to become tailwinds. One last topic before I over to Leanne, yesterday you should have seen our announcement regarding several changes to my executive leadership team. I'd like to take this opportunity to thank Ralph de Chabert and John Hayes who are retiring later this summer for their many leadership contributions over decades and the many ways they've helped our company grow in our inclusive culture thrive. In addition to these environments, I'm making further changes to my team through discipline, succession planning, to continue the company's successful brand building and growth strategies. I'm extremely grateful for the opportunity to work with an executive leadership team composed of such experienced and talented leaders and I'm confident Brown-Forman is in capable hands under their leadership. Leanne, I'll now turn things over to you.

Thank you, Lawson and good morning, everyone. As Lawson reviewed the key themes for the first nine months of our fiscal year, as well as the performance of our brands, I will provide additional details on our geographic performance, business results and our outlook for fiscal 2022. First from a geographic perspective, emerging markets developed, international markets, the US and the travel retail channel, all contributed significantly to our organic net sales growth. Collectively emerging markets while impacted by supply chain challenges delivered strong double-digit organic net sales growth year to date against favorable prior year comparisons. This performance was driven by the growth of Jack Daniels, Tennessee Whiskey in Turkey and Chile and continued launch of Jack Daniels, Tennessee Apple, most notably in Brazil and Chile and collectively our full strength tequila brand grew double digits in Mexico as the premiumization trend continued, which more than offset the prior year comparison of New Mix RTDs. Our overall business in Mexico continues to perform well as we are experiencing a faster than expected recovery in the entre. Our market share trends are improving and the pricing environment is positive as suppliers are implementing price increases across the spirits industry. Developed international markets collectively also delivered strong organic net sales growth up double digit year to date. Growth was broad based largely due to the reopening of the on-premise as well as a rebound of travel and tourism in some markets. Supply chain challenges impacted our business in countries such as the United Kingdom and France. The Jack Daniels family of brands continued to drive overall growth as Jack Daniels, Tennessee Whiskey delivered strong double digit organic net growth, led by markets such as Germany, where we are gaining market share and Spain, which is benefiting from the gradual return of tourism. The United Kingdom in only its second year of own distribution experienced strong growth despite being impacted by supply chain challenges, while Korea is benefiting from a shift in whiskey consumption to international brands. Jack Daniels RTDs also delivered double digit organic sales growth as we continue to experience strong volume growth in Germany, where the brand sustained its momentum and remains a category leader. And even with Australia lapping strong prior year comparison, it continues to contribute to our growth. In addition, Jack Daniels Tennessee Honey, grew organic net sales by double digits led by Korea's shift to international whiskey brands, strong consumer demand in France and tourism returning in Czechia. And while collectively the Jack Daniels super premium brands, which includes Gentlemen Jack and Jack Daniels Single Barrel grew organic net sales mid-single digits as they were significantly impacted by supply chain disruption. Beyond the Jack Daniels family, the rest of our portfolio delivered very strong double digit organic net sales growth led by el Jimador, Chambord and Woodford Reserve, particularly in the United Kingdom where we have placed additional focus on these brands through our emerging brands group. The US business delivered high single digit organic net sales growth in the first nine months of the fiscal year. The largest contributor to growth was Jack Daniels, Tennessee Whiskey driven by volume growth with the continued reopening of the on-premise channel, which led to favorable channel mix. In addition, distributor inventories increased as we worked to resolve supply chain challenges. Our tequila brands led by Herradura also contributed to the strong growth as the tequila category continues to be among the fastest growing spirits categories, driven by premiumization. Consumer premiumization trends also continue to benefit our premium bourbons led by Woodford Reserve and Old Forester, yet their growth rates have been significantly impacted by supply chain disruptions, particularly forward for reserve. These disruptions reduced our finished goods inventory along with the inventories of our distributors and retailers. Jack Daniels, Tennessee Honey and Gentlemen Jack, were also negatively impacted by the supply chain challenges, which led to lower year to date volumes for these brands. We continue to monitor consumer mobility trends observed by Google Mobility and Open Table, and they showed a decline in consumer activity during the third quarter, reflecting the disruption from the Omicron variant, but trends up here to be rebounding in the recent weeks. In the e-premise channel, our market share continues to remain slightly above 2% and well above pre-pandemic levels even as the on-premise channel reopens and consumers begin to return to in-store shopping. Finally, our travel retail business continued to experience a strong re bound driven by an increase in volume as we cycled against significant declines experienced during this period last year. Our travel retail business is still in recovery, as it is dependent on international airline travel and the cruise business, which continue to be below their pre-pandemic levels. Moving on gross profit and gross margin, year to date reported gross profit increased 11% with organic growth of 14% in line with our organic top line growth. Reported gross margin was down 20 basis points year over year driven primarily by unfavorable cost mix and the negative effect of foreign exchange, largely offset by favorable price mix and the impact of the sale of Canadian missed early times and Collingwood brands in the prior fiscal year. Positive price mix was driven by favorable portfolio and channel mix. Our portfolio mix has shifted to our higher margin full strength spirits brands, especially as we compare to the year ago, period, when we experience the very strong growth of our RTDs. In addition, the reopening of the on-premise channel continues to have a positive impact on our channel mix. Consistent with our comments over the last two quarters, our cost increases have been driven by our