Brown-Forman Corp (BF.B) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Brown-Forman second-quarter FY15 Earnings Conference Call.

(Operator Instructions)

Thank you.

I will now turn the call over to Jay Koval, Director of Investor Relations.

Please go ahead, sir.

Thank you, Lori, and good morning, everyone.

I want to thank you for joining us today for Brown-Forman's second-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 second quarter of FY15, and 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.

Jane?

Thanks, Jay, and thanks for joining us for our second-quarter earnings call.

I'm planning on covering two topics today which should leave plenty of time to address Q& A after our prepared remarks.

First, I'll review our first-half results including recent trends in the second quarter, and second, I'll discuss our updated outlook for FY15.

So, let's get started by reviewing our recent results.

As expected, second-quarter underlying net sales of 7% represented a solid acceleration from our first-quarter's 3% growth and resulted in first-half underlying net sales growth of approximately 5.5%.

You'll recall that the first quarter was negatively impacted by trade inventory adjustments in the United States, United Kingdom, and Germany.

So, let's look at the United States where underlying net sales rebounded from flat sales growth in the first quarter to an increase of 10% in the second quarter as US retail trade inventory levels began to normalize.

This resulted in our first-half underlying net sales growth of 5% in the US.

On prior calls, we have discussed our efforts to drive a more balanced mix of price and volume growth in the United States in FY15.

And, US syndicated data from Nielsen and NABCA suggest we are accomplishing this goal.

Jack Daniel's Tennessee Whiskey blended three-month value trends are up over 6%, a 3.5 point acceleration from the 12-month trends we were experiencing at the start of the fiscal year.

Lower gas prices appear to be helping to drive better on-premise trends and a modest acceleration in TDS.

Moving now to our developed markets outside of the US.

Underlying net sales increased 8% in the second quarter, a significant improvement from the first quarter's 1% decline and driving our year-to-date underlying net sales growth of 4%.

A strong sequential acceleration in underlying net sales growth in the United Kingdom led to a high single-digit increase in the first half.

Underlying net sales in Germany grew slightly in the second quarter, but our year-to-date results in that market are still down mid-single digits due to continued variability in trade buying patterns.

France and our best Swiss markets grew double digits.

Canada continued to grow nicely while results in Japan were flat, and Australia declined slightly.

Underlying sales in emerging markets grew 8% year-to-date.

Results were particularly strong in Turkey, Brazil, Ukraine, Sub-Sahara Africa, and Indonesia.

It is worth noting that our recent initiatives in South Africa are driving strong gains in a very competitive marketplace.

Russia's growth stalled in October due in part to a depreciating currency and waning consumer confidence which have negatively impacted consumer demand in that market.

Mexico's underlying net sales grew slightly in the first half following the first quarter's growth on easy comparisons.

Poland's underlying net sales declined double digits as the market continued to struggle as the large excise tax increase taken at the start of calendar 2014.

Excluding Poland and Mexico, our emerging markets grew underlying net sales 22% in the first half.

We estimate that after accounting for retail inventory adjustments in the US and Germany, our overall first-half underlying net sales grew over 6% in line with the low end of our outlook we shared with you for FY15.

On a brand basis, our results accelerated sequentially due largely to the Jack Daniel's family of brands which grew underlying net sales by 9% in the second quarter up from the 5% in the first quarter.

Woodford Reserve and Old Forester also enjoyed strong double-digit gains as favorable dynamics continued to support the growth of our authentic American whiskey brands.

Finlandia Vodka's underlying net sales declined 6% year-to-date due to continued softness in Poland.

Southern Comfort's underlying net sales declined 4%.

And El Jimador and Herradura's underlying net sales both grew nicely in the first half, up 4% and 19%, respectively.

Moving now to the reconciliation of underlying to reported growth for our first six months, the big story is the rapid appreciation of the US dollar which is driving a large difference between our reported and underlying results throughout the P&L even after considering our hedges.

The movement of our key currency has been significant over the last few months with most of them depreciating versus the US dollar.

The euro, for example, is down roughly 7% since our call for the first quarter in late August.

Let's start by looking at sales where our top line grew 5.5% on an underlying basis fueled by equal contributions of volume growth and price mix.

Foreign exchange negatively impacted our reported net sales by 3 percentage points in the second quarter and 1 percentage point year-to-date.

Underlying gross profit grew faster than net sales, up 7%, as improving price mix helped drive a 40-basis-point improvement in gross margin.

Underlying A&P spend increased 5% while underlying SG&A grew 10%.

The increase in SG&A was driven primarily by our France route-to-market investments, some one-time items, and the investments in our people, processes, and systems to drive our Company's continued globalization.

We expected elevated SG&A growth to not subside until we move into the fourth quarter and lap such items as the January 1 route-to-market investments we have been making in France.

So, putting this all together, we delivered 6% underlying income growth in the first half of FY15.

Foreign exchange headwinds hurt our reported operating income growth more than reported sales through the combined and roughly equal effects of a transactional impact on net exposure and revaluation of net current assets denominated in foreign currencies.

