Brown-Forman Corp (BF.B) 2015 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the fourth-quarter fiscal year-end earnings conference call.

(Operator Instructions)

Thank you.

I would now like to turn today's conference over to Jay Koval.

Please go ahead.

Thanks, Lavriel, and good morning, everyone.

I appreciate your patience.

We were trying to accommodate an unusually large group dialing in at the last moment for Brown-Forman's year-end 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 fourth quarter of FY15.

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, 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'll turn the call over to Jane for her prepared remarks.

Thanks, Jay, and good morning everyone.

Thanks for joining us for our year-end earnings call.

I'll cover three topics today, which should leave plenty of time for questions after our prepared remarks.

First, I'll review our FY15 results, including recent trends from the fourth quarter.

Second, I'll discuss our earnings outlook for FY16.

And finally, I'll update you on our capital investments plan.

So with that, let me start by reviewing our fourth quarter.

As expected, we delivered strong results in the quarter, with underlying net sales up 10%.

This top line growth flowed nicely to the bottom line and resulted in 22% underlying operating income growth.

As a reminder, the fourth quarter benefited from soft sales comparisons, and unusually high SG&A in the prior-year period.

These fourth-quarter underlying trends lifted our full-year growth rates back into the ranges that we have shared with you since the start of the fiscal year.

Underlying net sales grew approximately 6.5% in FY15, with price mix and volume contributing just under 3 and 4 points, respectively.

Price mix helped us deliver gross margin expansion of 60 basis points in the year, and underlying operating income grew over 9% through operating expense leverage.

We believe these are terrific growth rates against our public competitors, who we estimate are only growing organic operating income by low single digits.

Looking at our business by geography, results in the US accelerated nicely through FY15, resulting in 8% underlying net sales growth for the year.

FY15 marked the fourth consecutive year of volume share gains for Brown-Forman's portfolio in the United States.

Looking at the most recent blended three-month data for Nielsen and NABCA, Brown-Forman is growing value share at 8.2% versus TDS growth of 6.9%.

We believe we are well positioned to keep driving value share gains over the coming years, given the momentum in bourbon and American whiskey.

In FY15, our US team worked closely with our partners to highlight the heritage and authenticity of our leading portfolio of American whiskey brands.

We ended the year with depletions of just under 5 million cases for Jack Daniel's Tennessee Whiskey in the United States, and underlying net sales growth of 5%.

The US also drove Woodford Reserve's leadership of the super-premium bourbon category, with 30% underlying net sales growth, roughly 10 points ahead of the category's growth.

As well as accelerated Old Forester, we saw a 34% jump in underlying net sales.

On the innovation front, we continued to focus on creating long-term value through a disciplined approach, and we couldn't be more pleased with the enduring success of Jack Daniel's Tennessee Honey brand, growing underlying net sales by 10% as it begins its fifth year in the US market.

The brand has helped reinvigorate the entire trademark, bringing in new consumers, and allowing Jack Daniel's to participate in new drinking occasions.

We expect our latest innovation, Jack Daniel's Tennessee Fire, to be equally adept at expanding our consumer base.

After several quarters of testing, we began the nationwide rollout of Tennessee Fire in the US during the fourth quarter, and the trade and consumer reaction has been even better than what we experienced with Tennessee Honey.

Preliminary takeaway data suggests that the brand is tracking above Honey's results at similar points in the brand's evolution.

Despite its national rollout occurring late in the fiscal year, Tennessee Fire contributed almost 2 of the 8 points of growth in full-year underlying net sales in the United States.

Premiumization of the Jack Daniel's portfolio has been highly complementary to our flavor innovations, and between the two, they are increasingly important contributors to our growth.

For example, in FY15, we surpassed the 2 million case milestone globally for Tennessee Honey, Gentleman Jack, and Single Barrel, combined.

These brand extensions of Jack Daniels enjoy favorable economics, in addition to fast rates of growth, and are meaningful drivers to the Company.

