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 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Leanne Cunningham, Senior Vice President, Shareholder Relations Officer. Ma'am, you may begin.

Thank you, Dorothy, and good morning, everyone. I would like to thank each of you for joining us for Brown-Forman's first quarter of fiscal 2020 earnings call. Joining me today are Lawson Whiting, President and 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 2020, in addition to posting presentation materials that Lawson and Jane will walk through momentarily. Both the release and the presentation can be found on our website under the section titled Investors, Events and Presentations. In the press release, we have listed a number of the risk factors that you should consider in conjunction with our forward-looking statements. Other significant risk factors are described in our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures, a reconciliation to the most directly comparable GAAP financial measures and the reason management believes they provide useful information to investors regarding the Company's financial condition and results of operations are contained in the press release and investor presentation. One quick item before I turn the call over to Lawson and Jane. In the interest of time and fairness, we ask that you limit your questions to one per analyst. You are welcome to rejoin the queue and we will take your follow-up questions as time permits. With that, I'd like to turn the call over to Jane.

Thank you, Leanne, and good morning, everyone. Today in our earnings release, we reaffirmed our full year growth outlook for underlying net sales, operating income and earnings per share as our first quarter performance was essentially in line with our expectations. What I'm going to do is walk you through our first quarter results to provide clarity to our performance, given the considerable noise that exist. After I finish my prepared remarks, I'm going to turn the call over to Lawson for some additional color and comments. So, before digging into our Q1 results, I thought it might be helpful to remind you how we break down our performance to better understand; first, the significant drivers of our results; and second, the trends that could affect our business. We have consistently isolated both foreign exchange and distributor inventory shifts to provide an estimate of our underlying performance. When there are other factors that are significantly influencing our underlying performance, we have tried to provide visibility either qualitatively or where possible quantitatively. This quarter was particularly noisy with several factors influencing our underlying performance, most notably the noise introduced by the trade wars and the effects of the retaliatory tariffs, particularly from Europe. While we've discussed this subject for five consecutive quarters, the impact in this year's first quarter is significant and is affecting us in a couple of ways. First, the buy-in from prior year, which led to higher growth in the first quarter of last year; and second, a reduction in margin, which is a result of either lower net pricing to certain markets where we sell to distributors or higher cost in markets where we import and distribute our products directly. Aside from tariffs, other factors can affect comparability, and in this quarter, consumer buying patterns across a…

All right. Excuse me, thank you, Jane, and good morning, everyone. As Jane said and I'll just acknowledge it again, the significant amount of noise in our first quarter results in both sales that hit sales and the cost line, make it a difficult quarter to understand. So, hopefully, heard the comments and provided a lot of clarity in the slides that you have, and I'll provide some more clarity in why we remain confident in our outlook for the full fiscal year. So, let me reiterate a couple of the key points that we've talked about this morning already. The tariffs are the biggest single thing affecting us both as a result of the buy-ins from last year or comparing against the buy-ins from last year, and then also the costs that are flowing through this year. In addition, the timing of certain customer buying patterns, largely in our Travel Retail channel, but also in a number of emerging markets are also compounding some of the volatility. But if you cut through all of that, as Jane has said a couple of times, we really do believe that we're still delivering that mid-single digit sales growth, and importantly, maintaining our consumer momentum. Another reason, I believe that the overall business remains healthy, or you know, healthier maybe than the headlines might read is simply that our takeaway trends have improved in most of our major markets. So if you take a look at the U.S. and the UK and Germany and Poland, some of the other real big markets around the world, our consumer takeaway, which is really the leading indicator is moving in the right direction. So it gives us some confidence that those markets will continue to pull through. Third, we do believe that the top line…

[Operator Instructions] Your first question comes from the line of Amit Sharma with BMO Capital.

Hi. Good morning, everyone. This is Drew Levine on for Amit. Thanks for taking my questions. I just wanted to touch on the top line, just trying to think about the cadence through the rest of the year. Obviously, you have some easier comps in the next quarter, but you also mentioned some timing related issues with customer ordering pattern. So maybe you could kind of give us some help on when those should reverse, and kind of how we should think about the cadence through the rest of the year? Thank you.

