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Brown-Forman Q1 2023 Earnings Call Transcript


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Participants

Corporate Executives

  • Sue Perram
    Investor Relations
  • Lawson Whiting
    President and Chief Executive Officer
  • Leanne Cunningham
    Senior Vice President and Chief Financial Officer

Presentation

Operator

Good day. Thank you for standing by. Welcome to Brown Forman's First Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode, After the speakers' presentation, there'll be a question and answer session [Operator Instruction] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sue Perram with Investor Relations. Please go ahead.

Sue Perram
Investor Relations at Brown-Forman

Thank you and good morning everyone. I would like to thank each of you for joining us today for Brown Forman's first quarter fiscal year 2023 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 first quarter fiscal year 2023, 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 condition and results of the operation are contained in the press release and investor presentation. With that, I would like to turn the call over to Lawson.

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Thank you, Sue, and good morning everyone. As we began fiscal 23, our momentum continued and we delivered another quarter of double-digit top line growth on both a reported and organic basis. We experienced strong consumer demand driven by increased travel and tourism, the gradual reopening of the on-premise internationally as well as sustained premiumization trends. In addition, as we indicated on our last conference call, in the first quarter, we benefited from an increase in distributor inventories as we continue to recover from supply chain disruptions and constraints that began impacting our results in the prior fiscal year.

Supply chain disruptions continue to affect our business during the first quarter of fiscal 23, while our glass supply improved. Overall supply chain logistics and transportation continued to be constrained, which impacted our route to market and increased our costs. As some headwinds turned to tailwinds, our gross margin expanded with a favorable price mix, and the removal of tariffs more than offsetting increased costs and negative effect of foreign exchange. This improvement in our gross margin enabled us to further invest behind our brands and our people while growing our bottom line ahead of the top line. Overall, I'm very pleased with the start to our fiscal year and remain thankful to our Brown Forman employees for their continued focus on growing our brands throughout the world.

So, this morning I'll provide a few more details on the quarter and then I'll turn things over to Leanne. Our reported topline growth increased 11% with organic growth, increasing 17% after adjusting for foreign exchange headwinds. Organic net sales growth in the quarter was driven by continued growth -- strong growth for Jack Daniel's Tennessee Whiskey, Woodford Reserve, and the Jack Daniel's RTDs. Jack Daniel's Tennessee Whiskey remains the lead driver of our growth as the brand continued to deliver double-digit growth with an organic net sales increase of 21% driven by strong consumer demand, higher pricing, and a favorable channel mix.

Second, our super-premium American whiskey portfolio increased organic net sales double digits. Woodford Reserve led this effort growing organic net sales 39% and reaffirming the strength of the trademark. As glass supply constraints eased and we increased our bottling capacity, we were better able to meet consumer demand for Woodford Reserve. Also in May, we launched the first super premium Jack Daniel's line extension in a quarter of a century. The new Jack Daniel's bonded Tennessee Whiskey and Jack Daniel's Triple Mash Blended Straight Whiskey are the first two permanent expressions in the brand's new Bonded series and they're off to a great start. The products are currently available in the US, France, the UK, and Italy and will continue to rollout internationally.

These whiskies are another opportunity for both our friends and new drinkers to explore and discover everything Jack Daniel's has to offer. Jack Daniel's RTDs which grew organic net sales 17%, were the third largest contributor to overall company growth fueled by the consumer trends of convenience and flavors. Leading this growth is Jack Daniel's and Cola, which gives us continued confidence in our global agreement with the Coca-Cola company to deliver the iconic Jack and Coke cocktail as a branded ready-to-drink adult beverage.

We're on track to launch the Jack Daniel's and Jack Daniel's and Coca-Cola RTD beginning in late calendar '22 in Mexico. We look forward to sharing more about this exciting agreement between two global American icon's in the quarters and years to come as it expands to market throughout the world. The rest of the Jack Daniel family also delivered solid results led by a double-digit organic net sales increase collectively from Jack Daniel's Tennessee Honey and Jack Daniel's Tennessee Fire, particularly in the US as the glass supply constraints have eased.

Beyond our American whiskey portfolio, organic net sales for our full strength tequila portfolio declined 3%, supply disruption mainly related to glass were Herradura in the US and Mexico as well as difficult prior-year comparisons in the US were significant contributors to this performance. Demand particularly in the US remains very strong but glass supply challenges and continued stable but elevated cost for agave have slowed our profit growth. New mix performed well as the RTD category in Mexico is growing and the brand is increasing share, Sonoma-Cutrer build upon this momentum as the continued reopening of the on-premise channel drove a double-digit increase in organic net sales and our scotch portfolio led by GlenDronach and Benriach also produced strong results.

Earlier this month, we announced an investment of over GBP30 million in the GlenDronach distillery to significantly increase production capacity. Based on the latest IWSR data, global demand for the GlenDronach has tripled since 2016, the year that we acquired the brand as Whiskey common stores around the world discover the distilleries award-winning single malt. We believe this investment will steward long-term future growth of the brand, Leanne will go into depth about our results in each of the geographic divisions and I was pleased to see broad-based growth across all geographic clusters and the Travel Retail channel.

Also in the first quarter of fiscal 2023, our reported gross profit increased 13% and our organic gross profit growth was 21%; both ahead of the respective topline growth rates. While we experienced some headwinds in the form of a negative foreign exchange effect, higher costs related to supply chain disruptions and higher input costs due to inflation, they were all more than offset by tailwinds including favorable price mix and the removal of the EU and UK tariffs on American whiskey. This combination of headwinds and tailwinds resulted in 80 basis points of gross margin expansion in the quarter.