Moving now to non-US markets.

Developed markets outside the US grew underlying net sales 4% in FY15.

France, the United Kingdom, and Canada continued to grow at a healthy clip.

As a reminder, France's reported and underlying results benefited from comparison with last year's route to market changes, as we are no longer paying an agent to distribute our products there.

Excluding this change, underlying net sales in France grew 17%.

Total growth in developed markets outside of the US was pulled down by 2% decline in Germany, driven by reduced trade promotional activity.

Results were also sluggish in Australia, where weak consumer confidence and high spirits taxation is negatively impacting sales growth, as well as Japan, where a competitor is aggressively discounting its low price bourbon brand to drive volume growth.

Our emerging markets business grew 9%, with great results in Turkey, Brazil, Ukraine, Indonesia, and sub-Sahara Africa.

Mexico grew underlying net sales 3%, but Poland declined 7%, largely due to the prior year tax increase and subsequent trade loading.

Emerging markets excluding Poland grew underlying net sales by 14%, fueled by the Jack Daniel's family of brands that grew 19%.

Let's now move to a reconciliation of reported to underlying results.

An appreciating US dollar weighed heavily on our reported results throughout FY15.

So while our top line grew over 6% on an underlying basis for the year, foreign exchange negatively impacted our reported net sales by 3 percentage points.

An increase in net trade inventories helped reported results by 1 point, due in part to the pipeline fill associated with the US launch of Jack Daniel's Tennessee Fire.

Net of FX and inventory changes, reported net sales grew 4%.

Underlying SG&A and A&P spend increased 4% in the year, with lower rates of reported growth due to a stronger dollar.

Our full-year growth rate in underlying SG&A is more in line with the levels we are targeting in FY16, as we continue to focus on leveraging the investments we have been making over the last few years, including the recent route to market change in France.

Putting this all together, we delivered almost 9.5% growth in underlying operating income for the full year, and earnings per share of $3.21, up 5%.

Foreign exchange was a 7 point drag on reported EPS, including 3 points of transactional impact, 3 points of translational impacts, and 1 point driven by the higher than expected tax rate.

Moving now to my second topic, our outlook for FY16.

We are encouraged to see that the favorable trends that have been fueling our business over the last four years appears to be well entrenched and positioned to continue for the foreseeable future.

These include strong global demand for our authentic American whiskey, consumer interest in flavored whiskey, and continued premiumization globally.

In FY16, we expect net sales growth of 6% to 7%.

This range is consistent with the 6% rate we delivered in both FY14 and FY15.

While FY16 won't have the 0.5 point top line benefit from the France route to market change, and we expect Jack Daniel's Tennessee Honey to grow at a slower rate than this past year's 28% growth, 2016 does incorporate the anticipated incremental benefit from selling Tennessee Fire in the United States for a full year.

And we also anticipate to begin testing the brand in a few markets outside the US this year.

Looking at our outlook by geography, we expect solid momentum in the United States, improving trends in Europe, soft results in Australia, and a solid contribution from our rapidly-growing emerging markets.

In FY16, we anticipate driving both volume growth and improved price mix.

We have delivered 260 basis points of organic expansion over the past three years, but our gross margin should expand more modestly than this past year's 60 basis point improvement, given expectations for higher contribution from volume in FY16.

Gross profit growth should help drive underlying operating income growth of 8% to 10%, as we expect operating expenses to grow at a slower rate than sales.

Moving onto foreign exchange, the stronger dollar is forecast to negatively impact sales by approximately 3 to 4 points.

But assuming current spot rates, we do not expect this dramatic $30 million foreign exchange loss in our other income and expense line that occurred in FY15, due to the revaluation of non-US net current assets.

The absence of this translational loss is expected to result in positive year-over-year variance that offsets some of the negative transactional impact that we are currently forecasting in FY16.

We also anticipate that a reduction in inventory levels will negatively impact reported sales by another point, as we comp against FY15's pipeline fill associated with Tennessee Fire's US launch in the fourth quarter.

