BF.B (BF.B) Q4 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter Fiscal 2016 Year-End 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 would now like to turn the conference over to Mr. Jay Koval, Director of Investor Relations. Please go ahead sir.

Thanks, Paula, and good morning, everyone. I want to thank you for joining us for Brown-Forman’s fourth 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 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 fourth quarter of fiscal 2016, and 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 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 fiscal 2016 earnings call. I plan on covering three topics today, which should leave plenty of time for questions after our prepared remarks. First, I will review our full year results, including a brief over view of the fourth quarter. Second, I’ll discuss our earnings outlook for fiscal 2017, and finally I’ll share some additional color on the changes we have made to our portfolio over the past year, including the BenRiach acquisition. So let me start with our June out result. Despite a very challenging comparison against last year’s fourth quarter 10% increase in underlying net sales, which you’ll recall benefitted from the launch of Jack Daniel's Tennessee Fire in the United States; we delivered solid 4% growth in underlying net sales during this year’s fourth quarter. Underlying A&P spend increased 8%, while 3% reduction in underlying SG&A twisted our underlying operating income flow to 15% for the quarter. For this full year, underlying net sales grew 5% and underlying income increased 8% in line with the guidance we shared with you on our third quarter call, and well ahead of our estimate for the industry’s rate of growth. Our net sales growth in the year was driven by volume gains from our premium priced brands dropping four points of mixed benefit and 10 basis points of gross margin expansion. Looking at our business results by geography, the developed world delivered growth consistent with last year, tough enough that a slow-down in the emerging markets and declines in our travel retail channel. We grew underlying sales in each of the top 10 markets with exception of Russia, and believe our balance geographic approach in building our portfolio is one of the reasons why we consistently deliver top tier results. The United States grew underlying net sales by 6% led by the Jack Daniel’s family of brands, our remarkable achievement for our trademark that is celebrating a 150 years in the market. The US launch of Jack Daniel’s Tennessee Fire contributed almost 1 point of underlying net sales growth to our corporate results in fiscal 2016. Combined, Tennessee Honey and Tennessee Fire depleted over 1 million cases in the United States in fiscal 2016, strengthening the brand equity of the Jack Daniel’s family by appealing to news consumers and accelerating the brands reach across ethnicity and gender. We believe we are uniquely positioned to benefit of consumer interest and premium American whisky. Our leadership position in this category is of course driven by the Jack Daniel’s family of brand, but is also aided our bourbon brand such as Woodford Reserve and Old Forester, both of which enjoyed rapid rates of growth in fiscal 2016. And we believe that our whisky expertise including our vertically integrated supply chain from barrels to home place experiences position us well to grow our brand in the coming years. Woodford family of brands reached 500,000 cases in fiscal 2016. While this impressive milestone might seem like an overnight sensation, it required a strategy built on patience and consistent assessment behind the creation of a new brand in the mid-1990s that leveraged heritage and our whisky making expertise. We are replicating this proven business model with Slane Irish whiskey, which we believe can become the next Woodford like driver of our company’s result as we see the next 20 year of growth. Developed markets outside the United States also delivered solid underlying net sales growth of 6%. This rate of growth marks a two point acceleration for fiscal 2015, with particularly strong results in Western Europe up high single digit as well as solid gains in Canada and New Zealand. Australia, Japan and Spain each returned to growth during the year, while results in Italy declined. The Jack Daniel’s trademark is continuing to gain share on blended scotch among other categories and our market shares remained low compared to what we have achieved in the United States. So we are optimistic that the best is yet to come, as the Jack Daniel benefits from a brand positioning around confidence and independence, strong heritage and authenticity, not to mention its prominence in pop culture. Moving now to our emerging markets business, underlying net sales grew 4% in the year, a marked acceleration from what we had delivered over the last decade. Mexico and Poland, our two largest emerging markets grew underlying net sales by 6% and 1% respectively. Turkey grew 17%, while Russia declined 17%. Brazil, South Africa and Ukraine each grew underlying net sales double digits, but this growth was offset by the slowdown in many of our other small emerging markets including Southeast Asia. The regulatory changes in Indonesia led to significant disruption in the beginning of fiscal 2016. Our business has not been immune to the weaker economic conditions and currency devaluations that have negatively impacted consumer demand. In our other markets which represented 15% of total sales for the table in our earnings release this morning, underlying net sales growth accelerated from 11% in fiscal 2015 to flat in 2016, effectively removing 1.5 points from topline growth. As we look ahead, we think the challenges in many emerging markets will persist in the short term, but that does not diminish our long term expectation for emerging markets given how early we are in developing our brand outside of the United States. Travel retail had a challenging start to fiscal 2016, with underlying net sales declines of almost 20%. The rate of decline has moderated over the last three quarters. So while business fundamentals remained soft compared to this historic levels of growth, we believe the worst is behind us. Travel retail’s 12% underlying net sales decline in the year removed about a half a point from fiscal 2016 net sales growth rate. Let’s move now to a reconciliation of reported underlying results. An appreciating US dollar negatively impacted our reported net sales in fiscal 2016 by 6 percentage points. While inventories were roughly flat year-over-year, reported sales were also hit by one percentage point due to the two month absence of Southern Comfort and Tuaca revenue while under disposition during the fourth quarter. Our underlying operating cost increased nearly 3% in the year, but declined approximately 3% on a reported basis. Tight cost management helped us deliver SG&A growth of only 2% and we remain focused on leveraging prior SG&A investment. It’s worth noting that excluding Southern Comfort and Tuaca, our A&P increased over 5% for the portfolio of brands we have today in line with our underlying sales growth. Putting this all together, we delivered 8% growth in underlying operating income for the full year. Reported operating income increased 49% including the impact of the sale of Southern Comfort and Tuaca and 3% excluding. Earnings per share increased 63% to $5.22, excluding the $1.76 impact as a result of the sale; our earnings per share would have been roughly $3.46, an increase of 8% from the prior year. So now turning to my second topic for today, our outlook for fiscal 2017. Notwithstanding the emerging markets slowdown we experienced during fiscal 2016, we expect our portfolio skew to premium American whiskey will allow us to capitalize on favorable trends as consumers continue to shift from white to brown spirits, driven by a desire for heritage, authenticity and craftsmanship. In fiscal 2017, we will be activating global campaign to celebrated Jack Daniel’s 150th anniversary as America’s oldest registered distillery. This activation consists of a focused campaign here in the United States called Jack Attack, including additional media spend and programing behind the trademark with we believe will accelerate our growth in the United States. It also entails large scale events in Lynchburg and pop-up distillery experiences in several major metro markets. And we introduce special edition products including an 86 brewed Jack Daniel’s 105th Anniversary bottle. This intense consumer campaign extends far beyond the United States, including a global Jack Daniel’s barrel hunt in over 50 countries and incremental media support. Our global teams and partner will focus on the premiumization of this trademark through additional support