It was this time last year that we shared our plans to increase prices in the US on the majority of our brand portfolio as part of an overall strategy to increase prices more consistently year after year. At the conclusion of the first quarter and nearly 90% of the price increases for fiscal '23 have been executed and we've seen retail shelf price changes reflected in almost two-thirds in the United States. Based on Nielsen data, Brown Forman remains a price leader with 2.7% pricing growth outpacing total distilled spirits of around 2%. We continue to utilize our revenue growth management tools to evaluate pricing opportunities not only in the US but also internationally.

We believe the health and relevance of our brands as well as our continued brand-building investments will allow us to successfully implement our long-term pricing strategy. In summary, we had a strong start to the fiscal year and remain optimistic as we look ahead, even as the global macroeconomic and geopolitical environment remains volatile and uncertain. This optimism is grounded in our success in both the short and long term. We've been through challenging times and conditions over the last three years, as well as the last 152 years. We've been tested, yet we've remained resilient.

We have experienced adversity yet we have continued to grow. Brown Forman has endured because we have some of the most attractive spirits brands in some of the most desirable categories and we continue to innovate and expand our portfolio. We've thrived because of the bold and diverse perspectives of our people, which allow us to think creatively, innovate constantly, and grow consistently. I want to thank each and every one of them for delivering the results that we are sharing with you today, They give our company character and complexity, purpose and perseverance, agility and authenticity, and I am greatly appreciative. So with that, I'll turn the call over to Leanne and she'll provide more details on our first quarter results.

Leanne Cunningham
Senior Vice President and Chief Financial Officer at Brown-Forman

Thank you Lawson and good morning everyone. As Lawson reviewed our headlines for the quarter, I will provide additional details on our business results and our outlook for fiscal 2023. First, I will share our top line results by geographic clusters. Developed international markets collectively delivered strong organic net sales growth, up double digits for the quarter, an increase in tourism and a return to the on-premise channel, fueled broad-based growth across the markets despite continued supply chain challenges.

Jack Daniel's Tennessee Whiskey was the largest contributor to growth, driven by Germany, Spain, and Austria. Belgium also contributed to the growth as it has seen solid momentum since transitioning to own distribution in January of 2022. Jack Daniel's ready-to-drink momentum continued with double-digit growth led by Germany and Australia. Consumers' desire for convenience and interest in the ready-to-drink category remains high in these markets and we are gaining share. Aligned with our strategic priority of increasing focus on our premium and super premium portfolio, our emerging brands model that we recently began extending to some international markets delivered very strong double-digit organic net sales growth driven by GlenDronach, el Jimador, and Woodford Reserve.

Collectively, our emerging international markets continued to rebound with very strong double-digit organic net sales growth, driven by strong organic growth from Jack Daniel's Tennessee Whiskey, particularly in Turkey, Sub-Saharan Africa, Brazil, and Chile. Jack Daniel's Tennessee Honey grew organic net sales double digits led by Chile where the brand has more than doubled and New Mix growing strong double digits in Mexico. Growth was partially offset by lower volumes of Herradura in Mexico, as the brand faced supply chain constraints. And year-over-year declines in Russia due to the suspension of our commercial operations beginning in March of 2022.

The US business remained strong growing organic net sales 7%. This growth builds upon the 19% organic net sales growth delivered in the first quarter of fiscal 2022, which was fueled by the initial reopening of the on-premise channel. Woodford Reserve led the growth for the first quarter with a positive impact from higher pricing and higher volumes as supply and capacity constraints eased. Also benefiting from an improved supply chain environment, Jack Daniel's Tennessee Honey and Jack Daniel's Tennessee Fire, experience volumetric gain.

Growth was partially offset by lower volumes of Korbel and Jack Daniel's Tennessee Whiskey which both lapped double-digit comparison in the same prior year period. Despite the supply chain challenges, we estimate a net increase in distributor inventories positively impacted net sales, although even with the increase in the quarter, we believe distributor inventory levels remain below their pre-pandemic levels. This is due in large part to transportation and logistics constraints as well as increased consumer demand. We continue to monitor consumer mobility trend and based on data from OpenTable and Google mobility the on-premise trends have continued to harbor around pre-pandemic levels.

This shift to the on-premise is continuing to impact off-premise takeaway trends as consumers have made the gradual return to restaurants and bars. Our year-over-year takeaway trends have also been adversely impacted by supply chain constraints for brands such as Gentleman Jack and Jack Daniel's Tennessee Honey, Jack Daniel's Tennessee Fire, and Jack Daniel's Tennessee Apple, Finally, the travel retail channel continued its strong rebound growing organic net sales, 85% led by increased Jack Daniel's Tennessee Whiskey volume as international airline travel and the cruise business accelerated in the May through July period.

Our business in this channel has not yet fully recovered to pre-COVID levels but continues to close the gap. As Lawson will share the details of our gross margin expansion for the quarter I will now turn to our operating expenses. Organic advertising expenses in this quarter compared to the same prior year period grew at a higher rate than our topline growth, largely due to the timing of our increased investments in the United States to support Jack Daniel's Tennessee Whiskey, Herradura, the launch of Jack Daniel's Bonded and Triple Mash and Woodford Reserve. Our organic SG&A investment increased high single digits, driven primarily by higher compensation-related expenses and the investment behind our people to support our business needs in a post-pandemic environment while continuing to leverage new ways of working.