efforts to minimize the impact of the supply chain disruptions largely related to the glass supply constraints as well as input cost headwinds related to agave and other commodity prices, namely grain. Through close partnerships with our glass suppliers, supply constraints have continued to ease allowing for some improvement in inventory levels in the US, particularly for Jack Daniels, Tennessee whiskey. Inventory levels do remain below the prior year at both the distributor and retailer levels. Agave cost are remaining stable, but are higher than our expectations as they are not easing as quickly as we thought due to the increased demand for our tequila brands as growth in the US and a faster than expected rebound in Mexico continue. Turning to our operating expenses, which represents the investments we make behind our people and our brands to drive sustainable long term top line growth. Our reported and organic advertising expense increase 12% year to date as we continue to invest behind our brands. In the third quarter, reported advertising expense decreased 4%, down 2% on an organic basis as we now cycle the phasing of spend from the first half to the second half of last fiscal year. SG&A expenses on a reported and organic year to date basis increased 8% led by compensation related expenses. Our income on a reported basis decreased 4% primarily driven by the effect of the prior year sale of early times Canadian Mist, and Collingwood brands. On an organic basis, operating income grew 19% year to date. The decrease in reported operating income combined with a year-over-year increase in our effective tax rate resulted in a 12% decrease in diluted earnings per share to $1.43 per share. Now to our updated fiscal 2022 outlook, as Sue mentioned in our opening comments, when referring to certain non-GAAP financial measures, we will no longer report underlying measures of change for any P&L line item and will report organic measures of change. Therefore, this current outlook is presented on an organic basis and is not directly comparable to our previously presented outlook. With that, the operating environment does remain challenging and there are a number of uncertainties related to the pandemic, supply chain inflation and the geopolitical environment. Amid these uncertainties, we continue to be confident in the strength of our portfolio of brands and our team's ability to navigate these challenges. Therefore, we are optimistic in our ability to deliver strong, full year results. With our strong year to date performance and consumer demand for our brands, we expect organic net sales growth of 11% to 13% for the full fiscal year. This is based on the continuing strength of our US business, even as we cycle the prior year reopening of the on-premise. The continued benefit from the reopening of the on-premise channel and the gradual recovery in travel and tourism in our developed international markets, strong growth in our urging markets, as well as travel retail, as the recovery gains momentum and we cycle the effects of easier comparisons. And we continue to expect our non-core business mainly used barrel sales to not have a material impact on our results this fiscal year. We also believe that our supply chain constraints will continue to ease, enabling us to meet consumer demand as well as rebuild inventory levels across our supply chain. Additionally, we believe our portfolio of brands is well positioned to continue to benefit from premiumization trends as well as the price increases on a number of our brands in the US, including Jack Daniels. We are beginning to see pricing reflected in the US data and while food and beverage, as well as the spirits inflation lags the overall CPI, the numbers still show a healthy pricing environment. Based on Nielsen takeaway data, through the end of our third fiscal quarter, Brown-Forman is outpacing TDS pricing growth and is a pricing leader. Turning to gross margin, we continue to utilize our risk mitigation strategies to manage through the impact of supply chain disruptions and are addressing the various constraints on our business. We still believe that these challenges will continue to prove as we end the fiscal year, though still a headwind on a full year basis. We project cost headwinds related to logistics, as well as Agave and other commodity prices mainly grain, will continue to have a negative impact on our gross margin. As we shared last quarter, these headwinds will be slightly offset by the modest positive impact from the removal of tariffs in the EU, which ended on January 01, 2022. Based on these combined headwinds and tailwinds, we continue to expect reported gross margin to be flat or slightly down for the full year compared to fiscal 2021. Before I move on, I wanted to provide a quick update regarding the UK whiskey tariffs. While the EU tariffs have been removed, the UK tariffs remain in place. Talks are still ongoing between the US and the UK regarding the tariffs that remain in place and we continue to be cautiously optimistic that both parties will resolve this ongoing trade dispute. We expect our total organic operating expenses, which include advertising and SG&A expenses to be in the 7% to 9% range as we continue to invest behind our brands to support our ability to gain share and to drive top line growth. On an organic basis, we anticipate advertising expense to be slightly below top line growth. The growth in SG&A has been focused on increasing the level of control we have in our route to consumers. two of which Belgium and Taiwan have already launched this year. We have also invested in the international expansion of our emerging brands teams and increased investment in our digital marketing and e-commerce capabilities. These strategic initiatives support the growth and development of our broader portfolio of brands. Based on the above expectations, we believe our organic operating income growth will be in the range of 12% to 16% for the full year. Lastly, we continue to expect our fiscal 2022 effective tax rate to be in the range of about 22% to 23%. In summary, we are pleased with our strong year to date results, which deliver double digit organic, top and bottom line growth. Over these past nine months, we have continued to build momentum in a challenging and evolving operating environment and believe we are well positioned to have a strong fiscal 2022 because of the strength of our team members and our portfolio of brands. Our team has remained agile and resilient while living our company's values. And our portfolio of brands has remained strong, supported by our strategic priorities, our investments and consumer trends. We will continue to care for our people and our brands as they are the pillars of our ability to deliver sustainable long term growth. This concludes our prepared remarks. Please open the line for questions.

