Brown-Forman Corp (BF.B) 2015 Q1 法說會逐字稿

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the Brown-Forman first-quarter fiscal 2015 earnings conference call. (Operator Instructions).

I would now like to turn today's conference over to Mr. Jay Koval, Director of Investor Relations. Please go ahead, sir.

Thanks, Jody, and good morning, everyone. I want to thank you for joining us today for Brown-Forman's first-quarter 2015 earnings call.

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

This morning's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the Company's ability to control or predict. You should not place undue reliance on any forward-looking statements and the Company undertakes no obligation to update any of these statements, whether due to new information, future events, or otherwise.

This morning, we issued a press release containing our results for the first quarter of fiscal 2015. 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 reports filed with the Securities and Exchange Commission.

During this call, we will be discussing certain non-GAAP financial measures. These measures and the reasons management believes they provide useful information to investors regarding the Company's financial conditions and results of operations are contained in the press release.

And with that, I will turn the call over to Jane for her prepared remarks.

Thank you, Jay, and thanks, everyone, for joining us for our first-quarter earnings call.

I have three topics I plan on covering today, and that will leave us plenty of time to address Q&A after Paul's brief comments. So first, I am going to review the first-quarter results. Then I am going to share some thoughts on flavor innovation on American whiskeys and provide an update on our Jack Daniel's Tennessee Fire test. And then, third, I will discuss our full-year outlook.

Let me first start with reviewing our first three months of the fiscal year. As we discussed in June and as expected, we had a very challenging quarter in terms of comparisons versus last year. This was largely as a result of trade disruptions from recent pricing decisions.

We anticipated these actions would result in significant reductions in both retail and trade at distributor inventory levels. It caused some variability also in some of our buying patterns when we compare our results versus a year ago.

So what I thought I would do here is share with you some more specifics as it relates to the markets that were most affected by these inventory shifts, that distorted both our underlying and reported trends, to provide some context when you look at our underlying trends, which are depletion based, and compare them to our consumer takeaway trends based upon syndicated data, whether it is Nielsen or NABCA.

The common theme, though, that you're going to hear as I talk is in each of these markets, the consumer takeaway trends are much stronger than our depletion trends, again illustrating the retail trade inventory reductions that happened in the quarter.

Let's just first start with the United States. We discussed this with you in June that we had significant price increases over the last two years, as you know, particularly on Jack Daniel's Tennessee Whiskey, where we averaged somewhere in the 3% to 4% range of pricing per year.

That drove large buy-in at our distributor level and our retail level in the past two fiscal years in the first quarter.

This year, as we also discussed in June, we reduced the rate of our price increases into the 1% to 2% range. And so, what that resulted in is we saw very little buy-in activity in the first quarter, but a subsequent reduction in the inventory levels at both the distributor and the retail.

So we estimate when we look at the inventory levels at the retail and the distributor levels in the United States, they really have dropped significantly in the first quarter of this fiscal year, compared to the last two fiscal years, and then they are, in fact, below the pre-price increases in 2012.

Just to further illustrate, I am going to give you a couple numbers here. I am going to use Jack Daniel's Tennessee Whiskey, because, of course, it is our most important brand in the United States, as well as around the world.

In our underlying trend, our depletion results for Jack Daniel's Tennessee Whiskey declined 4.5% in the first quarter in the US. When we compare that to our adjusted blended takeaway trend, trends were up 2.5%. So you can see the significant difference between the depletion trends, as well as the takeaway trends, indicating the retail reduction in inventory levels, which is not in our numbers that we report on an underlying basis.

Importantly, also, is that we have seen the Jack Daniel's Tennessee Whiskey's volume takeaway trends have been accelerating by about 2 points in the most recent three months, compared to the trailing 12 months, which we believe bodes well for the US business over the balance of the year when we look at our price and volume balancing that we are doing this year.

Set aside the US, and let's go to the developed international markets, which we saw a deceleration in results in the quarter. Net sales were actually down 1%. Now some of that was due to lapping of comparisons to a year ago. Last year's first quarter was very strong in some of our key markets, developed international markets, but a lot of it was driven by some strategic decisions we made to reduce our promotional activity.

For instance, in the UK we moved from a high/low pricing strategy there to an everyday low price in one of our channels. What that resulted in is a short-term hit to our numbers as retailers reduce their inventories in that market. But we do believe that's the right action in the long term and we will realize higher pricing as a result.

A similar type of situation happened in Germany, different reasons, but also to do with pricing, but it caused some what we call variability in the customer buying patterns.

So, similar to what I just did in the US, I'm going to give you a couple examples of what happened in these two markets. Again using Jack Daniel's Tennessee Whiskey, if we look at the UK, the UK depletion trends, again in our underlying sales, for the quarter were down 16%, where the takeaway trends are up much, much stronger and actually are growing. They were up 5%.

In Germany, the depletion trends were down 23%, whereas the takeaway trends again were growing, up 4%.

So when you look at these two markets, there is roughly a 20-point spread between depletion and takeaway trends in these two important markets for us.

Moving on to Poland, it had another very challenging quarter, very weak economy there and a continued giveback from the January 1 excise tax increase from a year ago or from earlier -- from last fiscal year where we had buy-ins.

So what we have done, because of all the noise in the numbers, is we have made some adjustments. We estimate that adjusting for the reductions in the retail trade inventory levels that distorted our numbers significantly in the quarter, so the ones I just described for the US, UK, Germany, and Poland, actually resulted in our overall global net underlying sales for the quarter to be about 6%, which is right at the low end of our underlying sales growth for the fiscal-year outlook.