behind Gentleman Jack, as well as the continued growth and rollout of Tennessee Honey and Tennessee Fire outside the United States. In fiscal 2017, we expect underlying net sales growth of 4% to 6%, driven by sustained growth of our portfolio brands in the developed world. We intend to launch Jack Daniel’s Tennessee Fire in a few markets outside the United States, including the United Kingdom, France and Germany. We are innovating with high quality expressions including rolling out Woodford Reserve Rye and Jack Daniel’s Single Barrel Rye as well as introducing Coopers’ Craft, our first new bourbon in two decades. Furthermore, underlying net sales should benefit from global consumer demand for our premium bourbon and tequila brand. We expect to benefit from the easier comparison and travel retail this coming year, as well as the absence of the 50 basis points drive that Southern Comfort had on last year’s result. On a negative front, we anticipate moderate pricing for used barrels, as the global slowdown in blended scotch is negatively impacting barrel demand. Fiscal 2017 should be another year of volume gains and improved mix, but with minimal pricing beyond a few select market, given the overall economic environment. This should result in flat gross margins compared to fiscal 2016. We are investing behind our brands growth and development and are reallocating our human capital and dollars towards the brand market combinations that we believe has the greatest opportunities to create value. We are forecasting another year of low single digit growth in SG&A, and so while we are tightly controlling our core SG&A growth, we will invest where the opportunity exist just as we plan to switch to own distribution in Spain next summer, which will result in some modest cost later this fiscal year. In total, we anticipate underlying operating income growth of 7% to 9%. At today’s fast rate, we expect the stronger dollar will negatively impact reported earnings per share by $0.07. The benefit from a lower share count will be offset somewhat by reductions in distributor inventories. The effective tax rate will be in the 29% to 30% range. In aggregate, we expect earnings per share of $3.42 to $3.62. This represents 5% to 11% growth from our fiscal 2016 base line EPS of $3.26, which excludes $0.20 of earnings contribution from Southern Comfort and Tuaca in fiscal 2016. You’ll find additional details in a table in our earnings release that we released this morning. As a sensitivity on FX, a 10% move in the dollar in either direction would impact a full year EPS by approximately $0.15. Just a quick comment on seasonality, we expect our first quarter to be the most challenging comparison against 7% underlying growth in the first quarter of fiscal 2016, which was also helped by the US launch of Tennessee Fire. Regarding our capital spending programs, CapEx came in at $108 million for the year, well below our original estimate driven largely by timing as our long term capital expansion plan remain unchanged, timing the spend for Slane Castle and Old Forester’s distillery in home place, for example, will avoided more to fiscal 2017 than we expected at this time last year. We are over half way through our stepped up investment to increase total capacity and continue to deliver an industry leading 23% return on invested capital after adjusting for the gain on the sale of Southern Comfort and Tuaca, the highest ROIC in a decade for our company. Now let me move now to my final topic, an update on portfolio changes including the acquisition of BenRiach Distillery Company. We made some important changes to our portfolio of brands over the last 12 months, including the disposition of Southern Comfort and Tuaca, as well as our reentry in to the single malt scotch category with the BenRiach acquisition. These portfolio changes mark the continuation of a decade of portfolio evolution at Brown-Forman following the sale of Lenox China and Hartman Luggage, the acquisition of Casa Herradura Tequila portfolio in to some of our mid-price run [sector] in Bonterra. In addition to this M&A activity, we have introduced significant invitation in to the market place, including the launch of Jack Daniel’s Tennessee Honey and Fire, Woodford Reserve, Double Oaked and Rye and our entry in to Irish whiskey with Slane. So let me share a bit more color on our rationale for our most recent to our portfolio, the acquisition of the BenRiach Distillery Company and three great single malt scotch brands, GlenDronach, BenRiach, and Glenglassaugh. The single malt scotch category is one of the fastest growing categories along with American whiskey and Irish whiskey. Outside of the four largest single malt brands, GlenDronach, BenRiach, and Glenglassaugh represents the largest collective production capacity in the industry, giving us a great platform from which to build our [overturn]. We believe that our whiskey making knowledge, barrel technology know-how and long term perspective will continue to serve us well. Combined these single malt scotch brand are relative (inaudible) malt today at under a 100,000 cases in calendar 2015, but we believe they have significant global potential as the primary market today are focused on the United States, duty-free, UK, France, Taiwan and Germany. There is also a small blended scotch business today. Given our purchase price at just over $400 million, we paid up similar on trailing EBITDA to our Brown-Forman trades today. We believe that we acquired high quality brands and assets, including the current home places, distilleries, warehouses and the bottling facility, not to mention valuable inventory. Equally important is the potential for these brands in a rapidly growing category. So we are hard at work at developing the long term business plan of how we can maximize the value of these brands. As is typical with any acquisition, we expect some transition in integration cost this year, somewhere in the $5 million to $10 million range, but even after including these costs, we expect the acquisitions to be roughly neutral to earnings in fiscal 2017, given only 11 months of ownership and then we’ll be accretive in the following years. Let me remind you that our last acquisition of (inaudible) was when we acquired Casa Herradura in 2007. After several years of methodical investment, these brands have enjoyed solid growth over the last few years, as we believe they have reached an inflexion point in consumer awareness. Herradura’s underlying net sales jumped 13% globally in fiscal 2016, El Jimador’s US underlying net sales increased 19%, and New Mix, our Mexican RTD business experienced a 23% jump. So all in all a stellar year for our tequila brands, but one that was years in making. We expect that these single malt scotch brands will also require time and patience to best position them to help fuel our growth over the long term. So in summary, fiscal 2016 was another great year for Brown-Forman. We delivered solid top and bottom line growth, notwithstanding foreign exchange pressure from an appreciate US dollar. We invested significantly in the long term opportunity that we believe will fuel our growth over the coming decade, including our entry in to Irish whiskey with Slang and the launch of Coopers’’ Craft. We made several enhancements to our portfolio of brands, including the [sell-through] of Southern Comfort and Tuaca and the acquisition of BenRiach. And we invested over $100 million in capital investment behind our (inaudible) growth prospects. We did all of this while returning a record $1.4 billion of capital to our shareholders in fiscal 2016. Steady dividend growth is the hallmark of Brown-Forman and we increased ours by 8% this past year. We repurchased over 11 million shares, bringing our diluted share count to half of where it was in the mid-1980s. And we recently proposed a two-for-one stock split, our seventh split in 35 years. Our ability to simultaneously grow our business, invest in the future and return capital are reasons why we believe we can continue to generate to tier returns for our shareholders. Our TSRs have outperformed the competitive set, the Consumer Staples Index and the S&P 500 over the past 3, 5, [10] year periods by healthy margins. We believe that we will remain an industry leader through thoughtful allocation of resources and category focused on our core competency whiskey. We operate in a business with aged products and multi-generational brand and we benefit from having our long term focus and engaged shareholder base through family control. And with our strong cash flow generation and inherent capital efficiency, we will continue to pursue a well-balanced capital (inaudible) strategy aimed at perpetuating Brown-Forman’s strength and independence. So with that, let me turn the call over to Paul for his comments.