[Operator instructions] Our first question comes from Vivien Azer with Cowen. Your line is open.

Hi, thank you. Good morning.

Good morning.

So I've got a modeling question and then just a follow up on Woodford please. So, on the model, I'm having a really hard time understanding what happened with currencies this quarter, 6% on the top line versus 18% on OI. I would've thought that you would've seen more on gross profit given the transaction impacts, but the GP hit was only an 8%. So if you could offer any color on why the FX impact was such a greater magnitude on the OI line in the quarter that would be really helpful. Thank you.

Well, we know Vivian that the strongest drivers of that is the strength in the US dollar. And then against that, the currencies would've been the largest impact was in Turkey. Then we also had an impact with Russia and the UK. So those were the largest drivers and you can see that in the schedule that in the press release where it says rest of that's where you'll see the biggest impact. Yeah, I believe that Schedule C for you.

Yeah, but, is it just an outsized translation impact? Just kind of a timing of recognition in the quarter.

Let's say it's from translation.

It's translation. Okay. Very good. Thank you. I can certainly follow up after that. On Woodford, totally understand the reprioritization of the glass apply and it looks like that strategy is playing out quite nicely, given the reacceleration that you're seeing on the Jack Daniels franchise and Jack Daniels, Tennessee whiskey in particular, but I was curious if you comment please on the sequential degradation that you saw on price mix for Woodford in particular. Thanks.

