Good morning. My name is Selena and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter fiscal 2016 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn today’s conference call over to Mr. Jay Koval. Please go ahead, sir.

Thanks Selena, and good morning everyone. I want to thank you for joining us for Brown-Forman’s second quarter 2016 earnings call. Joining me today are Paul Varga, our President and Chief Executive Officer; Jane Morreau, Executive Vice 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 risk 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 second 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, Form 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 measure and the reasons management believes they provide useful information to investors regarding the company’s financial conditions and results of operation are contained in the press release. With that, I’ll turn the call over to Jane for her prepared remarks.

Thanks Jay, and thanks for joining us for our second quarter earnings call. I will be covering two topics today, which should leave us plenty of time to address Q&A. First, I’ll review our results, and second I’ll discuss our outlook for fiscal 2016 which we confirmed earlier today. Let me start by reviewing our recent results. During the first half of fiscal 2016, we grew underlying net sales by 6%. This underlying sales growth was broad-based geographically with mid half-single digit rates of growth in both the developed and emerging markets. In the United States, underlying net sales grew 7% during the first six months of the fiscal year. These results were led by the Jack Daniel’s family of brands, which grew underlying net sales by 7%. Jack Daniel’s Tennessee Fire contributed almost three points of growth in the United States. Our leading portfolio of premium whiskey brands outpaced their competitive set, including aggregate underlying net sales growth of over 30% for the Woodford Reserve family of brands and Old Forester. Our el Jimador and Herradura tequila brands grew well into double digits as the brand building investments we have been making behind both of these lean tequilas are creating important momentum towards achieving our long-term growth strategies. More on those in just a moment. Before moving on to our non-U.S. markets, I wanted to share some color on our blended value takeaway trends in the United States for Jack Daniel’s Tennessee Whiskey. Both Nielsen and NABCA’s three-month trends have slowed as we are now comping against last fall’s substantial acceleration and takeaway on the heels of the campaign in fiscal 2015 to reach the 5 million case milestone for Jack Daniel’s Tennessee Whiskey. When looking at our takeaway trends on a two-year basis, which removes short-term comparison issues,…

Thank you, Jane, and good morning everyone. I’ll be pretty brief here. FX headwinds aside, I’m pleased with our first half underlying results, particularly the performance of our premium American whiskey portfolio, which of course is led by the Jack Daniel’s family, but was also bolstered by strong performances from both Woodford Reserve and Old Forester. Also appreciated in the first half was broad and balanced geographic performance. In my view, this is a major asset for Brown-Forman and a very beneficial attribute of the company for investors. I will say that there is nothing easy about the current business environment, not that we ever expect it to be easy. At a time when the threat and reality of global terrorism is increasing, emerging market economies have softened somewhat, and industry competition has intensified particularly on the innovation front in the United States, I feel our underlying business continues to perform very well and notably very consistently. I’ll make this point related to this consistency, by noting that Brown-Forman’s FY15 full-year results from last year saw a 6% growth in underlying net sales and a 9% growth in underlying operating income. With today’s midyear results, we have posted a 6% growth in underlying net sales and a 9% growth in underlying operating income. Further, in confirming our full-year EPS guidance this morning, we are anticipating that underlying sales and operating growth will roughly continue at these same attractive rates, and if they do, we estimate that Brown-Forman’s underlying results will continue to compare quite favorably to our spirits competition. So while we still have the last half to navigate, and this includes our important holiday season, I’m pleased with where we are at this year’s midpoint. I’ll also note that our earliest read on November’s business, which of course was not part of this morning’s first half results, is quite positive and serves to further strengthen our confidence in our underlying growth outlook. Before closing, I’d like to note one other item that I believe reflects Brown-Forman’s ongoing progress, as well as our belief in the continued growth prospects for the company, and that was our announcement to increase the annual dividend by another 8% in calendar year 2016. This marks the 32nd consecutive year that the company has increased its annual dividend, and this, I believe, stands as another testament to the consistency to which I’m referring. Thank you. That concludes our prepared remarks this morning, and we’re now happy to take any of your questions.

[Operator instructions] The first question comes from the line of Dara Mohsenian of Morgan Stanley.

