BF.B (BF.B) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Selima, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brown-Forman First Quarter Fiscal 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn today's conference call over to Mr. Jay Koval, Director of Investor Relations. Please go ahead sir.

Thanks Selima, and good morning, everyone. I want to thank you for joining us for Brown-Forman's First Quarter 2016 earnings call. Joining me today are Paul Varga, our President and Chief Executive Officer, Jane Morreau, Executive Price President and Chief Financial Officer, and Brian Fitzgerald, Chief Accounting 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 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 of fiscal 2016. The release can be found on our website under the section titled Investor Relations. In the press release, we have listed a number of the risk factors that you should consider in conjunction with our forward-looking statements. Other significant risk factors are described in our Form 10-K, 8-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, 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 with that, I'll turn the call over to Jane for her prepared remarks.

Thanks, Jay, and thanks for joining us for our first quarter earnings call. I plan on covering two topics today which should leave plenty of time to address Q&A after Paul’s brief comments. First I am going to review our first quarter results, and second I am going to discuss our latest outlook for 2016. So let me start on reviewing our results for the first three months of fiscal 2016. Our underlying net sales grew roughly 7.5% in the first quarter. As expected, this rate of growth came in above the range that we are forecasting for our full year due to the seasonality we discussed on our last call. Our underlying net sales growth for the quarter were broad based with the United States being the largest contributor to our growth with underlying net sales up 10%. The Company’s portfolio of American whiskey brand drove these results with growth across the Jack Daniel's trademark, Woodford Reserve and Old Forester. Additionally, the launch of Jack Daniel's Tennessee Fire also helped results contributing almost four of the ten points of growth we delivered in the United States. Recall that Tennessee Fire was launched nationwide in the United States during the fourth quarter of 2015 with encouraging trade and consumer reaction. While the brand is still in an infancy in 42 states, it continues to track very favorably against the early days of Jack Daniel’s Tennessee Honey in the original eight test markets. I’d like to point out one key difference between the two brands. Tennessee Fire has seen increased acceptance and higher relative sales in the on-premise compared to Honey. We remain optimistic about Tennessee Fire’s growth potential and note the brand has expansion opportunities available to it as it is distributed in only 67% of Tennessee’s Whiskies off-premise accounts and 30% in the on-premise. While the competitive environment for flavored whiskies has intensified after the recent entrance of Canadian Flavored Whiskey, we still expect Fire to be a great addition to the Jack Daniel’s family of brand augmenting total value growth. As in this slide, we are encouraged by the early days of performance for Fire in its test markets internationally, notably, the UK and the Czech Republic. So let’s take a look at some of our other brands’ performances in the US. Our Tequila brand, el Jimador and Herradura grew underlying net sales double-digits as we continue to build brand awareness, do better on-premise activation and promotions. Southern Comfort and Canadian Mist, declined in the United States during the first quarter, while Korbel and Sonoma grew aggregate underlying net sales in the mid single-digits. Our business in emerging markets continued to grow well with underlying net sales up 11% in the quarter. The majority of our emerging markets enjoy solid double-digit gain led by Mexico, Turkey, Brazil, Ukraine and Africa. Poland also returned to growth as we believe we have worked through the inventory issues caused by the effects of the January 2014 excise tax increase. But in competitive markets an environment remains challenging there. Russia’s underlying net sales dropped 36%. This was the result of a deteriorating economy and the devaluation of the Ruble, both of which have negatively impacted consumer confidence and ultimately consumer demand. A challenging comparison with last year’s first quarter’s underlying growth of 17% also contributed to the decline in the quarter for this market. Looking at our non-US developed markets, we experienced a 5% increase in underlying net sales growth. This was led by strong double-digit gains in the United Kingdom, France and Germany. Germany was particularly strong as we have successfully resolved trade negotiations with several key accounts. While the UK and Germany both enjoyed favorable comparisons to last year’s Q1, Australia’s comparison was more difficult as the market declined double-digits reflecting a weak economy and a challenging excise tax environment for spirits. Travel retail’s underlying net sales declined 18% due to two main factors. The first and largest factor was related to what we believe is the timing of orders from a couple of our customers. The second factor was ongoing softness in European Travel Retail, which has been hard hit our Russian consumers who have kept back on travel and are spending less for trips and duty free. Our underlying net sales growth for the company, including some of what we believe to be timing issues in Travel Retail would have been over 8% for the quarter. Moving now to the reconciliation of underlying’s reported growth, our reported net sales declined 2% negatively impacted by nine points of foreign exchange. As an example of the foreign exchange headwinds we experienced in the first quarter, the euro was almost 20% lower in the first quarter of 2016, compared to the same quarter last year and other currencies have devalued even more dramatically against the dollar. Reported sales were further hit by a one point reduction in inventory resulting in an approximately 7.5% underlying net sales growth. Our top-line growth was driven by strong volume gains and a two point improvement in price mix. Our better price mix help drive an 80 basis point improvement in gross margins and a 7% increase in underlying gross profit. Our underlying A&P spend increased 3% and SG&A grew 6%. So when we put this all together, we delivered 9.5% underlying operating income growth. On a reported basis, operating income grew 3% and earnings per share grew 7% to $0.75 held back by approximately three points of adverse foreign exchange. This leads me to my second topic, our outlook for fiscal 2016, which we reaffirmed today. Before I dig into that topic, I would like to add that while we are fortunate to have a business model that combines long-term growth with defensive characteristics, we realized that we are not immune to a further deterioration in the global economy. So, like all I view, we are anxiously watching the market gyrations over the last two weeks, particularly in the emerging markets. We believe we are fortunate to be in the early stages of capitalizing on our emerging markets’ potential and are optimistic that over time, it will become an increasingly important driver of our results. But for now, our emerging market footprint outside of Poland and Mexico is less than 10% of our total revenues. So our exposure is significantly less than the competition. Additionally, this approximate 10% is well diversified, spread over a 100 plus countries around the world. Now, for our fiscal 2016 outlook. First quarter results were largely in line with the trajectory we anticipated for the full year and as such, we believe we are on track to deliver the 6% to 7% underlying net sales growth we shared with you on our last call. We expect to continue the combination of modest gross margin expansion and better leverage through our operating cost will allow us to deliver the 8% to 10% underlying operating income growth. We are also reaffirming our earnings per share range of $3.40 to $3.60. While currencies remain volatile, the net FX impact is still expected to be a headwind in fiscal 2016 using rates of late last week. Asset sensitivity, a 10% move in the dollar in either direction would impact EPS over the balance of the year by approximately $0.08. To share a little bit more color on the seasonality of foreign exchange, I thought it would be good to remind everyone that the large appreciation of the US dollar occurred in the fall of last year. So with that, we expect another quarter of significant headwind on our reported revenues, that would less though of an impact by the time we get down to operating income due to the absence of a $10 million loss in last year’s Q2, resulting from the revaluation of current assets that were reflected in other income and expense. Looking at our full year tax rate, we still expect it to be in the range of 30% to 31%. In summary, our balanced geographic approach has helped us continue to deliver market-leading rates of growth fueled by robust global demand for American Whiskey. Disciplined innovation is helping drive our results and premiumization trends continue. All of which we believe position Brown-Forman for another record year of top and bottom-line growth. And while we are investing significantly to meet future anticipated demand, our business model allows us to return capital to shareholders through growing dividends and our ongoing share buyback program. So with that, I want to turn the call over to Paul for his comments.

