BF.B (BF.B) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Dorothy and I will be your conference operator today. At this time, I would like to welcome everyone to the Brown-Forman First Quarter Fiscal 2019 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 call over to Jay Koval, Vice President and Director of Investor Relations. Sir, you may begin.

Thanks, Dorothy. And good morning, everyone. I want to thank you for joining us for Brown-Forman's first quarter 2019 earnings call. Joining me today are Paul Varga, our Chairman and Chief Executive Officer; Lawson Whiting, Executive Vice President, Chief Operating Officer and Incoming Chief Executive Officer; and Jane Morreau, Executive Vice President and Chief Financial Officer. This morning's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward-looking statements and the company undertakes no obligation to update any of these statements, whether due to new information, future events or otherwise. This morning, we issued a press release containing our results for the first quarter of fiscal 2019 in addition to posting presentation materials that Jane will walk though momentarily. Both the release and the presentation can be found on our website under the section titled Investors, Events & Presentations. 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 measures are reconciliation to the most directly comparable GAAP financial measures and the reasons that management believes they provide useful information to investors regarding the company's financial conditions and results of operation are contained in the press release and investor presentation. And with that, I'll turn the call over to Paul for some brief comments.

Hey. Good morning, everyone. As you all know from our late May announcement, at the end of the year, I’m going to be retiring and Lawson is going to be taking over as the company's CEO. And with each passing month, as you can imagine, with these types of transition, it’s normal to be handing things over and that’s actually the case with this particular call today. So, I'll be available with Jane and Lawson today for Q&A at the end, but otherwise Lawson and Jane are going to handle the call and I will turn it over to Lawson to take this way.

Yes, great. Well. Thank you, Paul. I’m going to open up today the conversation and add some color around what was a very good quarter, but one that also had several unusual factors impacting the results. Generally, we’re encouraged by the strength of the results and how our brands are performing around the world. Jane is going to walk you through the quarter in a moment to provide you a better understanding of the results, the estimated impact of the tariffs, and our current view of how we are approaching the business environment this year. Putting tariffs aside, we believe our brands remain in great shape and the portfolio is delivering growth that’s consistent with what we saw in fiscal 2018. One of the effects of the tariffs though is that we’re seeing inventories increase at the retail and wholesale level, particularly in Europe, Jane will get into more of the detail on this in just a minute. But even after taking into account the increased inventories’ impact on our sales growth, the core portfolio driven by the Jack Daniel’s family of brands and sustained double-digit growth on Woodford Reserve, on Old Forester, el Jimador and Herradura, all looked pretty good. Our most recent consumer takeaway trends also point to sustained growth, and we believe that our teams around the world are helping us successfully navigate some very unusual times ensuring that we balance short-term pressures with an eye towards our long-term strategic growth plans. In a year where we’re enjoying favorable bottom-line support from tax reform in most of the markets impacted by the tariffs, we decided to invest behind the continued momentum of our brands absorbing much of the short-term tariff costs through delayed price increases. This helps our consumers maintain the affordability of our products against the competitive set that is not subject to these tariffs. While this creates some short-term pressure on gross margins, we believe it’s the right strategic move to make during a period of uncertainty. Best case scenario is that these tariffs or at least those in the EU are rescinded over the coming months. However, the updated financial outlook in our earnings release does not assume this; our outlook assumes that the tariffs remain in place for the remainder of the fiscal year. Switching to a couple other important topics, we have made a number of refinements to our organization over the past several months. In the United States, we have created an emerging brands group to add incremental focus and help accelerate the development of some of our super premium and heavy on-premise brands. These brands include Herradura, Old Forester, Sonoma-Cutrer, Slane Irish Whiskey, GlenDronach and BenRiach single malt scotch brands. Outside of the US, we’re doing something a little bit similar, we’re investing additional resources in several countries to focus on leadership of super-premium whiskey. In particular, we see significant opportunity for Gentleman Jack, Woodford Reserve, GlenDronach, and BenRiach in many of our larger markets in Europe. We remain encouraged about the potential for better portfolio development across these developed markets and are making this a bigger priority for the organization. As we look to invest in other future drivers of growth, we to continue to seed our new brands too such as Jack Daniel’s Tennessee Rye, Woodford Reserve Rye whiskeys, Slane Irish Whiskey, Coopers' bourbon, and a number of other whiskey line extensions. In Q1, we also introduced the new Jack Daniel’s Bottled-in-Bond product that is a Global Travel Retail exclusive, so we’ve lots of innovation that we believe should continue to be an incremental -- should be incremental to our overall growth profile. So fiscal 2019 has certainly had a lot more noise and volatility than normal due to the tariffs, but we believe we are well-positioned to maintain our momentum into the holiday season and beyond. Now I’m going to hand it over to Jane and let her walk you through the quarter and give you some color on our updated guidance for fiscal 2019, so Jane?