Hi, good morning guys. First, just wanted to get an update on the positive offset to keep full-year EPS guidance the same, just like the incremental FX hit. Is there something specific on the positive side giving you confidence there, or is it more related to having a range around earnings and maybe where you land in that range is a bit different? Second, Paul, was just hoping for some more detail on the competitive pressures you cite in the U.S. around innovation. How big a concern is that going forward as flavored whiskeys proliferate? Obviously, you guys have been very successful with the flavored products so far, but do you worry competitive risk ramps up going forward as some of your competitors catch up to you? It looks like a number of the Canadian whiskey brands are kind of revitalizing themselves as they move into the flavored products, so how big a risk is that and how do you manage through that? Thanks.

Okay, thank you. Jane, do you want to take the first on the guidance?

Yes, I’ll take the first. Your question was really around what our full-year outlook, and really the biggest change just happened from what we gave you back in June and what we’ve reconfirmed in August and what we’re saying today, is FX. So excluding FX, I think as we confirmed today, we’re on track for the top line 6% to 7% growth and the bottom line 8% to 10% growth. So the only change has been FX, and FX is [indiscernible] fall within the range that we gave you.

To Dara’s question related to competition, let me just--this is something we started to emphasize a bit more in the conclusion of our first quarter when we were discussing results, so let me just maybe build on that a little more. I think this reference to competition--I mean, look, companies always have competition. It’s not like that’s new. I think the thing that I would emphasize, and I might break it down particularly as I think your question related to the United States, which is one of the most competitive markets just because of the structure of the system and the ability to innovate within it, which is both of course a blessing and a curse, depending upon which end you’re on. So when I think about what’s been happening in the last six months or so in the United States, going back a few years, many of the really global competitors had more, what I’d say balanced geographic earnings profiles than some of them have enjoyed here more recently. If you think back four or five years ago, a lot of people were dependent upon the emerging markets for growth, whereas their developed international markets may not have been growing as robustly. In the U.S., they could expect maybe industry competitive levels of the growth, but the emerging markets were really helping drive them. Obviously, what we’ve seen from a number of our competition is that’s just more difficult these days, so I think a lot of them are turning to a very attractive U.S. market where innovation is possible. It’s a very premium market, so the ability to influence your margins and the growth of your company is probably a little more rapid in the United States, just because of the structure and profile of the market. So…

Okay, that’s very helpful. Thanks.

Thank you.

The next question comes from the line of Bill Marshall with Barclays.

Hi, good morning. Thank you very much. Not to belabor the point, but just building off of that on the flavor commentary, we do have examples in other categories - vodka, maybe even craft beer - where the consumer does kind of jump from one flavor to the next, looking for the next thing consistently. I’m interested in your commentary around focusing on fewer flavors. What is the risk that the consumer just moves away from the flavors that you’ve emphasized, and is there anything different about the whiskey category that’s unlike vodka or beer, or these other categories which have been a little bit more fickle as we look forward in the sustainability of this growth? Secondly, digging into that even further, how do you view the flavor phenomenon impacting the core Jack Daniel’s style? Do you feel you’re cannibalizing the core brand, and will consumers come back into that brand if they do move away for some of the flavor expressions?

Good questions. I think the data would show that people are showing an interest in flavored variety. I think the key to not being susceptible to dramatic declines in your volume, it goes to, one, the strength of the trademark; two, the quality of the product offering itself and continuing to offer a product that really holds up in the glass, I think is really critical to this, because not all of them will; and then just the way that you sell and market the brands. You just don’t want it to be--I actually feel like sometimes, and it’s often a reaction to short-term conditions, studying something maybe perhaps that happened last month or in the last 12 weeks or six months, the reality is to really treat these things are brand expressions. For us, the fads of Jack Daniel’s Tennessee Honey today, it is a pretty significant brand on a global scale. I think we’ve mentioned this from time to time - there’s fewer than 20 brands that we know of that are in its price point and above a million cases globally. So we don’t treat it as what I’d call a flavor extension from which we’ve now got to go replicate it over and over again. I think that can be a self-fulfilling prophecy. On the balancing act of cannibalization versus what I’ll call the gateway of introducing someone through, say, Tennessee Honey or Jack Daniel’s Tennessee Fire to the whiskey category, where they might not have been a participant in the past, and we are seeing, I think really nice evidence of, particularly now with the passage of time because we’ve got more data on Honey, it’s newer still on Tennessee Fire, but it actually exposes people to the Jack Daniel’s brand in such a positive…

Perfect. If I could just ask one quick follow-up, it looks like your price mix accelerated pretty nicely in the second quarter. I presume that’s predominantly, if not wholly on the mix side. I’m curious what the puts and takes were there, if it was an acceleration in some of your more premium products selling through or a slowdown in maybe some of the more value products, and how we should think about this for the back half of the year on the price mix side. Thank you.