Sure. I'll take that. As you said, one of the things that we know is going to happen in our second quarter, which should help our top line quite a bit, is that we'll recycle them against last year's get back of tariffs. So that top -- that -- what you saw in this first quarter will be the opposite, the time we get to our second quarter. And we are further we're past the -- any impact to the sales line from price reductions with tariffs in the handful of markets where we reduced our price to compensate for tariffs. So that will all be behind us in the second quarter. Further, we'll get a benefit from the introduction of Jack Daniel's Tennessee Apple. It's expected to ship in the middle of September, and therefore, hit the shelves plans, is in sometime in October. So we'll get a benefit from that as well in the quarter. So, I expect the Q2 to have a nice top line growth. I think, our back half of the year will continue to benefit from the acceleration in the U.S. business, as well as the Tennessee Apple introduction. So all-in-all, again we'll walk through why we believe the top line of 5% to 7% is still achievable, because we're essentially still online with what we -- in line with what we were expecting in the quarter, and so nothing has changed that outlook for us.

Your next question comes from the line of Judy Hong with Goldman Sachs.

Thank you. Good morning. Just following up on the last question, Jane, you talked about the benefit from Apple launch in the second quarter. I'm just wondering if you have any kind of quantification that you could give us on what you think the impact could be? And then I think more broadly, if you think about the U.S. market, clearly, we've seen some improvements. I think your promotional activities went up in the quarter. So I guess I'm just wondering how you see sort of your strategy to accelerate the U.S. growth both from kind of the promotional activity, whether we should see that continuing as we go into the holidays, or we should start to see more of an innovation-driven growth in the U.S. market going forward?

Let me try that. Again, as we get the impact -- I'm not going to get down to the tens of points here, I think we communicated at year-end that we expected Apple to contribute incrementally to our business this year about 0.5 point of growth, because we're getting it out in the shelves, in the month of October you will start to see some of that come through. It won't be material, but it will help our second quarter. As it relates to your questions in terms of why we believe the U.S. business will continue to accelerate, this is really similar to what we discussed in the -- in our year-end call. You will recall that our takeaway trends there, which have been improving even at the end of April were not reflected in our financial results. We grew last year in the U.S. 3%. So we said, takeaway is a leading indicator. Lawson just mentioned them reminded us of that again. Our takeaway trends are well in the mid-single digits now 5.5% already. Our financial results don't reflect that. So as the year goes on, that will be coming through our financials, so that acceleration will continue to see the year-over-year financial. Further, as you noted, we do plan to continue the incremental spend on high-end Jack Daniel's Tennessee Whiskey. We believe that the incremental moneys that we're putting behind Apple, which actually are beginning in our second quarter will also benefit the whole Jack Daniel's family of brand and the parent company, a parent brand. That combined with incremental promotional activities will continue to accelerate that brand, and we do plan that all throughout the year.

Yes, I mean a couple of things I'd add on top of it too in terms of confidence for the U.S. business as a whole. Some of it is the brands themselves. The Woodford Reserve and Old Forester's that we keep talking about have simply gotten bigger. And they're maintaining the growth rates that they've had for the last couple of years or in some cases even getting better. And so, you get a more meaningful impact from those brands, and you combine that with really not much in the way of a drag from our tail. I mean, we have a couple of brands, obviously, that are not growing, but it's not a very meaningful impact from those brands. And so, I think, that helps the overall Brown-Forman portfolio. I mean, I think, there is some collectively said for the U.S. market, for the U.S. distribution system itself, which has been through a bit of turmoil over the last few years, seems to be settling down now, and everybody is getting their job done. So that I think is a bit of a benefit too. And then we continue to have, what I console, a strong discipline around revenue growth management, trying to manage the business than what we think is the smartest way possible. I think that message has gotten through and people are executing on it. So, things just feel a little bit better.