Okay. Sure. Vivian and I'm going to walk you all through kind of the long story as to what has happened between the quarters on the rest of portfolio and Jack, just so everyone understands it because I do realize it's very complicated and kind of hard to follow. Let me say something about Ukraine and Russia first just to get it, not to get it out of the way, but know that it's hard to talk business these days when so much this is hanging over us. So just a couple of things. One, obviously we are most concerned with our people that are over there. We do know they're all safe right now, but it is certainly a very, very difficult and volatile situation. It's scary, it's sad. It's exhausting for the employees and we're trying to do what we can from here. We're committing financial assistance, not only to our employees, but to some of the big organizations that are trying to help out and just a little story that I found, I don't know, touching, I guess a little bit in that our employees that live in Poland and Romanian and Hungary have a number of them. They go to the borders and our employees that have been trying to leave Ukraine and thankfully they were -- they got ahead of what the masses over there and met at the fences literally. And our employees picked them up and took them to their houses and are taking care of them now. So there are some touching stories out there and our thoughts are with, with all of them. The other part of this that I might as well get outta the way now is just on the business side of things. It does feel awkward to talk about the business in Ukraine is obviously shut down, but in Russia we want to make sure that people don't overestimate the size of our Russian business. It's a top 10 market. It's 10th X or one tenth and fiscal '21 and we disclosed last year, it was 1% of our business worldwide. So, important, it's been a growing market for us, which we -- that's obviously going to be greatly disrupted, but as I think you all would know are those that have been falling as closely, we've been building to have our own route to market organization there. We've got about 80 some odd employees now. We were hiring a lot more than that with the intent to go live in July. We've stalled that or paused it. We've paused on the recruiting there and at this point we're just waiting to see. We're going to have to evaluate the situation. It's only been a week. So we don't really have a lot more information to share on it right now, but know that we're doing everything we can. So get that out of the way. And then I'll answer your other question really that speaks to Woodford and it's more than Woodford. It is essentially all of our core brands outside of Jack Daniels, Tennessee whiskey. So to set the stage, remember in fiscal '21, if Jack Daniels, Tennessee whiskey was down 4% as it's on premise business was so weak, but Brown-Forman Corp did a plus six, which the only way that math works for us is you saw very, very dynamic growth in brands like Woodford, Old Forester or tequilas, namely the Jack Daniels flavors, everything was -- practically everything was in double digit growth mode last year. So it was an unusual year but it worked out that the company was still able to deliver a 6% growth in a chaotic year. Now moving forward a little bit, Q1, we talked for the first time in Q1, which was August of last year, we started talking about allocating glass to Jack Daniels. The on-premise was opening around the world and we did not want to miss that opportunity. And so that was the prioritization. Yeah. And the nine months Jack Daniels, Tennessee whiskey, organic growth is plus 20. Those are numbers that I have never seen in my career. And it's driven by the strength of the on-premise and global travel retail, but it's still, it's also the off premise too. So it's a global drive to drive that brand up. And it's an incremental 1.6 million cases in the first nine months of the year. 1.6 million cases is bigger than most of the brands in our portfolio and that's the incremental in nine months and Jack and Tennessee whiskey is above TDS in the United States, just by a little bit, but if quite honestly, Jack Daniel, the Black Label has not been above TDS given its size in a long time. So it just I think shows that when the stock is available, when the glass is available, there's still tremendous amount of consumer demand for the brand and that makes us feel good. Now, moving forward, in the fall, as we had allocated towards Tennessee whiskey, we really, the rest of the portfolio began to slow and in the fall we were able to draw down on inventories for a while, but that's -- we ran through the inventory space, September, October, November timeframe, it became a bigger and bigger problem. And so if anyone is looking at the takeaway data, the Nielsen takeaway data, which is very weak on that rest of portfolio is directly because the Christmas season for a lot of those brands, we were outta stock and it was paying. It was something the entire organization was going through and it showed up in the US most directly because the US has the broader market, the broadest set of brands in the market. So that was a tough cycle to get through, but now fast forwarding to the last quarter and you can see on Schedule E in our earnings about how we are now rebuilding those inventories and shipments are running ahead of depletions, which is a good thing and we're finally getting the glass to be able to reload. The minute that stuff gets into and this is mostly a US conversation, when it gets into the warehouse, it is very quickly out the door and back on retail shelves. And we believe that the trends will resume. So Woodford will get -- Woodford reserve was going at 20% a year plus for 20 years. There is no sense that that brain is going to lose consumer momentum. It's just got to be available. And so it's getting on to the shelves now. It'll take us several more quarters we think to fully reload. We'll see. But it's not that data or that takeaway is not reflected in the current instead of take, sorry, I said that wrong, the takeaway is not reflected yet in the Nielsen figures. We believe it will shortly, but that is the reason why it looks like it had lost so much momentum. So that's the long answer to a short question, but that, I hope you understand the sort of, at least what has happened.

Oh, very much. Thank you very much for the color. And I'll certainly echo our sincere thoughts and prayers for your team in the region.

Our next question comes from Nadine Sarwat with Bernstein. Your line is open.

Hi Lawson and Leanne. Thanks for taking my question. I want to create on advertising expense, so I appreciate the comp impact, but by my calculation on a nine month basis, your reporting advertising margin was about 10.6% below last year, 11.5% and below the peak of 14.6%. So is there a technical reason behind this being lower and what should we expect for normal advertising spend going forward? Thanks.

