Brown-Forman Corp (BF.B) 2014 Q1 法說會逐字稿

Good morning.

My name is Holly and I will be your conference operator today.

At this time I would like to welcome everyone to the Brown-Forman first-quarter fiscal 2014 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) I would now like to turn today's conference over to Jay Koval, Investor Relations Director.

Please go ahead, sir.

Thanks, Holly, and good morning, everyone.

I want to thank you for joining us today for Brown-Forman's first-quarter 2014 earnings call.

Joining me today are Paul Varga, our President and Chief Executive Officer; Don Berg, Executive Vice President and Chief Financial Officer; and Brian Fitzgerald, Chief Accounting Officer.

This morning's conference call contains forward-looking statements based on our current expectations.

Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements.

Many of the factors that will determine future results are beyond the Company's ability to control or predict.

You should not place undue reliance on any forward-looking statements and the Company undertakes no obligation to update any of these statements, whether due to new information, future events or otherwise.

This morning we issued a press release containing our results for the first quarter of fiscal 2014.

The release can be found on our website under the section titled Investor Relations.

In the press release, we have listed a number of the risk factors that you should consider in conjunction with our forward-looking statements.

Other significant risk factors are described in our Form 10-K, Form 8-K and Form 10-Q, all filed with the Securities and Exchange Commission.

During this call, we will be discussing certain non-GAAP financial measures.

These measures and the reasons management believes they provide useful information to investors regarding the Company's financial conditions and results of operations are contained in the press release.

And with that, I will turn the call over to Don for his prepared remarks.

Thanks, Jay, and good morning, everyone.

On today's first-quarter earnings call, I would like to cover three topics; a review of our first-quarter results, a quick update on the pricing environment and our current outlook for fiscal 2014.

So let me start with a review of our first-quarter results.

The first quarter is typically our smallest quarter and is usually fairly quiet compared to the quarters straddling the holiday season.

However, at times, the first quarter can also be a bit confusing because it is typically when we have taken a lot of price increases on our brands.

This was certainly the case a year ago when we reported first-quarter results for fiscal 2013.

If you remember, we had 10% underlying sales growth due in part to the unusually large retail volumes in advance of some healthy price increases, the first pricing we had taken in five years.

That was followed by the second quarter's relatively weak underlying sales growth of 6%, as inventory levels came back into balance.

When combined, the first half of fiscal 2013 saw an 8% underlying sales growth rate, in line with the full-year results.

This year's first quarter is equally confusing.

We took more modest price increases this year, in the 2% to 3% range, rates more in line with our practice prior to 2009.

This resulted in a retail buy-in that was much less dramatic on some pretty tough comps and contributed to our 5% increase in underlying sales in the first quarter.

Because we saw smaller retail buy-in this year, we expect to see a stronger second quarter relative to last year's weak comps.

And we believe that again after the second quarter, our first-half results will be more in line with our full-year expectations for high-single-digit underlying sales growth.

Three things encourage us to believe that we remain on track to deliver this growth outlook.

First, if you look at the last two years together, the first-quarter compounded growth rate would be nearly 8%.

Second, when we look at recent syndicated consumer takeaway data for our largest markets, we are seeing stable, positive takeaway trends across the majority of them, including the United States, the UK, Germany, France, Russia, Turkey and Mexico.

Finally, our shipments so far in the second quarter are up at a double-digit rate, suggesting we are off to a strong start to the second quarter.

With that as a backdrop, let me provide some more color on our 5% underlying sales growth rate.

First, underlying sales results were powered by our price increases, which have driven a strong improvement in our price/mix, up 4 points in the quarter.

In addition, these top-line results continue to be driven by broad-based geographic strength, although in the first quarter, the relative contributions were slightly different.

Starting with our largest market, the United States, underlying sales grew 5% compared to the year-ago period, which included unusually strong results driven by retail volumes, as well as roughly a point and a half of pipeline fill in the state of Washington as it transitioned to an open state.

As we look at the combined US Nielsen and NABCA data, we have observed a slight deceleration in the industry growth rate, from 4.5% value growth over 12 months to 4% value growth over three months.

But we believe the industry fundamentals remain sound, particularly in our areas of strength, premium whiskeys.

Looking at that same combined syndicated data, we have not yet seen a slowdown for our brands in the US, with takeaway trends running at 5.6% on both a three-month and a 12-month time frame.

So while we are closely monitoring the competitive landscape, our brands continue to outperform and deliver strong value growth.

In developed markets outside of the United States, underlying sales increased by 4%, but grew double digits if you exclude Australia, where underlying sales declined by 5% despite some market share gains.

While Australia's economy remains under pressure, economic trends in parts of northern Europe appear to be stabilizing, including the United Kingdom, Germany and France.

Each of these countries grew underlying sales by a double-digit rate, although the United Kingdom was helped somewhat by easy comparisons.

These are large and growing markets for Brown-Forman's brands, but with relatively low market share as compared to our competitors, we continue to see significant opportunities to grow our brands and have continued to invest in these markets while many competitors are allocating resources to other markets such as China.

The other developed country of note, Japan, grew underlying sales by 17% as Asahi continues to make solid distribution gains.

