Ladies and gentlemen, thank you for standing by, and welcome to the Brown-Forman Third Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Leanne Cunningham, Senior Vice President, Shareholder Relations Officer. Thank you. You may begin.

Thank you, Dorothy, and good morning, everyone. I would like to thank each of you for joining us for today's Brown-Forman's third quarter 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 released a press release containing our results for the third quarter fiscal 2020, in addition to posting presentation materials that Jane will walk through 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 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 delivering certain non-GAAP financial measures. These measures, a reconciliation to the most directly comparable GAAP financial measures, and the reasons 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 last note this morning, the state of Kentucky will be conducting a statewide tornado drill at 10:07 this morning. We are not certain if this will create any disruption to our call. If necessarily, we may need to mute the line for a moment and we apologize in advance for any potential disruption. With that, I would like to turn the call over to Lawson.

All right. Thank you, Leanne, and good morning, everyone. Before I comment on our year-to-date performance, I do want to take just a short moment to recognize what a special time it is to be part of Brown-Forman as we enter our a 150th year. Back in 1870, our founding brand, Old Forester was first introduced into the U.S. Today, we now have a portfolio of over 40 premium and super-premium brands sold around the globe. Since our founding, the Company's been agile and resilient in navigating through many challenges, including things like prohibition, world wars, and economic recessions just to name a few historical events. Today, we find ourselves in mid-trade wars resulting in tariffs that are weighing on our industry, geopolitical events that are disrupting many countries around the world, and now a virus that is threatening the global economy. While the headwinds feel pretty strong right now, Brown-Forman has continued to grow throughout our history and remains a strong, healthy company supported by the commitment of our long-term shareholders and importantly, our dedicated and talented employees around the world. So, now, on to the performance of the Company. Jane's going to take us through the Company's financial results in a moment. But, first, I'd like to provide an update on our progress toward our strategic ambitions. As you've heard me discuss on previous calls, we continue to evaluate our performance, both on a geographic and through a portfolio lens. From a geographic perspective, 18 of our 20 largest markets are delivering underlying net sales growth this year, highlighting the strong benefits of our geographic diversification. As a side note, this does not include Travel Retail, which actually is in decline and we can talk a little bit about later. However, the growth rates of plus 3% underlying…

Thank you, Lawson, and good morning,, everyone. Over the next several of minutes or so, I plan on walking you through two items. First, our third quarter and year-to-date results, which as Lawson just said a moment ago, are a bit lower than we had expected at this point in the year, driven largely by performance in some of our international markets. I'll discuss that in more detail, as I go throughout my presentation this morning. And then, secondly, I'm going to review our full year outlook, which we revised to reflect two things: One, a tempered expectations in some of our international markets; and two, the increasingly uncertain global economic outlook, which includes an estimate of the effect the coronavirus may have on our business globally, including our global Travel Retail business in Asia. So, let's begin with our actual performance. Our underlying net sales grew 3% in the quarter, lower than we had anticipated, but consistent with the Company's first half results. Second, while the impact of retaliatory tariffs, particularly from Europe, will continue to weigh on our margins and profits for the full year, the year-over-year effect began to ease a bit in our quarter three. In fact, our underlying gross profit grew for the quarter for the first time, since the cost of tariffs began affecting us up 3%, consistent with our top-line. The cycling of tariffs also helped boost our underlying operating income growth in the quarter, up 5%. Consistent with our third quarter performance, our year-to-date underlying net sales grew 3% on top of 5% growth in the same period last year, but again, lower than we had anticipated we would be, at this point in our fiscal year. So, breaking down our underlying net sales performance by geography, just there is a bit…

[Operator Instructions] Your first question comes from the line of Peter Grom with JP Morgan.

Hey. Good morning, everyone. So, maybe this is a bit early, but I would imagine you're starting your planning for next year. And it would be helpful to try and understand how you are thinking about the impacts of the virus and weaker international growth beyond just next quarter? I guess, what I'm really trying to get at is, if top line growth remains below historical levels, inputs costs are still a headwind and your tax rate moves back into the 20% or 21% range, what are the levers you can pull in order to deliver earnings growth in fiscal '21? Thanks.