This inventory reduction should be offset by a lower tax rate of 30% to 31%, and share repurchase should be accretive to the full-year EPS, based on past repurchases.

In total, we are anticipating diluted earnings per share of $3.40 to $3.60, or a sensitivity on FX, a 10% move in the dollar in either direction would impact full-year EPS by approximately $0.13.

Just one quick comment on the phasing of FY16.

The launch of Jack Daniel's Tennessee Fire in the fourth quarter of 2015 will create a challenging top line comparison in the fourth quarter of 2016.

Let me now move on to the third and final topic, an update on our capital investment plan.

FY15 CapEx of approximately $120 million was a bit lighter than we expected, largely due to some delayed timing into FY16, but we continue to evaluate our long-term growth assumptions and the resulting opportunities to invest in meeting our feature anticipated demand.

This includes plans to invest roughly $200 million in CapEx during FY16.

For example, late yesterday, we announced our entry into the Irish whiskey category, modeled off our success at Woodford Reserve.

Irish whiskey is a small but fast-growing segment, and we believe the business shares many similarities to American whiskey.

A total anticipated spend for the project over the next few years is $50 million, and this includes building a new distillery, constructing warehouses, and creating a home place for Slane Castle Irish whiskey at the historic Slane Castle site.

Additionally, our stepped-up capital spending includes the Old Forester urban distillery, as well as plans for a major bottling expansion at Jack Daniel's, and the purchase of a new stave mill in Indiana.

To share some perspective on the reasons to invest in our business, let's look at some of the anticipated five-year growth rates from FY12 to FY16.

Over this period, we expect to deliver underlying net sales growth of roughly 40%, and underlying volume growth of around 30%.

This type of growth, combined with low market shares in the majority of the markets around the world, reinforces our view that these investments in our organic growth are some of the highest-return opportunities we possess to create value for our shareholders, and we should be aggressively investing behind them.

We are halfway through the stepped up investment to increase our total capacity, but still delivered an impressive return on invested capital of 22% in FY15.

We expect capital spending to return to a more historic rate as we move past FY17.

So in summary, FY15 was another great year for Brown-Forman, as we drove market-leading growth while simultaneously investing in our brands, our people, and our assets.

We are fortunate that our business model lends itself to visible and sustainable long-term growth.

We generate tremendous free cash flow, which allows us to invest in our future, and returned $718 million of cash to our shareholders in FY15 through ongoing dividend and buyback programs.

Over the last decade, we returned $4.3 billion to shareholders, with nearly half of that occurring over the last three years.

Other companies are capable of returning these levels of capital, but few do it at the same time that they are rapidly growing their top and bottom lines, and investing in future growth at stepped up rate.

We believe that this balancing act featuring reinvesting in the business and returning capital to shareholders is one of the reasons we have generated a market-leading TSR over the last 10 years, well ahead of others in the industry, and almost double the S&P 500.

As we look ahead, we remain focused on delivering top-tier returns for all of our stakeholders, by continuing to execute on the strategy necessary to achieve our long-term growth ambitions, enabled by our family control and their commitment to thrive and endure for future generations.

And so with that, let me turn the call over to Paul for his comments.

Thank you, Jane and good morning, everyone.

Jane, I appreciate you taking the time to recap FY15 and give a good detailed understanding of our forecast for FY16.

Yesterday, in preparation for this morning's call, I glanced back at my comments from the last several fiscal years, and I noticed something interesting.

Although I've emphasized various points in certain years, or said things a bit differently each year, what was interesting was that the themes from each of these last many years were largely the same.

As I read through them, some of the words and phrases that I found common were strong organic growth, high margins, led by the Jack Daniel's trademark, focused portfolios of premium spirit brands, successful and impactful innovation, balanced and diversified geographic results, consistent investment behind our brands and people, long-term view,.