In the emerging markets, our portfolio brands grew underlying sales by 5%, as we had some inventory challenges related to price increases in Mexico on Herradura and New Mix and in Poland on Finlandia.

Price increases in both countries occurred at the end of fiscal 2013, resulting in some giveback in the first quarter of this year.

Excluding Mexico and Poland, the emerging markets grew 13%.

Turkey and Russia, for example, grew at double-digit rates, despite going dark on A&P activities earlier this year.

And our Jack Daniel's family grew underlying sales by 13% across all the emerging markets, including continued strength in Southeast Asia, Eastern Europe and Latin America.

For our brand results, I would like to point you to Schedule B in our earnings release, where we have provided additional disclosure to better present the underlying trends by brand, removing some of the quarterly noise due to changes in distributor inventory in addition to foreign exchange movements.

Our conclusion after looking at Schedule B is that while the timing of retail buy-ins clearly impacted year-over-year comparisons, we believe that the brand portfolio delivered strong underlying results.

Moving to the other line items on the P&L, reported gross margins increased by 40 basis points in the quarter, leading to 6% underlying growth in gross profits.

We continue to invest in our brands, with underlying A&P spend of 12%.

Some of that increase was related to timing, driven by the creative costs associated with the new Gentleman Jack campaign, as well as the cost of launching Jack Daniel's Tennessee Honey in several additional international markets, such as Germany.

SG&A increased 5%, resulting in underlying growth in operating income of 4%.

Turning now to my second topic, a quick update on the pricing environment.

Over the last few months, we have been implementing price increases that are more in line with what we have been able to implement on a sustainable basis prior to the 2009 recession.

Similar to last year, we expect to realize more pricing in our aged spirits portfolio than in white spirits, as well as more pricing from our super and ultra-premium price points than below.

Net-net, we are looking for an increase of 2% to 3% for our portfolio of brands in fiscal 2014.

Industry pricing fundamentals have remained healthy, with price/mix an increasingly larger contributor to industry revenue growth.

For example, according to the most recent three-month Nielsen data in the US, price/mix contributed 3.2 points of growth as of July 2013 versus only 1.7 percentage points as of July 2012.

As we have noted in the past, we believe pricing impacts the consumer's perception of a brand's premiumness, and ultimately helps determine the brand's positioning.

With a focus on value growth over volume growth, we will continue to look to pricing as a way to keep our brands special in the eyes of global consumers.

In addition, a disciplined approach to pricing and brand-building should allow us to offset cost inflation, and over time, grow our gross profits at a faster rate than our sales growth.

Finally, let me move on to my third topic, our current outlook for fiscal 2014.

As I mentioned in my introduction, we believe that we are on target to deliver high-single-digit underlying sales growth in the year.

Regarding the seasonality, as we look back to last year's results, buy-in activity was highest during May and June, and shipment growth slowed dramatically as we moved into July and August.

So it is not surprising that when we look at our monthly sales figures this year, May and June were down, given the challenging comparisons.

These comparisons turned favorable in July and we have seen the strong sales growth continue so far through August.

We expect the adverse seasonality of the first quarter to reverse itself in the second quarter, resulting in first-half sales growth that should be more in line with our top-line expectations for the year.

We anticipate that Tennessee Honey will again be a contributor to our corporate growth rate, albeit not at the same rate as what we enjoyed last year.

As a point of reference, Tennessee Honey is on track to be in 90% of Jack Daniel's Tennessee Whiskey markets, as measured by sales, by the end of fiscal 2014 versus 70% coverage in fiscal 2013.

With expectations for a low-single-digit contribution from price/mix and cost inflation of 2%, we are anticipating very modest gross margin expansion in the year.

As you saw in the first quarter, we continue to find ways to invest in the long-term global growth of our brands.

Notwithstanding some quarterly fluctuations due to timing, we still anticipate that A&P will grow roughly in line with sales growth, and we are focused on leveraging some of the investments we have made in our people over the last few years, which should result in operating income growth of 9% to 11% in fiscal 2014.

In the aggregate, this would lead to anticipated earnings per share of $2.80 to $3.00, including a $0.03 negative impact from foreign exchange headwinds, as well as an estimated $0.06 negative impact related to our France route-to-market changes.

Given the transition should occur on January 1, 2014, we expect most of the inventory buyback to occur in the third quarter.

And to help you model the potential impact from changes in foreign exchange, a 10% move in the dollar in either direction would impact EPS for the balance of the year by approximately $0.11.

So in summary, we continue to believe that Brown-Forman is well-positioned to outperform the industry.

Because of our geographic footprint as well as a focused portfolio of brands concentrated in faster growth categories, our results can and often do differ from how the industry performs, as was the case in fiscal 2013.

We have a strong presence in the US and Europe, markets where we are driving strong rates of growth, and the economic outlook looks better than the current trajectory for many of the emerging markets.

While markets such as Brazil and China appear to be taking a respite from the torrid pace of growth they have enjoyed over the last decade, our exposure to these markets is relatively limited today compared to our competitors.

We remain bullish about the long-term prospects for our brands in the emerging markets and are investing in the brand-building activities that will best position us to realize the future growth potential and deliver industry-leading results for our shareholders.