Just to mention a few other markets in Europe that are really doing very nicely, both on a underlying net sales basis, as well as the support of takeaway trends, such as France, Belgium, and Netherlands. We still are seeing some pressure, economic pressures, if you will, in Italy and Spain.

But if you flip over to our emerging markets, they had a very, very nice quarter, grew quickly. In fact, they accelerated from last fiscal year. They were up 15% in the quarter. We knew, and we had described some of this to you previously, that Mexico's growth was going to be up because of some favorable compares against weak periods last year where there were large givebacks.

But beyond that, the majority of our other countries in the emerging markets really enjoyed strong growth, and I can name a lot of them, but I am just going to name a few of them. Brazil had very nice growth, Russia, Turkey, Indonesia, just to name a few.

In summary, while I said our underlying trends were up 3%, net sales for the quarter, so we're all reported, we really believe that the underlying trends themselves, when adjusted for these retail inventory adjustments, were closer to 6%.

When I look, though, however, at the 3% growth that we had in topline for the quarter, about 2 points of that improvement was driven by price/mix. That, combined with a reduction in our cost, actually helped drive the 50 basis-point improvement you see in our gross margins, as well as our 5% profit growth that you saw in the quarter.

Moving on to A&P, you saw a reduction in A&P spend. That's really timing related only, where you saw a 8% increase in SG&A as we continued to invest behind our people to drive our business, including the route to consumer change we made in France last fiscal year. We discussed this at the end of last quarter call, too. We actually expected our first half of the year SG&A to be higher. And so, as the year goes on and we start cycling against these investments, this is a stepped-up investment we made in France. In the second half of the year, we expect SG&A rate of growth to go down.

So pulling this all together, our underlying growth in operating income was up 7% for the quarter, 1% on a reported basis. Our EPS grew 5% to $0.70 per share.

Let me now move on to my second topic, and I want to discuss flavored whiskey and its impact on American whiskey renaissance, and then I will update you on the Jack Daniel's Tennessee Fire test.

I thought it would help to frame the American whiskey opportunity that we see by going back in time. Let's go back to the 1970s and look at how many cases of American whiskey were sold at the time. It's about 100 million cases. That's when the consumption of American whiskey actually peaked.

We will fast forward it to today where there is a 40-year secular decline in the category. It was roughly cut in half, so it is about 50 million cases. If you look at the US population of legal drinking age at that time, it has grown about 50%, meaning the per capita consumption of American whiskey has fallen by almost 70% over that period.

We were witnessing an inflection point in the US American whiskey around 2010 where we really saw consumer interest in the category reignited. When we look at the work we have been doing over the last four years and the growth that has resulted, we think this is the first of many, many years to come of recapturing the lost market share that I just described to you.

When we look at what we think is the cause of this renewed demand, of course, those are multiple factors, but I'm just going to mention a few. One is the rise in craft distilling, which is led by our own Woodford Reserve; the consumer interest in heritage and authenticity; and what appears to be vodka fatigue.

But I am going to focus on another factor I am calling a fourth factor today, which is the importance of the flavored whiskeys. In 2013, in the US, flavored whiskeys accounted for about 45% of the American whiskey volume growth.

Looking at what drove that, definitely demographics played a major role in that, and with increased interest from women and minorities, based on their changing taste profiles and preferences, as well as convenience. I can speak to this. I have a couple of millennial kids myself and I know I probably taught them to like things that tasted differently, but millennials definitely have grown up with many different flavor offerings, whether it's cereals or soda or water or juices, so they now expect to have all kinds of choices in taste and they want great tasting things.

Now, of course, mixability and drinkability have played an important part, too, in the bourbon renaissance. So, of course, it's natural for Brown-Forman, our Company, to take these and leverage these sought-after characteristics through our disciplined approach that we have toward innovation, combined with our great American whiskey brands and innovate.

That leads me to how we have been innovating and approaching flavored innovation, and we have been doing it in two main ways right now, and first, we have been focusing on different taste profiles in expression of existing brands. Some examples would be Woodford Reserve Double Oaked, or Old Forester Single Barrel, or Jack Daniel's Sinatra.

And what these products had were different tastes built off of grain recipes or barreling technology or aging requirements, but they served to be what we believe were great extensions of our core brand offerings. And they also tended to be in the super-premium price point. They definitely have generated positive publicity and also satisfying what is new in this era of consumers' desire for discovery. So you can expect that we will continue to selectively release these innovative offerings into the future.

The second way that we have been introducing flavor into our portfolio of brands is through flavored liqueurs into our whiskeys, and, of course, we did that with Jack Daniel's Tennessee Honey. That is selling over 1 million cases just after a third full year in the marketplace. We reached that this past January, and we think that speaks volumes to the global interest in the brand and really the success of our innovation strategy. So it has allowed us to introduce new consumers to the brand, as well as offer new drinking occasions.

While we have seen some recent bit of slowdown of growth rates of the brand in the US as it begins its fourth year in the category and the law of large numbers take over, we really do believe there remain untapped opportunities for the brand in this important market in the US, as well as we can continue to expand it outside the US, as we continued to do this year, where the brand grew underlying sales well over 50%.