In total reported and organic operating income grew 19% and 32% respectively in the first quarter of fiscal 2023. These results combined with a decrease in our effective tax rate resulted in a 30% diluted earnings per share increase to $0.52 per share. And finally to our fiscal 2023 outlook, we continue to be optimistic as we look ahead, even in this, the current volatility and uncertainty of the global macroeconomic and geopolitical environment. We believe our headwinds and tailwinds will remain largely the same through the remainder of our fiscal year and the strength of our portfolio of brands, supported by strong consumer demand, and our strategic investments will enable continued growth and therefore, we are reiterating our full year fiscal 2023 guidance.

With the start of a new fiscal year, we have now cycled against the more volatile months of the pandemic and believe we are seeing trends begin to stabilize. We remain confident in the collective strength of our US, developed and emerging international markets along with the travel retail channel. We anticipate our results should continue to benefit from the continued return of tourism and the gradual reopening of the international on-premise channel along with stronger pricing and innovation. We do remain cautious given the potential impact of inflation and rising energy prices on consumer spending. I also want to reiterate that the seasonality of our fiscal 2023 results will be impacted by the abnormal seasonality of our fiscal 2022 shipments due to supply chain disruptions.

As you will recall in the first half of fiscal 2022, distributor inventories did not increase ahead of the important holiday season as is typical, and we experienced stronger shipments in the second half of fiscal 2022 as glass supply challenges began to ease. In the first half of fiscal 2023, we expect distributor inventories to continue to return to more normalized levels. Therefore, we expect our growth rate in the first half to benefit from the net change in distributor inventory. Our second half results will lap to increase in the net change in distributor inventory related to the rebuilding of our inventory position in the prior year period.

As it relates to our fiscal 2023 cost, the removal of the EU and UK tariffs on American whiskey remains a significant tailwind, while we continue to expect input cost inflation to remain a headwind. Also cost related, our glass supply position has improved. There are some challenges that remain for some of our brands, particularly Herradura. We are continuing to partner with our current glass suppliers, as well as add new suppliers to address these constraints and similar to many other CPG companies the overall supply chain particularly transportation, logistics, and freight continue to be challenging.

While we are actively working to navigate these challenges and their impact, we do believe supply chain disruption will remain a headwind for the remainder of the fiscal year. Based on these headwinds and tailwinds, we are reiterating our reported gross margin guidance for it to expand slightly for the full year as our trajectory of expansion continue. Also related to our supply chain, we constantly search to identify continuous improvement opportunities to optimize both our supply chain and its related costs.

As we have shared with you during many calls, we had been progressing various initiatives to address the challenges related to the cost of wood. One such initiative has led us to the recent announcement regarding the decision to sell our Stevenson mill in Alabama and Jackson mill in Ohio to Independent stave Company. This sale is a part of a long-term agreement between Brown Forman and Independent Stave to allow for the expansion and diversification of our supply chain network. Independent Stave is a dynamic family-owned cooperage company and is committed to environmental sustainability and its operations.

All of these existing mills are sustainable, forestry initiative certified and independent stave like Brown Forman is a founding member of the White Oak initiative to support the long-term sustainability of White Oak for us. Although divesting part of our business is never an easy decision. There are significant advantages to this partnership including broader-based sourcing continuous improvement initiatives and cost savings from economies of scale. We are also pleased that all employees impacted by the agreement will be offered positions with independent staves. It is important to note, we will continue to own and operate our Clifton mill and Clifton Tennessee and both are Brown Forman and Jack Daniel's cooperages.

For the last component of our outlook, the outlook for operating expenses remains the same. In addition to our philosophy of growing the investment behind our brands at a rate similar to our top line growth, as we have stated, many times that when the EU and UK tariffs on American whiskey were removed, we would reinvest a portion of the relief back behind our brands. We are very pleased that in fiscal 2023, we are now executing against this additional investment behind our brands. And as we shared last quarter, we will also invest behind our people and expect a continued rebound of discretionary spend to support our business needs in a post-pandemic environment.

Based on these expectations, we currently expect our organic net sales and organic operating income to grow in the mid single digits range for the full fiscal year and we still expect our fiscal 2023 effective tax rate to be in the range of about 22% to 23%. Lastly, we have noted, the impact of foreign exchange on our reported results. The dollar continues to strengthen against many major currencies. Most notably, we are seeing the negative effect of the appreciation of the dollar against the euro and the Turkish lira.

The guidance we provide is on an organic basis, which excludes the impact of foreign exchange. If we were to take the rates where they are today against the dollar for the remainder of this fiscal year, foreign exchange would be a headwind for us in fiscal 2023 on a reported basis. In summary and as Lawson stated, we have had a strong start to fiscal 2023, delivering double-digit top and bottom line growth on both a reported and organic basis.

We remain optimistic as we look ahead and are confident in our ability to build upon this momentum and deliver consistent long-term growth despite near-term challenges and uncertainties. We believe our brands and our people are resilient. As our results continue to reflect, as we often say, there is nothing better in the market than Brown Forman. This concludes our prepared remarks, please open the line for questions.

Questions and Answers

Operator

Thank you. [Operator Instruction] Our first question comes from Andrea Teixeira with JP Morgan. Your line is open.

Andrea Teixeira
Analyst at JP Morgan Cazenove

Thank you for taking my question. So good morning. I wanted to just, first of all, congratulate you on the earnings. But just as you had this 5% positive impact which was called out in the last earnings call in the first quarter, it seems as if like your, the remainder of your fiscal year with them be the risks because of -- this is strong number. Do you expect that inventory would build to phase out in the second quarter fiscal or you still have that benefits in your view. I know the TR numbers would still continue to be positive. But if you can elaborate a little bit more between consumption and attrition. Thank you.