That concludes my prepared remarks, so I will now turn the call over to Paul for some brief comments before we open up the call to Q&A.

Thanks, Don, and they will be brief.

I don't really have a lot to add after just three months and a quarter that was in line with our expectations.

As you can tell from Don's commentary, there is a lot of noise in the results, as anticipated, and after digesting the results, I think we are very much on track with our FY '14 full-year plan.

As a result, we confirmed our guidance for the full year this morning.

I just would add sort of to finish that a lot of the underlying themes that we have been discussing with you over the last many quarters and years remained virtually unchanged.

A lot of the stories that have been underpinning Brown-Forman over the last many years, particularly the global expansion of Jack Daniel's, continues to be one of the preeminent themes for the Company.

With that, Don and I are happy to take any questions that you've got.

(Operator Instructions) Vivien Azer, Citigroup.

Hi, good morning.

In terms of Mexico and Poland, did I hear you on the distributor inventory movements?

Could you maybe speak to what the underlying business did, potentially brands that weren't impacted or the health of the category, to give everyone a little bit of reassurance?

Because some of the numbers around el Jimador were a little bit surprising to me.

Sure.

I'll start with Poland and then move to Mexico.

When you look at Poland, obviously, it is a really large vodka market, and it is a large vodka market for Finlandia.

As we have seen, like we do in most of our markets, is consumers are getting higher per-capita income so they are looking to trade up to more premium brands, and we have benefited from that.

One of the things that you have seen over the last couple of years are a number of major competitors kind of in the popular pricing area for vodka that have been in a lot of financial trouble that has really kind of impacted some of their approach into that market.

And so it has been a bit disruptive.

Finlandia has continued to do pretty well within that environment, but I would say that when you look at the market fundamentals, not a lot has changed there from what we have been competing against kind of over the recent time and the recent quarters.

One of the things that we have also benefited from in Poland is -- and again, you see this in a lot of markets, too -- you have very heavy vodka markets that are looking to other areas of interest, and whiskey is one of those areas where we have been seeing some trading out of vodka generally and into the whiskey category.

As a consequence of that, Jack Daniel's has performed very well in Poland.

And so in spite of some of the things that we have seen in that market around Finlandia, we continue to see Jack do really well there.

Let me turn to Mexico for a second.

In a way, it's a little bit of a similar story.

As you know, from what we have talked about and others have talked about for quite a while, there was quite a glut of agave that took the prices down pretty low, which brought a lot of competitive brands in the low pricing arena.

And so the tequila market within Mexico has been pretty competitive for a while.

And while we have seen agave prices starting to go up, we still haven't seen any kind of a knock-on effect of that in terms of reducing the level of competition there.

And so overall, when you look at the tequila market in Mexico, I don't think that you see a lot of fundamental changes there.

And again, similar to Poland, you have been seeing a lot of interest in consumers moving into whiskey, and Jack Daniel's has been a big benefactor of that consumer interest move, and it has continued to do well in Mexico, while we have seen a more competitive landscape on the tequila side.

The one area in Mexico that I would say has changed a little bit is in the RTD arena, where we have got our el Jimador New Mix product, which has had a substantial share of that overall business.

There are a number of new entrants that are going into that category.

And so that really precipitated us to take some actions down there to try to take advantage of a current situation.

We did a few tactical things to make sure, as we saw new launches coming into that arena, we were doing some things to kind of protect our distribution.

And so that is an area where I think there is a little bit of a change and there was probably some particular issues that affected the quarter around New Mix.

But generally speaking, when you think about that in terms of the Corporation overall, it is a relatively -- it's an important part of our business in Mexico, but a relatively small part of our business for overall Brown-Forman.

Yes, I wouldn't read the Schedule D data as consumer-related on New Mix.

They are very much related to changes in trading patterns between the spring and the summer and Q4 of last year and Q1 of this year.

One thing, though, I think that Don touched that I think you all can -- I mean, it is not a 100% global observation, but places like Mexico and Poland where Brown-Forman made acquisitions into categories that we might call local categories, where there is always a sizable standard price category, it has been our experience over many, many years, that in these particular instances, where those local categories -- in this case, in Poland, vodka and Mexico, tequila -- that we are benefiting.

And it shows up in the Jack Daniel's business, not only from the distribution platforms that came from that, but also the consumer shifting from the local category toward whiskey.

And also in many cases, from lower price points to higher price points.

So we benefit from that.

And there is a number of other countries where I think that that has occurred as well.

It is not a -- you can't make that statement about every country around the world, but it certainly is a theme that we think we benefit from, particularly in our premium whiskey brands.

So that is one thing.

We have to take the hit for it, though, with a struggling standard price category in Poland that Finlandia certainly pays attention to.

And similarly, el Jimador pays attention to in Mexico with tequila.

But for the country overall, we think we, net-net, benefit.

Understood.

My next question has to do with Australia.

I understand that the first quarter largely came in line with your expectations on a total Company basis.

Does that hold true for Australia and what are your expectations for that market for the remainder of the year?

Yes, I think when you look at Australia overall, a lot of what you are seeing is around what is happening on a macroeconomic basis and the impact that that is having on consumers and consumer spending and alcohol consumption.