Thank you, Jane, and good morning to everyone. I’d say let’s start by just saying I was pleased with the quarter as it continued our strong underlying results from FY 2015, the underlying Q1 results were right in line with our full year guidance for both underlying net sales and operating income. So, in my view, we are off to a good start to the year. One noteworthy milestone that occurred during the quarter was Jack Daniel’s Tennessee Whiskey surpassing 5 million cases in the United States for the first time in its 149 year history and to be clear here, I am referring to the parent brand Jack Daniel’s Black Label as most know it. I’ve been reflecting some on this recent accomplishment. So I thought I’d share a few perspectives with you about it. First, I’ll simply note that attaining the 5 million case level in our industry is a rare event in its own right. This is a very high level of consumer acceptance achieved by very few brands. Add to this the fact that Jack Daniel’s is priced the super premium price level, well above the price of most brands that have achieved the 5 million case level and the recent milestone is even more rare and impressive in my view and considered further, that the 5 million cases are derived from just one single country for a brand that does more than 12 million cases in more than 160 countries around the world and it elevates the accomplishment even further. So as I think about all of this, and the brand’s recent performance further, it’s not that difficult to imagine that a different outcome was quite possible, while the trends for American Whiskey had been a positive factor in recent years, I can think of at least five factors that had the potential to negatively impact Jack Daniel’s volumes in the US over these last many years and yet, this very strong and unique brand forged ahead despite these forces. The first factor outside is the difficulty the big brands have experienced both inside and outside our industry. As evidenced, consider that the largest ten brands by volume in calendar year 2010, in the United States have not only lost share, but cumulatively lost over 1 million cases in the last four years with six of the top 10 having lower volumes today versus 2010. Jack Daniel’s was one of the brands that grew nicely against this very difficult backdrop for more larger established brands. A second force was pricing. Despite the consistent price increases by the Jack Daniel’s brand in the United States to support its super premium position and to reinforce its specialness, volumes has still moved forward and this is not always the case for brand to attempt to advanced price. A third factor has been the intensifying competition in the American Whiskey segment as new entrants in craft premium plus and flavored whiskey have exploded in recent years. While some of this expands interested in the category, at the same time it is the direct source of competition, particularly for the most proven and established players such as Jack Daniel’s. Additionally, the brand held extremely well to its own innovation where there was the possibility of cannibalization. It’s not uncommon to observe brand innovations that will significantly cannibalize the parent but the development of expressions like Gentleman Jack and Jack Daniel’s Tennessee Honey have not held back Jack Daniel’s volumetric progress to-date. And finally, it’s often believed that older, longstanding brands are mature brands whose best days are behind them. I find it impressive the Jack Daniel’s is in its 149th year in the United States and sits today at all-time volumetric point. Aside these factors to illustrate that Jack Daniel’s is not just normal brand, I believe it to be a special brand and often the exception to the rule. As part of our responsibility to be excellent brand stewards, we believe it is important to consistently and persuasively tell the brand story. Some of you on this call had the opportunity to hear parts of the story in June with your visit to the brand’s home place in Lynchburg Tennessee. The brand’s story is the story of authenticity, a story of quality, a story of the brand’s heritage and history, a story of Americana and a story of a small town brand making its flash on a worldwide stage. All conveyed with the down to earth personality, genuine hospitality, and with an intent to make friends the world over. We are thrilled that many of the attributes that Jack Daniel’s posses so naturally appear to be in fashion with consumers these days and we believe this bodes well for the brand both in the United States and across the world. So thanks for indulging my recognition of this milestone and congratulations to everyone at Brown-Forman on the accomplishment, most notably, our Jack Daniel’s and US teams. With all of the attention that our globalization and our Jack Daniel’s line extensions that received in recent years, I felt it is important to briefly highlight some of the impressive progress we are making with our most important brand and our most important markets. That concludes our remarks this morning and we are now happy to take your questions.

[Operator Instructions] The first question comes from the line of Vivien Azer with Cowen.

Hi, good morning.

Good morning.

Good morning, Vivien.

So my first question has to do with the top-line, clearly, the timing issue in Travel Retail was a factor in terms of the 7% plus underlying sales growth. But, keeping in mind that you are cycling your easiest comparison of the year, what gives you comfort that you can hit that full year objective, given kind of where you started the year? And if you could comment on the role of expanded distribution for Fire as part of that, that would be helpful?