Leanne Cunningham
Senior Vice President and Chief Financial Officer at Brown-Forman

Hi, Andrea. This is Leanne. We are continuing to evaluate the timeline to get back to normalization of our distributor inventories. Since the last fiscal year, and again, we talked about in our prepared remarks in the second quarter -- in the second half we began making significant progress on rebuilding inventories. We're continuing to work very hard to rebuild those inventories, but at the same time, we're continuing to experience very strong consumer demand and at the same time, we've also launched new innovations. So while we are working to improve our inventory position, and you can see that in a net increase in distributor inventory change that we are making progress, but we are facing challenges and strong demand. So, we will come back to you will know more as we get into the second quarter to understand kind of what our exact timeline looks like. But we do continue to see benefit in the first quarter as you stated.

From a glass supply perspective, supply chain in general, we expect to be a headwind for the fiscal year. Our glass supply has continued to improve again with our current supplier increasing capacity we've broadened our supplier base. The Jack Daniel's facility is still bottling at record pace. And as also noted in prepared remarks, we continue to face challenges for some brands in some sizes and particularly for this quarter, it's Herradura and we had some capacity strength in the current supply chain and we're addressing that currently by expanding our supplier base. And then as we noted kind of one of the challenges that we will, that will impact us through the remainder of the fiscal year is our ability to move the product into market through logistics and supply and freight constraints, because there is a high demand for the equipment. There is an imbalance of the equipment around the world and again that's coming with associated costs and in the US, which is our home market and our largest market, where we produce the vast majority of our product, we still face driver challenges and equipment challenges. So net-net, we're making progress, and we are working to replenish it, it does remain below pre-pandemic levels, but we're encouraged by the strong consumer demand, Lawson?

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Yeah, I mean I think I may add a little bit to it because it seems like glass supply. I mean this has been a major problem for us for a year now. We actually first started talking about this. It was this quarter a year ago when we first really gave some detail on our glass supply situation and so fast forward a year, I do think it's worth reviewing because it almost feels like every question we are going to get it has this morning glass supply is part of the answer. But a year ago, we really we prioritized Jack Daniel's Tennessee Whiskey, so core black label to folk, you know, to allocate our immediate needs to Jack Daniel's Tennessee Whiskey as really the on-premise was opening up, not only in the United States, but around the world. And so, we really prioritize Tennessee Whiskey to the detriment of practically every other brand in our portfolio. And so as the year went along, demand has been very strong, I mean demand for Tennessee Whiskey, which we believe is the largest or certainly one of the largest on-premise brands in the world, the demand has just been outstanding quite honestly.

And so we had a big year last year and it continued on through the first quarter of this year, but to this, as I said brands like Gentleman Jack, the flavors, and now most recently our tequila brands have all suffered for it. So we've caught up with Jack Daniel's Tennessee Whiskey for the most part, I mean it's taken a little longer because of the strong demand, but it's -- it's doing well. Woodford Reserve had a great quarter. So we begin to replenish the inventories of Woodford around the world. Same thing on Old Forester Gentleman Jack and flavors are not caught up yet, but they're getting better, but you'll see those -- I think you'll see those trends improve in the upcoming few quarters and then as we -- as we said Herradura really suffered over the last quarter. And that was -- was a bit of a surprise, but the Herradura for one point to also make Herradura grew by 90% in quarter one last year. So tough comps is also part of that answer, but certainly, the brand is suffering on our glass supply shortage that we're working very hard to try to fix but it's not there yet.

Andrea Teixeira
Analyst at JP Morgan Cazenove

Super helpful. If I can squeeze just one question on how customers have been receiving the price increase and if you were seeing, it doesn't look like you're seeing any down trade, but just, this is the topics as we obviously spoke to all the companies this earning season if there is any price elasticity you're seeing, on the trade that investors should be aware of?

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Yeah, I mean, look, we have pushed through our price increases. I think we said, sort of 90% of the price increases already reflected on the shelf and we haven't -- we haven't seen the trade down now. I express a little caution in looking at our trends and then extrapolate those to sort of macro trends because of our glass situation. So that dominates over any sort of trade down or lack thereof. Really, because it's not showing through in our numbers and when we look at TDS, we're not really seeing it is obviously at the US comment, but you're not seeing it really in the data there either and so elasticities.

I think the biggest piece of an elasticity question always is, what are your competitors doing and the competitors are also going up. And so for the first time in I'll say in a decade, you're seeing some pretty good pricing throughout the industry, and you're not seeing that -- you're not seeing a lot of pushback. So we're able to get prices through. We are getting them through the retailers. It's on the shelf and consumers are still buying it, so -- so feeling pretty good. We use the term affordable luxury a lot and I do think spirits is an affordable luxury where consumers and they prioritize that bottle of Jack Daniel's and to the detriment of a lot of other consumer products, you've seen a lot of the retail of the big retailers in the US that have struggled with inventories we are kind of the opposite, where we don't have enough inventory out there and it's pretty healthy. It's a good situation and that the demand is still there.

Andrea Teixeira
Analyst at JP Morgan Cazenove

Super helpful. Thank you. I'll pass it on.

Operator

Thank you. One moment for our next question. Our next question comes from Peter Grom with UBS. Your line is now open.