Thank you Jane and good morning everyone. My take on FY’16 and our guidance for FY ‘17 is that they are both illustrative of Brown-Forman’s strong and continuing organic growth story, once you consider the effect of last year’s disposition and account for the impact of FX and inventory which we customarily do. Something a little less customary is the disproportionate amount of work we’ve been doing of late to position Brown-Forman for enduring growth in the distant years ahead, and for sake of defining distant years ahead, I mean 2020 at the earlier and more like 2025 and beyond. While we always try to take a long view of our business, somewhat by necessity given the aging horizons for most of our products, this last 18 months in my view has been even more exemplary for Brown-Forman’s long term orientation. The current time reminds in some ways of similarly strategic times in our recent history, when we made changes to benefit our long term future. Examples would be the early 1990s when we began a more aggressive geographic expansion which included our initial work in emerging markets and our first experiences with international distribution ventures. The mid-2000s when we followed our disposal of Linox and Hartmann, with the acquisitions of Casa Herradura and Chambord. And more recently in 2011, when we sold a vast majority of our wine business to enable us to better focus on our premium American whiskey trademarks at a time when consumer interest in the category had begun to surge. In the last five years, this shift of focus, alongside further investments in our organization and global route to market contributed to successes such as Jack Daniel’s Black Label’s ascent to one of the industry’s most valuable brands. The creation of both Jack Daniel’s Tennessee Honey and Jack Daniel’s Tennessee Fire, two of the company’s most successful line extensions ever. The accelerated development for super premium brands with the [reserve] in Gentlemen Jack as both plans achieved the difficult super premium volumetric milestone of 500,000 cases. And the resurgence of Brown-Forman’s founding brand Old Forester. So now in mid-2016, we have our recent portfolio changes in capital deployment actions as examples significant actions and investments from which we believe shareholders are likely to benefit in the years ahead. The investments we’ve made in scotch and Irish whiskey over the last year intended to give us brand and production platforms for what I like to call, Woodford Reserve like brand development over the next generation in exciting premium whiskey categories adjacent to the American whiskey category that we now so well. Our patient brand building success on Woodford is certainly a source of confidence, as we begin our work for hand brands like [Mendronic] and Slane. And our initial investments behind Coopers’ Craft bourbon will enable us to tell the story of our Coopers’, the people who make our whiskey barrels and in doing so convey the importance of wood and barrels in crafting the highest quality bourbons. The brand will leverage our distinctive know-how and is very old and truly unique trade of barrel making. We will undoubtedly seek to apply some of this Cooperage expertise to our new endeavors in both Ireland and Scotland. For these new trademarks and products to find commercial success, they need to focus of an organization that has the skill, the scale and the time to develop them. Brown-Forman’s global route to market platform is the strong asset in this regard and with the sale of Southern Comfort and Tuaca in FY ‘16, we have enabled our sales team to shift their focus to existing brands with greater growth prospects as well as the newer brands that I’ve just mentioned. Since we are not reducing overhead cost dollars-for-dollar to cover the lost profitability of the brand we recently disposed, I consider this an incremental organizational investment against big ideas like Jack Daniel’s 150th Distillery Anniversary this year and Coopers’ Craft and BenRiach in the years ahead. We made a similar type of hidden investment to hand our American whiskies after the sale of our wine brands in 2011 and has served them very well in the years that ensue. Beyond these portfolio and organizational investments, quality capital deployment, along a hallmark of Brown-Forman will continue to be important to the next 10 years and beyond. We are fortunate to have a very capital efficient business model, as evidenced by the 23% return on invested capital that Jane mentioned in her comments, as well as financial flexibility. Beyond the acquisitions I’ve mentioned, we are continuing to make significant investments in production expansion and home-place marketing at Jack Daniel’s, Woodford Reserve, Old Forester and Slane and in the years ahead, we will incur depreciation cost associated with this additional capacity. These investments are intended to enable us to grow going forward in a manner similar to our last 10 years. Considering the margins, returns, track record of growth and the potential we see ahead, I believe these capital expenditures are excellent investments by the company. And finally, through our more ambitious share repurchase program of late, shareholders are essentially given the options of liquidity to those who chose to sell their shares or a slightly increased percentage ownership of Brown-Forman for those who chose to hold their shares. For non-selling shareholders, your decision means the repurchase program therefore represents a long term investment the company makes on your behalf in the future of Brown-Forman, and that is something that we believe in and I hope that today’s results and next year’s outlook as well as our discussion of the investments we are making to enable our continued success give you a similar belief in the company’s prospects for continued value creation. That concludes our remarks, thank you for listening and we are happy to take any questions you have.