I can start off with the first thing. Our forecast or our actual numbers, Vivien, came in a bit higher than our range. So it did come in around 7.5% and as you did know, if you pull away global travel retail, our results would have been over 8%. We had some other tough comps too, Russia, parts of what we saw in Russia we don’t expect to repeat itself some of which they had very tough comps versus last year. Australia, some of which are tough comps versus last year some of which were just difficult trading environments, things that are going on there. And so, if I wrap all those things up, I would adjust for all things our actual growth pipe would have been closer to 10%. And so, I think what I am saying to you is a lot of – or some – the three things I mentioned, I think some – that fits up with our timing. The only one I adjusted for you was the global travel retail piece. So, we knew we would start out at the gate stronger. So I am expecting those items I just mentioned to less than this a year ago – goes on in the timing of those orders as such in global travel retail to reverse themselves. That helps?

Very helpful. And if you could comment on the distribution opportunity with Tennessee Fire, given the metrics that offered in the prepared remarks?

Yes, so, just to give you a flavor, I noted a number of 67% of off-premise distribution for Fire as it related to Jack Daniel’s Tennessee Whiskey. As a point of reference, Honey is 81%, and so we know we’ve got that opportunity to get there as well, as in terms of its on-premise while we’ve gotten faster in the on-premise, the ratio of Tennessee Honey to Whiskey and Fire to Whiskey is got opportunity to – I mentioned 30% of Honey on the on-premise and – excuse me, Fire on the on-premise and Honey is, I think 39%. So we know we’ve got distribution opportunities there. All in the US that I am talking about right now to.

Vivien, I’ll add too - I think, while we are not, we don’t try to internally here precisely nail down the quarters as we go along when we try to give enough of a flavor to them and one thing in retrospect that I think we’ve learned is that, the acceptance at the trade for Tennessee Fire in our last fiscal year’s Q4, because we pretty rapidly built distribution and of course we can gauge with precision how much retail inventory there as we can do a really good job we think on the distributor inventory pipeline, but on the retail inventory pipeline, as it now I look back on it, I think we probably built it faster than we did on Honey in its early days for Tennessee Fire and so back when we are – I guess, perhaps forecasting our fiscal year 2016 and the Q1, we would have thought that maybe some of that pipeline was going to be more evenly spaced through the first six months whereas the lot of I think as we look back on it now happened pretty quickly for Tennessee Fire and we suspect that was because of the pent-up demand that was occurring because of the staged rollout. So, that could be a factor too in the Q1 results. It kind of a hybrid of both your questions there.

That’s very helpful. Thank you, Paul and Jane. Just one last one from me, as we think about operating leverage, for the full year, it seems like that should accelerate given your full year guidance. So can you talk please Jane, or Paul about the drivers of that?

Yes, sure. I’ll take that on. In the quarter, we actually had some cost pressures. So, you don’t know that our underlying gross profit growth and our underlying net sales growth were both in line, both grew 7% and we are still expecting some modest leverage there. But we had cost pressures from wood. I think I talked about this in the fourth quarter, just given the supply demand constraints there in the cost of wood. So, we expect that to bate over the balance of the years and our costs are coming down, our cost of goods to come down more in the inflationary 2% to 3% type of range. So we’ll expect to start seeing a bit of leverage through the gross profit and then in terms of operating expenses, we expect to continue to see leverage there.

We had…

Things like SG&A for the quarter, there was a handful of things that were one-time in nature or things that occurred only in the first quarter that will not repeat themselves over the balance of the year. So when we adjust for those things, it was more in the full 1.5% range.

Yes, we would certainly expect the SG&A to moderate from where it came in at the first quarter. We had – as Jane said, these will be like – for example, we had our global meetings that came in the first quarter and did not had that last year, so for example. So we did expect that to moderate.

Very helpful. Thank you both.

Welcome.

The next question comes from the line of Robert Ottenstein with Evercore. Robert? Q –Eric Serotta: Hello, this is Eric Serotta in for Robert Ottenstein. How are you?

Great, thank you. Q –Eric Serotta: Couple questions in terms of your comments about increased competitive activity manifesting itself. Could you give some color as to where you are seeing it in terms of countries and categories? And who you are seeing it from, is it the, sort of upstart craft players or is it some of the large established players in spirits getting a little bit tougher in terms of either price point or execution?

I think both, I mean, so when we talk about intensifying competition, it could have flat to any number of the reference points that we’ve – in our prepared remarks, I mean, outside a couple. I mean, there is no doubt that if you look at areas like flavored whiskey, premium plus, American Whiskey and I’ll just maybe comment on at the corporate level as lots of corporations are competing against each other out in the marketplace. There is just a large number of new entrants in flavored whiskey in that one example and just – if you just think about it in a very short amount of time, it’s my estimate that in the United States alone, the flavored whiskey segment could be 7 million to 8 million cases, which makes it – I mean, not only that happened fast, it makes it very large and so, that is very exciting and a lot of people who are seeking growth want to be a part of it. So you start to see a lot of entries. And so, that’s what makes that, in some ways challenging to forecast your business, to think of that. So it’s a quite a – because of the pace of its growth, it makes the management of those brands that are – from Brown-Forman in there a much more dynamic exercise. So that’s something we’ve been adjusting to a bit. I think at the super premium level of American Whiskey, I mean, you can just – it’s really the craft items are just the regionalization of the category where there is lots of offerings in each state, many distilleries being built and all of that has a competitive collectively really a competitive presence in the American Whiskey category. Some of it’s exciting because it adds new users, but for the established players it’s something you have to pay attention to it. So when we refer to intensifying competition, we are referring to that as well and that can be very much for retail space to based on shelf, based on back bars, et cetera. And then the third area really is, I mean, the world doesn’t just sit around addle and look at how Brown-Forman is performing and then reviewing themselves and not desire to grow at faster rates. And so we feel competitive pressures from companies that are simply striving to better out in the marketplace and often in more recent years, these some of the larger competitors and so whether it’s through their innovation or through the intensity of their efforts, sometimes it’s spending, sometimes it can be discounts. We are just seeing sort of more of an all-out efforts in some of our competition on that range. So when we cite intensifying competition, it really expands all three of them. Q –Eric Serotta: Okay and as a follow-up to that, you had about 2% price mix on assets average globally in the quarter. How does that break down between the US and non-US? I imagine there is some currency-driven pricing in some other countries. What should we expect in terms of price mix contribution to the US this year?