You can expect that we will continue to drive the Tennessee Honey's growth around the world, but we have been testing, as we have discussed with you previously, our second full-strength flavored expression, which is Jack Daniel's Tennessee Fire. The test results from these three markets where we entered -- where we started to test have been really, really encouraging, both from a trade perspective, as well as a consumer perspective.

We have also seen nice halo in these three markets on the Jack Daniel's trade market sale for its gained shares with minimal cannibalization to both whiskey, Tennessee Whiskey, as well as Tennessee Honey.

Now with that, our plan is on rolling out Tennessee Fire to five additional states during the fall and we're writing our plans for a further geographic expansion. But our goal with Fire is really in line with what we have been able to do with Honey, and it's to create a brand extension of Jack Daniel's versus the flavor of a week approach. We will, of course, update you on our plans in future calls as we go through this process.

Now that leads me to my third and final topic and I want to update you on our growth outlook for fiscal 2015, which we reaffirmed this morning. I know you can tell from my earlier discussion about the first quarter, there's a lot of noise in it, and so, we do not believe the first-quarter results provide a good read for our full year, and that's why we provided the adjustment for you, to give you an idea that we believe that the underlying trends are there to keep us on track to deliver the 6% to 8% net sales growth that we shared with you on our last call.

Now this does assume that there is no further deterioration in what we call the very fragile geographic -- geopolitical environment in Russia, where there is uncertainty around the government policies, how local laws may be interpreted and enforced. Just to put it in context, Russia is an important market for us, but in fiscal 2014, it represented 2% of Brown-Forman's total net sales.

We have and we continue to expect to take price increases this year, which we believe will drive modest gross margin expansion that we also described to you in June. This, coupled with the gross profit growth, continued leverage in A&P and SG&A, where we will continue to invest in both of these categories. We believe we are on track to deliver the 9% to 11% operating income growth that we discussed in our last call.

While our outlook for our earnings per share remains unchanged, it is still $3.25 to $3.45, we do see a drag as a result of foreign exchange, about $0.06, but we also are seeing a slightly lower -- or forecasted a slightly lower effective tax rate, somewhere around 29.5%, so we expect that to offset much of the drag from the negative impact of foreign exchange.

In summary, I know there is a lot of noise in the quarter, and I think you're going to have quarterly noise and that's why we like to step back and pull ourselves back and look over long periods of time and really to look at the future. And when we look at the global demand for American whiskey, it remains solid.

We talked about innovation of both with Honey and what we're doing with Fire, and that definitely has helped [pyre] our results over the last few years. The premiumization trends continue, and so, what we think all that combines together is it positions Brown-Forman for what will be another record year, what we believe will be another record year of both top- and bottom-line performance.

When we look to the future, we know that we have got a strong balance sheet, growing cash flow, and that will allow us to invest in the future growth, while returning cash to our shareholders through dividends and share buybacks, as you saw in the quarter.

With that, I am going to turn the call over to Paul for some quick comments.

Thanks, Jane, and good morning to everyone. I am just going to add a couple of supplementary comments to Jane's and I will be rather brief, given that we are only 90 days into the fiscal year and we actually did a pretty thorough presentation on the Company here a few weeks back at our recent shareholders meeting.

All in all, the quarter was pretty much in line with what we had anticipated, and in many ways, it was similar, in my view, to what I recall from the first quarter last year when inventory changes and buying patterns distorted the short-term results somewhat. And of course, the changes that Jane emphasized in her part are, of course, accentuated by the reality that, of course, we're just talking about a very short period of time here, in three months.

I thought most important were Jane's examples comparing the recent growth rates in consumer takeaway versus depletions for Jack Daniel's in three of our key countries, the US, UK, and Germany, particularly. I thought they were really illustrative of this inventory point that she was making.

So it also, not as important for understanding the results, but it is a source of reassurance to me that results should improve over the balance of the year as inventories come back into line as the takeaway actually drives the business versus the inventory shift.

All in all, the expectation of improving underlying growth rates in both sales and gross profit, coupled with the continuing expectations as we had at the beginning of the year and had last year of decent spending leverage, gives us the comfort to reaffirm at this stage the full-year earnings forecast that we provided just 12 weeks or so ago.

That is my summary of that I feel of what the quarter said to me. A couple of other things, looking ahead, Jane touched on Russia. It is a bit more of a risk today for us than it was when we did our full-year plans, and while no doubt an important market, particularly to the very long term for Brown-Forman, we do take some comfort from the fact that our emerging market business today is quite well diversified, and as we reported this morning, those markets collectively continue to perform very well, with underlying sales in the quarter up 15%.

Finally, I just want to add a point or two here on Jane's comments about the flavored whiskey opportunity. As she said, Jack Daniel's Tennessee Honey is off to another great start globally and we continue to have high hopes for it. Less visible to everyone has been the fact that alongside it, we have been assessing the potential for this possible entrant in the marketplace, which is Jack Daniel's Tennessee Fire, and so far I am very encouraged by what I have seen in the three-state US test.

As expected, this happens with almost any Jack Daniel's product that gets tested and introduced, there was -- has been high trade and consumer curiosity, and then, therefore, early demand for the product correlates well with that. So it is quite high, and as I said, we get this almost with anything we take out into the marketplace with Jack Daniel's.