Thank you, Nadine. That's nice to have you on the call. From a brand expense perspective, it really is a story of prior year because as we entered into our first fiscal full fiscal year F'21, we didn't know what the operating environment was going to be. Events were closed and not available to us as well as sponsorships. So we had lighter spending in the first half of fiscal '21, and we were more heavily weighted to the back end of the year. For fiscal '22, we are much more spending along our normal phasing cycle. It's just going against an unusual prior year. And then as you think about it previously, as we had talked about our brand spend being in line with our top line growth, as we have moved to an organic basis, our brand spend, we believe for the quarters ahead will be slightly below our top line growth,

But still very healthy. We're still in, what is it year to date?

So our full year increase is in the 7% to 9% range. And that includes both our strategic initiatives we're investing in and our brand expense.

Got it. Thank you. And if I could just squeeze one more, the price mix of 70 bps contribution to the nine month gross margin change in the present was a really good notable improvement on the 10 bps drag that we saw at H1. Can you give us a sense of how that's split between price and mix, and then I'll hand it over. Thank you.

So is more volume driven, but it's related to, as we said, in our prepared remarks, the reopening of the on-premise from a positive channel mix perspective, and then also from our portfolio mix, which we are more skewed in this fiscal year towards our full strength spirits, particularly Jack Daniels, Tennessee whiskey, and last year, we just had the strong growth in RTDs that we're now cycling. So it makes it a positive portfolio mix.

Perfect. Thank you very much. Very helpful.

Our next question comes from Nik Modi with RBC Capital Markets. Your line is open.

Yeah. Thank you. Good morning, everyone. Just a couple questions, we've been hearing in the trade that maybe some of your competitors might not be doing as well in the glass supply situation. So I wanted to see if that was something that you have seen in the market and do you think that contributed or how you're benefiting from that at retail. And then the second question is again, more lately inflation obviously has not been great for the consumer. We are hearing of some consumer shock, I guess, with some of the pricing that's in the marketplace. So I was just curious on if you had any commentary on that or have you seen that in the market as well? Thanks.

Well, I'll start specifically with our glass supply and we've been talking about this for several quarters now. For Brown-Forman, that was our largest driver of supply chain disruptions and we've just continued to work really closely with our current supplier, which has yielded in improved glass supply and additional capacity. We've been also expanding our glass supply network, and we believe that that work will start increasing and supplementing our current supply in the fourth quarter of this year. And as Lawson mentioned is that glass is coming in, we are producing it as quickly as possible, but with the multiple months that we had to draw down goods inventory at all levels of the distribution channel, the supply chain, it is moving through the supply chain incredibly quickly. And we are still working to rebuild our inventories to date. It has been some we believe that it has taken us multiple quarters to get to down those inventories. It's going to take us multiple quarters to build that back. And we just continue to have teams that are working on prioritizing the most optimal use of those finished cases that we're able to produce. Now from a competitor perspective, we know others have commented on it and we'll let them kind of tell their story. So with that, I'll switch over to inflation. And as we talked about with our year to date gross margin, we did have 110 basis points related to higher cost. That is split between the supply chain challenge the cost associated with our supply chain challenges that we have had in trying to as quickly as possible get our cases into the consumer's hands. While like others we are facing increasing commodity costs on corn, grains, natural gases, wood steel but good news is agave has stabilized. We had hoped that the cost of agave, the price of agave was going to decline more quickly. But as we've reported on multiple quarters, now, the increased demand for the tequila category has just maintained that. But at least it has stabilized in that 27 to 29 pesos per kilo range. So we are seeing inflation, but the good news is we've got a lot of things working on our favor, which is premiumization trends. We already mentioned our favorable channel mix. We're fully utilizing our RGM tools. And we've talked about how we're taking price to help with the inflation that we're seeing, not the reason why we're taking it, but it is -- a, is a positive offset to some of the price increases are some of the cost increases that we're seeing.

Yeah. I mean, I think in terms of inflation, make sure I answer the right question, but I mean, the, there is some spirit -- there is pricing happening in the spirits category right now, that is stronger than it has been. I'll say in the last, I don't know, five years or more you, if you really try to pick apart Nielsen figure, then obviously this is a us comment. The spirits inflation is between one and two points, and we're going to be there too, maybe even a little better than that. And I would call that really on a global basis. That is a, that is -- it's almost been, I don't know if I'd quite be called a cultural change, but it has been a mindset change inside the Company really over the last year, not just the last quarter where we are pushing through low single digit, but steady price increases. And it's a goal to be able to do that, consistently over the upcoming years. And, and we'll see what the consumer reaction is. I mean, the consumer reaction right now, and other inflationary comments, I mean, gas prices going up is generally not great for the spirits industry. It's not great for consumer spending in general. We'll have to see how that plays out. I mean, so much of it is so recent that I don't really have any data to support that, but no, we've pushed through price increases in the U.S on Woodford, on Old Forester, el Jimador, Herradura, Chambord and really the, the vast majority of the Jack Daniels portfolio. So we are following through with what we said to you last quarter and still feeling pretty good about our position.