Thank you, Lawson, and good morning, everyone. During my comments today, I will reference the slides we posted to our website this morning, help you, walk you through the two main areas of focus of our plan to cover in my prepared remarks. These two areas include; first, a review of our first quarter results; and second, our outlook for fiscal 2019 which you saw this morning we revised given the tariffs that were implemented earlier this summer on American whiskey products across a number of market including the EU, China, Mexico, Canada, and Turkey. So, after I complete my prepared remarks, then we'll open it up to Q&A. So, let me start by reminding you that there’s always noise when looking at results over a short period of time and this quarter was no exception. We had normal inventory fluctuations, foreign exchange, customer buying patterns, timing of product innovation, these are just a few examples. Tariff added yet another level of complexity. So, what I want to do now is spend on some time helping you understand our view of the quarter. So, let's begin with Slide 3. It highlights our first quarter results, reflecting strong top and bottom-line growth on both the reported and underlying basis. We are very pleased with the start to the fiscal year, particularly in light of last year's 6% underlying net sales growth, so delivering net sales growth of 9% during the first quarter is very encouraging. As Lawson mentioned, these results were favorably impacted by an increase in retail and wholesale inventory levels related to retaliatory tariffs, particularly in Europe. We estimate that buy-ins added approximately 2 to 3 points to our underlying net sales growth in the quarter. But after we consider these buy-ins, we believe we delivered underlying net sales growth in the quarter similar to last year's underlying rate of growth. A continuation of the theme we have had over the last six years now, we again delivered operating leverage with underlying operating income growth of 10% despite a significant increase that was partly timing related and operating expenses in the quarter. I will come back to this topic in a moment as well as our outlook. So, let’s move on to Slide 4 and 5, and look at our report -- results on a reported basis. You will see our reported sales growth was affected by 1 point due to the adoption of the new revenue recognition accounting standard we mentioned on our last call and 2 points due to adverse foreign exchange. These two factors were partially offset by a slight increase in distributor inventory levels. Moving on to slides 6 and 7, we will dig into our results by geography. Starting with our largest and most important market, the US delivered 2% growth in underlying net sales against last year’s solid 5% growth. These results were largely in line with our expectations, and as we look at the US business, we believe it is tracking well with blended Nielsen and NABCA value take rate trend fairly stable in the 5% range, roughly consistent with the overall market. Emerging markets delivered very strong 11% underlying net sales growth against last year's first quarter when underlying net sales grew 19%. You can see this on Slide 8 which highlights accelerating two-year stack. We estimate the emerging markets benefitted modestly due to tariff related buy-ins in countries such as Poland and Turkey. It was really in our international developed markets that tariffs related buy-ins had a largest impact on our underlying net sales growth rate. These markets were up 16% against self-comparisons from last year's first quarter when results were flat. We estimate that this year’s 16% growth rate was roughly double the actual trend into developed international due to increased purchases, build inventory levels in anticipation of tariff driven price increases. On top of the 12% underlying net sales growth the travel registered in the first quarter last year, this channel grew underlying net sales 22% this quarter due in part the timing to trade buys but also reflecting continuing increase in travelers. Slide 9 highlights the breadth of strength delivered across our entire brand portfolio with the Jack Daniel’s family of brands underlying net sales of 10%, our premium bourbon including Old Forester and Woodford Reserve up 29% and our tequila brands including Herradura, el Jimador, and New Mix, up 9%. Slides 10 and 11 examine our margins and other growth rates. Gross margins were flattish for the quarter resulting in gross profit growth roughly in line with sales up 9% on an underlying basis. Underlying A&P investment was up 17% in the quarter. So after adjusting for some items including the timing of the new Woodford Reserve Kentucky Derby sponsorship, which began in early May of this year and the opening of the Old Forester Distillery in home place right here in our corporate headquarters, hometown of Louisville, Kentucky in June, A&P is trending up roughly in line with sales. Underlying SG&A grew 5% against a 1% decline in the prior year. SG&A was negatively impacted by higher personnel cost including an early retirement program we offered in the first quarter as well as the timing of other benefits. In total, all of this resulted in a very robust underlying operating income growth of 10%. In addition through the overall business growth, a lower tax rate