But beyond this, we try to read the test results, and what we are seeing is that they are indicating a very strong acceptance of the product itself, which is always really important when we go out and introduce a product either on a large scale or into tests or even if it is in simulated tests before an entry. So the product performance in the marketplace itself we consider very important, and that seems to be very well accepted in these test markets, as well an appreciation by many for Jack Daniel's Tennessee Fire being a more premium, authentic, and masculine alternative in this space. Not surprising that Jack Daniel's would bring that kind of relevant imagery to the category.

We will be expanding to a few more states here in October, and in the meantime, we will read the original three states for a couple months more while we assess the timing and manner in which we will more substantively expand it geographically.

It is just an exciting opportunity for a US business, and we know there will be interest beyond the US as well, which, of course, we will also be evaluating. We will keep you apprised in the weeks and months to come on our plans more specifically for Jack Daniel's Tennessee Fire.

That's all for our prepared remarks and we are now happy to take any of your questions.

(Operator Instructions). Bill Schmitz, Deutsche Bank.

Can you just talk about how much of the emerging market growth, excluding Mexico, in your mind, do you think, is distribution gains versus same-store sales? Is there a way to quantify that?

We have fewer syndicated resources that cover the broad distribution of particularly Jack Daniel's in those markets, but you are always building a little bit of inventory because we're still at early stages of development there.

But I think we have been in many of those markets now long enough that these double-digit growth rates we are seeing, I feel, are reflective of consumer takeaway versus inventory build. They are not -- all these markets will be very different market by market, but you tend not to see some of the buying patterns that you will see with these major customers that you have in the developed markets that have the ability to inventory and build four to six to eight months' worth of inventory.

I think they -- my feel is just because of the consistency with which the results have been coming forward over the last many years that it is indicative of consumer takeaway in those markets, more so than any kind of inventory build.

Great, thanks. And then, just a quick follow-up. Did you set a revised time for the broader rollout of Tennessee Fire? Did I miss that in the prepared comments? Is there a timeline when you think you will have national distribution?

The only thing we just said was, if you missed it, was that we are going to go in October to five more states in the United States, and between now and then, we will be assessing the plans for doing something more substantively in terms of a broader geographic expansion and we will keep you posted on it.

But we have got some work still to do in observing a little bit of the performance in those original three states and we want to keep looking at how best to sell and market the brand when we go to a broader geographic platform. But all the signs are really encouraging that we are going to be well accepted with it. It is just getting our ducks in a row.

Right, thank you very much.

Bill Chappell, SunTrust.

Paul, Jane, can you maybe just help us understand what was different from your internal expectations in the quarter, because it sounds like a lot of the pricing and the timing of shipments was pretty much what you expected 12 weeks ago? So I'm just trying to understand if we look at maybe Finlandia or if we look at the growth in the tequila market, what was different from what you were expecting internally?

I think the only difference from our perspective was not understanding the impact of some of the pricing decisions that we were making in the developed international markets. Now we understand them, but I think that was the main one.

We were still somewhat uncertain as it related to a brand, Finlandia, and what that was going to be -- what the price increases -- two price increases last fiscal year was going to have on the brand itself in Poland, and still are evaluating that. But I think those were the main two things.

By and far, the largest thing that happened was -- affected our quarter was the US, and we anticipated it.

I thought Jane's examples on particularly the Europe -- I don't think any of us would have anticipated -- you cited a 20-point difference between the depletion trends and the consumer takeaway trends in Germany and the UK. We would have anticipated some of that, not to that size, and so you hope that will correct here in the ensuing months as you start to have trading patterns that match the consumer takeaway.

That would have been a bit bigger than we would have thought. I think the US one we largely we are in line with.

(multiple speakers) that one.

And does that change your longer-term outlook on pricing or how you would pass through pricing?

Not at all.

Nope.

Not at all. Some of it is we got more aggressive for two fiscal years. We had some of this same thing with the building of inventories in the first quarter back when we did it. Now you're coming back off of it a little bit in terms of the size of it, so it's an accordingly appropriate adjustment and it hit the quarter.

It does work itself out throughout the year, though.

It does, but the one thing you are always monitoring, and it's the reason we're doing a little less pricing this year than we did in the prior two fiscal years, is you just want to make sure the cumulative impact of the pricing isn't too much, particularly on a franchise like Jack Daniel's where you have both ultra-premium or super-premium pricing paired with very large volumes, and so that balancing act, we are always doing.

But I think that's the more important thing, and we always try to give you transparency to what's happening as it relates to these shifts in the inventories. But in any event, I think the more important thing is how the consumer and some parts of the trade, too, are reacting to your pricing plans.

Got it, and last one for me, just on further color on Tennessee Fire. As you said, Paul, you expected pent-up demand to have a good, initial response. Is there any more color in terms of -- is it cannibalization versus Honey or is it incremental or anything else you can give us? I know it is still very short.

We would anticipate -- the early reads, like I said, were so encouraging because it is very limited in terms of what we are seeing in terms of cannibalization so far, relative to both Jack Daniel's Tennessee Whiskey Black Label and to Tennessee Honey. If anything, it's providing a nice halo.

Some of it is to be expected. The flavor profile that we are testing of this Jack Daniel's Tennessee Fire is a really different taste than either Jack Daniel's Tennessee Honey or Jack Daniel's Tennessee Whiskey Black Label. So some of it by design, I think, you would expect to be for different occasions or for different consumer palates, and that, in fact, is playing out in this test. So that's encouraging.