Look, I mean, I think -- obviously, we're not giving out guidance for next fiscal year, but I think as you look at our business in general, we feel pretty confident on the U.S. business these days as it is sort of above TDS, and I would expect that to continue. As I said in my prepared remarks, even with Jack at sort of subdued rates, we're able to grow above that TDS number. And believe me, there are a lot of plans and there's a lot of action, a lot of activity going around, to try to -- to improve the gross rates on Tennessee Whiskey. And if that happens, we're even, I would call it, more confident in the U.S. market. So, that feels pretty good. The developed international side of things is subdued, but it largely -- as Jane said, it's largely the UK. There are other markets that are not kicking on all cylinders these days. But, I think we can get that -- we'll get that category of markets, the developed international back into what its traditional range would be, mid to even a little bit better than mid single digit growth. But I'll pick mid single digits out of that part of the world. And emerging is the volatile one. It's always in the volatile one. It's been growing at a rate above our company average now for a number of years. It has slowed this year, as we said, largely because of Mexico. Asia's the wildcard in this. And I don't know how to tell you that we're trying to think about what is the growth rate for that part of the world going to be. And right now it's solid. But, we're going to be a little more subdued. And I think at the end of the day, we're going to be -- we use the word around here, agility a lot. You're going to have to be agile next year because, while things do have a tough outlook, the comps are going to be a little bit easier next year. And I could see some bouncebacks and some other things that make it -- that turn it into a pretty good year. So, I'm not directly answering your question, but we have not provided that guidance yet. But, I think, we generally feel pretty good on the top line that the things will return to what I call a more normalized growth rate.

Just to build on what Lawson said, a little bit more on the developed international. He was hitting on the UK. And as I said in my prepared remarks this morning, what's happened in the UK we believe is at least some short term disruption. So, if you get that short term disruption behind us next year, just having that market back to a state of stability, we’ll get us back more to our historic growth in that part of the world. So that will help. As Lawson said that it is the emerging markets. So, we've got a lot of pockets of growth and we're very excited about a number of those. But, as you know, emerging markets always have been volatile in everybody's business, but there are tremendous opportunities long-term. I see this all is really the short term right now.

Okay. That's helpful. Just a quick follow-up, I just -- on your global Travel Retail guidance. I think, you mentioned earlier that you expect full year to be in line with year-to-date, which kind of implies minus 3% for Q4. And it just strikes me meaningfully better than what we've seen from your peers, any color on how you arrived at that would be pretty helpful. Thanks.

I'm sorry. It's better than what our peers, is that what you're saying?

Yes. I mean…

Yes. I mean, I think, our business is smaller percentage wise than them. They have more concentration in Asia than we do. And so, our concentration of our Travel Retail business is more in Europe. So, they probably are being affected a bit more than we are from the Asia part of the world. With that being said, we had, as we've talked about the Travel Retail business before, it's quite lumpy and volatile anyhow from quarter-to-quarter and when people purchase. And so, we had a strong growth at the beginning of last year, first half, and now we're cycling against some softer growth in the second half of Travel Retail. We still do expect some improvement, but that'd be offset by this coronavirus on our business and the global -- just people less traveling internationally. So, we -- but that's what I would answer your question in terms of why others are different than our smaller and it’s where they’re concentrated.

Your next question comes from the line of Laura (sic) [Lauren] Lieberman with Barclays.

I was hoping we could talk a little bit more about the UK. I mean, of course, you gave us some high level commentary. But, I guess, one, just more color on what's going on with cash and carry. I feel like last quarter it sounded like it was limited to a few customers and more of maybe a retail than a consumer dynamic. So, just curious how that sort of evolved? And then secondly, kind of changes in the promotional strategy, impact on the route-to-market transition, these I think were planned and embedded in guidance, and those things you've done in other markets previously. So, anything you could share and kind of like what's gone wrong or differently, specifically, again, because this is something you've done very successfully in other markets before with arguably less disruption? Thanks.