Your next question comes from the line of Peter Grom with JP Morgan.

So, I just want to get a bit -- how are you? I just want to get a bit more color on the UK distributor change. I know the Company has done a good job of developing in-house distribution over the years, but the UK is a large and important international market that is kind of dealing with a number of its own challenges. So, first, it would be helpful to get more background as to why the agreement wasn't renewed. And then second, realizing the Company is taking mitigation efforts, but will there be a point in the future where you have greater clarity on whether or not these issues could have a financial impact on FY '20 or beyond? Thanks.

Okay. Yes, let me -- I'll start with it a little bit and Jane can finish on some of the impacts on fiscal '20. But let me back up a little bit, just for those that haven't been close to this over the years. We entered -- we with Bacardi entered into, we call it a cost-sharing arrangement back in 2002. So it's a 19 -- 17-year partnership that we've been in there. And we've -- basically what it was, we're sharing the sales team between the two of us and then also sharing some back office support. So we have always held responsibility for our own brands, on the marketing of our own brands, and let the shared sales force do their job. And it's been a long successful relationship. It's -- but both companies agreed that it was just time. It was time to take control of our own business and develop our own portfolio. So as being the second largest market in the world for Brown-Forman, one of the comments I made in my prepared remarks was about how we now have a better chance in developing the rest of the portfolio, which is what we want to do. We really -- when we started the agreement 17 years ago, there were only 13 brands in the -- between both companies 13 brands in the portfolio, and that was largely complementary, as they were focused on rum and we are focused on really on Jack Daniel's. We now have something like 110 brands in that structure. I mean, both companies have grown tremendously over the 17 years, and it's everything from scotch to Irish whiskey to tequila. So there was a lot of overlap that became -- starts to become a problem in terms of how you're going to get priorities, how you're going to set priorities for your team. So we made the decision that the time was just right, and we'll see how trends going. Every time that we have made a distribution change in our past, I think we've had a nice uplift from it. So, you know, we have confidence that we've done this enough times that we won't see a tremendous amount of disruption and life goes on. So, yes, it's going to take us few months to get through all this stuff, but we put a lot of plans in place, and to make sure that it's not a lot of disruption this year, and we hope to be in a better place starting at the beginning of next fiscal.

So just to add on to Lawson's and answer your question as it relates to any financial impact to this year, yes, I would like to step back and say, this is really, unlike a lot of other changes to own distribution companies such as Spain and France, where we actually did take a financial hit in those years where we've moved to, and that was because of the inventory reductions that resulted from the third-party relationship. Well, in this case, we felt that impacts 17 years ago, because when we move from our third-party partner at that time to this cost-sharing arrangement in the inventories owned by us today. So, there will not be a big financial impact as a result of that. Now, we will start to see some start-up expenses sort of think of a more one-time in nature incurred later this fiscal year for putting in systems and hiring and training people. This has all been factored in our outlook. What's interesting about this particular distribution arrangement is, again 17 years ago, when we moved to this cost-sharing, we would have not only had the hit from the inventory reduction, we would have also gotten the benefit at the time from the increased margin from -- margin going away that we used to pay our distributor. So this cost-sharing arrangement we share in SG&A that's already in our P&L today. So you're not going to see incremental costs really going forward, once you get past these start-up expenses that aren't material in nature and that aren't full year outlook. So, hopefully that answers your question.

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

So it sounds like things are very much getting back on track in the U.S., but there are certainly from a macro perspective, a lot of noise in developed Europe, just in terms of kind of the economic health of the region and then some country-specific uncertainty mainly with Brexit. So, Lawson, given your long tenure at the organization, can you just remind us like how this business performs in particular in developed Europe against more challenged macro backdrop? Thanks.