I think it's more us wanting -- we are also very much trying to -- we are trying to do a lot of things at Brown-Forman, but also within the Jack Daniel's trademark, making sure that in the US market and other markets that we are appropriately focused on building Jack Daniel's Tennessee Whiskey in Black Label.

We continue to be really enthused about the potential for Jack Daniel's Tennessee Honey, and so, part of it is to make sure that we don't get distracted by the enthusiasm that is out there and we manage it well, and we can portfolio sell well and that we are in tune to any potentials that might exist for any cannibalization, even though it has been minimized so far.

And the other thing is just making sure we know how to market and sell and message these products to ensure the best collective success for the Company and the trademark, and that is always a trial and error process, making sure you get that messaging right, the weights of spending and investment between channels, and so part of it is, I think, the necessary exercise of using the test, in fact, as a test ground to see what might bring the best results for us.

Thanks for the color.

Ian Shackleton, Nomura.

A question around tax. You got into a lower rate this year. I wonder if that is reflecting a more sustainable lower base. I am aware, I think, some of the moves you made in Europe may be helping with the tax situation, so just interested to know how we should think about that going forward.

Those taxes, as you know, for us, I think we had the highest tax rate of all of our competitors' business and something that we have been very, very focused on and looking for smart ways to reduce our tax rate.

And of course, one of the biggest ways is to continue to grow your business outside the US, like we have been. We have been growing at a fast clip outside the US. That definitely has provided a reduction in our tax rate and has continued to do so.

If you look over the next several years' period of time, I think that you could expect our tax rate to be somewhere around -- in the 30% range.

Great, thank you. And perhaps just to follow up, Australia was a market you were quite cautious about last year. It sounds like that is doing quite a bit better with the growth now. Has that changed for the better?

I think a little combination of both. I think within the quarter, there may be easier comps down there versus what we had a year ago, but I know that the team there is a little more -- it's a very competitive market, I will say that, as it relates to what's happening at the trade level. And so, and of course, innovation remains really important down there, particularly as it relates to the RTD business.

And that team is, I think, in a better position today as they think about the marketplace, but I will say the one thing about that marketplace mid to long term is the pressure from those excise taxes that have hit all distilled spirits, in my view, have been significant and disproportionate to spirits, and have been one of the influencing conditions to slow to lackluster growth in the marketplace.

I actually think getting some relief on that through government lobbying, et cetera, is a really important thing for the industry, if it intends to have any kind of consumption growth down that market.

Is there any sign of success there? Because I know it is an issue being campaigned on for a while there, Paul.

Yes, it's a long slog, as you know. You're going to hear -- you would have heard it from a number of the competitive companies in this industry, and Poland, Jane highlighted here.

It is -- as we look around, you think about the topical issues, you don't want these excise taxes to become so rhythmic in the way that they have from year to year, particularly within countries, and you occasionally have things like a US consideration of the legalization of marijuana becomes a big threat. You try to assess and look at and think about long term.

These excise taxes, though, particularly with governmental departments needing revenue and us perceived as an easy target, as regressive as sometimes these taxes are, have really, I think, been more present in our business over the last five years than any of us would have anticipated, and they do have -- you just look to Poland right now. They do have an impact on the affordability.

And so, it requires both lobbying and it requires innovation for the suppliers and owners to go and innovate around it so that they can bring products to the market that may not be as high a proof is the other way to do it, because a lot of this is based on proof.

Understood. Thanks very much, Paul.

Mark Swartzberg, Stifel Nicolaus.

I guess a few questions. Firstly, as we think about your outlook for the year, your plus 3% start and your adjustments to plus 6%, given the takeaway dynamics being better than the shipping dynamics, still implies you're looking for an acceleration over the balance of the year, given your 6% to 8% view.

I know this is a mechanical question, but when you think about what is going to drive the acceleration, is it Tennessee Fire? Is it a particular country? I am just trying to square that circle.

I think that's a great question and something that we've been studying, as you can imagine.

As we look at it, I think the main driver of it will be the United States is where we are looking for the growth to come from. It is not Tennessee Fire. Tennessee Fire, while we have it in the numbers, we do not have a national rollout in the numbers. It is the US.

As you recall, the discussion that we had in June in terms of our rebalancing of price and volume, if you will, this acceleration after the first quarter. But even though I have made this adjustment, we are still expecting improving trends, which we have seen and I alluded to that, too, in my comments in terms of the takeaway trends for the Jack Daniel's Tennessee Whiskey brand itself.

It is the US, largely, is one of them. We have got to see some continued growth -- improvement, though, in the western Europe markets that I discussed, and we have reason to believe that that will happen, based upon some of the plans they have in place.

I think the other thing I would add that just helps, particularly when you are discussing it during Q1, is that as tough as our expected comps within the fiscal year were going to be for us in Q1, we would anticipate, at least based on history and barring any new news, that our Q4 comps would have been on the easier side relative to what we had facing us in Q1.

There is a counterbalancing things, but nonetheless, as we go along, in order to accomplish these -- the forceouts, as you indicate, things do have to accelerate. We expect some of it to come back through inventory, of course, but we also feel like you do need an acceleration as you go through the year.

There is other -- remember, some of these buy-ins, there will be particular periods and particular countries where we will be up against other buy-ins. The Polish tax increase is one such example later in the year. But we will try to keep you all current on where those inventory shifts are occurring and when they are not and how Brown-Forman is either benefiting or being hurt by them.

But nonetheless, part of it is we really only do have 90 days. We think we have a decent feel for the inventory impact on us and we feel comfortable affirming the guidance today, based on what we know.

