Brown-Forman Corporation (BFB) Earnings Call Transcript & Summary

We're going to get started. So it's great to have Brown-Forman's CEO, Lawson Whiting back at our conference. We were counting we think the ninth time -- seventh time. Okay. And joined by the company's new CFO, Jim Peters, who joined the company at the end of March. Lawson, I first want to congratulate you on your planned retirement. It's been a pleasure working with you, and thank you for being such a great supporter of our conference over these years.

So back to business. You guys reported earnings last week, you reiterated fiscal '27 guidance, conveyed confidence in the profit outlook towards the high end of the range, which is great news. So a bunch of stuff we can talk about I got a little. So Lawson, let's start with the broader kind of setup, if you will. Over the last year, the company has navigated softer developed markets, spirits trends, rising cost pressure, M&A speculation, CFO succession, considerable changes at the distributor level and now your planned retirement. So as you think about the next chapter for the company, and what's ahead for your successor. What are the 2 or 3 strategic priorities that you think matter most for restoring confidence in the medium-term growth algorithm -- opportunity I should say.

Yes. Look, I mean, it always with Brown-Forman starts with the geographic expansion really of our portfolio, but obviously, Jack Daniel's led. So -- and just to sort of put some context around that. So I started almost 30 years ago. When I started, we were 80% U.S., 20% international. Ten years later, we were 60% U.S., 40% international. Today, we are 40% U.S. and 60% international. So it's been a massive movement in terms of where we generate our sales and our business where our people are. I mean we are now spread out all over the world. We have many more employees outside of the U.S. than we have inside the U.S. So a lot of people think of Brown-Forman as this sort of U.S.-centric company from Kentucky, and it is much broader than that at this point. So look, I mean, the geographic expansion on Jack is over my career is where the value creation has really come from. And the brand has gotten bigger and bigger around the world, but it's created an enormous amount of shareholder value. So that is going to continue to be priority 1 for the company. We will continue to do that, although the rest of our portfolio, which I'll talk about in a second, also has a big place in that strategic plan, too. Another topic, I think, that is increasingly important, not only to Brown-Forman, but the industry and whole and especially in the United States, is innovation. So innovation, particularly when I started really wasn't that honestly important. It was a handful of core brands that continue to grow around the world. Innovation has become immensely more important, whether different categories play well in the world of innovation. It just happens, I think that American whiskey, scotch would be in there, too. But America whiskey and tequila are the 2 categories that play in innovation the best. A lot of that's because you use barrels to age, and there's different things that you can do to create super ultra premium align extensions off of that. And so innovation within the Jack Daniel's trademark ranges everything from what we did last year with Jack Daniel's BlackBerry, which has been a great success. In the same year, we did something called Jack Daniel's Heritage Barrel which is really an ultra-premium line extension that we sold out of -- we sold every bottle we could make, and it's quite substantial, and it was a really great product. So I say all that because I find the Jack Daniel's franchise or the Jack Daniel's family of brands has the ability to do a BlackBerry and then an ultra premium in the same year. It's the broad shoulders of the brand that can help to do that. And so you've got Jack Daniel's first. You've got innovation and making sure you're doing things there. And then a lot of the brands that we've not only just purchased in the last couple of years, the Gin Mare's and Diplomatico's. But certainly, I'll go back to Woodford. Woodford is now a big brand in the United States very small outside of the United States. So that's another international opportunity. But in general, we call them emerging brands. So the brands that are relatively small outside of the United States, but collectively are meaningful, Excited about the opportunities there.

Okay. Great. Let's talk a little bit about what I would describe as almost like the definition of self-help, and that's in the U.S. route to market changes. It's been about a year now. I think there were a couple of control states where we see some further changes in June. But it feels like a reasonable time to reflect on how that's gone. So are you seeing the better -- let's actually back up? Maybe talk a little bit what you were hoping to see in deciding to make these changes that offer some context for people here who might be less familiar. And then are you seeing kind of better execution coming out of that because it's hard for us to really see that particularly with the category as challenged as it is to really see what the outcome has been?

Yes. Well, the first and most important reason that we made the changes was focus. So towards the end, I mean, it really started with leaving R&D really in California was first, and then it's spread to the rest of a lot of other brands. And one, we were the first ones out for the most part, which gave us an advantage in that we looked at the rest of the industry and had the ability to navigate without 100 or other companies trying to do the same thing, which all accelerated as the year went on. But focus is so important, I believe, in our business. It's actually -- it's why I do believe Brown-Forman has been successful and not necessarily lost share or underperform the bigger competitors that we have out there because focus is that important. And towards the end of the RNDC days, I mean, they had huge portfolios. I mean, literally, the -- you could have literally hundreds of brands in a salesman's book, and that just doesn't work. You're not -- we're not getting the focus that we wanted. And so we wanted to really -- that was important. Better execution, we are getting better execution. Our trends have improved in the U.S. over the last year. It took some time. There were some markets were easier to transition than others, but we've pretty much got our feet under ourselves now the result of that was, interestingly, was our biggest brands transitioned pretty quick. It was our smaller brands that just weren't top of mind and the distributors themselves weren't really ready for the entire portfolio all at once. So that only took a few months to fix. But so that part is working right now. And then economics. We got better terms allowing us to either drop some of that to the bottom line or reinvest a little bit more and we did a little bit of both.