[Operator Instructions] Your next question comes from Dara Mohsenian of Morgan Stanley.

I just wanted to get a bit more detail on the inner play between volume and price. It looked like total company volume decline on a year-over-year basis in the back half of the year ex pricing mix which is the first I can remember that in the recent history. It sounds like you’re expecting volume growth next year, but can you give us a little more specifics on the balance between volume and price mix. And on the price mix side it sounds like you’re working with more mix than pricing. Is that fair?

Yes, let me talk about this year. I think what you’re seeing in the back half of this year are a couple of things that’s happened. One, we’re stopping the (inaudible) the Fire launch in the United States. So that will happen. If you recall last year’s fourth quarter, we didn’t repeat that. With buying, it sold all the way through to the retailers last years’ fourth quarter, and so that’s one of the things that’s driving. The second thing is we continue to have a decline in Finlandia. It’s a low priced brand so a little margin brand, so it really hit your topline not so much your bottom line. So it continues to be hurt in markets like Russia and the CIS. So some of the markets where the economic conditions just continue to be very, very poor. So we soften the acceleration in the back half of the year on that brand and then again the other piece being the absence of the launch in the US on this buyer. So you did see a slow down because of those two factors, if you will. They netted against the gains that we had on the rest of the portfolio that continue to grow nicely. Our super premium bourbon brand continue to grow nicely, our tequilas been injecting those (inaudible) as well. In terms - as we look at the next year, we’re expecting really very little if any pricing just enough to select market. So it will be more mix, but what’s coming along next year as Paul alluded to just a little bit, we’ve been making investments for a number of years, last several years behind our production facilities the same capacity, so we can meet the demand that we think will be there and in the not so distant future. So we’re going to have a bit higher cost, then our price will come first so that higher costs offset the mixed benefit that we saw this year. So, most of it will be coming from volumes next year, most of our growth.

And the benefit on mix, it would be evident in this past year’s results, but you would expect it to continually get more mixed benefit than pricing. If you just think about Jack Daniel’s and Woodford Reserve growing and brands like Finlandia and Canadian Mist and the absence of Southern Comfort declining, just the mix of profitability improves for Brown-Forman overall.

There’s one other thing, I thought (inaudible), the table somewhat misleading in the volume, so I think this is where you’re looking as the table. We’ve got (inaudible) volume, so (inaudible) is in the table and we did not adjust for the two months of last year’s volume, we adjusted for the two months of the revenue but it’s not out there for the volume, that’s probably the biggest piece than buyer and then Finlandia. So we need to (inaudible).

And then on the flavored whiskey side Paul, can you discuss as you look out over the next few years, you’ve obviously had a lot of success with Fire and Honey. Are you planning to launch additional flavors in that category and as you look out over the next few years, given we’re seeing such strong growth there and a lot of competition ramping up, how’s your portfolio kind of positioned to compete versus that expanding category.

The two that we discussed in our results today, we continue to have very high hopes for it, and I think I’ve mentioned this a few times, we have no plans at this time particularly on the Jack Daniel’s brand to be bringing out any additional flavors and what we think is the best approach for our company is and we’ve been encouraged so far but what we’ve seen from the success of Jack Daniel’s Tennessee Honey globally, but also the early and limited tests we’ve done on Jack Daniel’s Tennessee Fire outside the United States that for us we think global expansion versus additional flavors is the more effective tool for us in expanding our flavored whisky business. So I think we can stick to that, and actually I think some of that is incorporated in this year’s plan for Jack Daniel’s, Tennessee Fire’s as it enters either more full distribution in the markets where it was tested or some additional countries as well.

And then last in emerging markets, what we’ve seen here in this business recently is a pretty rapid slow down and also your business didn’t really slow as much early on as some of the competition. So I’m just kind of curious why you think your business has seen a more rapid slow down recently in emerging markets, given if we go back over the last two years, looks like macros have really been consistently slow in emerging markets overtime and can you talk a little bit about the pace of improving next year and when that plays out in terms of emerging markets organic sales growth.