versus last year’s Q1 lifted our earnings per share growth to 12% or $0.41 for the quarter. So now let's move onto my second topic and share with you our revised outlook for 2019 which are shown on slides 12 and 13. The key message is, we remain confident about our business momentum. This is evidenced by the strong top-line start to the year even after considering the impact of tariff related buy-ins. Our confidence is supported by our brands, consumer takeaway trends around the world which remains strong. For example, the US and Australia value takeaway trends are running up mid-single-digits. In Europe, in many markets our takeaway rate trends are even stronger, up in the high single-digits. And the emerging markets continued to demonstrate the improving trends notwithstanding FX volatility in Turkey and Mexico. As a result, we expect another year of 6% to 7% growth in underlying net sales in fiscal 2019. Now I thought it would be useful to walk you through the last several months of tariff news flows. Remember that tariffs in most countries, particularly the EU, were not a reality until a few weeks after we reported our fourth quarter earnings in early June. Given the possibility of tariff we have already begun our work on mitigation plans earlier in the calendar year, including considering pricing actions and inventory shifts among many others. To paraphrase what Lawson said just a few moments ago, the goal was to balance what's in the best interest of our business and our brands in the short-term considering the impact on consumers and our momentum with a careful eye towards achieving our long-term growth ambitions in the affected markets. We believe news flow around tariffs and retail anticipation of price increases led to some of the buy-ins we experienced during the quarter. So thus far we've implemented price increases in a handful of markets but have weighted in some of the larger markets in EU following positive development with trade partners. Further in a year where we expect tax reform to bolster our bottom-line results, as Lawson also said a moment ago, we saw this as an opportunity to invest behind the continued momentum of our business in these highly competitive markets during a very fluid period. As you would expect we are continuing to monitor and evaluate the situation very closely. So again, our current expectation which is a basis of our guidance that we are sharing with you today, assumes trade talks are not successful at rescinding the tariffs and that they remain in effect throughout the remainder of fiscal 2019. At this point, given the volatility and uncertainty surrounding tariff, are we intend to take price increases in many of the remaining markets as a result of tariffs and are continuing to assess the timing and amount on a market-by-market basis while considering the impacts on our business and our customers. However at this point we do not expect that these price increases will offset the cost of the tariff itself in the interim or the higher cost of goods we had already expected for the full fiscal year. As such, we now expect gross margin to decline over 2 points for the full fiscal year relative to last year. This gross margin pressure will show some degree in the second quarter and more significantly as we move into the second half of this fiscal year. This, along with other puts and takes, including other tariff related mitigation actions, translates into lowering our full year outlook for underlying operating income growth to a range of 4%, 6%, 3 point below our prior range of 7% to 9%. Regarding operating cost in fiscal 2019, we still expect solid reinvestment in our brands development with A&P up roughly in line with sales growth. And we believe that we can continue to drive and leverage our operating income through SG&A even after incorporating some costs with recent organizational changes. We remain on track to deliver the three-year $100 million cost savings initiative through fiscal 2020. This revised operating income growth of 4% to 6% combined with an estimated tax rate in the range of 20% to 21% drives our reported earnings per share outlook of $1.65 to $1.75 representing growth of 11% to 18% over last year's reported EPS of $1.48. This EPS range incorporates our expectation for additional foreign exchange headwinds and slightly higher interest expense for the year. As a sensitivity, EPS over the balance of the year would be impacted by roughly a nickel, if foreign exchange rates move 10% in either direction. In summary, our teams have worked hard over the last year and a half to accelerate our top-line growth back towards its historic rates of growth, and we are confident that we can maintain this momentum despite these trade disputes. We believe that we have the leading portfolio of premium American whiskey in the world and are very well positioned for additional market share gain. Our sales growth is high quality with leading returns and great margins. And given the efficiency of our business model it leads to strong free cash flow generation. We remain committed to growing our global businesses in a disciplined manner and being judicious allocators of capital back into the business and to our shareholders. And with that, that wraps up my prepared remarks. So Dorothy, could you please open up the call for some questions?