Yes, so, just to pullback on pricing a bit, I think what we guided is at year-end was we were going to clean a little bit more on volume this year and a little less on price. So we would still get a benefit from the mix, not just because of our portfolio and the more – in the ads and the faster growth rates we have experienced on some of our higher end whiskies such as Woodford Reserve, so that, that gives you a benefit. Recall that, we took a couple of years of pretty aggressive pricing in the US both in 2013 and 2014. We did some more moderate pricing last year and we expect to continue to do more moderate pricing this year. So in the low single-digits, the 1%, 2% range is what we guided to. I don’t have the actual number for the quarter, but the price mix, it was a bit – it was pretty split, as I’d recall pretty close to being split between price and mix in terms of contribution.

And you should always expect the mix factor to be more prominent in the United States, just because of the fact the portfolio and the fact that the premium items are doing so much better than our lower priced item in that particular market. I mean, our portfolio, it just isn’t that as expanse that was in the United States when you go to the international market. Q –Eric Serotta: Great, thanks, very helpful. I’ll pass it on.

The next question comes from the line of Nik Modi with RBC Capital Markets.

Hi good morning. This is Russ Miller in for Nik. It seems Jack Daniel’s has seen whiskey division slowed somewhat sequentially during the quarter. Could you provide some context around this slowdown for this brand and then I have an follow-up?

Yes, so, are you looking at our Schedule B? Is that what you are looking at?

Yes.

Okay.

3% division sales.

Yes, so, again, there is a lots of things going on, lots of moving parts in the quarter. I think I’ve mentioned some of them in my prepared remarks and I mentioned some when Vivien asked the question. We definitely had moving parts where we were down in Russia, typically and we had customers in travel retail that didn’t order, we also had tough comps in Australia. They had a price increase last year in the first quarter or as of August 1, there was a large buy-in there. So there is some of that dynamic going on. If you look on the flip side, there is other moving parts to in terms of looking at our developed markets. I think I would just pull back and not get hung up on Tennessee Whiskey in just one quarter. I think, what I would suggest and looking at our largest market Paul, and sometime when I am talking about the milestone we achieved in the US in the quarter of 5 million cases and when I think about what we were doing and takeaway trends a year ago, that brand was actually, I think it was flat to a little bit down and if you look as the year progress and it has continued to hold up, the growth rates has been – has improved and I think it was even stronger and that information I saw yesterday, but it’s in more in the 4.5% type of growth range. So, I think that, knowing that as a backdrop and then looking at the family number, I think you maybe referring to two, - that it’s large as it acutely impacted RTDs in Australia and that’s a tough market there right now from both an economy perspective, as well as just the RTD category. And if you were to just strip Australia out of those numbers, you would see a nice number for the Jack Daniel’s family of brands depletion growth it would have been up 7% for the quarter.

Yes, so it’s the Black Label as we look at the Jack Daniel’s Black Label numbers for the next nine months, we would expect – based on the factors Jane talked about some of the seasonal stuff that occurred in travel retail and Russia is a more difficult one to try to anticipate. But we would expect that volumetrically and hopefully from the sales standpoint to be better for the balance of the nine months and the first quarter.

Okay, thank you. That’s very helpful. And then, as a follow-up, could you provide perspective on your on-premise business overall and the delta in on-premise versus off-premise growth for the quarter and looking forward?

Well, that’s a country-by-country answer and of course, sometimes we don’t have the details to provide you. I mean, our business in the United States, the largest and most important country, we’ve actually been encouraged by our on-premise progress over the last six to 12 months where it appears our brands are performing a bit better than they were in prior 12 months. Some of that and as the fact that Jane mentioned that relates to some help from the introduction of Tennessee Fire into the on-premise, that’s a nice thing. But it really is the SKU to the American Whiskey a bit, is doing in the results on brands like Woodford Reserve, Old Forester, Jack Daniel’s continue to do well. So I think, we would be in the largest market encouraged by some of the more recent trends in the on-premise. And, honestly, something we look to for both on-premise and off-premise in this country are fuel prices and so, we would knock on wood that the lower fuel prices and the expectations they would continue could continue to help support some of the recent performance in that channel.

I thought I just build on what Paul said to, something he talked about at the end of our earnings release and something he talk to it about from time-to-time is, really we started seeing a change and consumer behavior starting right after during the recession and people started not going out as much and people started changing where they had or drinking occasions and I think we are seeing some of more blur between on-premise and off-premise and not that on-premise is not important, but, people where they drink has remained changed I believe from when the recession hit.

Fundamentally, yes.

Fundamentally, yes.

Yes, we do believe that. I mean, if you just look at the behavior of Millenial’s , where they might have spent three or four hours at a bar for an evening, they may only be spending an hour and a half in the first portion of it is in their apartment on the couch with their friends and so, the brand selections that occur in those different environments are really important and I think that actually is a contributing factor to why the flavored whiskies are actually doing fairly well because they are convenient to pour and consume and don’t require a lot of mixtures et cetera. So, I think there is some changing dynamics that made be with us for a while.

That’s very interesting. Thank you. And then, a last question if you don’t mind is, there seems to be a lot of buzz around the industry regarding Mezcal and is that a category you’d be interested in that ring through an acquisition or with el Jimador or Herradura, if you could just provide any comments around that that will be helpful. Thank you.

I can take a little bit of that and let Paul jump in. I would say, just in general, when we look at acquisitions, we are not necessarily looking at categories. We are looking at businesses and we are looking for brands and we are looking for good businesses and good brands. So, what I mean good group business is that have attractive economics, so are the margins well, the returns are well, or the capital-intensive if hopefully not, are they growing, are they sustainable, can they be doable. And so, we look less at the category if you will, versus a brand and looking for a good business, I would start-off with that. Given our portfolio we have now, we spent the last decade really tweaking it.