We’ll maybe hit on a couple of those. I think part of it was the early part of the slowdown; so much of it was associated for some of our competition in China, where just our presence is relative on a percentage basis smaller than many of our competitors. So maybe particularly the cognac players they were impacted by that going back a few years. I think more recently for us, we’ve seen that in places there’s a lot of us have - Jack Daniel’s is so geographically diversified and spread and for many, many years it has been developing its business and for example in the emerging markets we never singularly focus on brick. We looked to all kinds of smaller markets that were also emerging and we just felt that those were more appropriate developmental efforts on behalf of the brand, even going back 10 years ago. So like in Eastern Europe has slowed down in some markets, some of the smaller markets, particularly those related to oil. Just their economies and their currencies have been so difficult and so this round of emerging market difficulty because there’s always at least seems to me that there’s some markets going up and down and that’s why we like the geographic diversification we have this particular year with emphasis on Russia and then some of the smaller markets, other markets particularly tied to oil seem to hit us even more than they had in the past years. It doesn’t really takeaway over a longer period of time our view point that these will be important markets for Brown-Forman. It’s just that you have to be patient while those economies wrestle with what’s happening locally.

So just building on what Paul said, so you’re asking about also asking that what we thought about in ‘17 as it relates to these. We really don’t expect much improvement in the short term, so we’re not expecting big bumps, big increases from the emerging markets. It’s still less possibly been the long term of these brands or these countries. The one thing I would say just to add on to what Paul said, you’ve talked about the oil and all of these, but that had a big impact on currency and so we found that currency hit us in many different ways in emerging markets. So, whether it was that the consumer could - it’s the pricing, the valuation of the currency had gone down so much making our product so much higher. So maybe the purchasing power in this situation have (inaudible) that happen to some of our trade partners, margins were (inaudible). So it was pretty widespread and I would say a lot of the currencies does hit like starting last summer, when the big devaluation in the Brazil real and some of those desert currencies just kept going everywhere, and so I think it’s --.

Yeah, I think but then too if you’re looking for something that needs our company, because we play relative to our competition, are concentrated in terms of our sales and profitability at higher price points and impact like what we’re seeing in the emerging markets might hit us. For example, we don’t own a lot of local brands in these emerging markets. So they might have a hedge or something against these evaluation, the purchase power (inaudible). So that could be a point that helps to explain it as well.

Our next question comes from Judy Hong of Goldman Sachs.

Wanted to get a little bit more color on how you’re thinking about the US outlook for fiscal ‘17 in terms of the underlying sales growth. So, obviously you’re lapping Fire launch which will be pretty challenging. In certainly the first part of the year, I think you talked about some of the competitive dynamics in the market place. It sounds like you have a lot of the consumer campaigns planned for this year. So I’m just curious, as you think about what you did in terms of fiscal ‘16 to 6% underlying sales growth, how sustainable is that kind of growth lapping Fire and are all or a lot of these consumer campaigns that you have planned really aimed at driving growth more in the near term or more really built in the equity and the longer term and enduring growth on the Jack.

I’ll touch on it, just the second question you got there. I feel like what we’re planning for the US is sustainable, I really do. And I would segregate my answer to your question, some investments we’ll be making like for example this year in Woodford and Old Forester packaging for example which I think it benefits those brands. There’s usually some initial interest in it, but I think those things tend to benefit brands in the years ahead. Clearly the most significant that will have a timely impact I think is probably the most significant thing we’re doing this year is the promotion and marketing and selling around the Jack Daniel’s 150th anniversary. So I think that is pointed to - a lot of it is already underway, but also we’ll have really here in the second half of the year we think a pretty significant consumer impact. So that is one of our bigger ideas for ways to sustain the growth both in the US and at Brown-Forman.

And just to denote what Paul said and just to emphasize, that Woodford Reserve and Old Forester and our tequilas are doing very, very well and they continue to grow nicely and we expect them to continue to grow nicely next year. We’ve alluded to some of the double-digit growth on all those categories, so we [fully] rated an inflexion point and good consumer awareness it’s having and so we’re continuing to see a nice gain and nice contributions out of those. So those will continue is our expectations on the --.

And one of the offset, just - repeat something I said a few minutes ago. One of the offsets to cycling the initial interest in trial on Jack Daniel’s Tennessee Fire in the United States is the fact that we’ll be introducing it to new countries, and so that is clearly a partial of that. And it’s not diminishing the fact that the US market for this category is really competitive and in this particular year, in year two of Jack Daniel’s Tennessee Fire reminds in some ways the prior years’ where there was such interest in the prior year on the launch of something where there were some pent up demand which I felt last year in the spring particularly after we’ve done that staged rollout. And there was a huge surge in interest and trial associated with this product and as you can image, I just feel like just composition of the product it’s not going to be for every straight whiskey drinker because it’s in fact a flavored whiskey. And so I really do - it doesn’t surprise us that there are tough quarters following a launch like that in a particular country. But I do feel we have the benefit of expanding it geographically to partially offset that.

And if I can just follow-up on that Paul, so when you compare the Honey geographic expansion to the Fire expansion, how should we think about the impact and maybe also you can just remind us how big Honey is in some of the markets that Fire is getting launched this year in the UK, the France.

Well I think on a global level, the volumes are about half-half I think for Jack Daniel’s Tennessee Honey, isn’t it?

It’s a little bit more outside the US.

It’s a little more outside the United States, if it gives you any indication. And we’re in no hurry to go get as, I think Jack Daniel’s Tennessee Honey, it took us the better part of four years plus to get to where - I’m going rough this number, we’re something like in 80 countries where we’re doing most of the business for Tennessee Honey today, and I don’t anticipate us getting that fast this fiscal year even and the next two fiscal years on Jack Daniel’s Tennessee Fire. We’re fighting in a market at a time to see where there seems to be appeal. As we go along, we know that the - one of the differences between Jack Daniel’s Honey and Fire are that the way those are used. And so going in to it we knew that Tennessee Fire would skew more towards shot or straight consumption whereas Honey while some of that is also used in mixed format equally. So I think we’re just going to learn as we go and try to promote those. We’ve been encouraged, I’ll tell you from what we’ve seen not only in the United States, I just feel like we had a great first year there against a pretty tough competitive environment and what we’ve seen with the competition is not the same in these international market as it is in the United States that Jack Daniel’s Tennessee Fire is doing very well and sufficiently enough that we would either expand it within those countries or introduce it in to new countries.