Peter Grom
Analyst at UBS Group

Hey, good morning everyone. Hope you're doing well. So I kind of wanted to follow up on Andrea's question just around the guidance and just given the strong start to the year from a top line and margin perspective, it just -- the guidance seems to imply a pretty meaningful slowdown from here. I guess I would just be curious if is that simply just conservatism given the uncertainty on many fronts. Is there kind of something you're seeing more real-time eithe in US or other markets around the world, that's giving you some concern here?

Leanne Cunningham
Senior Vice President and Chief Financial Officer at Brown-Forman

Well, and again building on, Hi, Peter. How are you?, it's nice to hear from you, it's been a while. From building on what Lawson said from our inventory perspective, we really started as glass supply begin to ease in our second half of last year. Our shipments were kind of above, they were -- they were above our depletion level trying to get our inventory rebuild. So yes, we've had a strong start to our year and we know that next quarter, we'll be comping one of our -- our lowest performing quarter of fiscal '22, but then at the end of fiscal '22, we had a four-point benefit from those shipments. So when we have talked about, we will have a strong at first start, first half of our '23 and that we will have to call that four-point benefit that we saw in the second half.

And then we also again as we said in our prepared remarks and we do remain cautious about how inflation and rising energy costs are going to impact our consumers. It will there be any macro economic or geopolitical events that similar to last March when we suspended our business. So again, that will be an impact in FY '23 is the absence of our business in Russia. So from a cost perspective, we've talked about this a bit and we're facing challenges though easing on the glass supply, but then now moving to logistics and transportation and then will be our ability to get our product to market into consumers, which we believe is possible, but it's going to come at increased cost, some of which we planned because we plan for inflation every year. But one of the things that is different for us is that as we talk about inflation with the removal of the EU and UK tariffs on American whiskey and unlike many others will -- that will help us mute the impact of inflation and cost that we have. So I don't necessarily is very early in the year. There is a lot of year to go and a lot can unfold ahead of us. We are definitely optimistic and off to a strong start. But we know we have a strong back half of last year to come.

Peter Grom
Analyst at UBS Group

Now, thank you for that, that's super helpful and then I just maybe following different topic just you know the Coca-Cola and Jack Daniel's partnership. Can you maybe just provide some more background on the partnership why both parties decided now is kind of the right time and I know I think Lawson you mentioned in Mexico launch in the fourth quarter, but just any initial thoughts around timing in the US and contribution, the top line growth versus maybe cannibalization versus for the existing ready to drink portfolio.

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Sure. So look we are behind the scenes working through all of that right now. There's obviously a ton of work that goes into launching a new product on the scale of what this is about near correct. We are looking at. It's only a couple of months away from launching in Mexico, what we would -- what we're going to do. I think I prefer to do is push this question off for another quarter. We will be more transparent with you all, As we move into the rest of the fiscal year, we are still working behind the scenes on the cadence of launches, the level of investment, all the -- everything that goes with effectively a new product launch.

On the positive side, our Jack Daniel's and colas and not the coke but Jack Daniel's and cola is flying. I mean that business is still really, really strong and so that's part of the -- part of the trick to this launch is how we remove those products from the market and replace with Jack & Coke it's a little more complicated than maybe that might sound. But this is still very healthy business. There is a lot of, particularly in the US, there's a lot of competitors, not so much in the Coke side of things, but I mean there is a lot of RTD interest of these days. And there's a handful of brands that are doing really, really well. So we feel really good that this thing once we get it out there in the market and we will -- we'll be ready to drive some pretty significant demand, but I think we're going to wait another quarter before we sort of release a lot of those details.

Leanne Cunningham
Senior Vice President and Chief Financial Officer at Brown-Forman

And then the only thing I would add to that as we are, we are really excited about the numerous opportunities that we believe that this product will have from a geographic expansion perspective and our ability to gain share with it as well.

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Yeah, obviously the Coca-Cola system is so big, they cover -- they cover the world and our products, we haven't even offered Jack and Cola in many, many parts of the world. So it's going to be an exciting thing for this company and we're looking forward to -- looking forward to it, knowing that most of that growth is really going to fall in calendar 2023.

Peter Grom
Analyst at UBS Group

Thanks so much for that color. I'll pass it on.

Operator

Thank you. One moment for our next question and our next question comes from Nadine Sarwat with Bernstein. Your line is now open.

Nadine Sarwat
Analyst at Sanford C. Bernstein

Hi, everybody. So I got to kick off with my usual question on pricing, I remember, on the last conference call, we discussed how you have taken for pricing across the board in the US, Great to hear that. I think you said 90% of that pricing for this fiscal year has gone through. Can you give us an update on your pricing strategy outside of the US, though have we taken incremental price. This is especially in light of that inflationary environment. And then one final question. Jack Daniel's Apple, I know you mentioned Flavors being deprioritized. But even if we take into account the changes in distributor inventory we're at a fall of about 8% at an underlying level. Is there anything else we should bear in mind for the weakness in the quarter for this brand or is this a one-off because of supply chain issues? Thanks.

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Yeah, let me, I'll take pricing a bit, and then maybe you can comment on Apple itself. I mean, yes, the pricing strategy that we are implementing is global, It's not just the US and its on and kind of similar numbers. Europe has been a very difficult pricing environment for a long time, but we are finally push -- we push through successfully push through last year, and we'll continue to do it again this year. I call it that, low single-digit pricing that sort of 2% to 3% range is something I want to see for the foreseeable future. I mean every year not, we don't want to -- we're not trying to go up 10 one quarter and then back off a little bit. It's trying to go slow and steady, and that's worked, it's worked so far and as I mentioned to the earlier question, I think a lot of it has to do with other brands that are also going up too. And so we're not seeing this sort of negative reaction either from the retailers necessarily. There is still -- there are still challenges to partnering with them to get prices up, but the environment is more conducive right now for most -- for many brands in our industry, not only Brown Forman to go up. Maybe talk about Apples, just a little bit.