Yes.

More than tweaking it I should say, because we sold off our consumer durables business. We got sold off our well valued wine business. We brought in some brands in the portfolio too mainly the Tequila brand and so we have – what I call now pure play spirits portfolio, skewed to the premium in. And so, that would be something else that we would obviously look for and it’s obviously we are skewed through the American Whiskey which has – happened to be the place to be like today.

Yes, I think, you’ll find us being fairly focused relative to our competition on particular trademarks and probably most direct response to the interest that’s out there in Mezcal is that our response would be to focus ever more on Herradura. I mean, I think that, we have so much work still to do to build the awareness, distribution, velocity, telling the story of Herradura remains very important to us. We think it can be a very significant piece of business for us in due course. It’s actually showing nice traction of late and we think that interest in Mezcal might create interest as well on the Tequila category because of the flavor profile. But to your point, I think it would be short-sighted on our part not to pay attention to emerging categories and see how they might impose competitive tension or distraction for our brands in the marketplace and these have come from time-to-time whether they are Mezcal or the Cachaças or the Japanese Whiskies are showing some – in this country some interest. So I think it is worth always having little bit in your peripheral vision these categories. So you can see what you can learn from them. From what I can see so far from Mezcal it makes me want to work even harder on Herradura.

Excellent. Thank you very much.

You’re welcome.

Our next question comes from the line of Bill Schmitz with Deutsche Bank.

Hi, good morning.

Good morning, Bill.

Good morning.

Hey, it’s extremely short or long-term benefit from what’s going on with the ASU in the US on the investigation?

I’ll start off with that.

Sure.

You guess, you’ve probably have read as much as we have read on that and so we only know what we’ve read. The only thing I can really talk about is ourselves and how we address our own business and something that we’ve always done at least for two decades now is measure ourselves on a depletion basis, not a shipment basis. And, with that being said, we also not only do all of our management reporting here on that basis, but we also hold all of our sales force and employees accountable on a depletion basis. So what they are incentivized if you will on that same basis. And when, of course, when you are in the business that we are in which is the whiskey business, the whiskey making business, something we’ve been in a whole time, we’ve been around it’s very important to – really some art and science so I believe it has many learning’s over the many years if you will to be careful of how much you lie down, when you lie down, what you lie down. And so, it’s not like the bright spirits if you will. So we pay a lot of attention to what the inventory levels are at distributor level and we try what we have information on consumer cycle way which would be the best information obviously if we had that to see what’s going on in the retail to see when things were to get out and we’ll act. So that’s something that we constantly are looking at and are constantly aware of.

Yes, I’ll just add that, the idea that I mean, I’d reference just a little bit with the point I made earlier about corporate competition. I mean, I think the effect that amongst many other factors, perhaps for the idea that who you cite at is they are probably a more motivated competitor as a result of – really a couple of things, one the desire to continue to be a better company and grow. So, if they are doing that, that – of course for a company like Brown-Forman and everybody else in the industry creates competition. I think the test would be, whether or not it’s anymore significant than what we’ve experienced historically, because we always find that there is some competitors who are out in the marketplace make whether they manage their business by shipments or really trying to pre-occupy the retailers by getting them to spend more of their dollars on the ideal brand or somebody else’s brand, that’s always been a competitive force and people who manage their business that retail differently than we might, I can’t say that it’s any different today than I’ve seen them over my career in many countries around the world, people who will do things because, what I call competitive distraction. I think the net of – a more important factor are companies who are striving to grow at rates that are higher than they currently are experiencing and when you attempt to do that, whether it’s through investments or innovation or some of these others, you just get, sometimes they are more formidable competitor in the marketplace. I don’t know that that’s anymore difficult that we encounter all the time and so, my advice to our own people is to keep our heads down, do the right things that are right both short, mid, and long-term for our company and our brands and adjust where you see there is something new, particularly on the innovation front. I think that’s a more compelling competitive force sometimes than the heavy discounting or stealing the retailers’ dollars through loading or something like that. So, in any event, for us, we’d pay attention to it, but we are not going to be pre-occupied with it.

Okay, and that is very helpful and then, I just had a question on the guidance. I think you said only 10% of your sales are emerging markets ex Poland and Mexico. So, why do you feel it’s been a necessity of sort of caveating the guidance based on global economic environment because it seems like by and large most of the developed markets which are the bulkier business that are still – I mean, they are not great, but they are not any more volatile than they have been in the last – I guess, two or three quarters. Is that fair?

Yes, I think you make a good point. I think it’s more the uncertainty around where – what might go, what might occur going forward as a result of just the skittishness that we have seen over the last, I mean, literally week to ten days more impactful for our business are countries that undertake aggressive excise taxation as some policy of the country to raise revenues or whatever that can directly impact us. No, you are absolutely correct that there is always macroeconomic forces that are working both for and against you. But, we are acting a little bit more I think to just the recency of some of these market sell-off. That I mean, I am not, at this stage see what happens, I am not obsessed with what’s going on out there, I mean and lot of it is, because our geographic diversification of the company has really been a big help for us. I mean, the country we’ve been talking about here just a little bit today, Australia, which has been kind of difficult economy, it’s been a difficult to sell spirits environment and been not the leading performer for Brown-Forman more recently, but outside that, a while back, while countries were having difficulty whether it was in Europe or maybe the United States was not performing the way it is today, Australia was leading Brown-Forman in some ways because of the growth of our RTDs and our mainland whiskeys down there. So, I always try to reflect on how this geographic diversification and not putting all of our eggs in one basket can help us and it’s times like these and I am particularly appreciative of it.

Okay, great. And I appreciate it. Thank you so much.

You are welcome.

The next question comes from the line of Ian Shackleton with Nomura.