My last question is, obviously you’ve made significant changes in terms of the portfolio over the last few years. If I looked at your planned performance certainly Finlandia and Canadian Mist sort of screen is continuing to be a drag in terms of your growth. So not asking what you’re intention is with these brands or but - are you investing behind these brands at this point? Is it just more of a macro dynamics that’s sort of are pressuring these brands and are there other strategic considerations as you think about brand like Finlandia where given its size in the Russia market that you kind of need a sizeable brand like this if you’re going to be in that market.

You kind of answered your question. I agree with you, I think there are always strategic considerations. Look we don’t have the largest portfolio by any means, and so as a general bias we are brand builders versus brand sellers. And I really do feel like almost any brand in our portfolio we’re going decide to do the best job we can with it, and often times they do play strategic roles. And Finlandia has been very important to particularly Jack Daniel’s development in Easter Europe over the last decade and Finlandia has been on its own merits a very successful brand in that part of the world. It’s just a very difficult time for the vodka segments in those Eastern European countries right now, and we’ve seen this before with categories where they go through some rough times. But it doesn’t mean we don’t put our best foot forward, and actually right now we continue to work Finlandia. I don’t know whether it will hit this year, but it may be in to the next fiscal year because it takes a while to make these changes. But we’re sort of enthusiastic about some packaging changes there. And we have the latitude of being patient here, because it’s really in the grand scheme of things the brands you mentioned are not that significant a drag on Brown-Forman. I mean they are relatively small when you get down to the bottom line as it relates to the degree of their impact on our performance. I mean yes they might pull a quarter or two on the sales line or even in the operating income line a little bit from time to time, but the story at our company because of the development that I mentioned over the last decade or more around Jack Daniel’s and our American whiskies is really where we are placing our emphasis today. But having said that, it doesn’t mean we’re not going to develop brands in the tequila space, which we’re very excited about what’s been going on within the last 18 months or so, but also do the best job that we can to short up brands that are having difficult performances like Finlandia and Canadian Mist.

Your next question comes from Bryan Spillane of Bank of America.

Just a couple of quick ones; first, I think when you went through the components to the revenue billed for 2017 you referenced barrel pricing not being as good as it was last year, and also some reduction in distributor inventory. Can you just give us a sense for how much of a drag you expect that to be in 2017?

Yeah, I’ll take the distributor inventory one specifically, and we’ve estimated somewhere around a nickel, not to be a drag on a reported top line growth. So that’s the answer to that. What I would say with the other pieces of the sales growth, I would focus on the things that were a drag this year. So it won’t be a drag the next year, for instance the Southern Comfort Tuaca drag on our topline which was about 0.5 global travel retail which we think [divorces] the hand that was about one point. So both of those things we don’t expect to repeat again, and so in terms of the barrel sales it’s not material to our top line sales number.

So the message there is that those things are generally washing themselves out. Is that the way we should look at it?

You could get there.

There was also the mention about in the out year, changing over to self-distribution in Spain. Did I catch that?

Yes you did. That’s in 2018, so we’ll have some cost that we’ll start to incur in the latter part of next year, but the actual transition won’t happen until next summer.

Just in terms of order of magnitude I remember when you did this transition in France it caused a lot of noise around the fourth quarter, if I'm remembering this correctly of the year before and then in the year that you actually made the transition too. This order of magnitude, do you think it would have that similar types of effect on the flow of things?

No, it’s definitely not in ‘17 for sure and it’s the size of the market that’s not as largest, it’s brands are either so we don’t expect even when we do transition it will have that kind of magnitude. We will have a transition and we’ll have some small insights but not as significant as what we had in the France.

And we’ll make that more visible as we get closer to it. It’s intended to have similar long run and the impact as it relates to bringing focus to our priority brands in that market. It’s an excellent risky market; it seems from at least a few of our vantage point to be turning the corner as it relates to their economy and their exposable income relative to what they’ve been experiencing in the prior few years. So we think it could be well timed to go and make this move, which is familiar terrain for us. And in each instance they’ve been differently scaled, investments and operations, and as we get closer we’ll get the visibility to it.

And then one last quick one; does the EPS guidance range for 2017 include or include any share repurchases, or would that be - if you did any be above and beyond?

It only would include what’s been done thus far.

Your next question comes from Bill Schmitz of Deutsche Bank.

Can you just talk about the gross margin outlook for next year, because it seems like commodities are still relatively favorable, the currency environment is a little more tame, and it looks like there's going to be a ton of positive mix. Is that a fair assessment?

I’m sorry can you repeat that question?

I was just asking about the gross margin outlook for next year, because it seems like there's a lot of favorability going into 2017.

Yes, we aren’t expecting our gross margin to be flat next year, and the reason why that is we’re not expecting much in the way of pricing and our costs are going to go up modestly there with an offset pricing - offset to mix. So we’re not expecting margin expansion. So some of our cost increases, I mentioned this earlier are starting to come through as we’ve made these investments behind our stepped up capital spending to expand our capacity.

So the moderation in currency is not going to help?

You’re talking about it on a reported basis there?

Yeah, exactly.

Right now what we have forecasted and there are no.