Leanne Cunningham
Senior Vice President and Chief Financial Officer at Brown-Forman

And then to your Apple question Nadine, it's really in the process of lapping the final phase of its international launch last year demand has been high, and as Lawson mentioned you had the prioritization of our products with the constraints that we have. It has been negatively impacted by that. But we continue to believe that its launched and its connectivity with consumers remain very high.

Nadine Sarwat
Analyst at Sanford C. Bernstein

Got it. Thank you. If I could just clarify on that pricing, have you taken pricing yet outside of the US or is that something you're looking to do -- you have?

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

No, no we did it. Yeah, we did it kind of last cycle. So it would have been, I guess, Q2 for the most part, Q2, Q3 of last year where the international prices all went through.

Nadine Sarwat
Analyst at Sanford C. Bernstein

Got it. So you're planning on hopefully implementing similar pricing this fiscal year.

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Correct.

Nadine Sarwat
Analyst at Sanford C. Bernstein

Got it. Thank you very much, I'll turn it over.

Operator

Thank you. One moment for our next question And our next question comes from Vivien Azer with Cowen. Your line is now open.

Vivien Azer
Analyst at Cowen

Hi, good morning. Thank you. Sorry to go back to the glass supply, but one thing I think you've given us permission to dig in on that. So it seems like you know Herradura was clearly the surprise and as I reflect back on your commentary around glass supply issues, last fiscal year and just looking at Herradura's results were you rightly call out a very tough comp. How is that Herradura was more immune to glass supply issues in fiscal '22, what changed this quarter? Thanks.

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Well, I mean it's just, it's the where the glass is coming from and which plants are supplying the individual brands and so Herradura is one of the.

Vivien Azer
Analyst at Cowen

What changed this quarter? Thanks.

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Well, I mean it's just, it's the where the glass is coming from and which plants are supplying the individual brands and so Herradura there I was one of the most important brands in our portfolio. And so it would have gotten some level of priority particularly Herradura in the US. But as the demand as I said, was 90% in Q1 -- as the demand as I said, was 90% in Q1. The demand for several of our brands is not only to our Herradura but that would be the most obvious one where the demand was higher than we were forecasting and you can keep that going for a little while, but eventually that that runs into a problem and so that problem showed its head over the last quarter, a couple of quarters really in Herradura as we have, we are madly trying to find alternatives and find additional supply but it's challenging, I mean, it really is. But yeah.

Vivien Azer
Analyst at Cowen

Okay, that's helpful. And then maybe just to follow-up on that with the underlying gross margin disclosure, I was wondering Leanne if you could just kind of unpack even just like order of magnitude, the 180 basis points of cost pressure that you saw, like how much of that was glass versus the agave versus other? Thanks.

Leanne Cunningham
Senior Vice President and Chief Financial Officer at Brown-Forman

The largest driver of the 180 basis points of higher input cost is a portion of that is glass pricing as the glass prices -- as we have the commodity inflation on natural gas, I'd say, a bigger piece of it right now is corn and agave, and I'll explain the agave piece in a moment but for corn -- the corn futures, they've moderated throughout Q1 and as we stabilizing, as we look out for F '23, but it is stabilizing at a place that is approximately 20% higher than last year. So again this is where, in Q2, we'll know more about the harvest, it has been impacted by the weather with the quality of it will be supply demand and again harvest to be coming in soon and other thing associated corn is the increased freight cost due to fuel. For us, agave is going to be a little bit of a headwind this year. Now as I want to make sure that I'm clear the external agave prices have remained stable between MXN27 and MXN29 per kilo. Right now, we're seeing prices at the top end of that range, but for Brown Forman is going to be the mix of what percentage, we source from the external market versus what we have internally grown ourselves and with the balance between what our inventory of agave are that are ready to be harvest versus our demand. We are sourcing externally and a bit of a higher mix than what we would have last year. So there is a bit of that change impact there, but the pricing for external is stable. So really for us it's, I would say corn and agave are the two biggest we'll know more and for corn, as we get into the harvest and we do have small inflationary increases on the cost of wood and natural gas is above it. So is there anything else I can provide to you on that?

Vivien Azer
Analyst at Cowen

No, that's really helpful. Thank you very much.

Operator

Thank you. One moment for our next question and our next question comes from Chris Pitcher with Redburn. Your line is now open.

Chris Pitcher
Analyst at Redburn Partners

Thanks very much. I have a couple of questions on extending the Jack Daniel's brand it sounds from your comments Lawson that you're still comfortable with the flavor extension strategy and there is more growth to go for in Apple, it feels like Honey perhaps sort of achieved, sort of critical mass, should we expect you to be sort of working on further extensions beyond Apples or do you think the flavors story is perhaps playing out in the focus is more now more towards extending the premium extension for Jack Daniel's. And as a follow-up to that, I mean, looking at Bonded and Triple Mash what sort of price premium do you think Jack Daniel's can move to and still achieve meaningful volumes because you have tried to take the brand up the price ladder before and it runs into resistance? Have you -- are you targeting existing Jack Daniel's consumers to trade them up or are you now going after more premium whiskey consumers? Thanks.