I was really struck by how consistently I was using the same phrases over and over again.

There are a few more worth mentioning as well.

Excellent capital deployment, favorable balance of risk and reward, industry-leading returns on invested capital, strong track record of financial performance and financial responsibility, top-tier total shareholder returns, outperformance relative to the competition, Brown family commitment, engagement and support, and of course very importantly, diverse group of talented employees that make it all happen.

So when you put them all together, I think it makes for very nice list of ingredients in Brown-Forman's recipe for success.

It has been such a privilege to be able to discuss our Company and its progress using phrases such as these.

Know that all of us feel really fortunate.

As you can tell from our release this morning and Jane's comments just a moment ago, these same many descriptors can be applied to our FY15 performance.

The largest exception in the last 12 months would be the impact of foreign exchange on our reported results, and the drag we believe that has had on our short return TSR.

While it is beyond our capacity to precisely forecast future currency rates, when we study the US dollar's historical value against an index of currencies, we observe that its current strength is notably beyond the historical trading range.

Now foreign exchange fluctuations aside, it is also our plan for these descriptors to be the relevant themes for FY16, and of course, we hope they remain relevant for many years to come.

I want you to know however, that we do not take any of them for granted.

Inevitably, there are years that present more challenges than others, and we have had brands or countries which have struggled.

We try to pay close attention to competitive forces and trends that might limit our ability to describe Brown-Forman in this way.

I sometimes refer to this as the Company's healthy paranoia in evaluating risks and threats.

As a result, in the face of economic or competitive pressures, we strive to adjust, to innovate, to be adaptive without overreacting, to be balanced, to persist, so that these enviable descriptors I've shared with you this morning will still apply when we discuss Brown-Forman's progress in the future.

Now before we take your questions, I thought I would touch just briefly on the news we announced yesterday about our intent to enter the premium Irish whiskey category through a blend of acquisition, innovation, partnership, and investment.

We believe that the premium plus Irish whiskey segment has many of the attractive characteristics we've long admired and benefited from in premium American whiskeys and bourbons.

These characteristics include excellent category and segment momentum, high gross margins with the ability to further premiumize, attractive returns on capital once efficient scale has been achieved, shorter aging horizons relative to some categories, strong heritage and history but with a contemporary flair, the ability to innovate within the same trademark, great usage versatility ranging from straight to mixed.

And very importantly, still at very early stages of global development.

Something we find attractive about the category that is in contrast to the American and Scotch whiskey categories is that there are simply fewer competitors in Irish whiskey today.

While I expect this to change over time, this is a uniquely attractive attribute of Irish whiskey at the present time.

Given the very limited number of Irish brands and distilleries in existence, along with the fact that few, if any, have any interest in selling, we have chosen to take this unique approach to apply our Company's long-term view, and over time, try to build something similar to what we've done with Woodford Reserve over the last 20 years or so.

Needless to say, it's a very exciting opportunity for Brown-Forman.

When you consider this alongside our significant capital investments behind our production operations, and consider the enthusiasm we have for Jack Daniel's Tennessee Fire and Tennessee Honey, and consider that we believe the prevailing descriptors of Brown-Forman will remain relevant, and further consider that we have stepped up our share repurchase program recently, it brings into focus our belief that the best investment Brown-Forman can make at this time is in Brown-Forman.

We will of course keep you updated on our progress as it unfolds.

That concludes our remarks for the morning, and thank you for listening.

So we're now happy to take any of your questions.

Operator, we're ready for your questions.

(Operator Instructions)

And your first question comes from Vivien Azer with Cowen and Company.

My first question has to do with the outlook please, for price mix, and if you could unpack that a little bit, price versus mix and how that might vary, US versus international?

Okay.

I can take that.

So we'll talk about that the top line.

We have forecasted the growth in the 6% to 7% range, and we're forecasting that this next year we have a bit more volume than we had this past year, so volume will be up, the bigger contributor to our top line growth that it has been this year, but we do continue to expect price to deliver, and mix to deliver the low single digits, a couple percentage points.