Yes, good morning, Paul and Jane. Can I go back to what you were saying on FX? And we will guess with what’s happening in markets in the last couple of weeks the FX headwinds have become a little bit more severe and you basically kept your EPS guidance range intact. Is it a comment that the FX really hasn’t moved that materially or is the fact that despite that was more negative FX you grow the positives running the other way which allows you to keep that guidance?

Ian, actually, if you were to look at the rates earlier this week, which actually went in our favor, it would have – what we ran our analysis as of with the rates hadn’t changed much from when we gave the guidance at year end, so we really haven’t seen much movement at all as it related to what we are forecasting for the year which is a piece of moves for our FX.

With it being very focused on the first half of the year.

Very focused on the first half of the year, yes.

Understood, thank you for that. And if I just to follow-up, I mean, with what’s happening in – as I stick on the emerging markets and elsewhere with currencies weakening and probably expectations of valuation coming down, do you think this starts to open the door to be a bit more aggressive on M&A in the spirit space?

Yes, I think there is certainly unique opportunities that the currency can create. We totally agree with you there. I think the trick still becomes whether or not what you might pursuing is really on two fronts of our four As, whether they are available and in fact attractive. And so, as far as I am concerned that hasn’t changed that much. I think that we would find most attractive – are pretty strongly unavailable, and so we are not going to be pre-occupied with it. It’s one of the reasons it can become so focused on the innovations with – through the example of entering Irish and trying to do with that initiative something perhaps similar to our experience on Woodford Reserve over the last 20 years. So, I think, the industry continues to be an attractive place it can change and it has for some of our competitors and whether or not that creates some impetus for M&A or some opportunities for us remains to be seen.

Great, just finally, I mean, is there any update on - I know that the Ireland thing was quite a long-term project, but is there any update on how that’s progressing?

Yes, I think there is a – at the end of September, we are doing a groundbreaking over there and so, from our original sort of 12 month plan I think we are on track which – sort of exciting around here, that we are getting some products in initial packaging and brand identity works done, so that we can do something concurrent, while we are building out the distillery and then starting the distilling of the product and the aging of it. So, it will be a concurrent process, very much the way it was that the company for Woodford Reserve back 20 years ago.

I think we are targeting to bring in 2017.

2017, so, maybe a year from the end of next – our fiscal year, we might be entering the market.

Very good, thanks for that. Thanks a lot.

You are welcome.

Your next question comes from the line of Judy Hong. Judy? Judy your line is open.

She may be on mute. Judy?

Your next question comes from the line of Bryan Spillane.

Hey good morning.

Hey Bryan.

Hey Bryan.

I guess a question - just one question and I guess it’s a little bit of a follow-up to Bill Schmitz’s question. If you look at what’s happened in the currency markets, the commodity markets, the equity markets in the last couple of weeks, markets are essentially trying to suggest that there has been some change, right, that that either growth has slowed in some of the emerging markets, China especially, but also maybe even you are beginning to hear a little bit of concern that may be there is a risk that you even see a slowdown in the US. So, I guess, my question is, as you are doing your planning going forward now from maybe where you were when you set your plans at the beginning of the year, is there anything at all that you are seeing that suggests that there has been any kind of change as the year has gone on? Just trying to get a sense for whether or not there has been any signals, any indications, anything that you are seeing as you look into your markets into your plans that suggest maybe the market’s shifted a little bit?

It’s a good question. We are going to – actually, I think next week I am looking at our distillery production plans which is always a point in time in our process that review and reflect on whether your plans have changed, because I mean, we have obviously, unfortunately have to look out many years, which means you are going to be inaccurate. But, here is the way I’d say it, I would say that – about three large sort of pieces of business we sometimes dissect our business into, in the United States, generally I think it’s a continuation of what we would have felt and seen. I think the only factor which is it could be macroeconomic indirectly has been some of the intensifying competition I think would be a point I’d make. But otherwise, we are continuing to – I mean, we really like the growth rates that we are experiencing and the performance of the company relative to the industry in the United States and we are sort of sticking with those plans. I mean there is always an uncertainty around innovation like Tennessee Fire and where it will settle out and all that, but we are putting forth our best effort on that and so that would be one bucket. Another bucket would be how I feel today versus maybe a year ago or so on or even six months ago, I know your question was about versus three weeks ago, about the developed markets. But, actually better about what’s happening for our company just sort of summer and going into the fall in Europe, than I did previously as we have seen the UK continue to do well. Germany, France which has continued to be a great market for us and coming off of a year that was in our financials had a lot of transitional things going on because of the start of the company. Emerging markets, Russia, you couldn’t feel better about and part of that’s because we – to protect our margins took a pretty large SAS price increase that was related to currency which is rare for us to take currency direct – directly related to currency price increases and I think we will have a pretty uneven month-to-month business in Russia, some because we will be trying to figure out what’s going on in that economy, how our business is being affected by and as people sort of acclimate to our new price level over there. In the same way some of the other emerging markets are doing very, very well and again, the diversification we have across many emerging markets is a help in that. We are paying particular attention to Australia. It’s an important country for us and it’s having some difficulties and I think as Jane said, I mean, we are just trying to understand better what’s going on in our travel retail. We think this is seasonal impact as she explained there. But that has been a very consistent and strong performer for the company for the last many years. So we will be paying more attention to it. But, on balance, when you put it all together, I mean, here is the way I’d say it, our first quarter underlying sales and operating income basically mirrored what our forecasts are for the full year and are also a continuation of basic results we had last year. So I don’t see anything right now and I mean, we could change our minds if we have a global financial crisis or something like that. I think that was the point Jane was trying to make. Nobody really knows where this is headed. We are trying to stick to our own very focused plans around our business until we see something else there.

Thanks, Paul and just one follow-up and I think you might have addressed this in an earlier question. But just, when you talk about intensifying competition in the US, you are talking about just a lot of new products hitting the market, not price competition or discounting?