Excellent. If I could just quickly follow-up lean on the inflation comment, given the agave process of the product, would it be fair to say that some of the inflation that you're seeing now won't really be a, an issue for brown foreman until we get kind of maybe into 2023 and beyond? Or am I not thinking about that the right way?

Yeah, that's not to get too much of the technicalities with the weight and the methods that we use. Most notably Lipo most commodity costs come through as we as we incur them. Except for wood, wood is one that [indiscernible] will layer in over time.

Thank you. Our next question's from Bonnie Herzog with Goldman Sachs. Your line is open.

Thank you. Good morning, everyone. I hi -- I just wanted to kind of circle back on a few things and just kind of ask about, the way you're going to be discussing results now, going forward in terms of organic sales growth and then distributor inventories. I understand everything you guys said, but I just was hoping to maybe get a sense of how much distributor inventories may have impacted your results in the quarter? And then, given the supply challenges which you guys have discussed, is there a way for you to quantify, how much your top line was negatively in the quarter? I'm just trying to get a sense of maybe how much higher it could have been. And then when you guys are expecting some of these supply chain pressures to ease?

So I'll start with the, the change and how we talk about our business. And again, as you would've heard from Sue, this is driven by a comment letter from and discussions with the SEC. And just so that you all are aware, all of that has posted as of yesterday, out on Edgar and available to you. As we think about it, it might be easier to run through an example. So when in our earnings release, when, when you read that the U.S, the business on a reported basis group 5% organic basis, 8%, and then in the commentary, it says an estimated net increase in distributor inventories, positively impacted net sales. We added, we believe that it is important information at, with the transparency of what the -- of our, of our business and the fact that we have added schedule E and at the bottom, you can see how then following on the U.S example that the net change and distributor inventories was 2% for the United States. So our organic was supported by 2% of net change and distributor inventories. We believe that supplemental information is important to continue to provide transparency into the trends of our business that will, that chart will give you our geographic and brands. And then at the bottom, you can see that the statement of operations line items that net sales in total was 2% impacted by our organic impacted by the net change and distributor inventories. Does that help?

Definitely. Yeah, that does. And then just thinking about all of these puts and takes, and especially kind of going back to the supply chain pressures, because if I'm, I'm hearing you correctly, like that obviously was an impact in the quarter and I think year to date. So I'm just trying to get a sense of the magnitude and when some of these are you to maybe normalize or the pressures ease.

Yeah. And then as we, as I previously stated, it took us several quarters as we were going through the most significant period of glass supply constraints. And we had to draw down distributor and retailer inventories and even inventories at our own facilities. It's going to take us several months to rebuild that. So we do expect for shipments to exceed our depletions as we continue to rebuild that inventory

And a comment on the underlying thing too, a little bit, we were the only Company, I think this is true, that was doing underlying reporting and is why the FCC couldn't, they couldn't get their heads around it. So we switched to organic, which is now largely consistent with way the rest of the industry has been doing it for a long time. So on a positive side of it, all, it we're now sort of equivalent with them and make it a little bit easier to compare. But I know, I do recognize that this is a crazy quarter to be doing it, given the volatility and distributor inventory.

Right. All right. Thank you both so much.

Thank you. Our next question from Kevin Grundy with Jefferies. Your line is open.

Thanks. good morning everyone. Two que questions for me, if I may just first on, on the organic sales growth guidance not asking you to repeat what you've said in prior questions, but just specifically with the change in methodology, because it would seem like some of the upward revision would be owed to changes in distributor inventory levels. But very specifically, if you can sort of unpack the other items, other areas of business, which are coming in better than you had expected I think that would be appreciated. It seems like international business certainly stronger than we had modeled on premise recovery sounds like strongly had modeled, but maybe on a, like for like basis, just comment on what came in better in the quarter than I have a follow up? Thanks.