As our non-US business has expanded, so have our overseas net assets, particularly cash, and most notably in Europe.

These revaluations are captured in the $17 million negative swing in the other income and expense line on the P&L.

For the first half of fiscal year, foreign exchange negatively affected operating income by $33 million, equivalent to a 7 percentage point hit to our operating income growth and a $0.10 drag on reported EPS which came in at $1.67.

So, now moving on to my second and final topic for this morning.

An update on our Outlook for FY15.

We have a significant presence in the American whiskey category which is enjoying favorable trends.

Global demand for the category continues to grow, and we believe that we have the best American whiskey portfolio in the world measured by breadth, global appeal, and leadership of the category's development.

We continue to invest in our brands, our people, and our markets with an eye towards delivering market-leading returns for our shareholders.

And, with consumer takeaway trends in the US acting as a tailwind, coupled with our disciplined approach to innovation, we believe we are well-positioned to drive long-term growth through further development of our whiskey brands.

Today, we are re-confirming the ranges we shared with you for our full-year outlook for underlying net sales growth of 6% to 8%.

This rate of growth would represent significant outperformance of our competitive set given their flat to modest declines over the last 12 months.

This 6% to 8% range also assumes continued momentum in our US business, stable economic conditions in Europe, and no further disruption from markets such as Russia.

We also announced today the nationwide rollout of Jack Daniel's Tennessee Fire later this fiscal year after several months of strong and very positive response from consumers and the trade.

We believe that this brand extension will help us seize one of the largest and fastest growing opportunities in flavored whiskeys with a premium, cinnamon-flavor whiskey under the Jack Daniel's trademark.

But, given the time needed to gain distribution and build momentum with consumers, we expect minimal impact on our underlying net sales and underlying operating income growth rates this fiscal year.

And, most of the positive impact from pipeline filled in the fourth quarter will be offset by investments to support the successful launch of the brand.

We also anticipate delivering 9% to11% growth in underlying operating income.

So while we will remain thoughtful in how we invest in A&P and SG&A, the pace and timing of our P&L investments will determine where within the range we land as we continue to find good opportunities to drive long-term growth through investments in our brands and our people.

Moving now to foreign exchange.

Assuming current spot rates, as well as our existing hedges, the foreign exchange headwinds that hurt our first-half reported results are expected to continue to negatively impact our reported results in the back half of FY15.

We anticipate foreign exchange will adversely impact our full-year operating income by approximately $45 million to $50 million, removing 4 to 5 points from reported growth in FY15 and about $0.15 from EPS.

This EPS headwind is $0.09 worse than our first-quarter outlook of a $0.06 negative impact from foreign exchange.

This is the principle driver for our revised EPS Outlook for the year of $3.15 to $3.35.

As a sensitivity, assuming our foreign currency cash exposures collectively move 10% in either direction, our EPS over the balance of the year would be impacted by approximately $0.07.

So, to summarize, our underlying business fundamentals remain robust, and we are confident about our future growth prospects despite the challenging trading environment for the industry.

We are investing heavily to meet future demand as seen through the large-scale distillery, warehouse, and homeplace investments at Jack Daniel's, Woodford Reserve, and Old Forester.

Meanwhile, we continue our track record of returning capital to shareholders through dividend growth as well as our share buybacks.

So, before I turn the call over to Paul for his comments, we wanted to say how much we're looking forward to spending more time with you next Wednesday, December 10, in New York where we plan to share our perspective on Brown-Forman's future growth prospects and positioning in the marketplace and our continued excitement for our American whiskey portfolio.

Paul?

Thanks, Jane, and good morning, everybody.

I'll be brief here but just wanted to add a couple of additional comments.

Overall, I was pleased with the quarter as we did see the acceleration in underlying net sales that we had anticipated when we spoke with you back in the summer.

It was particularly nice to see the US Jack Daniel's Black Label acceleration.

It has been some time since we've seen quarterly takeaway growth in the US at this level.

So this has been particularly encouraging for all of us.

You would have seen that the adverse impact of foreign exchange is an unwelcome reality for the Company just now.

But, I am heartened by the fact that the first-half underlying results generally met our expectations, and as Jane mentioned, they continued to compare quite favorably to what we observe from our global competitive set.

Now, as we've commented many times in the past, our wonderful Jack Daniel's brand is the primary driver of this differential performance, and I am going to cite just three of the ways in which we believe Jack does this.

First, as the undisputed leader of American whiskey, premium-priced or otherwise, Jack Daniel's, along with some of our other well-performing premium bourbon brands like Woodford Reserve and Old Forester, disproportionately skew the Company to one of the hottest categories in our industry right now.

And, we continue to believe that American whiskey is still at a relatively early stage of global development.

Secondly, Jack Daniel's widespread global consumer appeal is the source of the Company's exceptional geographic balance and diversification today.

The benefits of this geographic breadth are not only that it provides Brown-Forman with a larger consumer marketplace and much longer runway for growth than a more limited geographic scope might, but it also enables us to weather those periodic regional or country setbacks that inevitably come along over time.