Sure. I’ll take that. So just to talk about the split on the price mix, it was more mix, as you said, than price. I think it was one-third, two-thirds, if you will, or in that range. It was driven--as we looked through it, it was driven by definitely higher growth from our premium portfolio of brands, so our Woodford Reserves, our Jack Daniel’s family of brands definitely contributed. To a lesser extent, we did have some of our lower margin products not do as well - Finlandia, Canadian Mist, but to a large extent, it was due to the premiumization of our products. As we look forward in terms of the rest of the year, as we’ve been consistent and said throughout the year, we’re not really expecting much from pricing the whole year, very modest pricing, so anything that we get will be more mix-related. I think at the beginning of the year, we said it was going to be a couple percentage points, is the message that we’ve had. So I would assume that it was in the 2 to 3% range for price mix in totality.

Perfect, thank you very much. Appreciate it.

The next question comes from Bill Schmitz with Deutsche Bank.

Hi, good morning. Just a modeling question to start, and then a real question. Do you have a share repurchase target for the year, because it was much higher than we thought or at least modeled for the quarter. Then also, capex was a little lower than we thought, given all the initiatives you guys are doing. Lastly, your comfort level on the leverage ratio, where you think you could take it and still be within your comfort zone, and then any sort of commentary on divestitures or acquisitions, because there’s obviously been some stuff in the press about some of the brands you may or may not be parting ways with.

Okay. Boy, you asked a lot of questions. I’m not sure if I got them all. What was your specific question, do you mind saying, on the share repo again?

Do you have a share repo target for the year, because it came in much higher in the quarter than we thought.

Okay, yes. We don’t target a share repo. I’ll remind you that we have a $1.25 billion authorized share repurchase that was effective last March 24, I believe, and we’ve repurchased about $1 billion against that, so we’ve got $250 million or so left on that initial approval, if you will. But the way we approach share repurchases is opportunistically, so we’re looking into it as an investment, so you saw us buy a significant amount in our second quarter where we felt like the market wasn’t understanding and realizing some of the underlying growth that we see in our business and how we see it going forward, and it was being masked somewhat by foreign exchange. But we don’t have a target for that for the year, if you will, so it’s more opportunistic. Several factors go into play when we do it, both the price of the stock, what the needs of our business are, so funding our own business, a whole host of things that go into that. But we do have about 250 left on it. In terms of the capex, you did see it’s lagging where we thought it was going to be for the year. We expected it to be about $200 million for the year. I think some of it is going to get shifted over to next year, so right now we’re expecting somewhere in the 150, 160 range for the year. It’s timing only, so it will be pushed into next year. When we get done with all of our capital expenditures, the major ones behind expanding our distillery, adding the cooperage to mills, adding bottling. We have spent well in excess of $300 million on those expenditures.

Okay.

And then you asked a question about the--

The leverage ratio?

Which we don’t--you know, we’re very comfortable at the levels that we’re at right now. As you all would know from following us, we have a pretty conservative posture about that historically. Some of it is just what opportunities come along, it’s not that we’re not willing. I will say that in addition to what Jane said there, that the attractive borrowing rates paired with the long-term prospects we feel for the company combine to motivate us a little bit on the share repurchase activity right now. The ability to--you know, if you just think about it, for a very, very long-term investment, to buy back shares today and to have a view of the company in the way that we do as managers, and then to be able to support it with very low priced debt today by historical terms, is a wonderful combination of factors. Just to boot, you’re always looking at what your alternative investments might be, and as we scour the world and think about the things we can invest in, investing in our own business is right near the top, and that occurs both through the capex that Jane mentioned but also through the share repurchase program. Then you had also mentioned about rumors in the marketplace, and is our typical posture, we just have been really well served by not commenting on rumors that are out there related to things that we might either be--somebody’s prospecting that we might be selling or buying. We just really appreciate the fact that over the years, the no-comment on that has served us well, so we’ll continue to hold by that today.