Yes. So, let me start. I think, Lawson will chime in here too. The cash and carry is limited to a couple of customer -- one customer really. And so, that business -- and we talked about last time, so that really hasn't changed from our third quarter what we were referring to what was going on there. We just have a more precise thing, cash and carry this time. The increased promotional strategy, you are right, it was planned. And it's something that we're doing as we get ready to own our own distribution come May. And that's why when we look ahead to this market and the optimism we have going forward versus what we have had this year, we will be in control of a lot of our decisions of working with the grocers and determining the pricing strategies. And right now, that doesn't always happen. And so, that's important for us as we go forward. Just a reminder, why we made this decision to go on our own route-to-consumer, in the UK? This relationship has probably served us quite well. It started in 2002, served both companies quite well, but we had very limited portfolio at that time. I don't know, 10, 12, 15 brands. And now, combined, we have over 100 brands. So, you can only imagine the lack of attention, focus prioritization, understanding the consumer and focus on our own portfolio. And so, we haven't transitioned yet. That again is May 1. But, we believe the focus, the prioritization, the understanding the consumers, the more direct contact with our customers, if you will, will allow us to not only accelerate our business there but get our rest of our portfolio grown quite nicely.

Yes. This one's kind of a different animal this time. This is a cost-sharing arrangement, as opposed to what we use typically with more agency type relationships. And so, you're not going to see a big margin change. You're not going to see -- I mean, our -- this has been one of the most successful markets in the world for Brown-Forman for literally a long time. But, I think both companies would admit, it's just time. We've -- as Jane said, our portfolios got bigger, the conflicts got bigger, and we've moved on. So, on the pricing or the promotional question you asked a little bit earlier, I mean, the -- if we're totally honest, the amount of promotion in the UK market got too big. And so, we're trying to reduce that a little bit and get some pricing up. And we're working on that slowly, it's not a -- I mean, you have to do it slowly with the European retail world. But, we're paying the price necessarily. We're just seeing short term disruption with some of our customers as we do a little bit less promoting. We do think in the long run, it's the smart thing to do. And we'll -- we're taking our medicine now for what we think can be a great outlook going forward.

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

Just to follow up on the topline, please. Jane, you guys were pretty specific about the coronavirus impact on Travel Retail and what you're seeing in February, specifically in Asia Pacific. But, as we think about the revision to the full-year guidance, are you already or also baking in some weakness in newer markets where the coronavirus is starting to emerge, particularly developed Europe, like Italy and France? Thanks.

Thank you, Vivien. I'm glad you asked the question. But, let me just pause for a minute. We want to be super clear here with what we have in our forecast. So, again, if you looked at what we did, it took our overall forecast down as you saw, reduced our underlying -- was two factors. First, it was the tempering of the growth and contribution from some of our international markets, again reflecting some sort of short-term disruptions as well, these macroeconomic and geopolitical challenges. So, when we look at our base business, but we would estimate now that our base business is doing -- is probably growing 3.5% to 4.5% range. It is therefore a couple of points less than what our expectations were just three months ago. But, the second factor that we built into our forecast, and this is what you are asking specifically about, Vivien, that led to our reduction in our top-line outlook, and again not surprising is just unpredictability and uncertainty surrounding the coronavirus and what it may have on our business globally. So, we've estimated at this point, there is about a point drag, including those markets that are currently affected. So, to your point directly, the Asian markets, including China, other parts of Asia, Travel Retail, and we have in -- Italy in there. So, collectively, that's about 8% of our business. And as I said earlier, yes, we've already seen areas -- many of these areas already affected in our February results. But that being said, we also have in that 1%, some additional downside impact. And we don't know, none of us know if that's going to be enough, too much. We’re learning daily as this situation unfolds. So, we're really only looking at our fourth quarter, we haven't tried estimating downstream, secondary effects on anything beyond the demand we see and then an expectation for perhaps it spread in some other markets. We don't know about the economy and the consumer confidence and sentiment and how they may linger into our first quarter in summer months. So, we'll obviously come back in June with more guidance on that for next year, so. Vivien, I went into a little bit more detail, but I thought it was important to phrase it for you or put in perspective in terms of where we are in this -- why we did reduce our guidance into the two buckets.