I think within that, there is a couple of unique characteristics around Australia that we think about.

Australia is one of these markets where by law they take excise tax increases every 6 months, basically around the rate of inflation.

And because of the different taxing environment on spirits being higher than what they tax beer and wine -- and they have been doing this for several years -- there is really a price disproportionality in that market that really puts spirits at a bit of a disadvantage.

So when you find yourself kind of coming under some of these recessionary squeezes and what have you, I do think that spirits ends up getting hit a little bit disproportionate to the rest of the alcohol industry.

And within spirits, it is not surprising to see Bourbon, because it is such a -- it is the largest category in Australia -- kind of seeing that hit probably sooner or bigger than others.

And so I don't know that I would say that it is out of our expectations in terms of what you kind of see when you go into these kinds of economic downturns.

Within the market, for the most part, we have been gaining share as it relates to several of our brands and several of our introductions there.

So we have continued to perform pretty well in spite of all of that.

But there is a lot of pressure on that market.

And I think as you look forward, it is anybody's guess as to what will happen in the Australian economy, but there is nothing that I think we see that indicates that it is going to improve in the near-term.

The other thing that I would cite that is unique to us down there is that Australia has been one of our most active countries on the innovation front.

And when you are active on the innovation front down there, it has been both very much so in RTDs historically.

Last year, they had the launch of Tennessee Honey that they are cycling against, that pipeline that went in there.

As well as even standard price tests we are doing down there.

So there is always comparables against introductory periods in markets that are very active with innovation.

And so I think that can be a contributing factor as well, particularly to 90-day results.

Terrific.

And my last question is a quick one.

Can you just comment on inventory levels with distributors, given that your shipments are up double digits so far in the second quarter?

Oh, are you thinking about forward-looking?

Just kind of where are -- are you kind of restocking inventory with distributors?

How are your shipments and completions running?

I think Don's comment on that was just to describe the seasonality of these shipping patterns, and what we -- they from month-to-month, of course, vary, based on these fluctuations.

But I think that was more a reflection of things coming back into balance with our historical rates for whatever season we are entering.

They fluctuate within the year even on a normal basis, based on whether it is the holiday season or what other months might be unfolding based on our programming.

But, no, I think that reference was just to let you know that some of the seasonality that was working against us in the first two months of the year seems to be -- we seem to be benefiting from in the ensuing two months.

Yes, just to kind of reinforce that point, Vivien.

I think what -- we have seen buy-ins in advance of our price increases this year, just not to anywhere near the extent that we saw them a year ago.

And so our expectation is that there will be some kind of, quote, giveback in the second quarter, but nowhere near the amount of giveback that we would have seen a year ago, so that net-net by the end of the 6 months, we would anticipate being back in kind of a normal balance at that juncture.

Terrific.

Thank you.

John Faucher, JPMorgan.

Thank you.

Just two quick questions here.

First off, can you talk about the gross margin performance in the quarter?

The top line was probably heavily weighted towards pricing.

So do you think you see relatively consistent gross margin performance like this over the balance of the year, or was there something interesting in the comp given the buy-in before the price increase?

And then the second question is about your Europe commentary.

Can you talk a little bit -- particularly the Western Europe piece -- how optimistic you are that it will get better from here?

Or is it something where you see it sort of skimming along at the bottom?

Thanks.

Yes, so a couple things.

I think as we have talked about the full year, we are anticipating at the cost line somewhere around about a 2% inflationary cost.

And so when you think about a 2% to 3% increase overall on pricing, that is where you end up -- where we talk about some modest, very modest improvements at the gross profit line.

I think the first quarter was somewhat in line with that.

I think one of the things that [stood out] a little bit in the first quarter was still getting a little bit of the advantage of last year's higher price increases, kind of in the May/June timeframe, when we were taking July 1 price increases.

So I wouldn't read too much into that.

I would really focus more on how we have talked about the full year overall.

As long as the portfolio and geography mix holds up, about like it was last year, or planned.

(multiple speakers)

-- for inflation.

Yes, that always has an influence on it, if there are higher or lower gross margin countries or brands in the portfolio in terms of the mix.

But after 90 days, we don't right now have any new position on that.

And then on Europe, there was -- Don can make some comments about that.

I think any of the short-term news on Europe, one encouraging thing was much better performance from Southern Comfort over in Europe.

I don't know that that was necessarily directly related to the economy or the environment as much as it was to our own efforts in the competition that exists for the brand.

And we were really encouraged by some of the things we have transferred from learnings in the United States and other places to see particularly the UK and Germany get off to nice starts there.

And I think Jack Daniel's -- and Don cited statistics -- is just off to a nice start, which is encouraging, given what we just talked about as it related to other large countries, like Mexico, Poland and Australia, that in France, Germany and the UK, countries that a lot of people in our space are not talking about, they were very important to the first quarter, and continued to grow nicely.

We have been gaining share there even when the market was declining and sluggish.

Jack Daniel's particularly not only gained share, but continued to grow in Western Europe.

So notwithstanding the Southern European difficulties, we don't have any new stories that relates to perspectives on Western Europe.