I totally respect that. More on the business side of things, how do you balance market share versus profitability? If I look at the U.S. data, and admittedly the data set is pretty limited for us because we really only have the Nielsen data to go on, but it looks like the incumbent brands are losing quite a bit of market share, at least year-over-year on the whiskey and bourbon side. You have pretty substantial share growth from Bulleit, and then that all other category, which probably some of your brands are in there as well, but it seems like that’s accelerating a little bit. I know the margin mix obviously is improving quite a bit with Woodford and some of the other variants, so how do you guys manage that, and how important is that market share data? And again, I know it’s a short period of time, so maybe it’s just not a broad enough data set.

It’s important to study, I think, over time, mostly to make sure that the opportunities you see for your company, you’re not letting others have, although I will say it’s been my experience in this business to be more growth oriented and not size or share oriented. We typically don’t set scale-based or size-based ambitions relative to competitors for our company, because I think that can lead to oftentimes the wrong sets of behaviors. I mean, it’s not that it’s not useful. We’re as competitive as the next person, so we like to look at share data, but I think the criticality of growth and enduring growth is what we continue to focus on. So I mean, I really don’t feel like we lose sleep--like, for example, it will be a fact with the size of the Jack Daniel’s Black Label business in the United States, it will have a very difficult time growing at the growth rates that Woodford Reserve is. It’s in an earlier stage of development. So what we tend to do when we look at share data is we look at it with and without Jack Daniel’s. We look at it in ways that can inform us and illuminate where there might be growth opportunities for us. I actually--but we are competitive. I will tell you that we want--for example, at the price point above Jack Daniel’s in the U.S. American whiskey market, we want to be a leader. We want to have our fair share of it. That doesn’t mean we do anything at any cost to be the number one volumetric player at the ultra-premium level, but I will tell you that we really feel like that’s an area that we know well. We have the assets, the production assets and the know-how to be part of that, and the same thing is true of flavored whiskey. It’d be rare for you to hear us say something like we need to be number one in flavored whiskey in the United States. I’m just not compelled by that, and I don’t think our company is. We don’t like to see other people get consumption that we don’t have, but when you have, as our company does today, in our largest markets something like a 6% or 5% market share, and when you have across the globe less than 1% of the market share, you’re going to be really frustrated for a long time if you measure yourself on that basis. So we think we can be an enormously successful company, building value for shareholders without having to dominate any particular category or segment.

Great. Thanks very much.

You’re welcome.

The next question comes from Judy Hong from Goldman Sachs.

Thank you, good morning. Jane, on your full-year underlying sales guidance, I know you’re continuing to stick to the 6 to 7%. You did 6% year-to-date. I guess last year, you also did 6%. If I look at the fourth quarter comp being pretty tough, and U.S. comps are probably going to be tougher in the next quarter or so, I’m just wondering - I know it’s 100 basis points to get to the high end of it, but is there anything in the back half that you expect some acceleration, whether it’s markets or brands, that gives you some confidence that actually we could see some acceleration in the back half?

Yes, great questions, and again we’re looking at our full-year forecast and we do see, as Paul already alluded to, getting off to a good start in November, so we are seeing an acceleration from that perspective. So we’re expecting--we had a pretty soft third quarter last year, so we are expecting soft comps against that or easier comps against that quarter, and expect that to be a good quarter for us. You do point out that we did have a nice quarter in the fourth quarter last year with the national rollout of Tennessee Fire in the U.S., but we also had some markets overseas that we’ve been testing, not that we’re rolling them out further, but we’ve got further tests to do in some of those markets, so there will be some offsets there too, so it won’t be a one-for-one kind of thing if you’re thinking about it’s going out and we’ve got to cover it all. But our full-year forecast anticipates all this, Judy, and we think the 6 to 7% range is acceptable and reachable, given the environment we’re in currently.

Thank you. Just following up on the November trends, I know you guys had a pretty weak trend in Poland in the third quarter last year. Is the acceleration driven by Poland, or are you seeing broad-based acceleration in November?