Poland and Russia are two such examples in the results we've reported today.

This vast geographic footprint also carries with it foreign exchange volatility that is also evident today.

So, we consider this a very acceptable risks for the benefits of geographic diversification.

And then, third, the strength of the parent Jack Daniel's Black label band provides the foundation for thoughtful, meaningful line extensions such as Jack Daniel's Tennessee Honey which has been a noteworthy contributor to the Company's growth over the last few years.

And, with today's announcement that we'll be expanding Jack Daniel's Tennessee Fire nationally in the US, we are hopeful that it will follow the successful lead provided by Gentlemen Jack, Tennessee Honey and the Jack Daniel's RTDs over the last 20 years or so.

So, favorable category concentration, geographic breadth and diversification, and impactful innovation, all driven by Jack Daniel's are three of the primary factors that we believe account today for our Company's favorable and differential performance.

Accordingly, we will continue to invest in these areas, and, of course, behind the Jack Daniel's trademark.

This concludes our prepared remarks for this morning, and we're now happy to take any questions that you have.

(Operator Instructions)

Vivien Azer, Cowen and Company.

Hi.

Good morning.

Morning, Vivien.

First question has to do with the strong acceleration that you saw in the United States in particular for Jack Daniel's.

From time to time, we have discussed the potential for a competitive disruption to the Brown spirits Renaissance from your vodka competitors.

So, can you talk a little bit about what you're seeing from the competitive stance in particular from the light spirit players in the market?

Sure.

As I just commented, we were pleased to see this acceleration, not only in the results that Jane discussed, but also with some of the syndicated data that supports improved consumer takeaway.

As I think about it, there are a couple of things that we might point to.

Of course, the category continues to do very, very well, but the category has been doing well for some time, and the jump that we've seen in the Jack Daniel's Black Label trends recently -- we think it may be attributable to a couple of factors.

One is, this year relative to past, we think we just have improved relative pricing.

We had been quite aggressive in the US and consistent over the last couple of years of taking prices, and I think in some places around the country we got ahead of some of our competitive set.

Particularly at a time when the consumer might not have had as much disposal income.

So you put together the fact that we have improved relative pricing -- even though we haven't been like dramatically lowering prices.

It is just that others have caught us to up as we've been less aggressive with pricing this year.

And, you put that together with maybe this benefit the consumer is seeing from lower fuel prices, which might be giving them better discretionary income.

And I think we might be at a sweet spot where it's easier for our consumer who drinks upon occasion to trade up more frequently is maybe the bottom line.

And then, I would add to it, entering FY15, we consciously mobilized our US sales and marketing teams in the United States with a renewed focus on the Jack Daniel's Black Label brand.

We -- in some ways, I will call it asserting our category leadership.

Just making sure we weren't taking for granted the fact that Brown-Forman was the leader of the American whiskey business in the United States at a time when it was booming, and that therefore made it, of course, more competitive.

And, I just think in some ways through either investment focus -- just the heavy reminder of the importance of Jack Daniel's Black Label to Brown-Forman in its home country at a time that's very important for the category has really helped to focus attention promotionally and from an investment standpoint to also add to it.

So, I think the combination of that improved relative pricing -- maybe improved posture from the consumer and then our promotional efforts around it may be the primary factors contributing to the uptick.

That's very helpful.

Thank you.

Jane, thank you so much for all the color on currency.

Can you just remind us what your hedging strategy is?

Whether today's transaction translation -- a little bit of both?

And then, to follow up on that, the implications for lapping some of the expense hits that you're seeing right now as you go into 2016?

Sure.

So, just to give you little background on our hedging philosophy.

I think that's what you're asking for is.

First of all, we aren't in the market for speculating about FX -- we have never done that.

And, we don't hedge in excess of our underlying net exposures either.

We don't fully hedge our transactional exposure.

So, in other words, we are not in to take -- get 100% mitigated exposure all taken care of, or we wouldn't go the other way and have none.

So, what instead we do -- we do something that we call more like you're used to dollar cost averaging so that we are over any period of time -- a 12-month period of time you would see about 50% of our transactional exposure, if you will, hedged.

And so, I thought while I'm here I thought I might just spend a little bit more talking about FX because I'm sure there's going to be more color to this and thinking about what happened in our first half of the year -- the $0.10.

I thought I would spend a minute and break it down a bit more because what I was just referring to largely centered around our transactional exposure.

And, our transactional exposure I'm referring to is really our business -- our ongoing business.

Our sales of our product less the expenses to sell those products so our people, our advertising, and spending that we would do in foreign currency as well as any costs that might be incurred in a local market.

And so, when I look at the $0.10 that we had -- hurt our results in the first half -- about 50% of it was due to that.

And, that was if you looked at the currency shifts, as I said, early on how much they moved in just a couple-month period of time was pretty dramatic.

The other 50% of it -- but it worked as we had planned in terms of how we hedge and what we would have been expecting in terms of our net exposure.