I think like a lot of places around the world, it will depend somewhat on how any of our innovation, whether it is in the Jack Daniel's Family or otherwise, unfolds over the next balance of the year to see what kind of impact that could have on Europe.

Okay, great.

Thank you.

Judy Hong, Goldman Sachs.

Thank you.

Good morning, everyone.

Just a couple of questions.

First in terms of the US category, a slight deceleration that you have cited.

Can you just talk about what you think is causing a bit of a deceleration and whether you think that there is any risk to pricing as the category has been a little bit slower.

Sure, to be honest, you see such fluctuation in these NABCA/Nielsen data from month to month that I wouldn't read too much into it, to be honest.

We have seen what we identify as a slight deceleration, when you look at it more recently.

It is hard to say if it is going to stay there or not.

I think the one thing that we have seen is that while -- when you look at the NABCA data and you break out the off-premise from the on-premise, the off-premise has continued to stay very healthy in terms of growth rates.

The on-premise has continued to get a little bit more sluggish over time.

And the NABCA markets tend to be more about the central part of the United States, and doesn't really do a very good job of capturing what is going on on the East Coast.

But even anecdotally, we are hearing a little bit of softness in the on-premise that might be showing up in the overall numbers.

I agree.

I think that one thing to remember, too, I think this was -- there was a lot of news over the last, I don't know, maybe six weeks about the US retail environment generally.

So there were a lot of reports of softness.

Unlike that environment that was reported as discrete, we actually do benefit -- we don't have good data to tell us what these rates of transfer would be, but when people don't go to restaurants and bars, and that might have a softening effect on the on-premise, we do think they continue to consume products from our category and industry at home.

We don't know enough about that, but anecdotally.

And that is different from many retail environments.

And so I would reiterate that we watch that on-premise number very closely.

And whether that has an impact on pricing, whether it is economic or just some other factor that might be explaining it, we don't have a lot of deep or interesting perspectives on that, but it's certainly something we monitor.

Okay.

And then just on pricing, so you have talked about taking 2% to 3% pricing for the portfolio as a whole, more on the premium whiskey versus the other part of your portfolio.

But I was just curious if you can actually give us a little bit more granularity in terms of the magnitude of the pricing you are taking on the premium whiskey.

Are you taking any pricing on the white spirits at all?

Just maybe a little bit more color, either by brand or by category.

A little bit, sure.

Yes, we can give you some.

If you look at Jack Daniel's Black Label and you look at it across the board, it will be somewhere in the range of 3% to 3.5% over the course of the year.

We are also taking somewhat similar increases on Honey in various markets because we are -- to a large extent, we are trying to keep pricing comparison between those two fairly close.

We are seeing similar things -- a little bit higher rate, kind of 3% to 4% or 3% to 5% on Gentleman Jack and Jack Daniel's.

Finlandia, I mentioned that we had the price increase in Poland.

That is certainly the largest market for Finlandia, and that is the one where we would have focused our pricing actions around.

And then we are doing a little bit on Southern Comfort in the United States and we are doing a little bit on el Jimador in Mexico.

Woodford, I think, spotted 2. And actually, remember, we are also going to benefit some this year from price increases taken last year.

That is the other thing, the carryover for full year; so there is a little impact from that too.

Got it.

Okay.

And so all of these price increases have been announced, and in terms of flow-through to consumers, I guess similar to last year, it will take a little bit of time to see the impact all the way out to the consumers?

That's correct.

Okay.

All right.

Got it.

Thank you very much.

Tim Ramey, D.A. Davidson.

Good morning.

Thanks so much.

Just so interesting to see the increase in Canadian Mist.

I know that is not core to the portfolio, but there is such a great halo effect there.

Can you talk at all about availability there and what that does to that brand, or is it just enjoy the ride kind of thing?

Yes, of course, it is only important to our North American business.

And so it is encouraging that -- they have actually been a bit more innovative, now thinking about our North American group, first, with a non-Canadian Mist trademark.

Because actually Collingwood going into test a couple years ago to look at leveraging the trend towards super-premium and then just observing the trends that are in flavors, introducing a few flavors here more recently.

And then also just seeing interest, I think, more broadly in whiskeys generally.

And this is a more unique one.

This category sometimes gets referred to as lighter whiskeys, lighter-tasting whiskeys.

So it is a different segment than some of the more full-strength bourbons.

But it has shown some growth.

Actually, there is quite a bit of innovation going on right there by a bunch of our competitors.

And I think Canadian Mist is in the game, I would say, versus two or three years ago, where it was not as innovative and not bringing things in.

I think there is probably -- we can't quantify it, but I think there probably is some halo effect there.

Great.

And then on Europe, would you attribute the recent strength to innovation or just finally bouncing along the bottom and seeing some improvement in the macro?

I just don't think that -- maybe a little improvement in the macro.

We never really hit the bottom.

I would say on Southern Comfort, we felt it at times, but I never felt on Jack Daniel's that we got as discouraged as many of our competitive brands and companies did about it.

I think the big factors for us, just to use an example of Germany, where a combination of an investment in route-to-consumer and starting our own Company there would have had a dramatic impact on Brown-Forman's differential performance in Europe, certainly in Germany.