[Operator Instructions]. Your first question comes from the line of Brett Cooper with Consumer Edge Research.

I have two questions from my side. First on the emerging brands business that you guys are setting up, I was just wondering if you could kind of give us some color as to where those, I guess the funds to invest in that business are coming from? And then second, we’ve seen this from other companies in terms of this business becomes a vehicle to invest in smaller brands and take stakes and helps them out as they go and then be able to acquire them going forward, so we’d love your perspective on that? And then on the other side on tariffs, if you could give us a sense of what you’re seeing with respect to the pricing environment in the key, I guess EU markets where you’re going have to take price in the coming months or you’re talking about taking price in the coming months? Thanks.

I’ll take the emerging brands and then Jane can talk a little bit about the tariffs and sort of pricing that we’re seeing around the world. The -- yes, I mean, I think you said it largely correctly. A number of our smaller brands need some incremental focus, so we would like to see some incremental focus on there. The cost most of the investment is being reallocated from other parts of the organization as we have continued to -- our SG&A numbers still remain pretty low, so while some of it’s been incremental, a lot of -- most of it is just a reallocation from other brands or other overhead costs that we’ve been able to pull out and put into the, call it, a more front-facing part of the organization, so we remain pretty optimistic about it. I think there’s another part of the argument too that may not be obvious at first glance is people that get to focus on these smaller brands then don’t have to focus on Jack Daniel’s, and the folks that are working on Jack Daniel’s don’t have to focus on [indiscernible]. I’m sorry, just a broader emerging brands portfolio. We have found it challenging when you’ve got a brand family as big as the Jack Daniel’s family is to ask a sales guy to go then and focus on a new brand. And that -- we don’t want that distraction or that lack of focus on what is the biggest part of our portfolio right now, so it goes both ways and we’re pretty optimistic as the group is just getting put in place right now, so we’ll have to see how the results unfold over the next few months and quarters, but we remain pretty optimistic about it.

Yes, hi, Brett. Your question as it relates to the pricing environment that we see around the world, I would say it remains very intense and very competitively intense, and I think one of the reasons why we have made the decision -- we have made thus far not only because we have some positive news coming out with the trade [ph] discussion potentially happening, not only we’ve got some news earlier this week on Mexico and the US, but at the EU and in US, and hope that they will reach successful completion, so we have determined that we’re going to not take price increases right away in many of these markets. Because of this intense competitive pressure and not only that our other competitors do not have the same pressures that we have as it relates to this, so we do intend on taking things later in the year but not at this point in time, and so we’ve not seen a whole lot of pricing improvements from what we discussed with you in early June.

Your next question comes from the line of Vivien Azer with Cowen.

I was hoping that you could touch on the US, clearly the comps were tough and we can see that in the NABCA data, but underpinning the 2% underlying sales growth, can you talk about some of the trends by brand please?