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Well, to the second half of your question the answer is both. The Bonded series as we say, we haven't done an ultra-premium or super premium line extension in a long, long time really since Gentleman Jack and some of the Single Barrel expressions over the year. So we are -- we feel really good about the initial takeaway on these innovations has been very strong. And we feel very good about that. It's getting really positive reviews. And that sort of $29, $30, $31 price points, there is a real market for Jack Daniel's consumers. And so we feel pretty good about that. As far as the flavor side of things, I mean certainly Honey -- Honey has been a home run for this company over the last 10 years. And Apple -- Apples experiencing its own sort of issues, not only lapping some the launching but, the Apple launch is just the timing whether you're talking about the US or International was terrible because it was right in the middle of right as the pandemic was hitting and that was a tough time to introduce new products. So I do feel that Apple is to going to have a healthy future and will do well.

We do not have plans for another flavor in the near future. I'll never say never, but we're going to focus on these more premium line extensions for now and the core right in the core Jack Daniel's Tennessee Whiskey which is having growth like hasn't seen in a number of years. We've now, it's going to be several years in a row of growth on growth in ways that we feel pretty good about. And so yeah, so I think we'll be slow on any flavor extensions and you're going to see -- you're going to see be more advertising behind these the Bonded series. It's already, we are already promoting it prudent up price promoting it. But television and digital and all the different ways that we communicate in a big way on these brands. And so it's kind of exciting to see that there is a nice market for some premium extensions off the Jack Daniel's brand.

Leanne Cunningham
Senior Vice President and Chief Financial Officer at Brown-Forman

And then only thing that I would build on to that is when we think about premium extension for Jack Daniel's Tennessee Whiskey, Gentleman Jack is now over 750,000 cases. And we still believe it's very early in its international growth opportunity. So for me, I would say higher than 750,000 cases.

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Yeah, I mean, keep in mind Gentleman Jack too was, I mean as we look back, if we fast forward a couple of years and then look back over everything that happened over this glass shortage, Gentleman Jack is probably going to be the brand that really I don't suffer the most, but it was rough. I mean the Nielsen numbers are nowhere indicative of what we think the true underlying demand is for Gentleman Jack, it's just the brand is just taken it on the chin last year, as it really didn't have any supply.

Chris Pitcher
Analyst at Redburn Partners

Thanks very much.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Stephen Powers with Deutsche Bank. Your line is now open.

Stephen Powers
Analyst at Deutsche Bank Aktiengesellschaft

Thanks very much. I had three questions. The first one is on the US. If I back out the trade inventory dynamics and get to the metric, formerly known as underlying growth. I think we end up with like a 2% growth number in the US in the quarter, which was a bit light of our expectation. I just wanted to get your sense for how -- what that signifies for sort of that underlying normalized demand in the US, if it was in line with your expectations and how you expect that to trend from here?

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Well, first of all, calling underlying what did you say, formerly known as that is of one of the better lines, I've heard in a while. Look, the US business -- our International business is still very much dominated by Jack Daniel's. And so the International demand was very, very strong and we were able to supply it. The US is much more diversified and so brands like Woodford and Old Forester and basically everything other than Jack Daniel's, you've got such a massive, you've got a very broad portfolio that was constrained by glass supply. Also think something that I'm just not sure, I appreciate it a year ago, but the US on-premise opened up quicker than the rest of the world. And so we're lapping now that reopening Q1 would have been a heavy reopening period for the US. But international markets were more like Q2 or into Q3 and so -- so that some of it was just the comps do so that once again I answered everything is glass supply and tough comps impact of the US business.

Look, I look at our US business, I mean Woodford when the US number I guess it was a global number, but still being a plus 39 is a huge growth number. We've got to get our Tequilas going again, I mean that certainly was not that was a negative for the quarter. But still feeling pretty good about our US business and the way it has trended over the last, even in the last few years. Our US business has been elevated now really throughout the pandemic. If you go back and step back a little bit and look over a longer time period of three or do a three-year CAGR or four-year CAGR, you're going to see our US business has been growing more like us -- it's been pretty steady, but it's been higher than our historical average is more like a seven, as opposed to a really long-term average more like five or six. So US business is still really healthy.

Stephen Powers
Analyst at Deutsche Bank Aktiengesellschaft

Okay. Yeah that's good perspective. Thank you. I mean, I guess the second question, if I could was just going back to, I think it was Andrea's question at the start around inventory dynamics into the second quarter. I may have misheard or misinterpreted the answer, but it seems like there was a bit more uncertainty from your answer in terms of whether or not, and to what degree that trade inventory rebuilding would be a continued tailwind in the second quarter? I guess my perspective is given what we've seen in the first quarter and acknowledging constraints, but seemingly improved supply. And just what you're lapping last year with sort of the teeth of the -- of the supply constraints. I would expect -- I would have expected more kind of, you know affirmative answer that trade inventory dynamics would be more of a definitive tailwind in the second quarter. And I just wanted to play that back to you and see if I was wrong or if I misinterpreted what you had said earlier? Thank you.

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Yes, I mean it comes back to, we're continuing to evaluate the timeline for the normalization of our distributor inventory, because we've got multiple factors at play at the same time. Our glass supply position is strengthening, our facilities are modeling at record pace as we're getting inventory finished cases produced that are seeing challenges to get to market through supply chain. But we're not, we have met multiple strategies in place to get the cases there. We are experiencing very strong consumer demand. So, as we believe we have inventory to meet demand, demand is increasing. And at the same time, we are launching new -- our new innovation at the Bonded series and getting back to market. So we know when we started really January, but the second half of that '22, we began producing at a higher level and moving cases into the market that is continuing, but the rebuild is potentially going to take a longer period of time depending on how consumer demand changes.