And then I think paired with things like innovation; when you have your own Company, you can be a bit more innovative.

And they have had, particularly in the ready-to-pour -- that was where the Winter Jack expression came a couple years ago.

And so I think there are a number of influences.

Do we hope for an improving European economy?

You bet.

But I think route-to-market investments and improvement there, along with spotted innovation, not the least of which here more recently is Tennessee Honey, are contributing factors for us.

Yes, and just finally on Southern Comfort, still sort of seeing modest declines there, despite the amount of A&P and the controversial approach or the advertising.

Have you thought more about that approach?

Do you continue to feel confident there or are we taking a second look?

Well, we're looking at everything on Southern Comfort.

If you go back a few years, we were seeing more like mid- to high-single-digit declines that, through this work, we have had the brand's performance moderate down more toward low-single-digit.

So I feel pretty good about it, despite what you call the controversial presentation of the brand.

We felt so comfortable with the reaction to that that we have actually extended it into the European markets that we were citing, and so far, pretty good reaction to it, as you can tell from these early results.

So with Southern Comfort, I think the biggest news about it versus when we were -- any brand we take into the market, we want to do the best we can with it.

It is less impactful today as a drag on Brown-Forman in the way that it was three or four years ago, I think, because of the work that has been going on and getting it stabilized, particularly in the United States.

Where just going back -- all that is going on today with this flavored brown spirit or flavored whiskey -- you might call it the shot occasion, you might call it the young adult segment, however you frame it -- Southern Comfort had far less competition five or six years ago in that arena in the United States.

And today, just to see the backbars and the shelves and see the size of some of these new competitors, including our own Jack Daniel's Tennessee Honey, all are new competition for a brand that had this space very much -- not all to itself, but played a very dominant role in this arena.

And so my expectations now looking back on it is that it has held up pretty well given what has been happening.

We still want it to do better, and so efforts like the communications you referred to are our attempts to try to make it stand out in a really exciting segment of the US business right now.

Terrific.

Thanks.

Ian Shackleton, Nomura.

Yes, good morning, gentlemen.

Love to get a bit more color on how you see Tennessee Honey in the international rollout continuing, and which of the key markets that is still to move into?

So yes.

So when you look at it, I think Tennessee Honey overall has continued to do extremely well.

US, when you look at syndicated data, it is still kind of growing in the 30% to 40% range.

It's in its third year in the US.

When you look at the international expansion, there is a number of markets that it is going into this year.

Germany is the biggest one that we will be going into, but we will also see introductions in France and Russia, and then a whole host of smaller markets throughout the world.

We are seeing second-year results in the UK, Australia, Poland and South Africa that we went into last year.

And I would say with maybe one exception, pretty much they have all been going similarly to what we saw in the US in terms of consumer interest.

And one of the metrics we use is what percentage of Jack Daniel's Black Label business is being represented by Tennessee Honey.

And as we have kind of continued to roll these out, we have been seeing pretty much within a fairly tight range, pretty much similar performance across all the markets.

Ian, I might add on it too, you can imagine this is a conversation we're having inside the Company about what is the mid to longer-range potential for a very successful line extension; and how much of it is a line extension and where is it almost from a mindset standpoint its own brand that begins to take on far more life of its own.

It certainly will always have its core equities associated with Jack Daniel's, but the thing that is most encouraging that we found not -- starting first in the United States but everywhere else is the new consumers and new occasions that it is giving the Jack Daniel's trademark access to, which is resulting in very low levels of cannibalization thus far.

So all of this feeling incremental.

And as Don was saying, sometimes you can measure these things as a percentage of the parent.

Well, if the parent brands -- if it is a highly cannibalized effort, the parent brands coming down and the new brands going up, those are irrelevant.

But this is a really interesting one, and with the low levels of cannibalization, this is all new consumers, new occasions, new business.

And that is the thing that is encouraging us to maybe dream a little bit bigger about what might be down the road for a brand like Jack Daniel's Tennessee Honey and how might we think about it.

And we are still at the early days of that, because maybe, quite frankly, we have just been trying to get it launched into the marketplace.

The US would be ahead of that thinking because it was the introductory market.

But those are questions that, of course, we are asking ourselves, but we have seen nothing but encouraging news so far from the global rollout of Jack Daniel's Tennessee Honey to make us think in bigger ways about innovation at Brown-Forman.

Sorry -- Don referred there to one exception.

Which market was that?

Were you slightly surprised?

Did they teach you something else about the brand, or --?

Yes, so the exception would be Australia.

To be honest, it started out very similar to what we were seeing pretty much across all the international markets.

We have seen softness across the category recently.

It is really hitting all the flavored whiskeys that were introduced into that market.

And to a certain extent, we think that part of that is because it is such a strong bourbon and cola market, it has just got so much dominance around that kind of a flavor profile.

And when you think about it in terms of consumption occasions, how big of an RTD market it is down there and what have you, it just may well be that there is not as much interest in new flavor profiles than what that market already has.

And then to a certain extent, I am sure there is some impact from what we were talking about earlier from a macroeconomic standpoint.

Okay.

That's very interesting.

Thank you.