It’s pretty broad-based right now.

Yes, it’s early now, but it looks broad-based. Poland is a top 10 market for us, but it’s rare that it would drive the entirety of Brown-Forman. Oftentimes the numbers--I mean, you can get that from sometimes the United States because of the size of it within Brown-Forman, and periodically you’ll get the U.K. or France and Germany, particularly when they combine. But right now, and again it’s early - we’ve still got a lot to see, but we’re encouraged by what we’ve seen, broad-based out of November.

I would just like to add one more thing, too, and I alluded to it during my script - travel retail. It’s still tough sledding there, if you will, but we do know that the U.S. travel retail business had some timing issues. We kept waiting for them to come, and then we started seeing them come through in November, so we are expecting the rate of decline in travel retail not to be what it is for the full year, thus we are expecting acceleration there from what we’ve had year-to-date, so that will add to some of the growth. That’s why we’ve been pointing out and pulling out travel retail, both in the first quarter and the second quarter, to show what it actually has done to our growth rates, and it’s been fairly significant in both the year-to-date as well as our first and second quarter.

The other thing I’ll mention is I think the travel retail piece - I mean, we still have some determinations to make inside the company as it relates to geographic expansion on Jack Daniel’s Tennessee Fire, so we’ll be getting to those here in the next few weeks or so. But the other thing is as the calendar year turns, once we enter into 2016, it marks actually the year where the Jack Daniel’s distillery will begin to celebrate its 150th anniversary, so you can imagine at a company like Brown-Forman, it’s a great milestone. I don’t know how much impact that would have on this fiscal year, but it’s something that we expect to be something that’s a really nice mobilizing event for the calendar year 2016 period. I mean, you can imagine us having a lot of fun with that, but also consumers getting to have a lot of fun with it as well, so we’ll be talking probably a little more specifically about that with the passage of time, maybe a little bit more at the end of Q3. That’s another point I’d note.

Got it, okay. Then Paul, obviously you said you don’t want to comment on any of the market speculation about M&A, but if I just look at your portfolio, it sounds like you’re definitely stepping up your focus on the premium tequila with the Herradura brand, and that makes perfect sense. But as you think about your broader portfolio, and thinking about some of the declining brands and the lower margin businesses, what are the puts and takes from a strategic standpoint of keeping those brands so that you have scale versus perhaps maybe pruning some of the portfolio so you can focus your portfolio to really be more of a whiskey, premium tequila brand portfolio, even if there is some potential dilution in earnings?

I think our portfolio management generally across time--I mean, I think you could just observe it. I think it’s stood the test of time. We’ve increasingly become more premium and more whiskey, would be the observation if you go all the way back to the consumer durables days, and then wine. But I think it would be evident that when we even chose to exit wines, we chose to stay in Sonoma-Cutrer. So we find that--I mean, we have found the benefit of focusing on fewer trademarks that are excellent businesses that have great growth profiles. The story of Brown-Forman today is a lot of companies will have brands that are smaller in terms of their contribution in the modern day than they might have been five or 10 years ago, and we always talk about if the company is Old Forester, that here it’s enjoying remarkable success both on and off premise. But it’s a little brand still in the scale of Brown-Forman and probably endured about a 50-year decline, so I guess you could call that patience. We waited for it to get small enough that it could be termed craft and retro and all these other things that it’s enjoying this renaissance that it is today. So here’s an example of staying with brands, and I really do feel when you take Brown-Forman’s portfolio overall and compare it to many of our competitors out there, we just have one of, if not the most focused portfolios in the spirits industry, and I do think we benefit from that. But again, going back--I think it was in your preface, we just don’t comment on things that either are incoming or potentially outgoing. It just doesn’t serve us well, so we let the rumors be the rumors and we keep focused on our business. I know some of you all--I mean, people have speculated--I will say, I’m really encouraged by there’s some recent marketing on the Southern Comfort brand that is literally occurring in the last week or so, where some viral advertising, I’ll call it, associated with Danny McBride has gone out there, and Spotify is noting it as one of the top ten viral efforts in the United States. It’s actually gone global as well, so I think that’s evidence that the brand continues to get support and we continue to try to put our best foot forward in a really competitive environment for it.

Got it, okay. Thank you very much.

You’re welcome.