Okay. I'm also curious to get your read on the state of the distributor landscape as a whole. There's been a large shake up. There were catalysts along the way, but we have a very broad shakeup since we were last here a year ago. So how has that impacted the industry? Do you think we're through the worst of it from that standpoint? So just talk a little bit about the impact of the distributor...

Yes. I mean look earthshaking for the industry in the United States, the partners that we had mean RNDC, I don't know when it started. I mean, decades and decades and decades of partnership and all of a sudden, it goes away. So that part was very, very difficult. I think another dynamic that we haven't talked as much about, but it's the blurring of the lines between really beer and spirits for the most part, and then who plays in there. So suppliers are starting to cross the lines a little bit, but the distributors like take a raise. I mean they've got a huge beer. They've got huge nonalcoholic business, and now they've gotten -- well, they're ready had wine, but they're getting much bigger now in spirits and have begun to expand. And so what we need in distributors is a solid, strong balance sheet that is extremely important. When they weaken, that becomes a problem for all the suppliers. And so I think that part is working well. And whether or not it's over or not, that is a tough one to speculate, I think it largely is. But who knows? Who knows the way the world is going to go. And it's stuff being in a business that is capital intensive distribution is with low margins when volumes decline, everyone hurts. And yes, it was a heck of a transition to watch. A lot of -- as I said, a lot of years of partnership went away. But at the end of the day, we're in a better place today than we were a year or 1.5 years ago.

Okay. And so you think the shakeout from all of that, though, the we're kind of through the...

Largely. Yes.

Okay. So I want to stay on the bigger picture, but Jim, I'm going to turn to you now. You joined Brown-Forman from the more mature and cyclical consumer durables industry which at least historically had very different growth dynamics in spirits. Could you share some of your bigger early observations about where Brown-Forman has the opportunity perhaps to operate differently and particularly when it comes to cost discipline.

Yes, and I appreciate it. And to begin with, I'm very excited to be here and obviously, joining Brown-Forman has been a great experience. I'd say it's company that's in very good shape, obviously, in a tough industry, which, as you alluded to, I've spent some time in different cyclical industries. But we start off with a really strong portfolio of brands and products. as well as an incredibly strong balance sheet. And so I think that's something that kind of sets us out there and really sets us apart in terms of different consumer companies out there. Now as you alluded to, things that I've started to notice and understand and all that within how we operate in the different models is the good thing is coming in, especially from a cost perspective. we were already taking a lot of the right actions. And we'd already done some of the restructuring and reorganization that many companies will do in these type of situations and had a lot of that behind us. We were already developing within our pipeline around cost of sales and ideas to offset some of the increasing costs that we're seeing now. So what that did is this is now more about an operating system go forward where we've really got to have both discipline and we've got to have balance. And the discipline comes around that you're just constantly looking at your cost structure and constantly looking at things and saying, Am I doing this in the most efficient way? Am I optimizing what I spend. The balance is that, listen, you can't cut or cost save your way to prosperity because it's really about growth. And it's about creating the opportunities in the fuel for that growth. And the business that I came from, we used to just use a term we call it productivity for growth. And that's -- you've got to find ways to continue to fund the different things you want to invest in and that you want to grow. And so Lawson gave some examples earlier of the areas that we want to be able to reprioritize to our emerging markets in some of our innovation. And I think that's what it's now about now is making sure we have that discipline to ensure that balance.

So just building on that, more rigorous cost mindset don't want to compromise long-term brand equity. What has to happen culturally or organizationally to sort enable? What I think you're describing is a pretty big mindset shift, not that the company wasn't oriented towards growth, but now it's we need to find the resources that we can invest in growth. So based on -- I mean it seems like some of the -- you updated the guidance to say you're more confident towards the better end of the range suggests maybe there's you're kind of getting momentum on this front a little bit faster. But curious, culturally, organizationally how you bring this to bear?

Yes. And I'd say here, I mean, to begin with, I think that a lot of the mentality is already there and the culture is already there. But this comes back to what I kind of mentioned earlier, is really helping the organization to prioritize and to say, okay, where are really those true areas that we want to invest in? How do we make sure that they have the right return? Because, listen, you can't get too focused on the short term. We've really got to keep our eye on the long term. A company that's over 150 years old doesn't get there by staying very focused on the short term. They focus on executing in the short term but making sure you're investing more towards the growth as we go forward. And as I mentioned kind of previously, and Lawson talked about is really that's as we look to what are those areas where we see the growth opportunities coming, and those areas such as the emerging markets, such as a lot of the innovation that we brought to the market right now. And throughout the day, we've talked a lot about how we've -- whether -- and Lawson even mentioned it now with things such as the Tennessee BlackBerry, Jack Daniel's Tennessee BlackBerry, the heritage barrel, many of our RTDs. These are all things that we're able to continuously fund internally by making sure we have that right balance. I mean it's also within our brands as we invest in our brands, it's making sure we have the right amount of investment, but it's also optimizing how we do that investment and being as efficient as possible. And I really truly believe, and I said that on the call is that we are very good at that, and it's the discipline we'll just continue to focus on.