Fair enough. And if I could follow, purely on the US for a moment, if you will, ignoring the inventory dynamic, when you look at the takeaway you are actually seeing and look at it on a total North American whiskey basis, how would you characterize those rates of growth versus, say, earlier this year or year-ago levels? Are they, in fact, accelerating?

I heard your prepared remarks. I wasn't quite clear if indeed takeaway for your Brown products, if you will, is, in fact, accelerating.

And then, relating to that, vodka fatigue in some ways is a good thing for you guys, but we are seeing promotional activity there pick up. Could you just speak about how that's affecting, again, the brown component of your portfolio from a takeaway perspective here in the US?

I can -- I don't know if you get Nielsen data. I can read you some numbers just to give you a feel for North American whiskey and their trends, both on a three-month basis, as well as a 12-month basis.

The trends have accelerated. They are improving, so on a volume basis or a value basis, but let's look at volume basis, it is up nearly 8% on a three-month basis. And it is about the same as it was a year ago, so I guess it's not as [strong], but it is still much stronger than the TDS category, which has, I guess, slowed slightly in the three-month period. I think some of that is due to the vodka category, if I look at the vodka trends, which continue to slow down.

And for us, within it, I think -- I will highlight one little difference that we might observe, and Jane has touched on it, within the quarter -- now you are focused here only on the United States, is that -- and this is a continuation of last year's results where Woodford Reserve within our portfolio continues to really do well and performing very much above the performance of North American whiskey generally.

One of the brands, one of our oldest brands, our oldest brand, Old Forester, has been accelerating in its performance over the last 18 months to two years, so those would be real highlights.

Of course, Tennessee Honey as a flavored expression has done very, very well, but those rates, as Jane mentioned, have been coming down some off the higher basis. The Jack Daniel's Tennessee Whiskey volumetrics are going up, but associated with it -- it is not just because we have been taking less price. You will see less price, so price/mix will come down subtly on that.

And then, brands that have been performing below North American whiskey, and it depends on how broadly you define it within our category in the United States, would be our Canadian Mist, Early Times, and then even if you went so far as to include a brand that straddles it, which would be Southern Comfort, has been a brand that we from time to time refer to, even though it is a liqueur, as a flavored whiskey, it would be performing below. But that's consistent with some prior-year reports as well.

I think the big changes that people might note in the first quarter are slightly different delivery of the sales dollar growth on Jack Daniel's with volumes accelerating here more recently and Tennessee Honey coming down off some of those higher growth rates to more moderated levels of growth.

Remember, that's reporting only retail business, primarily. The one encouraging thing about the US market that we are starting to hear and see some data for is improvements in the on-premise trend and we certainly can note that for our Jack Daniel's Tennessee Honey brand, as versus its first couple of years, it has really picked up its momentum in the on premise relative to the off premise.

That's great. So the on is -- okay, so we have heard the same. Okay, so you are seeing the on.

Final one is can you speak more to whether you think this dynamic with vodka is actually good or bad for your brown spirits?

Certainly for the brown spirits, if people shift out of white goods and go to [brekken], net net, that's great for Brown-Forman's, particularly its American, business. But --

What I am referring to is the promotional activity picking up, specifically.

I think promotional activity picking up, and I would say not just the United States, I would say globally, and I wouldn't confine it just to vodka, either. I just think when you have softness in emerging markets for some of our competitors, when you have some of the corporate growth rates that we observe with some of our competition, particularly the underlying sales growth rate, you anticipate that they will fight and compete for that sales dollar more aggressively.

And that goes across categories, in my view, and it can be observed on strong trademarks that might exist in everything from rum to gin to Cognac to vodka.

We anticipate and observe -- it varies market by market -- that people will continue to be competitive and that sometimes will take the form of promotional pricing. I wouldn't say that it's at a level that I would find out of control or something that I would raise as any different than what I might have observed three or six months ago.

I think the other thing that we continue to watch out for, what are the new innovations the competition are bringing, because it is new forms of competitive activity in the marketplace. And so, it's a reminder to corporations like Brown-Forman that are doing well that they, too, need to be innovating and continuing to bring products to the market that can meet the needs of the consumer and the trade.

The two things we will keep a close eye on are what level of promotional pricing are out there and the level of competitive introductions to new products.

Got it, great. Very helpful. Thank you, guys.

Bryan Spillane, Bank of America.

Jane, I want to just go back through, make sure I understood a few of the components that you outlined in terms of just breaking down the first quarter. The underlying growth to the bridge, I guess, from 3% in underlying sales growth to an adjusted 6% is really just the change or the effect of distributor inventories -- I'm sorry, retailer inventories coming down. Is that right?

That's correct. The distributor inventory is already reflected in our numbers. Yes.

Okay. The just rough weighting, just how much of that gap, if you will, between 3% and 6% was the US versus what you saw in the UK and Germany? Just trying to get a rough idea of the proportions in terms of how much they might've contributed?

It was about two-thirds/one-third US versus Europe.

Okay. And then if I'm looking at operating income, and I know you guys measure yourselves -- one of the measurements that you use for management is depletion-based adjusted operating income. I guess if you were looking at that measure, just trying to get a sense for what the profit implication was in the quarter for the change in depletions because of the inventory adjustment. Just trying to get an understanding of how much of a profit hit it might have been.

Pretty good, I would say.