Just one quick follow-up.

SG&A expenditure went up quite a bit in the quarter.

From what you were saying earlier, it sounds like nothing of that has to do with France; France, any cost comes later.

Is that just a comment of additional spend in existing markets?

Yes, there may be a little preparatory, very tiny amount related to France, as we sort of gear up.

But I think most of it is just sort of the regular reinvestment in the business.

I don't think there is anything major or noteworthy there.

Great.

Thank you very much.

Bill Chappell, SunTrust.

Good morning.

Just for fun, I will ask the 43rd question on pricing.

But wanted to get a little clarification, just so I understand on this past quarter, why the pre-buy didn't match the pre-buy of last year.

Is it because -- mainly just because the depth or the size of the price increases wasn't as big as last year?

Or was at the timing, where pricing is going to be rolled out over multiple quarters versus all early on in the year?

Yes, to a certain extent, there is a little speculation here.

But I think there is a couple of things, at least that we are thinking about from that standpoint.

I think one of them, you could argue, is psychological.

We had gone five years without taking any kind of a price increase.

And when we went out with -- when we went out a year ago, it was at a relatively high level compared to what people were accustomed to, kind of in the 3% to 5% range.

And I think in a period of low interest rates and people not knowing what the impact was going to be, I think what you saw was a little bit perhaps of an overreaction at the retail level in terms of using it as an opportunity to buy in in order either to make more money or to do things competitively.

And I think as we came back this year and it -- it became sounding like it was going to be a more routine thing, the price increases were at a lower level -- we just saw a lot less interest on the buy-in side.

I also think that there was a little bit -- a lot of these price increases come in July 1. Some come in June 30.

I think you saw a little bit more competitive activity in the marketplace around that time frame this year than what we would have seen last year.

And so in terms of having that period a little bit more to ourselves in terms of how retailers were thinking about their own purchase patterns, I think there were some other factors that might have been out there where they were taking that mindset and that approach across a bigger portfolio of brands.

I also think one other factor, just the scale of a couple of the excise tax increases, around which we went ahead and took this first price increases, created, in some instances -- I will just cite the UK -- far higher price increase versus this year.

And then just I think -- I would have to go look at -- my recollection is that this time last year, far larger number of markets, so a more pervasive global increase, particularly for Jack Daniel's Black Label, relative to this year.

So people taking price increases, letting them sit.

In some cases, people said, look, if we are going to go up this amount, we might as well go to the next price point; so we will take two years of price increases in one.

And you look at those types of things market by market.

But they will have an impact on the number of markets and the overall amount that we end up taking.

Paul, that just kind of leads to the question, as you look back now a year, maybe especially over the past few months, are you pleased with the competitive matching on your price increases?

And no, we're not just talking about bourbon, I am talking about all spirits in general.

Or have you seen some use it as an opportunity to be more competitive?

For Jack Daniel's, particularly excluding either two major factors.

One would be the presence of excise taxes that accompanies it, which has a profound impact on the marketplace, as you well know.

The things that we initiated on our own, I feel very good about.

I think that we did a very nice job of implementing those and the ultimate positions of the prices were an improvement and did something we were trying to accomplish, which is improve the premiumness and specialness and some of the things that we've referenced in the past.

So I think for Jack Daniel's Black Label, the answer to your question would be yes.

There are some other things that -- last year we talked about things like the reduction of value-added tax and some other things that ended up hitting cost of sales.

You have to smooth some of those things out to look at your price-up and what is the impact on volume in order to understand it.

And when we get through that analysis, actually feel comfortable that we did the right things with our pricing last year, particularly on Jack Daniel's in terms of price positioning and that the consumer's response was acceptable to us.

That helps.

Last question for me.

Just with LIFO accounting and grain prices looking more favorable, are you expecting any relief this fiscal year, or are you just waiting to see what happens?

Yes, you know, any benefit from corn prices would definitely come through LIFO.

I think that -- and we have talked about this as much as when we saw corn prices going up and we will talk about it as corn prices come down.

And when you think about the relative impact that corn has on our overall cost of sales, it is not that large.

It is very manageable.

When you look at the component of our cost of goods, it is far more impacted, quite honestly, in terms of what is happening with glass prices, what is happening with wood prices.

The cost of the barrel and the cost of the bottle actually is more impactful than what you would see with corn.

Got it.

Thanks so much.

Mark Swartzberg, Stifel Nicolas.

Yes, good morning, gentlemen.

I guess the 44th question on pricing.

Could you speak a little bit more on the white spirits dynamics here in the US?

To what extent is the lack of planned pricing a symptom simply of the non-age nature of the category?

To what extent do you think there are other elements here in terms of consumer behavior and the way young adults are treating white versus brown these days?

Well, I mean, if you are talking about the US market, I think the white spirits market -- and I will cite -- let's just use the term vodka, primarily, which is the dominant category there, -- is -- remains amazingly competitive.

Their mix of volume and pricing as contributors to net sales growth is dramatically different, from the data I have looked at, relative to whiskeys.

So it's -- their recipe for getting net sales growth has historically been around innovation, particularly directed at flavor.

And so a big question as you sit and think about that business would be, where is all the flavor growth of the category going to end up?