Yeah. You want me, or I mean, I'll start it at least. I mean, what came in better in the quarter was Jack Daniels, tendency whiskey. I mean, it was a blowout in terms of its ability to get the glass, get it through the system. And the demand, I don't want to say surprised to the upside, but it was just very, very strong. And so when that gets going, it's amazing. What kind of, growth that this Company can do is I compared it to last year when it was down 4% and we were able to do this fixed. I mean that when it, it's not going to maintain its 20% growth rate through the year, it's still going to be outstanding. So, and it really, it came from really all parts of the world really showed pretty dynamic growth. We had some really strong markets in Europe and some very strong markets in the emerging, in the emerging world. So…

Yeah, and I think that's the big story. The big story is our, our business has just been very resilient and Jack Daniel's Tennessee Whiskey returning to growth related to the reopening travel and tourism. Really, we keep saying strong consumer demand for both our American Whiskey and our Tequilas, premiumization to the extent that they weren't disrupted by supply chain challenges. Woodford Reserve, Old Forester, Herradura continue to just exceed expectations. And then again, we have the rebound from the travel retail and all of our, and we set it in our opening comment. We are seeing growth in all areas of our business geographically, including the global travel retail channel. So I think that as an under layer, regardless of what method, a methodology or basis change we're using, I think that's the big story. So that would've been that would've been a driver regardless of the change, what you can do again at the bottom of the bottom of schedule E you can take a look at the organic guidance that we have put out there. And as you try to make some high level adjustments for net change and distributor inventory, I think you continue to see that compared to our half year we have momentum.

Got it. That that's helpful. If I could just one more, I'll take a number of these off offline, but just shifting to capital allocation repurchases and share repurchases specifically, any updated thoughts there and maybe just comment on I guess maybe some of the hesitancy to sort of wait back in with respect to share buybacks, the cash level is near historic highs. Your leverage ratio continues to creep lower and the business is obviously performing really well and volatile, it's obviously still volatile, but we're in a much better place collectively than we were a year or two ago; so kind of pulling that all together. What, what maybe comment on the hesitancy to buy back shares then I'll pass it on. Thank you.

Yeah, I don't know if I would call it a hesitancy. I think we always look we try to use a very balanced approach because our core objective is for sustainable long term value creation. And we've talked about this many times, all of the dimensions over which we, we balance that and we have our ongoing investments in our business. As far as the Kentucky distilling expansion, we have had distilling expansion in our Tequila facilities. We have our single multi scotch and expansions. We have warehouse expansions, just port Jack Daniels growth family of brands, growth and Woodford Reserve. And those are they cost more in today's environment based off the inflation we talked about. But our number one objective is to maintain flexibility and strength of our balance sheets to do a couple things, which is to be able to invest back behind the, our business to, and to take advantage of growth opportunities. And recently we did just do a special dividend of -- it's approximately $480 million. So we did deploy cash to our shareholders from using that method. So again, our, our approach is consistent balance it's about maintaining flexibility and we are looking at many things to, in, from the investments that I just spoke of. And we're also thinking about the increased volatility that might be in the months and times ahead related to the geopolitical environment that are just send down at this moment.

Okay. Very good. Thank you for all that.

Thank you. Our next question comes with Steve Powers with Deutsche Bank. Your line is open.

Hey, thanks. So the on, on the operating income guidance year, day growth is plus 19%. The guide is for 12 to 16, so it implies 4Qs to be negative. And I just, I was wondering if you could just unpack the, the drivers there especially because you're cycling last year's foundation contribution. I don't know if that's included in the organic base or not. But just how we should think about the OI progression in 4Q and then I guess on top of that, back to Vivian's question, just how we should expect FX to FX impacts the trend as it relates to operating income through the, through the remainder of the year?

Well, I'll start with your last part of, we don't we don't forecast FX. We have it in there as what is known to date, but we wouldn't attempt to forecast what that change is going forward. And then as I would just say from a, an outlook perspective in our fourth quarter, we really are going to be cycling our strongest comps from the prior year when in the last quarter of the prior year, the on premise largely, I mean, in some places around the world, but specifically in the us, our largest market began to reopen. So we do know we're going against some tough comps. And we also we're still addressing some I chain constraints and input cost headwinds. And then I'll just layer on the last piece, which is potentially the rising, the rising uncertainty of the geopolitical environment and the unknowns by which that creates.

Okay, that's fair. I guess, where I'm thinking about those, the organic guidance implies, growth both shipment and probably some inventory catch up. But then you you're, the, the, the cost trends are overwhelming that in the implied guide. So is it, where is the cost pressure coming from? Is it, is it cogs? Is it incremental SG&A and just how we should think about that?