Yes, I will start it at least. Yes, so I mean the comps were tough and that had -- that definitely had an impact on -- at least on the shorter-term results. I would say overall, as a company, we continue to trend really in the US in that mid-single-digit range sort of in the 4.5% or 5% that's what the blended takeaway figures would indicate. And that's been pretty consistent now for -- actually probably for a couple of years. So, pretty good overall results, and maybe just a notch above TDS on a long-term basis is clearly one of our goals. It’s being driven -- a lot of it’s being driven by -- while Jack Daniel’s Tennessee whiskey maybe a couple points below that, the Jack Daniel’s family in aggregate is just sort of around the 4% range in consumer takeaways, 4% to 5% also. So, we feel pretty good about that and then we’ve got the bourbons and tequilas led by Woodford Reserve is the biggest of them, but the bourbon and tequila business remains very, very strong, well in the double-digit range, and clearly lifting the portfolio in aggregate. And if you went back five years or 10 years, our rest of the portfolio was a big drag in the United States, and we were clearly being led by just the Jack Daniel’s family or relying on the Jack Daniel’s family for our growth. And thankfully that has changed over the last few years where the rest of our portfolio is sort of mid-to-high single-digit growth rates in lifting the overall profile. So it's a good story there.

And just building on, you will also see our tequila is doing very well also in the US growing in the teens. So that’s another piece of our portfolio that had for a number of years not really hit its stride in the last several years, we think that we’re at that point -- tipping point if you will for our tequila brands and they continue to perform very well in the US. Further, I would point out, Lawson mentioned this, but I’d also say we’re going into our eighth year of Honey in the marketplace and it’s still growing strongly in the US and our fourth year for Fire. And we continue to see new consumers coming into the franchise from both Honey -- via Honey and Fire and then both continue to grow very well.

Let me add to it, I think just sort of piggybacking on Jane’s point about Honey, I think beyond just the quarter results, if you were to think about just what’s happening in the US, I mean I consider that the US distilled spirits market continues to progress very much in line with the way it has been performing for many years now. And then when we look at it I mean just using sort of the NABCA data, the two influences that I think that could help people to understand the dynamics of the market as it relates to us are, particularly if you zone in on the Jack Daniel’s Black Label brand which is continuing I think to hold up pretty good at least for the last 12 months to my eye on the NABCA dollar sales it’s 2.5% to 3%, slightly lower deceleration of the growth versus 12 months ago but still in that 2.5% to 3% range and the family still at about 4% range on value. And all of this at an interesting time where we're seeing some of the key larger brand competitors in the bourbon category. If you just look at their volume trends versus their value trends, there is clearly some negative price mix going on which would indicate people are just putting lower prices out in the marketplace sometimes. And those are things that you have to deal with, particularly in the competitive market. And I think the other thing is that last year's elevation of a number of the Jack Daniel's family of brands such as -- whether it was Gentleman Jack or Tennessee Fire or Tennessee Honey, the introduction of Rye, all of these in a small way, I think have to take away on occasion or two from Jack Daniel’s Black Label. So, one thing is we watch really closely to see how Black Label is holding up in the environment against where at least this time there could be both a little bit of pressure from cannibalization and a little bit of pressure from some lower prices from competition. And my view is, it’s holding up very well.

Your next question comes from the line of Amit Sharma with BMO Capital Markets.

Hi, there. This is Drew Levine on for Amit. Thank for taking the question. I just wanted to jump back to -- you talked about the price mix maybe under pressure. I know you talked earlier about maybe taking some pricing on tequilas and American whiskey. So, could you just talk about the pricing environment in the U.S. if you put any pricing through so far and kind of the outlook for the year in the U.S. in regards to price-mix?