If I look at some of the flavored brands in the US and this is obviously just in the scan channels it seems like some of the sales trends are declining pretty rapidly. Is that kind of what you are seeing as well and maybe what's driving that? Is there a plan to get that moving in the right direction again?

I think there’s been such a dynamic category when you look at any short term period whether that’s a month or a quarter, there could be all kinds of explanations as for why they might be showing big gains or big losses. I think we have the number of entries that are going in there. I know as we sort of explain for our business, we’re currently on the Jack Daniel’s Tennessee Fire up against some significant introductory promotion and trial from last year. So for us that would be the case. I can’t speak to every single competitor, but I suspect that - remember this category is still relatively new, so there’s been a lot of new introductions just in the last two years. I don’t remember thinking about it, I guess as we turned the calendar year this year, how much has it changed, just even since we began with the launch of Tennessee Honey and then how we had sort of methodically been testing Jack Daniel’s Tennessee Fire and how rapidly the category kind of changed just from the test market on Jack Daniel’s Tennessee Fire to the national launch. So it’s the nature of these categories that rapidly develop. We think we are smart to be in it in a way that we’re in it. It’s been very nice business success for us to date, but also placed just as we were referencing on the roles brand can playing it for (inaudible) because it’s very strategic role in some ways defensively but also very offensively as it relates to giving people an opportunity to try whiskey in a way that they might not had before. A straight whiskey can be an acquired taste and we find that this category particularly for our brands has been bringing new consumers and it generates an interest in our other whiskies, the most notably Jack Daniel’s Black Label. So it can play a strategic role as well as being a bonafide business in its own right.

Got you, that's helpful. So, do you think it will start inflecting positive in the sell-through data as we see the data come out?

You’re talking about the category or for our brands or what?

The category and your brands.

I think the category is continuing to grow. Just because there’s been - I mean it’s really concentrated right now around three predominant flavors, but I think the category will continue to grow, but within the category you’ll see trademarks and certain flavors, the more volatile than you would say a normal bourbon or gin or vodka category. But just because of the category is so dynamic right now. As it relates to Jack Daniel’s Tennessee Fire, I think once we cycle through some of these comparisons, the impact won’t be as large. But I still expect, I really do feel like that first year with particularly the brand that’s participating in a category with the flavor of cinnamon. I really do expect that they are in the first sort of half of its national launch, there were absolutely - but just think of it this way, I know there were a bunch of Jack Daniel’s drinkers who were straight whiskey drinkers and were not participants per say in the cinnamon whiskey business who tried it, and just decided it wasn’t for them. Right, they prefer straight whiskey. There were also a fair amount of Fire Ball which was obviously the large volume lower price brand that tried it and then maybe didn’t see fit that they could afford it on every single occasion when they were consuming cinnamon with flavored whiskey. So I think those things they end up being what I call trial influences in those early days of a brand existence in the market place that just don’t get repeated. So till you work through some of that and then also begin the marketing and selling process to introduce the brands to new consumers which the most encouraging thing we’re seeing in our numbers which don’t really get reported a lot in the syndicated data are the results of the on-premise, which kind of started okay I felt. I thought it was going along pretty well, but with the expanded distribution and the momentum that sort of happened out in the market place, the Jack Daniel’s Tennessee Fire brand is doing very, very well right now in the on-premise which it might surprise you because the off-premise is not doing as well against that introductory launch. So in any event it’s the same, it gives us encouragement and tells us we can either continue to sell it and market it and promote it in a way that can make it the choice for more consumer occasions. I mean it just comes down to that, and in knowing it so well that it’s going to be a competitive environment in which you are attempting to do that.

Your next question comes from Mark Swartzberg of Stifel Nicolaus.

Couple of operating income questions, the first is when I look at fiscal ‘16 Jane, you've had this nice reversal. You've gone from another expense item in fiscal ‘15 to another income item. And I think it's about a three point benefit to your total operating income growth. So it's pretty significant, and I don't quite understand what's going on there. So is my math right, and if it is, can you give us some understanding of what is going on there?

You’re talking in the fourth quarter, correct?

Well, it's clear that it's more of an impact in the later part of this fiscal year than in the earlier part of the fiscal year. But I'm really looking at the full year, and just saying you are incentivized on operating income performance, you got to your 8, but 3 of those points came from this reversal from another expense in fiscal ‘15 to another income in fiscal ‘16.

So the largest component of it is FX related. So we had some terribly sizable [launch] this last year, that we had talked about throughout the year that wouldn’t repeat itself this year, coupled with as the year went on, particularly in the fourth quarter of this year. When we got to April we had a nice gain and these are on cash and other current asset and liabilities that aren’t denominated in US currencies. So that FX related is a big of that is probably about half of it due to that, well more than half of its’ actually due to that about two-third is due to that. Then we also had an effort that we wrote them off last years’ fourth quarter that was the low value (inaudible) brand. So it was a write-off that we had in last year that didn’t repeat itself and that’s about the other piece of it. So those are the two pieces.

Got it, and that FX component, how much discretion do you and your team have with that, and to what extent is it just what the market deals you?

What the market deals us? I mean we do hedging, but hedging is largely against another line item in our P&L more against ourselves.

Got it. Okay, and as I think about fiscal ‘17 the 7 to 9, you talked about SG&A. I'm still not quite there, because you're talking about a volume driven revenue performance. You're also going to get this distributor draw down effect. You're also saying gross margin is going to be flat. It all really comes back to SG&A, and perhaps if you have some optimism about this other income line as well. So can you just help me better understand how you think you get 7 to 9, given what's going on from the revenue down to the GM percentage line?

If you step back for a moment on the distributor inventory number, that’s our reported number not an underlying number. So that’s not going to affect the 7% to 9%.

Fair enough. Good point.