Stephen Powers
Analyst at Deutsche Bank Aktiengesellschaft

Yeah. So to extent that you are having your organic growth will either benefit from -- you've got your supply getting stronger. I think you're sort strengthening. So if consumer demand is strong and that will show up and sort of -- that's sort of the consumption and if demand is a little bit softer allowing you to replenish inventory would show up in kind of the trade inventory build either way. Okay, I understand of sovereign link. Thank you so much.

Operator

Thank you. One moment for our next question. And our next question comes from Noah Erni with Jefferies. Your line is now open.

Kevin Grundy
Analyst at Jefferies Financial Group

Hey, good morning, everyone. It is actually Kevin Grundy here. Congrats on the strong results. I know we covered a lot of ground, hopefully, these will be fairly quick. Leanne, on FX fully acknowledge that you guys do not guide. My question is on transactional FX, so maybe you can just help us think about that we can do our own modeling on topline. Just thinking about the flow through to operating profit, should we be thinking about the same transactional impact to operating income? And that is to say, it was a 6% impact headwind in the topline the quarter was a 16% impact to profit, it's a more than 2.5 times for the multiplier if you will. Is that the right way to think about the impact of profit for the year, is that something you can comment on?

Leanne Cunningham
Senior Vice President and Chief Financial Officer at Brown-Forman

Well, as we would think about this. So starting with it is the transactional impact largely related to the Euro and the lira you're exactly right on the impact. For the shape of it for the full year, I don't want to comment on that, because again we started in calendar year '23, which again would have hit some of the back half of our F 22, we started to see some challenges with our headwinds from FX. So that will, we'll be going against that a bit in late F 23, but again it's transactional. We don't see any meaningful re-measurement from a translational perspective. And we've just been clear, to say that if we were to assume the rates remain where they are today, it's going to be a headwind, so I would hesitate to say shape-wise it will be consistent throughout the years it will be more consistent than not is going to it depend, when we get into the back half of the year, how we're lapping that.

Kevin Grundy
Analyst at Jefferies Financial Group

Okay. Okay, thank you for that and then a quick one. We've talked about this on the call before just balance sheet and uses of cash, So the debt leverage continues to creep lower Leanne you talked about some asset sales at the end of your prepared remarks. I'm not sure magnitude of that maybe you can comment on how we should think about it, but just, it would be good to get your updated thoughts on where your debt leverage is now even taking into account elevated levels of capex for the year, your debt leverage would still continue to creep lower. So I just. I'd love to get your thoughts on targeted debt leverage and then as we think about uses of excess cash, where is the bias today between buybacks versus perhaps one-time dividends, of course, has a long history Brown Forman of those sort of consideration. So your updated thoughts there Leanne would be -- would be appreciated. Thank you.

Leanne Cunningham
Senior Vice President and Chief Financial Officer at Brown-Forman

Okay, great. I'll start with the divestiture of our two stave mills, again. This is about optimizing our strategic sourcing model, we think there is going to be -- gives us a broader base of sourcing continuous improvement initiatives that will ultimately result in cost savings of economies of scale. Now the impact of that, from a capital perspective, it would not be material. And, but we do from a barrel cost, wood cost perspective, we do expect to start seeing favorable cost the back end of this kind of Q4 of this year, but with our aging process and the associated accounting for that it will take a period of time before we recognize that. So that I just wanted to comment on that part first. And as it related to capital again we don't typically -- we don't talk about a target, but what is really important for us is that we maintain flexibility in the strength of our balance sheet. We know that we are facing supply chain challenges there are geopolitical environmental events that we also want to hedge against. But we also want to be well positioned to take advantage of any potential investment opportunities that we keep our balance sheet and a place where we can capture those opportunities and hedge against any of the risks.

Lawson Whiting
President and Chief Executive Officer at Brown-Forman

Yeah, I don't think there is much of a change really in our capital allocation strategy. I mean we're always going to look to invest in our business first you know acquisitions are difficult in this industry, but we work, we're always looking. Sshare buybacks. The current administration has made them maybe a little bit less attractive with some of the excise taxes they're posting but we'll always balance the share buyback and special dividend question, it's only been or it has been eight or nine months since we did a special dividend. And so there is not pressure necessarily to do one of those really soon. But I think just at the end of the day, we feel like we're good and smart and we have a good capital allocation strategy and we're really not changing it.

Kevin Grundy
Analyst at Jefferies Financial Group

Very good, thank you both.

Operator

Thank you. At this time. We have run out of time for questions, I would like to hand the conference back over to Sue Perram for any closing comments.

Sue Perram
Investor Relations at Brown-Forman

Thank you. And thank you. So Lawson and Leanne and thank you to everyone for joining us today for Brown Forman's first quarter fiscal year 2023 earnings call. If you have any additional questions, please contact us. We look forward to presenting next week in person at the Barclays Global Consumer Staples Conference and hope to see many of you for those of you that are unable to attend the presentation will be made available as a webcast, that will be accessible via our Brown Forman corporate website under the section titled Investors Events and Presentations. We wish everyone an enjoyable weekend and hope you will join us in raising a glass on September second as we say, happy birthday to our founder George Garvin Brown. With that, this concludes our call.

Operator

[Operator Closing Remarks]

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