Yes. I think that’s the dominant piece. You always have pricing competitiveness, but I don’t see that that is that in some level of intensity. I just think that because of what’s happening with American Whiskey and flavored whiskey and our positions in both of those so prominently, you take note when there is a lot of new entrants. So, it’s mostly on the innovation front.

Okay, thank you.

You are welcome.

Your next question comes from the line of Mark Swartzberg.

Yes, thank you and good morning everyone. Kind of looking at it from a different angle Paul, when I first read this press release I looked at this 3% depletion number for the JD family and I was concerned, but when I see the plus seven for the total portfolio and the plus four from last year, it seems like el Jimador is a part of that. It seems like one can make the case that that these are end-demand statistics that your portfolio is actually getting stronger on a total underlying rate of growth basis. So it is a bit of a softball I realize, but is that a reasonable way to look at it? And then I do want to address some of the questions I have about the slowdown in JD.

It certainly was an element of our – what I’ll call rest of the portfolio outside of the Jack Daniel’s brand having a very good quarter. If you look at the – and that’s a rest of portfolio, I know you are referring to Schedule B, I am talking about everything, other than Jack Daniel’s. And the Tequila has had a really good quarter that might be one of the contributing factors, Woodford Reserve, it gets larger and the larger it gets and the more it grows at 26%, the more it makes contributions, it’s not specifically called out here, but even contributions from brands like Old Forester, Sonoma Cutrer, et cetera. Yes, it was a good quarter for the non-Jack Daniel’s brands. But I also don’t want to take away from the fact that we expect the Jack Daniel’s family and particularly Jack Daniel’s Tennessee Whiskey over the balance of the year to post better numbers than the 3% that was in there. So, but I think it’s a fair comment. I mean, it was a good quarter and there were some, as all these brands have when you just look at 90 days at the beginning of a year, you have all kinds of things that are influencing sort of a quarterly number. So, I wouldn’t expect or for example, our Tequilas to continue to run at those rates for the full year. But nonetheless we do think they are performing better than they were in the recent past.

Great, and you did have a comparatively easy compare, but – and then to your point about JD, I want to make sure I am hearing you accurately. So you think this plus three in the quarter from a depletion perspective accelerates as we move through the year and that necessitates that the Black Label certainly accelerate but perhaps too Honey accelerates. Can you just tell me what the planning assumption is and I presume that’s supported by August trends?

One of the big things is the – what’s driving that 3% decline that you are referring to on the family or slowdowns do you referring to decline in the RTD.

Which are in there, not at equivalent cases, but it’s a volumetric case.

So we don’t expect that to be the number. We still have tough comparisons that’s coming from Australia. When we strip out Australia, the number is 7%.

But, you look at it, I think, we’ve already commented on Tennessee Whiskey, on Tennessee Honey, we at least hope and plan that it will grow double-digits. I mean, I posted whether they hear 14% underlying 18% for the quarter, I mean, I think it’s off of a very large base that has – in the growth rates that moderated in the United States somewhat. But also internationally, I mean, if I look at countries like Czech Republic and Brazil and others, Tennessee Honey continues to do very, very well. And it’s always a challenge when you have new excitement for a brand like Jack Daniel’s Tennessee Fire to make sure everybody is also continuing to focus on Tennessee Honey. I’ll also add that, it’s hadn’t been a premier focus of the Jack Daniel’s Tennessee Fire launch this year, but we thought it’s important to do a few international market tests, even if they are channel-specific or within a country, even regionally-specific, some of the early results we are hearing back from, particularly the UK and Czech Republic are quite encouraging as it relates to acceptance on the Jack Daniel’s Tennessee Fire business out in those markets. As you’ll recall, we did some of this with Tennessee Honey years ago, when we launched we started in the United States, but then began to test interest in the international markets. We used to have far more ability to control some of this with social media and the way that world travels today an introduction for example in the United States by Jack Daniel’s is instantly known amongst a lot of devotees to the brand all over the world. So, it becomes a little bit harder for us to manage some of that, but, right now, I would say, even though it’s more qualitative and anecdotal to these tests, I feel like the acceptance for Tennessee Fire in the international markets has progressed a little better than we might have anticipated. So, there is a lot of factors that could influence the family’s continuing performance over the balance of the nine months and I’ll remind you that the seasonality for our company really picks up in the next six months over the fall and into the holiday period. And so, those will be more important to the full year than just in the first quarter.

That is great and if I could ask two quick ones on JD. Did you give us the US rate of growth just for the Black Label, if not, could you give us that? And then, are you saying RTDs at negative four you think moderates or do we have several quarters of that continuing?

I think it will moderate. I think we may still see test, plans there, but I don’t think it will be – what we saw in the first quarter, because that’s going up against the price increase. If we think a year ago, we are ahead of buy in. We did not talk about what I referred to was – information yesterday that showed volumetric growth on Jack Daniel’s Black Label, Green Label at 4.5%.

Yes, I would direct you to some of this…

That was three months.

Publicly available data. Here is just the trend line that I noted once we are sort of prepping for this is that using just the NABCA data, not the Nielsen data for the United States, that a year ago, the 12 month trend projecting that was approximated minus one. Today the 12 month trend is plus 4 and the three months trend is plus 4 and the one month trend was plus 6. So, I mean, as you see, it’s just traveling on has there’s been some strengthening. And so, it’s very much in line with what Jane was directionally saying about the improvement in the parent brands’ performance over the last 12 months.

That’s very helpful. Excellent, okay, thank you, Paul. Thanks, Jane.

Welcome.

And your final question comes from the line of John Faucher.

Thanks. Good morning. Wanted to go back to one of the earlier questions which was about the growth in the flavored whiskey category and one of the questions we get from investors a lot is how do you guys avoid, sort of the peak and then the fall-off in flavored whiskeys that we saw in flavored vodkas from a number of years ago? And I understand the supply constraints can be different on whiskey, but can you talk about the differences you are seeing in either the development or the management of the flavored whiskey category, so that you avoid a boom-bust type cycle like maybe we saw in flavored vodkas? Thanks.