Our next question comes from Eric Serotta with Evercore.

Good morning. Not to belabor the competition point too much, but wanted to approach it from a different angle. Paul, last quarter you made the distinction between increased competition for shelf space at retail and back bar space on premise, as opposed to competition, price competition either at retail or on premise, saying you had clearly seen a pick-up in the former but the latter was in line with historical trends. Wondering whether you could update us on that, particularly price competition in the off premise. We’ve seen some hot price points from particular markets. Related to that, in response to Dara’s question you mentioned some popularly priced flavored whiskies. Just wondering whether you’re seeing more or less or the same discounting of the premium core brands from your competitors, so two related questions.

Yes, I think it’s fair for us to comment on that. There’s two forms that we’re seeing, just to go back and be clear. There are two forms of the competitive effort. One is level of entry into the marketplace. It was something that--an internal report we were looking at here just this week where, and this is a pretty interesting statistic, that in the United States, in the U.S. alone whiskey market above the $20 price point, so $20 price point and above, over the last four years more than 500 new entrants. So there is that--now, where are you going to put all those? I mean, it’s shelf space, back bar, and of course--I mean, those are in many instances highly regional, so those aren’t going to be full blown national brands immediately unless they’re large trademark line extensions which have the capacity to do that. But in addition to that--I don’t know, I almost feel like every year for the last 10, around October and November, December, we start to observe increased price completion. I mean, it differs from brand to brand or company to company, it feels like every year, but I don’t know that this year is any more competitive than 2014 was or 2013. I always feel like both anecdotally and when you study the data after the fact, some brands chose to go deep on their 175 or to put RSCs or coupons out there. It all depends on the motivation of those particular competitors. So we have seen some spread difference in the U.S. market between, say, Jack Daniel’s and Jim Beam - that would be an example for this year. But in prior years, we’d seen other brands go deep on discounting, and all of it is just a reminder of the balancing act. I actually think one of the things that will be interesting to see over the--this is not a comment about 2015, but as I look at it, 2016, ’17 and ’18, some of this will be dependent upon the stock available. If these rates of growth for the category continue and these entrants continue to go in, we never have quite a good enough feel for how much supply is actually out there, so if demand outstrips supply out there, I think you’ll start to see pricing go up, not down with rational competitors. We don’t have any indication of that now, but these growth rates have been running pretty solid for a while now in the industry, and I think that can be an influence to the pricing and the pricing competitiveness out there.

Great. Just as a follow-up, Jane, I’m wondering whether you could give us any more color or an update in terms of the COGS inflation. I think last quarter, you were talking about 2 to 3% for the year. I believe last quarter, you talked about some moderation in wood that would happen in the second quarter. It now looks like that’s more pushed to the second half. Just wondering whether I’m remembering that correctly or if you could give us an update there as to what happened.

Yes, sure. I still think we still would expect COGS somewhere in the 3% range for the year, but in terms of what I’ve said, I don’t know if I referred to it second quarter or not, but let’s just focus on the wood as we go forward. We are expecting a moderation in the rate of increase to occur over the back half of the year. That’s one of the big drivers of the increase of COGS growing a little bit faster than it has historically for us. The reason why it’s going to moderate is because last year at this time, the cost of logs, the cost of [indiscernible], the cost of headings, if you will, all components that go into making a barrel took a pretty significant increase, and it’s continued to increase but the rate of increase over the balance of the year is expected to moderate.

Yes, so going a little bit back to that earlier question, any price-mix benefit that we would have been seeing through the year is being offset somewhat by some of those higher wood costs. As we start to cycle them, we’ll get more benefit from our price mix in that second half because we’re cycling a higher base, so that is a positive for the company in that second half.

Great, thanks a lot. I’ll pass it on.

You’re welcome.

Our next question comes from Nik Modi of RBC Capital.

Yes, thanks for the question. Paul, I was wondering if you can help confirm something we recently picked up in the trade regarding Bacardi putting its distribution out to RFP, breaking the alliance with Remy and Brown-Forman, and if that is true, what would be the implications if the distribution alliance actually broke up? Would that benefit you or would that hurt you? Any thoughts on that would be helpful.