It would have been (multiple speakers)

Yes, because you would have to flow the 3 points all the way down to the OI line.

Yes (multiple speakers)

Yes, same.

Okay.

(multiple speakers). It would be more impactful to the 3%, wouldn't it?

Way more impactful. Yes.

Yes.

Fair to say, right, that the retail inventory (multiple speakers) -- the retail inventory adjustments, that effect in this quarter was one of the things that was probably a little, order of magnitude, was a little bit more than what you were expecting. When we look at it from a operating profit and earnings-per-share basis, there was actually a more meaningful unexpected drag in the quarter just because of that dynamic. Is that fair?

I don't want to overexaggerate it. I think we anticipated the US. We anticipated some in Europe, but just not quite to the extreme, so I wouldn't take that whole amount, if you will. But in theory, it was a little bit (multiple speakers)

Yes, and we (inaudible) fine-tuned in terms of our own even -- just as we don't go and provide quarterly guidance on our earnings. I think it was a simultaneous qualitative and quantitative exercise that informed our expectations, and so we just weren't that obsessed with trying to forecast it in advance how much of the inventory (multiple speakers) might impact the overall bottom-line earnings.

We try to give ourselves some sense of how it might hit the topline, but nonetheless, I think your point is relevant. It did, of course, have an impact on the underlying operating income growth rate.

Okay, and it was and is -- approaching this quarter, trying to -- the first quarter, trying to model it was like one of my kid's math word problems. There were just so many different components.

And I guess, not trying to get you into a 2Q discussion, but if you could, just in terms of some of the big puts and takes that we might need to consider as we are modeling 2Q, do you have any color you could give us in terms of inventory adjustments or any of those types of things that, just from a big picture, at least, we may need to think about?

Nothing that we would guide. I think an expectation of improvement.

The only other thing that we know that is a difference from prior years that we anticipate being a help in the marketplace, particularly competitively during an important season, is we anticipate there being more gift and value-added that cycles in at a greater level. Some of that, I guess, could hit, Jane, Q2, just some of the shipments (multiple speakers) -- in Q3. So it might be spread between Q2 and Q3, but otherwise, it is the classic culprits of inventory shift, FX, the things you're trying to read in order to get down to a really good underlying number.

I would just take off where Paul left off, I would think about -- I think Q2 and Q3 would probably be more normal. I think Q4 will be a bit easier, and I think component pieces of the P&L, I talked about SG&A a little bit. It will continue to be high, definitely, for the second quarter and start to come down somewhat in the third quarter, but really come down in the fourth quarter.

You will see spend more normalized. A&P spend, which was abnormal, obviously, for the quarter here, timing related only. But I think that's (multiple speakers)

And nothing on anything from Tennessee Fire, as Jane mentioned, in Q2. If anything had an impact, it would be in the second half at the earliest, I think, as it relates to significant impact. And of course, we will just keep you posted on that as we have plans that we are ready to talk about.

Okay. And just, I have got two other short follow-ups. One, if there has been any change in the expectation for the capital spending range for the year.

And then, the second, I guess following up on Mark Swartzberg's question about acceleration, just want to make sure I heard -- so there is acceleration that we should see just in terms of -- shipments should accelerate because of some of this inventory noise and that type of thing. But is there an expectation that end takeaway should also accelerate meaningfully? I guess that wasn't totally clear to me whether the acceleration referred to just what you will be shipping versus expecting some meaningful acceleration in takeaway.

I don't know that we have got to that level where we feel like it has to jump up considerably, certainly versus Q1's reported results, but at the consumer takeaway level.

I think if there is one thing that could have an impact -- there are certain market-by-market examples we could give of this, but the one thing that you would anticipate having a positive impact is less pressure in the marketplace on consumer prices because we are, [point] in fact, not getting as much benefit from taking price increases.

I think that as with the passage of each month and as the prices establish themselves, and you are always thinking about that from a competitive reference point, so it will depend a bit on what our competition is doing, as well, but I think versus prior years, if anything that would be a potential contributor to acceleration versus deceleration, the fact that we are taking less price.

Okay. And then, Jane, just CapEx. Any change in the CapEx guidance?

No, it's unchanged. It's still $120 million to $140 million range is what we (multiple speakers) provided (multiple speakers)

Great, thank you, guys. Have a great Labor Day holiday, as well.

Robert Ottenstein, ISI Group.

I was wondering if you could help us ring fence the potential downside in Russia, how to think about the situation there? I know you said about 2% of sales, but if things got really bad, worst-case scenario, how much potential income statement impact could there be?

I think it's just really too early to quantify the potential impact. It's a really fluid situation, so (multiple speakers)

We're, obviously, working more right now to, frankly, in some ways, understand it, attempt to mitigate and communicate, and, in as direct a way as we can, cooperate with what we can consider to be the authorities, who have in a very limited way, from what we understand thus far with affecting one region and with three stores, just literally opened up those lines of communication to try to administratively cooperate with them.

That's where we are, I think, and really it's just premature to go and start doing any significant risk assessments at this stage. I think we want to get more information before we even undertake that exercise.

Okay, and I can certainly, certainly appreciate that. Perhaps something easier to speak on, could you give us a little bit of an assessment of how the new French infrastructure is working out?

Great so far. It went live in the beginning of the calendar year, and so you have normal sort of transition issues in both the marketplace and the people themselves encounter, being a new company, but it was very well planned.