People have been predicting its demise for many, many years and quarters here, and actually the flavors continue to be a very exciting part of the overall vodka categories, from what I can tell.

And some of the fastest growers and highest-flying trademarks and syndicated data happen to be flavored expressions from relatively new trademarks, too.

And then the other influence there are -- is the fact that the lack of barriers to entry, I think, will continue to permit lots of competition.

I think regularly there.

So I think the churn that exists in vodka in the United States, I don't see any reason to forecast any diminishment in that.

The supply/demand dynamics of global whiskey and the barriers to entry are always influences to the ability to take price.

And I would contend that the size of the premium-plus or the ultra-premium category in the whiskey segment, not only in the United States but globally, just dwarfs the same segment in vodka.

So consumers show a willingness to pay up for the heritage and authenticity and quality that comes from those expressions in our category.

We think we have a number of expressions that compete very well in that.

And I think that continues to be an area where there is a lot of innovation.

And all this micro-distilling that is going on.

I'd also take note in vodka, there is actually one player in the United States who I would contend was a forerunner of micro-distilling -- it is doing well -- isn't winning with flavors; is primarily winning with selling vodka the way -- often times the way whiskey is sold.

And so maybe that's an example of somebody standing out going against the grain.

But we are encouraged.

We're certainly encouraged that the growth trends have been holding up and continuing for whiskey in the American market relative to vodka, even though we want to see vodka growth rates continue as well, because we think it is good for the industry.

And it sounds like on the vodka dynamic, it doesn't -- to your point about churn, it has been there for a while.

It doesn't sound like you feel like that dynamic is getting more competitively challenging or the comparative like pricing is there is a symptom of an increase in competitive pressure there.

Is that -- in terms of thinking out the risks to the story, so to speak, it doesn't sound like that is a particularly large risk versus your larger objectives.

Not for us, certainly.

But I think for the category, if you were trying to set the category --.

I think one of the differences is in vodka, you see a tremendous amount of innovation at lower price points.

You continue to see a lot of new entrants into standard and even lower than that price point in the United States, and then tons of innovation, usually around flavor, for those entrants.

And a lot of the growth going back before the Circo success, which has been out there for a while, and some of the other ones that have been newer entrants, some of those were down at relatively standard price points or below for vodka.

Whereas in bourbon, you are seeing most of the innovation up at the premium plus level.

And I think that is some of the economics of the category -- I am talking about in terms of new trademarks.

I think that's some of the economics of the business, that vodka is an easier category to get into with less risk, whereas if you're going to enter into bourbon or American whiskey and have the capital exposure that you do, you are going to want to try to compete at higher price points to get your returns.

And so I think those dynamics play out.

So a lot of vodka competitors, instead of raising price, where it's difficult to do it, they introduce -- or lowering price even -- they introduce a new brand under sometimes a different trademark.

We have seen that from some suppliers.

Whereas I just think based on the momentum of the category and the attractiveness of the individual brands, it has been easier for the premium trademarks in bourbon to get pricing.

That's great.

That actually feeds into my other question, on Jack Daniel's.

You have made a big decision; you're going to be expanding in Lynchburg.

Can you speak to how you came to that decision?

The growth has clearly been there and there is a lot of reasons to believe it will be there going forward.

But historically, you have not had this -- you haven't put as much emphasis on expansion of actual distilling.

Can you just speak to how you came to that decision -- whether it is sort of inevitable, so to speak, given the anticipated growth?

Can you just give us a little bit of color on that decision?

I think you cited it.

It is eventually run out of distilling capacity for the expectations you have for the business.

We have been making expansion investments all along.

They are more in the area of, say, warehouses.

We have been expanding our cooperage-making -- the barrel-making capacity here in -- in the last year we announced it, I think.

And this one was just a larger investment, and so we gave certainly more prominence to it.

But it is all in line with trying to ensure we've got sufficient distilling, warehousing, cooperage capacity to meet the forecasted growth that we see for the Jack Daniel's trademark.

And the other thing I would just add to that is, just so that is kind of understood.

If you go back many years, at various times, we've had to add stills within the current structure that we had.

And we are just running out of room to continue to add stills.

And so it was time for us to really kind of think about it from a broader basis and where it is all going and how to think about it going forward, and came to the conclusion that at this juncture, to be able to continue to expand, to be consistent with our growth, we needed to go invest in a new distillery.

Compared to a lot of business, our single-point production is so unique for such a large business.

And I would just cite breweries who are building their breweries all over the world because they have a shelf-life concerns and things like that, that we don't have.

And so it is unusual for us to be making these very, very large investments, because we are so efficient in producing this global brand.

And so I think it probably stands out as unique news for us.

But it is all about our forecast for the future, and that Jack Daniel's has this great opportunity as a trademark out there, and we want to make sure we have all the manufacturing capacity that can support that.

Great.

Thank you, guys.

At this time, there are no further questions.

Thank you, Holly.

I want to thank all of you for joining us today for our first-quarter earnings call.

Please feel free to reach out to us if you have any additional questions, and we hope you have a good long weekend.

Take care.

Thank you for your participation on today's conference call.

You may now disconnect.