Well, Paul largely hit on the Jack Daniel's side a bit. We are not going backwards on the way of Jack Daniel's Tennessee pricing while some of our competitors are. So, we are going to hold firm on that. And while I think it will be very low single digit pricing on the brands, we certainly want to keep it moving in that direction. Tequilas are a little bit of a different story where it’s also sort of low to mid single digit pricing growth on those brands. We will see how the competition sort of lays out this fiscal year, as you sort of mentioned that and we have talked about in the past. But, the cost environment is particularly challenging right now in the world of tequila. And so, many of the brands are going up and we consider that a good thing. So, bourbons and the rest of Woodford Reserve and Old Forester and those are largely kind of flattish on the pricing environment, although they are getting help from mix. We continue to do innovation on both Old Forester and Woodford and higher price points and that helps to lift up the overall portfolio.

One thing to observe as you continue to look at the U.S. market as it relates, there is the price piece and there is the mix piece, which I think is enormously important as it definitely applies to our Old Forester and Woodford Reserve lens where the higher end expressions are growing so rapidly, obviously in some cases from very small basis. The other thing that I think is going to affect the marketplace the U.S. for some time, it's really been interesting given how strongly, for example, a brand like Tito's has performed now for many years. It's amazing to see how low the growth of the vodka category is generally. And you can imagine that it would be very hard to get pricing in vodka right now, across the board. And as a result, I mean my view is that bourbon in terms of dollar share relative to the largest category in the country, which would be vodka, you would expect to see us from a mix standpoint to continue to grow, I mean really continue to grow share over. And we’ve used this statistic quite often over the summer, but we are still a long way from the volumetric high of the American whiskey category which was reached in 1970. We obviously got many, many years of -- consecutive years of growth in order to get back to even that volumetric level and that wouldn’t even touch the per capita consumption levels at the time. So, there is a lot of excitement still about the U.S. market, even though it does remain competitive because people are so excited about it.

Your next question comes from the line of Bill Chappell with SunTrust.

Sorry, if I don't fully understand the guidance, but it seems like as you are looking at kind of the slight lowering of operating income guidance this year that $0.06 to EPS that really doesn’t have a whole lot to do with tariffs, it has -- as lot of that planning been done in place when you put the initial guidance. And this is just I guess an intra-quarter decision to step up SG&A in terms of focusing on international. And so, I guess the first question, is that correct. And then second, why would that be more focused outside of the U.S.? It seems like there's -- it's certainly in kind of the media and marketing bigger, more competitive activity in the U.S. and didn’t know if that was needed instead.

So, let me take the first part of your question. In terms of our guidance that we gave today versus the guidance we gave back in June, they are different. The guidance we gave in June, explicitly did not assume any tariffs. Nothing had happened at that time. So, the fact that we have revised our guidance this time about a dime, we said that about 6 and 7 [ph] net tariff related net of mitigation actions that we have in place plus the tariff costs themselves and things that we’re doing and then the other $0.04 full expenses largely at foreign exchange. So, it is largely tariff and then of course the market -- that foreign exchange we always update that each time depending on what's happened in the marketplace.

And most of the tariffs is in cost absorption versus volumetric decline.

Okay, yes, I guess, I would have thought it would have been a bigger impact on gross margin, it wouldn’t affect the SG&A. So, I guess that's what….

Yes. So, SG&A, and let me make sure I understand where you are going on SG&A. What I said on SG&A I think early on at yearend, we said it was flattish; now, we're seeing a slight increase. So, again, where the tariffs are going to hit, they are going to hit gross margins as I alluded to in my script here a few moments ago. We did revise and have provided guidance that we expect our gross margins which we thought were going to be similar to last year's hurt, if you will, or decline in margins, we actually expect it to be a little bit worse if assuming tariff remains for the whole year because the cost of the tariff will go in cost of goods. Yes, we will offset some of the pricing later in the year, at least that’s the plan currently. So, it’s happening in the gross margin line.

And then, in terms of just the investment in the U.S. versus international?

In terms of advertising investments?

Yes. I mean, do you feel like you have enough in the U.S. or you are seeing increased competitive pressures there?