So what was, so from a cost perspective, we've talked about, our commodities we've talked about with labor, we've talked about transportation, which continues to be constrained of freight rates due to logistics, imbalances, all those things are in there. And then we also are continuing to invest from an SG&A perspective in our strategic initiatives, which is increasing the control of our distribution, increasing the focus on our super premium brand and places around the world. And then just increasing investments back behind our brands with new marketing campaigns and a new I, what we refer to as an IMC organization.

Yeah. I mean, I think the biggest part of it really tough comp though. I mean, I think that there's nothing really unusual going on or, anything like that. It's just, I mean, last year, fourth quarter was plus 19. Is that right? Yeah. So going against a plus 19.

Okay. Okay. I guess, the other, if I could squeeze it one more question, just I know it's hard to dimension and certainly hard to time, but as we think about just how far below some kind of normalized inventory levels you are exit in the third quarter, is there a way to, to size that maybe is that, is that on an annualized basis, maybe a, a couple of points of revenue growth to catch up to, relative normal or, how do we think about the, the magnitude of the inventory rebuild that remains?

Yeah. And this isn't going to be, and I've said it a co a couple of times, and, and this isn't a specific number, but it's, for example, it has taken us three quarters to draw down that inventory. We do believe that it going to take us three quarters to, to fully replenish our inventories at all levels of the supply chain. So as we look ahead, we do believe that we're going to see those shipments be stronger as were refill the inventory levels across the retailer, the distributor, and our internal.

Okay. Well, thank you both. I appreciate it.

Thank you. Our next question comes from Christopher with Redburn. Your line is open.

Thank you very much. A couple of follow up questions for me. Thank you. Firstly, apologies going back on the Russia situation, but you had a very strong organic performance in Russia. Were, were you shipping and rebuilding inventories with the new route to market in place there, or, or were you still selling into independent parties? And in terms of going forward, the inventory, there will be enough to, to carry you forward for, for how many quarters without the ability to, to ship in. And then secondly, has the sort of the development in, in sort of global events perhaps slowed the expansion of, of route to, to consumer that you've been putting in place. I think you've got up to 70% of your international business through your own distribution is something that perhaps we might see a pause now for a while and think until things settle? Thanks.

Well, we're still for the time being, we are going to continue using that same, I think called independent, third party distributor. I don't have, I don't know how many months of inventory they have, but they're continuing to stay in place and that, that we don't expect a ton of disruption on, at least on that side now consumer demand is going to fall off. There's no way. I mean, we're all. And I, I think the competitors are doing it to taking big price increases as the rule has fallen so far. So that's going to shave off some demand, but what was a very strong market for us is going to be less of a driver going forward. But as we said earlier, I mean, it is, in fiscal '21, it was 1% of our sales, so it's not a falling off the cliff.

And then the only thing I would add is we aren't in a, a normal, steady state. We are in a situation where we are prioritizing the most optimal usage of our finished goods. So as we think about our business, we will, I mean, we will deploy that inventory globally in the way that most optimally benefits the Company,

Meaning higher margin markets are going to get more, get per choice in the glass line over those that are lower

And maybe to thought, had you sunk much in the way of costs yet into Russia or you still at the sort of the design phase, I think you mentioned you started to, and I'm just trying to get a sense of how much sunk cost is there versus [indiscernible]

Well, it's, I mean, we have begun or we had begun to hiring. I said a little bit ago we had eighties, some odd people in, in the Russian market right now. We're obviously putting a pause on that and we're just kind of survey. I mean, it's only been a week, so we just haven't, we, we haven't made any sort of material decisions yet, but there, there wouldn't, there're not going to be a write off or anything like that that I can, that I would expect out of that market. I mean,

Yeah, it's a fluid situation and we're, we'll, as we, as we meet three months from now, we hope that we have much better geopolitical news to report, but at this point we're just continuing to assess where we are.

Thank you. I agree. Thank you.

Thank you. We have run out of time for Q&A. I would now like trying to call back over to Sue per director of investor relations for closing remarks.

Thank you, Shannon. And thank you to Lawson and Leanne, and thank you to everyone for joining us today for brown foreman's third quarter and year-to-date fiscal 2022 earnings call. If you have any additional questions, please contact us with that. This concludes our call.

This concludes today's conference call. Thank you for participating. You may now disconnect.