Well, look, I mean the -- some of our largest markets in the world are obviously in developed Europe. This has been a place where we've been able to grow call mid-single digit now for many years. And as we look at the true underlying I mentioned with the consumer takeaway numbers in there, I mean we -- it's why we think we've got confidence that will continue to be able to grow at those kind of rates. Now one of the -- I don't know if you are implying this or not, I mean with the -- is the world of macro political issues and all that kind of stuff starting to hurt our brand is being sort of Americana, and something we at least ask ourselves, but this is not the first time that we've been through. I mean, it's a little bit different this time, but certainly, there's been some anti-American sentiments that have leaked through various markets around the world. But for whatever reason the Jack Daniel's brand seems to be a bit insulated from that. We just haven't seen any negative backlash against some, you know, political issue impair the brand, and in fact, if you rely on the takeaway figures, it's not happening now either. So we'll continue to fight through. It is a difficult environment, it's a difficult pricing environment over there too, but I think our strategy of maintaining consumer momentum, what you've heard us now, saying multiple times, is still the right thing to do for the long-term good of the Company, it's to maintain that momentum. And so I'm happy as long as we continue to get that top line growth. That answer your question?

Your next question comes from the line of Tim Ramey with Pivotal Research.

Thanks so much. I know there is tremendous noise relative to Travel Retail, but that segment sometimes is a canary in the coal mine for overall economic activity in potential slowdown of markets. It sounds like you didn't really see any slowdown that would be attributable to the base business, but I just wanted to ask that. And number two, if Jane could comment on the tax rate outlook for the year?

Sure. I'll talk about the tax rate, first. We didn't get it to a tax rate of around 21% for the full year. We now think it's going to be somewhere between 20% and 20.5%. So slightly better than what we had provided at year-end. As it relates to global Travel Retail in terms of anything that we're seeing there again we got it, so we think we're going to continue to grow mid-single digits. Are there things happening in various airports and channels that happens all the time ebbs and flows, I don't know what that does mean.

Yes. I mean, our growth last year in the first quarter in that channel was enormous 22%. So, I mean -- and I think it gets a little more exaggerated over time as we've gotten bigger in that channel and we do more business Woodford Reserve, single malt scotches can be, I mean, you can see some volatility in the way that they order those. So it's just, it's part of the game playing in there as you're going to live with the choppy order patterns. But, I still, I don't think there's really a change in the outlook. What we've not seen is a decline in travelers and all those kinds of macro things, but that stuff all seems to be pretty solid.

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

I just want to ask a little bit about tequila. So, first was I guess a follow-on on some of the comments that you had made last quarter around pricing receptivity of the market and the competitive environment. So just kind of how that developed, what you've seen, in more recent months and the outlook as we move forward? And then also just it feels at least from my seat in Times Square like there has been a major acceleration in your efforts to market both Herradura and el Jimador in the U.S. or maybe just in New York. So if you could just talk about if that's the case and sort of a bit of why now? Why not two or three years ago? Why not two or three years looking forward? Why is this the right moment to really step up efforts on those two brands domestically? Thanks.

Let me take the pricing part of it.

Yes.

Yes. So tequila category remains amazingly healthy, particularly in the United States. I think if you looked at last year's ad, if you saw the overall category grew 16%, so quite nice. But as it relates to the pricing environment both in Mexico and in the U.S., that's one category where you're seeing in pricing, you're seeing fairly significant pricing in Mexico, and we've taken fairly significant increases as well on our brands. The overall category down there is actually -- volume has actually slowed value to some categories of the Mexican market actually down a bit from a volume perspective, but the overall value improved year-over-year. So, if you move to the U.S., as I said a moment ago, we're actually starting to see pricing across all price points in tequilas. We took some pricing last year on Herradura and el Jimador. We took some significant pricing on our low value in tequila this year, Pepe Lopez, and we continue to expect to take some more surgical increases across a number of markets on Herradura and el Jimador this year. We continue to monitor what's going on in the environment. People are taking, as we talked about, like you said, at year-end more related to that incredible increase in the cost of the agave, which is a cyclical pattern that we discussed and expect that to come back in the next couple of years, but people are past trying to offset these increases as we are. I'll pass the non-pricing.