What I will say what we're doing as it relates to pricing, we're taking nominal pricing, if you will, in the US and many markets around the world.

But in some markets we are being very focused on pricing.

So for instance I'll focus on el Jimador, which of our largest full-strength tequila, and the Mexico market itself, we're in our second year of pretty major pricing activity, so that is the second year where we are positioning the brand to be more premium, and really trying to improve that brand business, if you will, and we think over the long-term that will improve the equity of the brand, the growth of the brand, and most importantly, the returns on that brand.

And so that's a place where we are focusing heavily on taking pricing.

Some markets where the FX has hurt the results, and where we see competitors also taking pricing, such as Brazil and Russia, we're also taking pricing in those markets, too.

And so we're obviously very -- looking around, being very aware of what's going on in the marketplace, and where the economics and so forth support pricing, and we'll take further if things happen to improve in certain markets, but that's kind of the way we're looking at volume price mixes next year.

I hope that helps.

That does help.

I might add one thing on this.

I think it's helpful, if you think about the pricing over a multi-year, if you go back a few years, we have been a little more aggressive, and I would say this year, we are leaning a little bit more on volume than pricing in the total mix, and some of that is because as we look ahead as well, if you think about the consumer trends and their volumetric interest, particularly for the premium brands where we are already very well positioned, this is a great year for us to get volume, I think.

And in future years, because of the capital investments we've been making over these last many years, it will start to see some of the cost associated with those, I think they will be -- there will be more responsibility on our part to try to cover some of that with pricing.

So if you think about it over like a -- which we try to do over a three or five or seven-year period, the balance of pricing and mix, this is a particularly good year we think, and I think our people feel that way, too, when we did our planning, that this is a good volumetric year, and so we lean a little bit more toward that, and we still got a lot of benefit from the mix, we think.

Yes, that's a good point, Paul.

Just building on Paul's point on mix, you have heard us talk about some of our brands, Jack Daniel's brands, exceeding 2 million cases this year, our premium end, the Gentleman Jack, the Single Barrel, and actually the Honey brands.

And those are our higher priced brands, if you will.

Those coupled with, if you get Woodford Reserve growing over 30%, those are higher price, and that mix alone, as they continue to grow, will help --

They become effective pricing increases on the whiskey.

Absolutely.

That's terrific.

My second question has to do with your outlook for advertising spending, please?

Yes, so I don't have specific -- I think what we said, looking to do next year, is get some operating expenses, some leverage between operating expenses.

Most likely, it will come in the form of SG&A.

SG&A is the biggest of our two components, so we're going to continue to invest behind our people, and we will continue to invest behind our brands.

I think what I'd like to do is look at, similar to what Paul said about pricing, is to look at what we've invested over the last five years, particularly as it relates to SG&A.

And I think our step up investment, whether it was in route to consumers in France, or Turkey and Brazil and other places.

We've had investment quite a bit and we think of this as a good year ahead to start leveraging that.

As it relates to A&P, we will continue to invest behind our brands in the markets where we think that the consumers are willing to listen, and where we can listen.

I think one other point -- important point to make here is on dark markets, more and more markets are becoming dark.

And so I think that we all need to be aware, the people are the ones building the brands in those markets, so in those markets, you may see SG&A increase.

So we look at the things together.

You have to have people to grow the brands, and they've got to be there to support the A&P spend, too.

I think within the mix, too, Vivien, you would, as you would imagine, this quite a bit of -- not quite a bit, but reallocation has been going on within our mix of A&P investments, so like for example, in the first half of this year, you would expect us to be spending more money on Jack Daniel's Tennessee Fire as it launches and we go out and support its initial reception in the marketplace.

Our American whiskeys increasingly have been receiving more A&P, because of the trends are so favorable to them, and it might be coming, like I know for example, last year it came a little bit at the expense of some media budget for Southern Comfort, which had not been traveling as well with its trend.