I think we put investment in upfront so that it could launch in the way that it has effectively done, and I would say that just more qualitatively, the vibe that you pick up when being around the people who are undertaking the Brown-Forman France today is really encouraging.

And of course, Jack Daniel's has been a very leading performer in that marketplace now for some time. And actually, we continue to have very high hopes for it.

For this year, you'll probably hear more about the margin as it makes its way in, as well as some of the costs, but the margin impact is significant for us this year as it makes its way into its first full year. And then from there on, going out, it really becomes about implementing in the marketplace, innovating, doing the right -- Jack Daniel's Tennessee Honey is entering that market, which I think is very -- it's off to a great start.

And so, all of that becomes the important exercise. And we will keep you posted. I know there is a lot of interest on what might happen in France, and Europe more broadly, but as a counter to these trading patterns that we talked about in the UK and Germany -- I'm glad you brought it up -- because France continues to do very well for Brown-Forman.

Can you give us any sense of the volume acceleration that you are seeing now?

No, and actually, it wasn't planned as some massive acceleration to help either pay for it or to recoup it. It was really more -- probably more capturing the margin than it is in any volume acceleration.

And I know one of the things that group is doing, now that they have got their own company, is looking to what possibilities might exist for some forms of acceleration or innovation in that marketplace now that we have more direct influence over the marketplace. Those tend to come in the forms of three- and five-year plans.

Terrific. Then my last question, I was very interested to hear your comments on flavors, and I know you guys plan long term. Just so we have an idea of how to ballpark these things, 10 years out, do you imagine -- how many flavors do you think that the Jack Daniel's brand could carry long term?

As expressed -- your example of a flavor being a Tennessee Honey or a Tennessee Fire?

Exactly. Obviously, I don't think anybody expects anything like vodka. Are we talking about two or three, a dozen? Just round numbers, how should we think about what you see the long-term potential for different types of flavors?

I don't see it -- it is hard, of course. The crystal ball is really difficult. At this point, I would find it hard to think a number that you -- just using a number like 10, at least from my limited visibility looking into the future. Something about that doesn't make me feel real good.

The two, I would say, that we have -- which is one, with still studying and looking at the second one at a preliminary stage, feels about right for us right now. I think what you want to do, though, is with Jack Daniel's -- and there have been times where Jack Daniel's may lead the consumer marketplace. It's harder for a big trademark like this. You want to be innovative and all that, but we also are simultaneously quite protective.

If the consumer marketplace evolved to the point where actually to be competitive it required the trademark to do more than a couple, that would create a different opportunity than I would say exists today. From what we have seen right now in terms of flavor, it has really been, in any kind of scale, really just two flavors for whiskey. It doesn't mean there won't be broad acceptance of other forms because there is no way six or seven years ago I would have forecasted two pretty significant, very scaled, volumetric markets associated with honey-flavored whiskey and cinnamon-flavored whiskey. We wouldn't have been able to anticipate it.

Some of it we will have to see where the consumer marketplace evolves to, but our current plans wouldn't forecast a rapid expansion of flavors.

I will give you another example. Jane referenced a different type of flavor that we might forecast is we have been slowly releasing this into a very limited distribution in the United States the last couple of years, has been the possibilities of going into rye whiskey, which has been a very hot category in the United States of late, and we have been making rye whiskey and then releasing limited amounts of it in its various stages of aging to whet the appetite of the marketplace.

That's a different flavored whiskey. It's not necessarily what I will call the liqueur type of flavored whiskey that you are referring to.

I think that kind of innovation could be important as well, and then the other extremely attractive potentially area of innovation around the Jack Daniel's trademark, beyond flavors and RTDs, is really the higher rungs of the ultra-premium ladder, which the Jack Daniel's Gold No. 27 and Jack Daniel's Sinatra would represent the latest very limited distribution and very limited offerings associated with those.

But really important not only to marketing, but if, in fact, we would get those to any sort of size, they could become important to particular markets or to -- because they are very efficient in their production of profit. So the ultra-premium end, alongside the flavored end, and I continue to think that at least to date has been a unique opportunity for trademarks like Jack Daniel's that exist in American whiskey. We haven't seen that potential to go both upward on the pricing ladder and across on flavor in many other categories.

That's very helpful. I take it from your comments that you don't see maple as having a lot of potential?

There is not a big -- I know there is a couple of expressions of maple in the market, and they have gone up and down a little bit. Nothing has been developed there.

Of course, that is a very natural flavor in a lot of whiskeys anyway, so I don't know how different as a taste that is for attracting new consumers.

One of the tests we consider when we look at these is does it bring new people who otherwise appreciate either -- maybe, let's say, appreciate the trademark, but don't like all the offerings provided by the trademark that might enjoy it in a different format. The ability of it is to bring in new consumers. It has been my very distant observation that, particularly with the example of maple, that there were high levels of cannibalization in some instances -- at least -- that was at least anecdotally or qualitatively what I was observing. I can't -- don't have any facts behind that.

But it would make sense because it is a much more slight variation on the whiskey than something more where the flavor itself is quite different, as it is with the honey and the cinnamon.

Terrific. Thank you very much.

Thanks, Paul, and thanks to all of you for joining us today for Brown-Forman's first-quarter earnings call. Please feel free to reach out to us if you have any additional questions and have a great Labor Day weekend.

Thank you. That concludes today's Brown-Forman first-quarter fiscal 2015 earnings conference call. You may now disconnect.