The other half of it is what I was referring to that shows up on the other income and expense line item, and it is referred to as our net assets.

Largely cash in this case.

And, I think I referred to in the first quarter we had -- of that other $0.05 hit -- we had a $0.02 hit in the first quarter that was one-time in nature that related to an inter-Company transaction.

The remaining $0.03 is really driven by the revaluation of cash balances that we have -- growing cash balances become bigger oversees.

So, when I look ahead and think about what to expect for the rest of the year, this piece that I'm talking about -- the $0.05 piece I'm talking about, I would say that is done and behind us.

It's the transactional piece that you still have exposure on.

Meaning at today's spot rates and you compare to what we're looking to do for the rest of the year compared to those spot rates, you've got downside.

And, that's where the $0.05 was that I was coming from.

So, when you think about the FX and how much is ongoing versus how much is one-time in nature, I would split them in two pieces.

And then, think of the rest of this year as $0.05.

You're right in terms of the following year -- until we start lapping these rates, you'll still have some downside in that [16].

(multiple speakers)

That's very helpful.

My last question has to do on Australia.

I think recently Diageo announced that they had reduced the ADD on some of their ready-to-drink product because I know that's a big ready-to-drink market for you as well.

Have you made any adjustments to your ADD?

Yes.

So, Vivien, that's something that we constantly look at.

We're looking at our proof and consumers and what they're looking for and what they see in the products, and what they're wanting in their products over time.

We actually are currently and have been for a number of years -- SoCo RTDs, our Southern Comfort RTDs in that market have been at that rate that Diageo was lowering their Smirnoffs down to and Captain Morgan's -- they did it some time ago -- we are already there.

But, we don't have any plans for our premiums, Jack Daniel's RTDs, to reduce them to those rates at this time.

But, it's an ongoing thing that we always look at and consider the consumers while we're at it.

It's interesting to note, we do have an RTD that we do have at a lower proof than even the Diageo one, and it's more for special events where your camps and mining and different things like that where the alcohol products are allowed to be sold but at a much lower rate.

But, no plans right now.

I will add that [lu] that Diageo is, I suspect, a direct reflection of them trying to remain competitive, given what's been going on in that country, with what I consider to be excessive excise taxation.

And so, one of the tools available to any of the brand owners is to reformulate, in order to make the products to continue to be affordable and attractive to consumers.

You do end up having a trade-off between alcohol content and price, and so their move, in my view, is understandable.

Yes.

Absolutely.

Terrific.

Thank you very much.

You're welcome.

Nik Modi, RBC Capital Markets.

Yes.

Good morning, everyone.

Thank you.

Just a couple quick questions from me on the pricing how to -- looked like a real nice result.

Just was wondering if you can break it down for us in terms of rate and mix, and just provide some context around that?

And then, the second and third question just quickly, are you doing Winter Jack this season?

I usually buy it for Thanksgiving.

I didn't see it in the store so just curious if you are going to have that back out there as we think about comparisons versus a year ago.

And then, just the last question is that the guidance really looks like it's implying a nice acceleration in the back half of the year.

If Jack Fire is not really going to be a big driver of that, I'm just curious on what will be the driver?

Thanks.

By the way, where do live?

We're going to make sure that it's in your liquor stores we've got Jack Daniel's Winter Jack.

It will be available, yes.

It should be.

Maybe it was sold out.

There you go.

Yes.

We are planning on selling it.

In terms of the pricing, recall at the beginning of the year when we communicated that, and I think we are very much on track to deliver this price mix that we've been talking about.

But, we took very -- Paul already alluded to it after two years of really hefty strong pricing in the US in 4% to 5% range two consecutive years of those rates, we chose in the US to moderate.

Take time out.

Get some of the competitors to catch up from a relative perspective, and so it's very low.

About 1% is all we were planning.

But we were still planning pricing outside the US.

And so, we are still seeing pricing coming from outside the US, and we were expecting I believe when we talked about this early on that we were expecting about a one-third of our growth in net sales to come from pricing for the year.

So, I think we're still on target on that.

And then, your question in terms of the acceleration on the back half of the year?

I think one of the things that you have to think about is what happened in the first quarter.

It was only a 3% growth rate in the first quarter.

We had tough comps in the first quarter.

We talked what was going on.

It was largely retail inventories, if you will.

And, we adjusted for that.

We've come a long -- we knew we were going to get an acceleration in the second quarter.

We grew 7% in the second quarter.

I don't expect that 7% to slow down for the balance of the year.

So, in fact, when we get to our fourth quarter, we had a pretty weak fourth quarter in a couple of markets.

Particularly we've been talking about for some time in Poland and Germany, and we are expecting a rebound in both of those places.

They had some buy-ins in their third quarter of last year, and so that -- we're not even including Fire in that.

These are the things that we are talking about that will give us a lift in our sales growth.

Along with the US acceleration that we've been seeing.

And, the US momentum.

We're certainly dependent on that continued performance in the US from Jack Daniel's Black Label as one of the contributing factors.