Your next question comes from the line of Kevin Grundy with Jefferies.

Two very quick ones for me. Just a clarification on the guidance and just to kind of see where you are for fiscal 4Q. So, the guidance is now low single digits for the year. My thinking is, you're probably toward the higher end of low single digits, and that is closer to 3% as opposed to 1%, with the 3% for the year implying something sort of similar for 4Q, particularly given the strength of the U.S. But, if you could just confirm that that would be helpful, just to kind of see where you are with that. And then, for Lawson, just an update on the U.S. pricing environment. As we look at the Nielsen data, the price mix remains negative and has been that way, although albeit moderating somewhat. Can you just give us a little bit of an update there in terms of what you're seeing in the competitive environment, and then your expectations going forward from a pricing perspective to help drive some gross margin improvement? So, thank you for both of those.

Kevin, just as I just mentioned a moment ago, our base business guidance would be in the probably -- in the 3.5% to 4.5% range. And we've got about a point drag from the coronavirus. So, whether it's going to be worse or not than that, we don't know. That's how we got to our low single-digit growth.

And I can take a shot at the pricing thing. So, look, I mean, as we've talked about now on numerous calls, the pricing environment has been challenging in the U.S. for a number of years now, really, really for the last -- I'll say last decade it's been low single digits. Some of that -- I mean, as most companies do, we take a hard look at what our competitors are doing and where we are relative to that and try to pick our spots. And, we've done that in the last -- last year, we have gotten above and the competitors are going down and that hurt our volumes a bit. And so, at the beginning of this fiscal year, we got a little more aggressive and our volumes have reacted. Our volume growth this year is as good as it's been -- how many years? It's a number of years. So, I think, if we -- that's a good thing and that means consumers are still taking the product away, and we feel pretty good about that. But it's cost us on the value line, and we want to get that back in balance again. So, the idea for next year is certainly to have it more in balance. And that's something that we're working on very hard. And actually, I think you'll start to see some of the results of that even in the fourth quarter, which will improve our mix. When you were commenting about the mix, was that a Jack Daniel's question or the full portfolio?

That was a Black Label question that I'm saying. I mean, overall, the higher growth of the more premium products is driving more favorable price mix overall. But, I was specifically just looking at Black Label where the trend there from a price mix perspective remains negative.

Yes. That will start to improve here in Q4.

Very good. Thank you. Good luck.

Your next question comes from the line of Sean King with UBS.

I have a question, just drilling in a little bit on the Travel Retail. Is it safe to assume that that business is a I guess a lower gross margin but a higher operating margin than I guess the base business? And I guess, if at all, is that something to keep in mind?

Yes. I'm sorry, if I make sure that I understand your question, did we earn less a higher or lower margin…

Yes. I was wondering if the margins from a -- what I've heard in the past is that it's a higher gross margin business for Travel Retail, but it's actually a lower operating margin -- or sorry, a lower gross margin, but a higher operating margin. Is that a fair assumption for the travel retail portion of the business?

It’s definitely a higher operating margin because there is not brand spend in there. So, it's really more of the products themselves and the packaging that you see in some of the people -- the experience that are there, some more that…

Yes. If you look at the business -- the gross margin of the business today, I mean, we saw a lot of Single Malt Scotch for instance into that channel, and that's going to be higher margin business. And Woodford Reserve has actually had a really nice run in the global Travel Retail business too. But now, we also most often focus on the airport side of things, but you also got to keep in mind the global Travel Retail sector is a lot broader than just airport business, there's a lot of borders to our business in Europe and in China.