I mean, I think, to head on the why now a little bit. I mean, obviously, we bought these brands 12 years ago, and it took us a while to sort of get our feet underneath as with tequila. It was a sort of a slow start. We have changed the model for tequila quite a bit on el Jimador in terms of premiumizing in Mexico and continue to really grow in the United States. I mean it's gone from Herradura 150,000 cases to 600 over that period of time. So really good growth there. But Herradura at the higher price point is the brand where we're going to put the most sort of consumer-facing activities out there. And really the category -- the ultra premium tequila category in the U.S., which was always led by some of the big brands like Petrone, but is a very healthy place to be. The consumer demand is very healthy. I think the consumers love the mixability, the authenticity, the -- it's just a hot category. And so, I think it's really taking off and it's some of the things that we would have put down on the rationale for interest back in 2007 coming out from a recession soon thereafter, but a lot of those consumer dynamics are coming true today. So, yes, it's just a hot place to be, and somewhere we want to continue to invest.

And beyond the U.S. and Mexico, it's so early and it's infancy as it relates to the rest of the world. But we're very excited about the opportunities to introduce consumers of tequilas around the rest of the world, that's also in line with Lawson and what he was talking about in our investments and focus on people to premiumize our portfolio beyond Jack Daniel's in those markets outside of the U.S., where we think there is such tremendous opportunity. Those brands are part of it.

Your next question comes from the line of Bryan Spillane with Bank of America.

Got a couple of -- Jane, just couple of clean-up questions and then just one broader question for Lawson. So, just first on the model. I might have missed this earlier, but I think on the last call you talked about gross margins for the year being down 200 basis points. So is that still a good -- still a good figure to work with?

Yes, about that is perfect. Yes.

Okay. And then, I think last year the tariffs were about 100 basis point drag on price mix annualized for the full year. So if this is really the last quarter, I guess, where we'll have that sort of drag year-over-year comparisons, we should see a little bit of a pick-up in price mix as we're modeling out the balance of the year, because we will have kind of lapped all that noise?

The latter part of your question is correct. I want to say that the impact last year was maybe a bit more, 160 basis points, is kind of what I had in mind.

Okay.

So -- but, yes, as we -- once we get past Q2, we have -- we'll have to lap the cost of the tariffs.

Okay, thanks. And then, Lawson, you know with the -- I guess, the emergence of hard sell-through this year in the U.S., and it's sort of a slash, right? I think is it a beer, is it a spirit? I think people -- you know, consumers have a lot of kind of varying viewpoints of kind of what it is. Can you kind of just maybe talk about how you're observing it and whether there are some opportunities that might present themselves for some of your brands, not necessarily a hard sell-through, but is it maybe the format, right, having things in more convenient portable ready to go format, maybe consumers more sort of open to that now than maybe they had been before, at least in the U.S.?

Yes, you know, what, I mean, I think you're right. I wondered that we did this at year-end. We talked about the categories to be in whiskey, tequila and gin, and how we feel good about that. And then the item we saw puts a lot into the format of the next 10 years is going to be RTDs. And we've got about a 16 million case RTD business around the world, seven new mix and 9 million cases of Jack Daniel's. So -- but as the vast majority are outside of the United States. So how are we playing inside the United States. I mean, I'm sure everyone knows, it's from a tax perspective, very punitive against spirits relative to beer or malt. So certainly, that is a disadvantage that the spirits players have relative to these malt brands. But I do think we are -- in fact, there was a commercial on television last night for Truly, where the guy took, it was a bottle of whiskey and it was a generic bottle, just had whiskey across the top of it. And he actually poured it out and went over to his cooler and grabbed is Truly out of the cooler. I don't know if anyone have seen that yet. So, obviously Truly is coming at us a little bit, I'm not -- but I would argue that the whiskey category is a little bit more insulated from this sort of spike and hard seltzer demand. They are -- it's closer in on beer and then likely closer in, I think, on some of the lighter drinks, given that skews female and that skews younger. So you're going to get a lot of -- you're going to start ticking from bottom. So I don't worry too much about our whiskey portfolio and the impact that it might have on there. But we spent a lot of time thinking about how can we play in there and we're running some tests in California right now with Jack Daniel's under a spirit-based model. But it's, given the tax thing that I mentioned, they are expensive. So we feel pretty good about it. It is an interesting phenomenon to watch and see how many people are going after these seltzer drinks. But I'm not going to predict the category direction, but we've seen this before in the RTD world, it's -- a lot of brands go up fast and go down. So we're trying to do it in our own way mostly with the Jack Daniel's brand.