Whereas, again, it was another piece of the business that was slower in the first quarter than it will be through the remainder of the nine months.

When you think about key markets in Europe, and you think about the US and then focus on the results in the second quarter and think about that over the remainder of the second half, it can account for the kind of guidance we are giving you.

Exactly.

And back on your question on Fire, though, again, just to reiterate what we said in terms of the timing of this.

This is a late fiscal year introduction.

The time that it's going to take to get into the system.

From a distribution and really for the consumer to start pulling in, and so forth and like that, we really are -- we've written down --

A very modest --

Very -- minimal if any, a very small amount in the forecast.

And then we know there will be a pipeline, so our reported results will get some benefit from that, at the top, but by the time you get to the bottom it's minimal too, because we want to introduce this brand in the best way we can, and to be successful, and thus we are investing a lot to support the launch.

Perfect.

Thank you so much.

You're welcome.

Judy Hong, Goldman Sachs.

Thank you, good morning everyone.

I had a couple of questions, really more around your markets outside the US.

So first, maybe just touch on the UK and Germany, related to number one if all of the trade inventory volatility -- if that's behind us now, so we see more normalized buying patterns going forward?

And then if you strip out the inventory movement, what are you really seeing from an underlying perspective?

And then the second question is really related to Russia.

I know it's only 2% of your business, but clearly a pretty volatile situation.

So how much of risk are you factoring in as you look out for the next 6 months, 12 months, and what are you -- what have you noticed so far just in terms of your trend in that market?

Lots of questions.

Great Judy.

Yes.

In terms of what we're seeing in the markets outside the US, particularly you're focusing on the UK and Germany, and those were the two markets we called out in our first quarter, outside the US, that were having some disruptions in trade inventory adjustments.

The UK is back in balance, so in our numbers, they had a great second quarter and third quarter.

And they're back in balance, they're growing half single digits year-to-date.

Did very well in Jack Daniel's Tennessee Honey.

Absolutely.

Thanks Paul.

And then Germany is still going through a period of, I would call it buying disruptions, if you will.

It is an interesting market right now.

The economy is pretty difficult.

We have set forward, for ourself, a what we believe is the right strategy, as it relates to the price positioning of our brands.

The retail market there, as you can imagine, is very challenged with the economy, and looking to take prices down.

And so we continue to work through this situation with them, with our retail partners, in that market.

But we have not worked through all that yet.

So as I have noted in our script today, we still have a little bit of hangover, if you will, from retail adjustments in the US and in Germany.

And so if we take into consideration -- those are the two primary markets left that we have that occurring in.

If you take the 5.5% underlying growth that we reported this morning, and adjust for these two things, you'll -- over 6% underlying growth.

Got it.

Okay and then the question -- Yes.

Russia.

Yes.

I think on Russia, Jane alluded to a bit in her comments, but I think the thing that we are focused on -- I mean it's a place where, of course, as it relates to any relevance for our companies, it relates to the trade disputes that are going on between Russia and the United States.

I mean we're continuing, as we said in the first quarter, to cooperate fully.

There's no news for us to report on that today.

The thing that we would have seen in Q2 relative to Q1 was, one, very much prevalent in a lot of people's results, is just weakening economic conditions within Russia, associated at the consumer level, but then also for brands who have been in the press like some of ours, some hesitancy at the trade level associated with buying and putting into inventory the brands, while there is uncertainty around the government's actions.

So I think the combination of those -- then you add to it, when you look at our reported results, what's happened with the ruble, you get three factors influencing what's been going on in the last 90 days in Russia for us.

So as we have updates to report on anything, as it relates to the Russian regulatory agencies, and how that affects our business, we'll certainly bring those forward to you all.

Okay.

And then just following up on the national expansion of Fire, any color just in terms of -- is there any changes to the approach you're taking here versus Honey, whether it's faster roll-out of the national expansion, given that you've already invested behind the Honey flavor line.

Is there less investments to be made here?

Just any color just in terms of the difference between how you're approaching Fire expansion versus Honey.

Sure.

Let me give you a little background on this.

Because it's a -- we are of course, number one, by nature, conservative on this front, because we are dealing with the Jack Daniel's trademark.

And I think we are just, as you would expect, and I hope you would expect, we really want to measure not just short-term but continue to monitor long-term the impact of these line extensions off of Jack Daniel's, and I think one of the reasons we've, largely over a very long period of time, done it well, is because the conservative approach to it has served -- has really served us well.

Having said that, there is this what we think a great opportunity out there for Jack Daniel's Tennessee Fire, associated with what's going on in particularly the US right now, with the flavored whiskey segment.

So I'll just draw a couple of comparisons between Tennessee Fire and Tennessee Honey.

One is that Tennessee Honey itself is a brand that today is in excess of 1 million cases, approximates $25 a bottle, and is growing in excess of 30%.

And so number one, we just think we want to make sure we keep our eye on that, because the statistics I've just cited there, those three things are very unusual, to have brands of that size, at that price point, at that growth rate.