Well, it’d be premature to even assess that. We are aware that there are some RFPs out there that Bacardi has initiated, but as far as we know, we’re continuing to partner with them in the same ways that we have historically in the United States. Just remember, there is part of that partnership we do all together, and then the respective companies go and do their individual brand-building work, and then within each company people are building their own individual brands. I mean, I think no matter what happens, and I always feel this way about the U.S. environment, whether it’s wholesale consolidation, supplier consolidation, people changing distributor alignments, et cetera, I really have a high level of confidence in Brown-Forman’s ability to navigate the U.S. system, I really do. We really don’t have a one single way of doing it in the United States. There’s literally 50 different ways you can go to market in the United States, so I just like the flexibility along with the stability that comes from Brown-Forman’s historical approach to the U.S. distribution system. We really do, have always--I mean, there’s still a lot of markets where we go to the marketplace with Bacardi, not only in the United States but outside the United States as well, so where that’s appropriate, we’ll continue to do it.

Great, thanks so much.

You’re welcome.

Our next question is from Tim Ramey from Pivotal Research Group.

Hi, good morning. Thanks. I’ll attempt to recapitulate something you said a few minutes ago, but I think it bears thinking a little bit more about. Consumer behavior in alcoholic beverages has always shown a tendency to more complex flavors and more crafted flavors, if you will - you know, light beer drinkers go to beer drinkers, become craft beer drinkers and so on. I think it really is the right way to think about it, to think that the best thing about Tennessee Fire is Jack Daniel’s Black Label; the best thing about Jack Daniel’s Black Label is Woodford Reserve or Gentleman Jack. Am I thinking about that right over, say, a 10-year outlook?

Yes, I think that’s one aspect of it, Tim. I think there’s a phenomenon, it’s really interesting, in the spirits category relative--we often get compared to beer or wine, so one observation along the lines of what you’re thinking, first just to ground you. Remember that the core offering of distilled spirits more often than not, it’s consumed in its final format in a varied or flavored or mixed way. So it’s even more natural, in my view, for flavored spirits to exist. In some forms, that’s providing convenience; in other forms, it’s providing a little more prepared form of what they ultimately enjoy anyway. And that’s not true--you know, beer is not an ingredient in a broader-based beverage, for example, so I think that’s one thing to think about, which I think bodes well for the longer run. The two factors that I think will make flavored whiskey have a longer life versus shorter are that it’s inherently the way the core whiskey category gets consumed anyway, and two is that they are aged products that have a moderating and regulating mechanism to the boom-bust phenomenon that can happen. I think those are two contributing factors that they don’t guarantee that some brands won’t go away or there won’t be some bubble or something like that. But for our business, it’s why we believe that they can be very strong, enduring brands. Then the other piece is what you’re talking about, which is the--and I’m just going to give you an anecdotal one because I saw it over the last--I think it was last night. I’ll give you an example of my wife, who literally does not drink whiskey and never has. With the introduction of Tennessee Honey and Jack Daniel’s Tennessee Fire, she said, well, that really tastes good on the rocks. Literally over the Thanksgiving holiday, she was stealing my Gentleman Jack on the rocks, so here is an example of somebody who has developed a palate over a period of time, someone who never would have been interested in the category. I think it is an example of what you’re referring to. Now, whether or not she’ll trade up to Woodford Reserve or Double Oaked, I don’t know; but in any event, I think there’s a real foundation to the premise that you’ve suggested there.

Yes, at the end of the day, the ultra-premium is kind of where everybody’s going. They might get stuck along the way, but they might end up going there.

Tim, the other thing - it’s a really affordable luxury. You can get on a liter of, say, Woodford Reserve, right there, there’s 20 standard drinks in a liter of Woodford Reserve. For the money compared to where you might put your entertainment dollars, particularly if you’re entertaining people at home, it’s real value.

Jane, just a quick question on barrel making. You do all that in-house, I believe, and so other than just the raw material costs, as you expand barrel making activities, should we think about that diluting COGS from higher depreciation and so on, or should we think about that as a benefit to COGS from greater efficiencies? How would we think about that?

Yes, we’re definitely building our new--all of our new facilities with a couple things in mind: one, to make them as efficient as possible; and two, make them scalable, so we’re not necessarily building it to be double what we need today. We’re building and scaling it as we go, so I think the answer is sort of in the middle. There will definitely be some incremental depreciation as time goes on from some of the investments we’re making, but we’re also being very thoughtful in terms of how much we’re investing now to minimize over-constructing and over-making something that we don’t need at this point.