That’s probably your biggest piece. But let’s talk about SG&A as I alluded to. We had about a couple of percentage point increase in underlying SG&A this year. We expect about the same next year. So, if we’re going really leverage our prior investments that we’ve made to consumers, Paul alluded to this in his comments as well, the reallocation of resources is that, as I did to us from the folks that were spending the time on Southern Comfort and to walk that we’re reallocating the time and energy to some of the value - to new brands that we bought in to our portfolio as well as other opportunities for that value creation. So you get the leverage (inaudible).

And do you have a view about what will happen with this other income line or do you just kind of see what happens with that line?

The other income line, we don’t forecast the FX per say in that line till and so we won’t. Whatever was in there that related to FX this year won’t repeat itself, other than whatever happens at the stock right as you asked you said earlier we’re at the mercy and we are at the mercy of (inaudible) balance sheet.

We do think just based on where currency rates are today versus last year, we know that currency is net-net and our EPS forecast is a bit of a drag on the overall. So we do forecast that, but we sort of just do our plans at a consistent rate and we report to you while the years goes on and fluctuations occur.

And you can probably tell what's driving my questions is, is the rate of operating income growth for a lot of companies is coming down because of the nature of the marketplace. But you have this incentive comp structure that changed a few years ago. If eight is the magic number and you got there in fiscal ‘16 and fiscal ‘17 has got incremental challenges on the top line, I'm just trying to understand how you're thinking about the cost flexibility you have as a result. And when you think about the distributor intention, how are you thinking about your own promotion rate vis-à-vis either your more expensive brands or some of your lower tier brands. I would think there’s an incremental incentive to promote a little more, given that you do want to improve volumetric performance. So am I thinking about that right or can you help us better - and that’s a US question, I’m just trying to better understand how you’re thinking about that.

I don’t have a higher level discounting our promotional activity plan for next year or when they do it and how they do it.

I think it would be consistent from here. I actually think the thing that will drive more promotion this year that will assist and it might help you with your answer in is the Jack Daniel’s 150th Anniversary. It is significant news for our trade system and we just happened to have a very and we’re fortunate to have such a loyal and affiliated Jack Daniel’s consumer base around the world, and that we can already tell from their early reaction to some of the initial PR that they are very enthusiastic about the things we are planning and will be undertaking which includes new to the market place, special offering and packages in the latter half of the year to which from which we should benefit. But I also think you’ll just see more Jack Daniel’s Black Label on displays because of the event itself. We sometimes call this a gift from the calendar that we’ve lasted this long, and we think that there’s just been an energy and emotion around that we had a bunch of the US distributors in here about three weeks ago and I can tell you their reaction to what’s forthcoming and the expectations that we’re placing on our US system. They didn’t [bark] at them at all.

We have time for one more question. Your final question comes from Tim Ramey of Pivotal Group.

My question was really about triangulating how impactful the 150th anniversary might be. I can see this being quite a gift from the calendar. But I don't know how and you probably are not ready to tell us how big your promotional plans are. But will the average consumer be aware that this is going on, or is this sort of an insider cult anniversary?

No. Look our advertising and promotional budgets aren’t of the scale of some industries, but there will be quite a bit. It will be targeted through our social media means, so that the less you do the efficient, but there will also be mass media. The public relations piece of this which is more significant than in past years will also expose it to larger populations of people. \ The special packaging of course will be more devoted to the retail environment where that’s offered. But there’s a couple of offerings, there’s one that’s a little bit above the price of Jack Daniel’s Black Label on an everyday and then there’s one that’s truly more limited that’s $100 a bottle. So these are unusual events for us because you don’t come along on that much, and so when you treat them like a milestone, and I actually expect - when I sit and look at it, can you get another point of growth out of the Jack Daniel’s Black Label franchise over a year because of an event such as this, I sure think so and I’d like to hope so. So we’ll keep you updated as we go, and some of it will become more visible as the marketing and selling makes its way out in to the environment. But we wouldn’t put forward a forecast that we didn’t have some level of confidence in and we will always do a range because we can’t predict what the world’s going to do out there. But as I’ve said in my comments, I really do feel like what we’re considering, even though the puts and takes are a little bit different, what we are forecasting in our outlook is really a continuation of the good year we think we reported this morning.

Is the $100 offering you mentioned a special product or a special package?

It’d be hard to get. I know you’re going to want one aren’t you?

I will. Put me down.

Yeah, I’ll fix you that. I don’t even know if (inaudible) wants. The others will be much more limited as the market for them is, but nonetheless we think it’s something that honors the 150th anniversary this day. And I actually think, I’ll tell you it’s really important, it’s not only just an important thing for Brown-Forman earnings as we’re discussing here today, but it’s also really important as an opportunity for Jack Daniel’s against a competitive backdrop where there is everything from Craft whiskies and bourbons out there to some of these waves of and trends where big is bad and small is cool and all of that. I just feel like this is a really important opportunity for Jack Daniel’s to tell its authentic story in really, really compelling ways which will go way beyond calendar year 2016. And I think that it is an inflexion point for the brand to remind everybody that it’s one of the most special brands of any kind in this industry and I think across a lot of categories of consumer good, and you all have observed across a lot of companies and a lot of categories. It’s hard out there right now for established brands and we’ve largely been continued to be successful against that backdrop, but this gives us a really unique opportunity to what I’d like to say, to tell our story. And it’s a story that should fit beautifully with why people are choosing American whiskies today, and drinking whiskey generally. So it’s just a great opportunity for the press to get out and tell that.

Thank you Paul and Jane and thanks to all of you for joining us today for Brown-Forman’s fourth quarter earnings call. Please feel free to reach out to us if you have any additional questions and we hope you’ll have a great week. Take care.

Thank you. This concludes your conference. You may now disconnect.