And so first and foremost we wanted to make sure and continue to make sure that Jack Daniel's Tennessee Honey has every opportunity to realize its full potential.

And I'll remind everybody, it's in year 4, 4.5 I guess of maybe, in the United States it's starting the fourth year.

So part of this is to not have these things be flash in the pan, and to make sure they are nice and enduring profitable growing brands at Brown-Forman's.

So if you think about that, then you approach Tennessee Fire, it being a second line extension in the flavored area, in a short amount of time.

We're being cautious, that's why we went and tested it.

For Jack Daniel's Tennessee Honey, we immediately went to a launch nationally in the United States, in a relatively short amount of time.

So with this, we wanted to make sure that what we were doing was well received in the consumer marketplace and --

And understand what it was doing to our own brand.

Yes.

You bet.

And understand cannibalization, and understand competitive reference, understand how the trade puts the brands into distribution and promotes them.

So all these things that are just a little more complicated on the second one.

Now the one thing I will say is really encouraging to us, that has enabled us to go ahead and announce the national rollout is how well it has done in test market.

I mean we have seen exceptionally strong test market results, and of course, we're reading not only what's happening volumetrically in the marketplace, with sales and trial and all that.

But really also focusing in on brand equity perceptions, `doing a couple of waves of research to understand how the consumer is viewing Tennessee Fire.

And I will just say, of course, one of the most important things that really points to great opportunity is that there's already a very large player in the cinnamon whiskey market, there's both a potential source of volume, but also creates the opportunity for additional entrants.

And the one thing about it is the leader in this case is popular price, and we are going in at the premium level.

And that's something we accept as a reality.

But even with that, one thing that we've learned from the research is that Jack Daniel's Tennessee Fire against the marketplace today, is seen as having great advantage on a really important dimension, at least they're very important to us, such as taste, premiumness, quality, authenticity, masculinity.

Those are the types of things that we look to, to help us make these decisions.

So price will always be an inhibitor for some on any product, and we would expect that to be one of the things that we, for any period of time, would be dealing with, as it to this particular product.

But nonetheless, we've been really encouraged by what we've seen.

And just remember, the other thing, the results of Tennessee Fire in its test markets have been as strong or stronger than what we would have seen for Tennessee Honey in its early days.

And what really heartens us is that we really have had no media support behind it to speak of.

It's mostly been promotional, some social media, and word-of-mouth.

And in store.

So as we go national, we think there's an opportunity to build awareness and appeal at a higher level, similar to what we did with Tennessee Honey's launch.

So I hope that gives you some background on why we've approached it the way we have.

We'll continue to be both enthusiastic and optimistic about it, but also appropriately conservative about it.

Thank you.

That's helpful.

You're welcome.

Bill Schmitz, Deutsche Bank.

Can you just talk about cash flow in the quarter?

I think a lot of it has to do with the accrued tax liability, but it seems like you're negative cash from operations in the quarter.

So can you just tell us if it's timing or something else, and maybe the outlook for the rest of the year?

Sure.

So if we look at -- you're right.

Our cash flow was down I think about -- cash flow from operations, is really the driver, if you look at it.

Was down about $130 million from the same period last year.

And if you think about what drove that, I think -- I like to break it down into a couple buckets.

The first piece is what you would expect, you're going to have a small piece of it that's due to just normal seasonality, or in our case, working capital increases, because we got a growing business, and we are laying down more whiskey for our expected demand as we get out three, four, five, six years from now, so set that aside.

The majority of it, as you pointed out, 80% to 85% of it was due to tax payments, and essentially really all of it is timing.

But let me explain the timing to you a bit.

About 40% of that timing will clear itself out in the current fiscal year.

And the remaining pieces are one-time in nature that relates to some restructuring that we did in our European business.

That one-time item is really spread over this year, where we had a payment that we made, last year where we got a benefit, and next year where we are going to get a small benefit.

So those three things together, net to the one-time item, is really just timing, if you will.

And so when we look at the rest of the year, expect our cash flows to grow year on year, if you will.

And our forecast, which suggests that as our business grows.

So nothing unusual, as you look at the rest of the year.

Hope that helps you.

Bryan Spillane, Bank of America.

Just a follow-up first on Bill's question.

And I might have missed it, but did you give an update on your capital spending guidance for the year?

I did not, but I'll be glad to.

We are still projecting somewhere in the $120 million to $140 million range.

Okay.

And then, I guess a second question just related to some of your earlier questions you had, related to the sales outlook for the balance of the year.

And I guess, just wondering if you could help maybe shape how the environment, I mean you look at all of the variables that went into projecting sales over the balance of this year from where we stand today, versus where they would have been when the year started.

Are there more negatives or positives, in terms of what you're looking at going forward today versus maybe what you were thinking about at the beginning of the year?

And as I go through the list in my head, it just seems like Russia and maybe some emerging markets, a little bit worse.

Germany, maybe a touch worse from a macro perspective, but on the other hand, you have seen some positive momentum in terms of some of the actions you've taken in the US, and then of course we're layering Fire on.