Yes, a couple things in addition to what Jane’s saying there. Just remember from a traditional economies of scale thing, you don’t run these down a line in the way that you get that ramped up with extra--I mean, these are made by human beings, so that’s one of the tricks of the barrel making operation. We do get some benefit, I think, a little bit probably on freight because we’re down closer. The new cooperage is a little closer to Jack, which is the primary customer. A lot of it would depend too on how you account for the used barrel sales, and do you count that as efficiency or do you count that as a sale. Of course, we’ve been benefiting from the used barrel sales these last couple of years because the market has been so buoyant, so a lot of it depends on how you account for that aspect of it. I will say the other piece that relates to that is it really was in part, I’ll call it a risk mitigation move by the company to ensure we had two cooperages spaced in different locations, et cetera. We learned that long ago with warehouses and other aspects of the business, that it really bought some insurance for us as well because our business is so attractive, we would not want to have any limitations as it relates to getting wood.

Yes, I would just say anecdotally in wine, used barrel prices are up 100% because there’s so much demand from craft distillers and craft beer makers who want to put beer in oak, so.

You bet.

That’s one of the reasons about the cost just of our own wood that we were procuring went up, because some of the wood was going to the craft beer makers.

A lot of competition from people who want to use coopers.

Thank you.

Thank you.

The final question comes from the line of Bill Chappell with SunTrust.

Thanks for squeezing me in. Just a couple things on the cost front I just wanted to clarify. You had said wood prices would get better in the back half. Is that a start of a longer term trend as we move into ’17, or is that just very small changes on year-over-year?

Bill, that’s actually what I was referring to as a year-over-year comparison, so the rate of change that we have experienced in the first half of the year is abating over the rest of the year. It’s not that the costs themselves are coming down at this point, because the demand for it is still outstripping supply.

They're just comping the higher cadence in the second half. They started to go up in the second half of last year, so you won’t have as negative an impact as you did in the first half.

Okay, and I kind of missed the commentary. You had said also SG&A would accelerate faster in the back half. Is there something behind that in terms of marketing and advertising, or is that just kind of the normal flow?

I was referring to operating expenses, so if you look at our first operating expenses in the first half of the year, they were up modestly, and a lot of it is due to easy comps, if you will, versus last year. We had pretty [indiscernible] in the first half of last year, so we’re flipping it in the second half, so you’ll have tougher comps, if you will. That’s all.

Okay, and then last one - in all the talk about price competition, does this impact your views of the goal of trying to raise price a couple percentage points every year as we look to the June price increase?

I don’t know that we’ve ever had that programmatic an approach to it. I think we do like to try to advance prices, but we kind of do it--I don’t recall. We did some June and July pricing three years ago, I think? We thought that was the right timing to do it, and not all markets did it then but a large number of them did. Sometimes they’re associated with input costs; other times, they’re associated more with price positioning, just a desire to continue to price the brands at the premium level around the world. So I mean, we’ll probably be taking here in the next, I don’t know, 90 days, start to look at what our expectations would be for FY17 as it relates to pricing, but we don’t have any early thoughts on that. We will continue to get--I mean, I’ll just use the example, as you sell more Woodford Reserve and less Canadian Mist, you’ll continue to get mix, though. That will continue to roll.

True, but in terms of what you were saying, the current price competition in the U.S. doesn’t alter your plans at this point?

I mean, you’ve got to look at it. The reality is that a lot of that competition I’m talking about is above the Jack Daniel’s price point, so as it relates to Jack Daniel’s, we’re as motivated to make sure we’re not seen as too lower price related to a lot of these new entrants, because pricing, in addition to being an economic tool, is also a marketing tool in this business. So I just feel like we’ll be weighing that as well as we do what the price spread is between us and, say, Jim Beam. We’ll be looking at both factors.

Got it. Thanks so much.

You’re welcome.

Thank you, Paul and Jane, and thanks to all of you for joining us today for our second quarter earnings call, and please feel free to reach out to us if you have any additional questions. Thanks and have a great week.

Thank you, all.

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