Yes. I mean, clearly the first quarter was -- talked about all of the investments we're doing in the U.S., whether it was opening of our new distillery in homeplace here in town, Old Forester or the Woodford Reserve sponsorship with the Derby, those were all incremental new investments for us in U.S. and in the category of bourbon, which is fast growing. So, I think we feel good that we’re investing appropriately in the U.S.

I mean, I think to add a little more color around it. We’ve been investing heavier in advertising than we have in SG&A now for several years, as we’ve reallocated within our operating expense mix. So, we feel pretty good that it’s in an appropriate level I guess. And you should expect increases, I think Jane mentioned it, of sort of commensurate with sales growth. And that plan has been around for a while, and I think we’ll continue that going forward.

I like the explanation Lawson provides on this, even though it leads with the topic sort of branded and as emerging brands. But this heightened focus by dividing and conquering people and brands within our Company, I think can be a benefit. But that initiative comes in the form of an investment. I mean, I call that an investment, investment in people. And I feel like the level are about right. But as you can imagine, we’re regularly, as you look at the competitive figure, always tinkering with everything from what’s just supporting and when you support it during the year. I think we’re regularly thinking about and trying to improve the creative messaging around our brands, those kinds of things. Those are ongoing exercises. I think they’ve been sharpened in the last few years. But, I think that there in will be the difference, creating the appeal with what the investment does, much more so than do we have today the right level of investment versus some individual competitor.

Your next question comes from the line of Lauren Lieberman with Barclays.

So, emerging markets were really strong this quarter, obviously. I think it’s been an area of concern for a lot of investors in general, sort of slowdown in emerging markets, Turkey possible contagion and so on. So, could you just talk a little bit about sort of overall macros and sort momentum that you’re seeing in your business and why you believe, if you do that the momentum you’re seeing now can kind of continue, even if the environment continues to be volatile? Thank you.

Yes. I’ll take it. I mean, as I know you all realize, our basket of emerging markets is very different than many of the competitors that we have, and in fact, many of the broader consumer products companies, sources of growth in emerging markets. So, markets like Brazil and Mexico and Poland and even Eastern Europe which is a very low growth in aggregate for many, many companies, continues to be a really nice source of growth for us. And we’re delivering overall aggregate emerging markets growth that’s pretty consistent with what we’ve seen over the last year, I think, and we remain pretty optimistic about it. So, in particular, I’d highlight a market like Brazil, which is obviously in the media and has all sorts of sort of macro problems down there. We continue to absolutely fly in that market. And it’s gotten to be quite sizable now. So, it is a very strong contributor and somewhere we’re pretty optimistic that we’ve got a long runway in front of us.

Yes. Even though, I mean, the tariffs are the main headline of -- and appropriately the thing we’re commenting quite a bit in this particular quarter, I think the underappreciated bit of performance for the first quarter was the emerging markets. And particularly against -- it was highlighted, I think in the deck that Jane referenced in her comments about how strong that is compared to last year, which is strong as well. So, the two years stack on emerging markets was good. I would take everybody back, those of you who covered us for a while, you’ll remember the meeting we had, investor meeting in New York a couple years ago where we highlighted the long runway for growth for the Company. And a major part of that, you all, is how much we are still a relatively early stage development in these emerging markets. And you would anticipate that we -- as long as they’re receptive of the type of work we do to build the brands and in this case it’s largely around Jack Daniel’s brand -- as long as they’re receptive, and I don't have crippling economies or financial crises, et cetera, we think those markets should be growing double-digit. They’re the types of markets, based on stage development and the appeal that we see there for our brands that should give the Company a boost on its growth rate for some time to come. So, I know because we’re very big U.S. Company and Jack Daniel's is so large, a lot of the focus I think correctly in some cases goes the conversation around Jack Daniel’s performance in the United States. It really is an amazing story of where Jack Daniel’s has developed around the world and within it, how much room there remains for growth in these emerging markets.

[Operator Instructions]. Your final question comes from the line of Judy Hong with Goldman Sachs.