So just trying to get a sense, just sort of maybe your confidence in the 6 to 8 now versus maybe where it would have been at the start of the year, relative to maybe some of those headwinds and tailwinds.

I'll try that.

I think -- well, the first thing of course, Bryan, is that we have got six months behind us, so by nature, you're more confident about six months ahead of you versus 12.

You always have the holiday season, that in this industry particularly, you worry about.

But I think it's about the same.

I think you've mentioned most of the -- and I would say they largely offset each other, if I think about my own confidence level.

I think US probably stronger, and it's a big -- it's our number one country.

I would say I feel stronger about it today than I would have back in, say, May or something.

And I think you're right to call out Russia, and actually the prolonged nature of the excise tax increases in Poland.

I would have hoped that would have been a consumer, and the trade would have adjusted more rapidly than we've seen.

But again, that gives us some of the confidence in the back half, because you'll go against some pretty soft comps in the fourth quarter there, particularly.

And part of it is too, you will be a year away from this sticker shock that comes from these excise taxes.

So I think you hit it about right.

You have some regional reallocations, but generally I said it at the beginning, I continue to like the balance of our growth, across the globe.

And that diversification we have allows us to make adjustments.

The other thing is, they're smaller levels but things like Herradura continuing to do better, and the other premium products, Woodford Reserve.

And if you just look at, over the years, particularly a brand like Woodford Reserve is just getting bigger and bigger.

And so something like it at that size that's growing 30%-plus starts to have an impact.

So I think a lot of it, we'll of course, reevaluate this after we see the December results, because it's such a big period for us, but we did think we're going to have pretty favorable comps in Q4 for the Company generally.

So that gives us a lot of confidence about the range we provided today.

Okay.

Great.

That's helpful, thanks.

I look forward to seeing you next week.

Yes.

See you then.

(Operator Instructions)

Mark Swartzberg, Stifel.

Yes.

Thanks, good morning, Paul, Hello Jane.

In that perspective on Tennessee Fire was very helpful, Paul, so thank you for that.

I guess a few questions.

Firstly Jane, the $0.05 you mentioned from FX in the quarter, could you just repeat what that was?

It's not going to be recurring here, at least as far as you can tell, for the second half?

Sure.

The $0.05 that I was referring to was actually the first half.

$0.02 of which happened in the first quarter, related to a one-time item in our Company items.

That other $0.03 relates to our net current assets, primarily cash, in Europe, by the way.

That are denominated in euros, and exchanged to US dollars.

So is just the revaluation impact on that.

And so, again, we have to use today's spot and say okay, here's what your exposure is, and we've got that all captured, whereas if you look at your transactional aspect of it, at today's spot rate, you still have downside relative to the prior year, as a result of the spot rate.

Got it.

Great.

Does that help?

Yes.

It does.

That's great.

And then on Germany -- really a follow-on to Judy's question -- you're talking about the fourth quarter benefiting there.

Can you speak to takeaway, or give us a little more color on why you expect this down performance to reverse in the second half, and then into next fiscal year?

So actually, I will start with Poland.

We actually have seen some recent takeaway trends, that are showing some positive improvement on both Finlandia and Jack from a takeaway perspective, so they are growing again.

So that bodes well for the rest of the year.

Plus in that market, as well as Germany, because of the price increases, so there was a large buy-in in the third quarter in both those markets in advance of price increases on January 1. One was excess tax driven, and that was Poland, and the second one was a price increase on -- in the German market, on our brands.

There was a large buy-in in the market on both those brands in the third quarter, which resulted in, of course in Poland, the sticker shock -- there wasn't buy-in in the fourth quarter.

So we know we will get back in balance in terms of our inventory levels, and if we see takeaway trends accelerating, we would expect to see our results to have a benefit, not only cycling against a week comp where no activity was going on, or very little activity was going on, to where we are seeing some growth now.

Also, I think in Germany, just the retail activity itself, the retailers in that market -- I mean the takeaway trends have been softer this year than they were a year ago.

But part of it I think is associated with -- there's some fairly large retailers there, and a couple have changed, one in particular has changed their manner of which they price to the consumer.

I mean -- you might call it one of these everyday low pricing, a version of that.

And that always, I think, takes the marketplace time to adjust to their -- to the consumer levels -- time to adjust to new buying patterns as well.

So some of those show up in our consumer takeaway numbers, of course.

And so I think part of it is just time away from higher prices.

As you move from month to month or quarter to quarter, I think your confidence level raises, and that's beyond the levels of just favorable comps, because there was buy-ins, and then basically very low sales afterwards.

But I do think some of it is -- you really in the end want to focus on the consumer level.

And we think just time away from those higher prices and acclimation to them helps.

Got it.

And can you speak to order of magnitude what takeaway rates you're seeing right now, in Germany?

Hang on just a second.

We can refer -- let's see we got something we can refer to.

Yes.

So Germany's categories are growing -- whiskey category itself is growing in the mid-to high single digits.

And Poland, whiskey is back growing in the high single digits.