So Lawson, time about brand building a little bit in terms of the portfolio. So Jack Daniel's, obviously essential to the investment story. And the company put a lot behind the new global brand campaign, on-premise activation and innovation. What gives you confidence that the work underway is not just stabilizing the brands in a tough category, but actually building better share-taking capacity for when the category improves?

Yes. I mean -- look, Jack Daniel's it's so big now that taking share in some of its big, big markets is difficult. I mean, just to be honest, in the United States, in particular, it's such a massive brand that we've been pretty public, not -- I mean, over the last 10 years earlier of saying this company can grow very nicely. It doesn't need to take share in the U.S. whiskey market, but we do need to take share outside of the United States. And we largely do even in some of the challenged markets really in Europe right now, which are in -- they are more difficult than even the U.S. market is, but we are taking share in a lot of those. And so we feel pretty good that we've made the right changes in the brand building mix. I mean they range -- it's from sort of the classic things that you do in terms of consumer communications and where you do it and all of that. But McLaren has been a great partnership. We -- that's a little bit less of a U.S. thing, and it's a little more of an international as the races are obviously so spread out around the world. But gives us a unique and differentiated way of promoting the brand. And so we like that and then music. I mean lots of brands try to do music. But I don't think there's any brand that owns music is probably up an exaggeration, maybe a little bit, but can certainly be successful in music, there's not many brands that do it better than Jack. And we will continue to do that. I mean it ranges from Shaboozey and [indiscernible] that we have, it was about a year ago now, even too. But there was an interesting stat somebody told me in our marketing world the other day, which I actually didn't know. But they did a -- I don't know how they did it, but they look at country music, which for you, Northerners may not be huge, but I can tell you down in Kentucky and then really in the rest of the country has gotten so massive. But there is -- we are the #1 most often cited brand in country music. So I say all that just because it speaks to the relevance of the brand and people's -- just their love for the brand in aggregate and what it means to them. I think that's really, really important. And it just sends a good signal that we continue to have. The brand continues to have the DNA to really be important and relevant in today's world.

So when you think about Jack growing in the U.S. and your point that it's just tough at this point to gain share holistically, then is the key to growth in the U.S. really about category recovery?

It certainly helps a lot. I mean if TDS in general, full-strength CDS, which is still sort of down 4 or 5 in -- it's hard for the really biggest brands in the market to really diverge a lot from TDS. And there's a long list of them that way. So but we're certainly trying to do that and getting the trends in the right direction, ultimately, is going to be one of the most important things that we can do for the company.

Okay. So the category in the U.S. has become more value conscious. You guys have been very clear that you don't intend to chase low-end volume. Lastly on the call, you've mentioned some new pack sizes. I'm just curious how you're thinking about affordability, price pack architecture in a way that keeps brands accessible while still protecting the premium positioning of these equities.

Yes. We -- so over the last really 10 years -- really, I could probably go back 20 and 30 years. But really intensely in the last 10, we have changed our portfolio quite a bit. We got out of a lot of lower-end brands, honestly, that were declining. So the Southern comfort to the world, everybody remembers that. But list gets a little bit longer. I mean it's Canadian Mist and early times in Finlandia. More recently, Sonoma-Cutrer, which really wasn't a low-end brand, but it was the last entry we had in the wine business. So 20 years ago, we had a huge wine business. And we sold a lot of it out 15 years ago, held on a Sonoma-Cutrer because it was sort of just a different brand. It was a true brand in the world of wine, and we loved it. But ultimately, it's not very efficient to own 1 wine brand, and we got rid of that just basically at the right time. So we did all that and then purchased half a dozen different brands. But they are almost all very super premium even in the ultra-premium category. So we premiumize the portfolio that's been difficult in this environment right now when some of the lower -- the brands that cost $25 are doing better than those that cost $45. But we're not going to change strategy based on that. What we want to be able to do is offer those super premium brands at a price point that's accessible for a lot more consumers. And so you all have probably heard because this is not new news, but smaller sizes have done considerably better than larger sizes over the last couple of years. And I think that's just because consumers want their brand. If they are Woodford [ reserve ] drinkers and that's a $30 to $35 a bottle brand, that's expensive lot of folks to go into a store. And if I only got a $20 bill, I can get a $3.75. I can still buy my Woodford. I can still have it be my brand and do well with it. And so that the industry is taking. We're not the only ones doing that, obviously. But it has provided sort of a base of business for us in a time when consumers are truly pinched, and it's worked out pretty well.