So, I guess, I wanted to actually go back to the tariff. And your comment about sort of not taking the full pricing to offset the tariff impact, is that more of a function of the development that could potentially be positive in terms of rescinding the tariffs or is it more related to the competitive environment? I asked this because if to the extent that the tariffs do remain in place, I’m just wondering how much pricing you’re expecting to take to offset more of the tariff impact and how we should think about the price elasticity in the marketplace?

Yes. So, I think it’s more -- it is as I said, I think it’s due to two things. One, we were thinking about the decision or some of the positive news we’ve heard over the airwaves, if you will, as it relates to some of the talks that have been had. But that didn’t -- has influenced us a bit. We also know we’re going into the critical O&D period. And if these happen to get resolved during that period of time, we defiantly don’t want to have our consumers or our partners in the trade, if you will on a roller coaster ride. And third of all, we’re trying to weigh the momentum of our business, our consumers, the affordability the comparative environment that faces it. So, all those things came into play. If you’re asking how you should think about it, I think this at this point in time, I assume that we have taken, as I said earlier, a handful of price increases in some market. We’re going to continue to look to take price increase in many more markets later in this fiscal year. But if we get to the O&D period, clearly the impact on any elasticity or anything like that would not be that great. But you would probably have some givebacks. As we talked about, we had a lot of -- two to three points of top line benefit from buy-ins in the first quarter. And so, we would assume that some of that would be given back later in the year. The impact on the consumer will depend upon market by market what we decide to do, where we decide to do, what competitors do. You can imagine all the different scenarios that could come about as a result of that.

Another way to think about it, if we had very low margins or low returns and these things occurred, I mean you would have probably less of an alternative -- you would not have as good an alternative as I think Brown-Forman has to be patient with these with these with the hopes that they could work themselves out over the fall months. In some ways, yes, we are buying time to see if these things can be worked out. And in some ways, you might view that as an investment in consumer momentum. I mean, consumer momentum takes all kinds of forms in terms of what propels it. And because these are so unique, just one category - and it just so happens that outside of the United States, the size of the American whiskey and bourbon category is driven primarily by Jack Daniel's that a lot of the competitive reference points outside the United States move you immediately into scotch whiskey. So, I just think on balance, we feel like this is the right posture right now. I really do feel like it’s the right posture until we can see how things unfold over the next 4, 8 12 weeks and stay in tune with it and adapt this, and in the meantime, do the work we normally do to build our brands. But, I think the updated forecast tries to capture the impact of that. It captures both of it. And I'm sure, we'll have some form of update midyear because there will be new -- some just new information surrounding all this.

And then just to follow up on the inventory impact. So, the underlying sales growth guidance is 6% to 7% for the year, assumes that all of the benefit you got in Q1 does reverse in the back half of the year. So, you basically have, in terms of the underlying sales guidance, no benefit from the inventory build that was during Q1?

Yes. I think at this point in time, we think that’s a prudent, reasonable approach to assume.

It will be -- just from a quarter to quarter, this year, it will be very abnormal for -- just because of all this, the trading patterns and we will do our best to explain what we think. I think, it’s really interesting. I mean for -- we are one of the few companies that tries to get you down to inventory shift with the precision we do even between our reported and underlying. In this case, I thought it was helpful for our teams to go evaluate what they thought, even within the underlying, might be fitting in terms of some temporary inventory build even sort of retail. So, we will try to keep track of that. That one is a of course a harder estimate for us because it’s a step away. But, we will try to keep you all abreast of that as we monitor it ourselves.

Perfect, all right. Well, thank you Lawson, Paul, Jane for your comments and Q&A today. And thanks to all of you for joining us for our first quarter call. Just a heads up for those of you who like to plan your travel far in advance. We will be hosting our biannual investor day on afternoon, December 12th in New York. More details should follow in the coming months. But in the meantime, please feel free to reach out to us if you have any additional questions. And have a great Labor Day weekend. Take care.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.