Very good backdrop here, once you get these inventory adjustments taken care of.

That's great.

Yes.

And acclimation to the prices.

Right.

That's great.

And then two final ones.

One is, the vodka segment here in the United States heading into the holidays, anything notable in terms of pricing behavior among the competition, any changes there?

And then finally, capital allocation.

You authorized another round of repurchase.

You're below one-times EBITDA in terms of leverage.

I think you're going to continue to build below one-times when you look out a year, absent any deals.

Can you speak to why you're not returning more cash more aggressively to shareholders?

Why we're not returning more cash to shareholders?

Yes.

I think --

You've taken the opportunity to lever up a bit, nothing crazy, but get a little more leverage and return more cash?

We always look at that, as you've seen, and we tend to look at that over much longer periods of time than just what's happening in that particular year or quarter.

But I would certainly say that over the past several years, we've been returning more shareholders, than for example making acquisitions -- returning more to shareholders then making acquisitions, and of course that's been a good investment on behalf of the Company, and the shareholders.

But we'll always look at that.

I just think that compared to what we've seen out there as of the uses of cash, particularly around the acquisition area, it's been pretty thin as it relates to the things that we found attractive and advisable.

So that's reflected in sort of the absence of really any acquisitions in some time at the Company.

By contrast, we've been very successful with innovation, so as companies think through how to win in the marketplace, you always have the opportunity to buy it or to build it, and in the case of the last few years, we've been successful in innovating.

Around vodka, my general comment about that globally is, it is brutally competitive right now.

I mean the largest -- if you think about the large markets for it, you've got Russia, Poland, and the United States as being the premier markets.

And we've already talked about Russian and Poland quite a bit here.

So with the excise taxes and people repositioning or innovating to hit lower price points, I mean, it is just very, very competitive.

Particularly in Poland and Russia.

And then I would say over in the United States, I mean a lot -- it's really been interesting to watch.

It's harder to get prices these days.

The flavored aspect of the US vodka market has gone soft here in the last couple of years.

And the winning brands happen to be coming from, as was the case five years ago, to established brands from upstarts.

So it's undeniable that Tito's is the leading growth brand, and it's not in the flavored business.

It's benefiting from the organic and local and craft benefit.

There's -- and so one of the lessons that you see over time from vodka is that, once you think you have an established brand, because there's very few barriers to entry, particularly in this US market, you really see new brands come in and capture the imagination of the consumers.

It's is true of both Tito's and this Gallo entrant, New Amsterdam.

That's great.

And one quick follow-up on that.

On the margin here in the US, price competition -- similar to what it was three months ago -- what's the dynamic here in the US on price in vodka?

Stable.

Tough to get prices, it looks like to me.

I think the big dynamic that's influencing growth in vodka right now is that the flavors have, in terms of their ability to add to growth versus the prior years, have become soft.

And it's always been the case that the ability to get price in whiskey was far greater than it was in vodka, in most of the key markets.

Got it.

Great.

Thank you, Paul.

Thanks Jane.

You're welcome.

Bill Chappell, SunTrust.

This is actually Stephanie on for Bill, just kind of going off Judy's question earlier.

First, in terms of what's going on in Russia.

Now, is this primarily impacting just the vodka sales, or is it more broad-based across brands?

And then secondly, just on your rollout of Tennessee Fire -- are we going to start seeing maybe shipments for half the country starting in the third quarter with the majority of the launch in the fourth quarter, or is it all primarily in a 4Q?

Thanks.

On the last question, you should expect Q4.

Yes.

It'll be February and beyond for us.

And on Russia, the impact -- I would break it into the consumer impact, because of the weakening Russian economy, would apply to all categories.

I mean it's just really -- it would be difficult -- whatever impacts the consumer will influence their purchasing patterns, generally.

I mean, overall, the whiskeys in that market tend to be more premium-priced than the vodkas, just so many local important vodka brands in Russia.

But as it relates to our Company, some of the concerns and risks we've identified through this first half have been more associated with some of the things that have been in the public side related to Jack Daniel's, and would not have applied to as much to Finlandia.

So on Finlandia, we would worry more the competitiveness of the economy in Russia, whereas on Jack Daniel's, we would worry about that.

We worry about also some of these regulatory concerns we've surfaced, and on both of them, of course, for our Company, worry about the translation effect of the ruble.

Got it.

That very helpful, and then just quickly on housekeeping, are you still expecting the 29.5% tax rate for the year, because I noticed it was a little bit higher in the second quarter.

I would -- just use 30%.

30%?

Okay.

I got it.

Thanks so much.

Okay.

Thank you, Paul and Jane, and thanks to all of you for joining us today for our second-quarter earnings call.

Many of you have already RSVPed for our investor day on December 10, but for those of you who haven't yet, please feel free to follow-up after our call, and we'll make sure you have all the details.

Have a great week, and we look forward to seeing you next week in New York.

Thanks.

Thank you for participating in the Brown-Forman second-quarter FY15 earnings conference call.

You may now disconnect.