Yes. Right. Thanks for that Lawson, and have a great Labor Day everyone.

You too.

Thank you, Bryan.

Your next question comes from the line of Chris Pitcher with Redburn.

Hi. Thanks very much, a couple of follow-up questions. On the UK business, just to get a little bit more understanding on where you are sourcing the results for your own business. If we look at the development of that joint venture, you've become a much more significant player than your partner was sort of back, when you first set it up. Are you able to just basically carve out your respective costs? And those sales people will be enough to support the business, hence you were saying, there isn't going to be a significant increase in costs, or to date does your existing partner still require the headcount they currently have in Bacardi-Martini? And then just secondly, following on from tequila, one of the other distiller has recently been saying that the agave costs aren't falling off as perhaps as quick as they thought. Can you comment on when you expect your higher agave cost to start to run off, where you've seen some of that being pushed out a bit further? Thanks.

There is a contract in place that goes to a process what's the teams up for the most part. So that -- so yes, we're working through that right now. But on the cost side of things, as Jane already said, we expected to essentially be neutral to where we are today. So...

We already have marketing folks there -- our marketing folks we have. So this is really the sales force, and so, yes, we'll...

We're going to split the teams. Yes.

Yes. So we already have those.

Thanks.

Yes. And then in terms of the agave, really we haven't got -- haven't really changed what we believe will happen. Again, we can go back in terms of when we will start seeing that cycle of pricing of the cost of agave to go down. As we talked at year-end, we've had perhaps some visibility into the number of plantings. And by year -- by calendar year, and that points to really probably late 2021 -- calendar '21, before you start to see that. But there is a lot of dynamics going on. I'll just say that now, in terms of the market with people -- our competitors ourselves actively taken -- have the pricing particularly in Mexico where the margins aren't as attractive as U.S., so they can take that agave and move it toward the United States and support the great growth that's been happening in the category in the U.S. So there's a lot of dynamics that could impact that, but that really nothing has changed this right now, but it could perhaps come a little bit earlier, meaning start to see -- start to come down a little bit earlier, should, some of the volume in the Mexico market where it's low margin, it's being suppressed really not be needed as quite as high as what is expected in the U.S., so it could be some little things like that and move it up a little cleaner. But we've said that in toward the end of calendar '21.

Thanks. And just one final clarification, you've reiterated your earnings per share range. You've got a lower tax rate. Is that helping compensate for some of the adverse currency movements that we're running through particularly inside the UK market, otherwise think why earnings hasn't changed despite the tax?

Yes, if you're looking at -- yes, so foreign exchange for us, I think, we have a couple of things, may be in our full-year forecast, which is fairly consistent, I think with what we started off in the year. But what you're probably asking is, hey, I've seen a lot of movement in the currency just themselves, but we have a hedging program in place and have for a number of years. Of course, it's a 36-month hedging program. So what you're seeing is, some of the underlying results that really being offset by our hedges. That's what you're seeing right now. So that's why it's not expected to be a big deal this year, because we would have hedged these currencies before [math] of the hedging and offsetting the fluctuations you are seeing in the market.

Thank you.

Hopefully that makes sense, because these were laid down some time ago at better rates.

And there are no further questions at this time. I will turn the call back over to Leanne.

Thank you, Lawson and Jane, and thanks to all of you for joining us today for Brown-Forman's first quarter 2020 earnings call. If there are any additional questions, please feel free to reach out and connect with us. Thank you.

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