Military goes in there…

So Military, I mean, so you've got a real big mix. But, I think, as Jane said earlier, global Travel Retail, while it’s hurting our growth rates right now because it's -- it's not big enough to really consider moving our corporate, say gross margin or operating margin around it. I wouldn't try to overthink that piece of it in terms of is that going to be a help or hindrance to our overall company gross margins.

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

Two quick ones for me. First, I think, you touched, Jane, in the prepared remarks, touched a little bit on agave inflation, and that sounds like it's going to stay inflationary for next year. Can you give us just an update on where we stand now on barrel costs and wood, and has anything loosened up in that market? And then, I have a follow-up.

Yes. Sure. I'll talk about -- we did talk about tequila or the agave cost a bit. And just as a reminder on that, we've been consistently saying that we expect agave cost to continue to increase through calendar year, most of calendar ‘21. So, in other words, we won't start to -- start seeing an easing to the back half of calendar '21, early calendar '22, so just as a reminder. And we've got that information based upon what is publicly available from the CRT. So, we can see when planting started to accelerate -- and we kind of know what the demand is. And so, we can see -- by the way, tons of plantings more recently. So, we know, six years or seven years from now we'll have -- there probably will be lots of pressure on pricing at that point in time. But, in the near term, again, it's going to be late calendar '21 and early calendar '22 before we see cost pressures. Now, with that being said, Bryan, it's important to note that what we're seeing in the market, where we had seen like a five-fold increase from 2015 in the price of the agave, it really -- and it rapidly increased during 2016 through mid last year, we have seen some slowing. It’s still growing, but not at -- and still at unprecedented dollar, or I guess, peso cost, if you will. But, it's just not growing as rapidly. So, that perhaps is a bit of a good news there, if you will. As it relates to the cost of wood, we have seen some moderation in that. But again, you're not going to start to see that come through our P&L because of our age products for four years from now, and coupled with that we have capital investments that we've made. So, all of that's going to factor in and none of that will come through our P&L from four years because of our aged products.

So, the rate of growth of our -- the cost of our whiskey products, really Jack Daniel's will moderate considerably next year relative to where we've been in the last couple of years.

So, more think about, we're at higher cost levels at this point but the rate of inflation should start to moderate versus what it's been the last year or two?

Yes, combined, the two combined. Yes. If you put the agave and barrels together.

And then, lastly, if you could just give some color now that Apple has been in the market for a while. And I guess, what I am interested in is, how it's -- how you think the Jack Daniel's Tennessee Black Label is impacted by having all of these sort of wine extensions. Do you think that it's diluting the kind of the core, are there things you may need to do to strengthen or reinforce the positioning of Black Label in order to make sure that it stands out from all of these other brand extensions?

Yes. So, I mean it's a good -- the cannibalization question is one, it's -- first of all, we look at it about 16 different ways, trying to figure out how -- what is actually happening out there. Because, the honest -- we were a little more concerned about the cannibalization of Honey and Fire necessarily than we were on Black Label. But when we've done the work, and it's the same thing that we've said, sort of on prior when this has come up in prior conversations around Fire and Honey, there has been almost no cannibalization. To be honest, I think it probably surprises a little bit. But it just hasn't been there. There's -- it really has been successful in bringing in new consumers in different occasions and it just feels like it is showing through the analysis that we do that it's tiny. I mean, it's almost truly on -- what we've done so far year-to-date on the impact on Black Label is imperceptible. I mean, literally, a few thousand cases kind of thing, but it's not the reason that the Tennessee Whiskey brand in the U.S. has slowed down, like it has. Another piece of that is on a volumetric basis, Black Label is up nearly 3% at the same time that we've released Apple. So, I think that also gives us some confidence that just the cannibalization is not there.

There are no further questions at this time. Are there any closing remarks?

We just would like to say thank you to Lawson and Jane, and those that have joined us today for Brown-Forman's third quarter fiscal 2020 earnings call. If you have any additional questions, please feel free to contact us. And thank you.

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