Well, I don’t know that the boom-bust on flavored vodkas, boom was 20 years, and it busted then more recently. But the initial entries into flavored vodka back at the early days of Absolut and Stoli, to some extent Finlandia was back around then in the United States, goes back quite sometime. So, and it became a prominent part of the category growing to what I recall, something like 20% or something of the total category. I think flavored vodka today if you were to independently review it as a category it would be huge. And so, if you – of course, that took some time as well. What can we do – I can’t speak as an industry, I can only speak to what we can do as a corporation and how we responsibly develop the category and the brands and the way that I feel about it is to treat the entrants in there even though they have in these cases might be line extensions as bonafide brands. And, when you do that it takes you into a consideration of how are you managing – in this case to get truly new consumption to the category and so – I kind of referenced this in my comments that we are prepared that the success we’ve had and I’ll just use the United States in this example of being able to attract new consumers through both Jack Daniel’s Tennessee Honey and from what we are seeing in the early days of Jack Daniel’s Tennessee Fire, to not only the whiskey category but to the Jack Daniel’s brand without cannibalizing Jack Daniel’s Tennessee Whiskey. I find that it’s – and we are looking at it from a bunch of different angles, it’s very different than say, in the soda business of diet sodas versus mainland sodas or a light beer versus mainland beer where they are with the passage of time was considerable cannibalization as one went up and the other went down and so far because, these are occupying quite different drinking occasions, we think if you build the brands in a – I think a constructive way and have that in mind, you will have a more prolonged existence as an expression of it, in this case, the Jack Daniel’s trademark. So that’s what we can do. I can tell you, we are not going to be introducing a brand every three months in order to chase numbers or something like that. It’s just not – it would be responsible to the Jack Daniel’s trademark. I think there is a statistic we’ve been using that Tennessee Honey by itself, when you consider brands that average retail around the world for $25 and above, is something like the 16s or 18s or something like that largest brand because it occupies – I think at year-end it was about 1.4 million cases and that is a very significant amount of business and so, I don’t want to really treat this some line extension of Jack Daniel’s. You really have to think about how it can continue to be a prominent brand in the global marketplace. I think the other thing sort of – we have had some unique experience with here is that there is a lot of – of course natural focus on this emerging 7, 8 million case and growing flavored whiskey market in the United States. When you leave the United States, Tennessee Honey has played a very prominent role, it’s not the lead role, in developing the flavored whiskey category outside the United States. And so, we think there – that’s why we continue to test and read it very closely, so that we can expand the world that’s possible for flavored whiskey from just over 300 million people to perhaps 7 billion people. We can – and so we really are taking a very long-term, even though it’s a really dynamic category where there is a lot of competition, a lot of change, and a lot of new entrants that will make a bunch of noise, I think what we intent to continue to build it along the lines of the way we treated Jack Daniel’s Tennessee Honey with a very long-term view and trying to create incremental value for Brown-Forman. That helps Ian?

It does, thank you. And then, one follow-up and I apologize for sort of pressing on this. Can you walk us through – I know you talked about some of the impact of FX on the bottom-line versus the top-line for the year. Can you talk a little bit about what drove the positive leverage this quarter? Was it sort of recycling some of the changes last year? And then can you give us an idea on the full year just the difference that you are thinking now, you talked about this on the last quarter, the difference that you are seeing in terms of impact on revenue versus impact on EBIT and EPS? Thanks.

So John, just to clarify, are you talking about FX only? Is that what you are talking about?

Yes, FX only.

Yes, so…

And a little bit of the view in terms of the impact – transactional impact on the gross margin versus offsets that you are seeing below the gross margin line?

Yes, so, I think if you refer to the table that we have in our appendix, you’ll see, the impact on our reported results from FX of 9% on net revenues and then you’ll see the gross profit. You’ll see all the pieces that’s again.

Yes.

And as you said, it gets plus as you go down obviously because we have some – we have expenses offsetting our revenue line items. The one big thing that you are not seeing on there is something that – was in our other income and expense which also what I was referring to that we expect to not happen again in Q2, or Q3 and a little bit in Q4, but it was mainly Q2 and Q3, but we had about a $5 million number or so in the first quarter of this year in other income expense that was not -

Not repeatable.

It’s not repeatable, it was one-time in nature if you will. And so, that’s what you’ll see if you take all the numbers from the schedule at the end and then consider that $5 million going the other way or the absence of last year because of that, okay? So that answers the first part of your question?

Yes it does.

Okay, now repeat your second part again for me.

Well, just sort of – again sort of mapping out that gap and how we - the rough order of magnitude of the gap revenue versus EBIT and EPS over the balance of the year?

So, again, if we think about headwinds, we simply are going to have a few cents of headwinds by the time we get to the end of the year. We had $0.03 or so in the quarter. So that’s maybe a couple more cents, what you are going to see, what I was trying to point out is in the next quarter because it’s the right sales essentially where they were as of last week. We had another pretty good hit versus last year’s second quarter at the top-line, now you will see another pretty good hit on a transactional basis if you will for our revenue line. I was pointing that out, but I’d think it will be much less time you get to the bottom-line for the second quarter. We won’t say a whole lot more comments there, but I wanted to make sure that you understood that your revenues for the first half of the year are going to be challenged because of the FX comparisons and then set aside absence of the other income and expense items, I don’t know that helps.

So it’s just that, the only thing we really need to worry about from a comp standpoint is simply that that Q2 comparison?

Well, yes, think about it as we go into the third and fourth quarter, if the rates were, if the euro was somewhere around 1.11, 1.12, that’s somewhere – where it got during the third and fourth quarters. So it’s - as an example

Great. Thank you.

You are welcome.

Thank you, Paul and Jane and thanks to all of you for joining us today for Brown-Forman’s first quarter earnings call and please feel free to reach out to us if you have any additional questions. Have a great week.

Thanks everybody.

Thank you. This will conclude today’s conference call. You may now disconnect your lines.