So there's been some reallocations within the mix as well.

But we think -- because of the past investments and the level we are going to have of investing behind it now, I think we're pretty comfortable that we should still get nice leverage.

Terrific.

Thank you very much.

You're welcome.

And your next question comes from John Faucher with JPMorgan.

Wanted to follow up a little bit on some of the comments about the SG&A leverage on investment.

And I guess what I'm trying to figure out is, you improved the profitability per case by bringing this stuff in-house, but there are also was, I guess, a level of investment in terms of building that capability.

So as we look at you cycling those, is it two benefits as we look out to FY16, in terms of the additional profit plus the lower spending?

Or is it just one benefit from that standpoint?

Thanks.

Can I just ask you to clarify, which benefit are you talking about?

I maybe missed the first part, but are you talking about the absence or presence of the French investment?

I was trying to read into your --

Yes, I guess what I would say is, right, my understanding is the investments in France create a business that is structurally a higher profit per case business.

And along with that, you have additional -- were there additional investments, so as we look at the leverage, are there two things driving the SG&A leverage, as opposed to just one, if that makes sense.

I will take the first part of your question.

The benefit of from France happening FY15 in terms of our net sales benefits, that we are currently -- you will not have another benefit in FY16 as it relates to that, so that happened.

But just to step back for a moment, when we change these routes to consumers, really what happens, if someone else was representing us in the market and we were paying them a margin.

So our sales were lower at the time.

Now we brought it in-house, and our sales are higher, and we brought the capabilities in-house and so that SG&A, which started when we geared up this route consumer about a year ago January, so we had nine months of it in this fiscal year, roughly, that won't repeat itself again next year.

So you will get a benefit from that next year, that you won't have that year-over-year increase, if you will.

Yes.

So it's now in the base, and there will be less benefit to the sales line of incorporating it, and less hurt to the SG&A line of hurting it in FY16.

Yes, there's no more hurt coming through.

It's in the base.

Yes, it's in the base.

Does that answer your question?

Yes, it does.

Thank you.

Your next question comes from Robert Ottenstein with Evercore ISI.

It's Eric Serotta in for Robert.

A couple questions with respect to flavors.

First, on previous calls you talked about Fire indexing at about 130 to 140 relative to Honey at similar stage of its development.

I know you mentioned this call, it's also tracking favorably, wondering if you could put some quantification around that.

Second, hoping you, Paul, could talk a bit about flavors more broadly.

Diageo is having a lot of success recently with Crown Royal Regal Apple.

Wondering how you're thinking about whether a year-round apple variant for Jack is needed or next?

Any context would be greatly appreciated.

Let me want me to take the first part and you take the second part?

Sure, that's fine.

So as we talked about, Jack Daniel's Tennessee Fire just got launched in our fourth quarter nationally, and we know there is, continues to be an enormous amount of interest in flavors, as you know, this in the US.

In third place, with Honey just completing its fourth year, and having the type of growth it had this year in the US, at 10%.

So as we look at our read on Fire, what we have communicated last quarter, we had really just focused on our three test markets, and we've now since had five other markets that we had expanded to in October, so we got a little bit more read, and we feel very good about what we're seeing.

It still is in the 130% range as it relates to how it's relating to the same period of time for the Jack Daniel's Tennessee Honey launch.

And so we know cinnamon is a hot category and we have -- we're very cautiously optimistic about the Tennessee Fire, and what it could do for us this next fiscal year.

I will turn it over to Paul to talk about flavors in general.

Yes, just building on what Jane said there.

I think, as a general comment, I think we're going to continue to pace ourselves correctly.

Even with Tennessee Fire, which in my view had a three stage introduction to the US market.

We, even there, want to continue to evaluate his performance in the marketplace.

As you can imagine, with any Jack Daniel's product, or line extension in these cases, there's always initial interest in it.

It's such a big and powerful brand, and people give it the benefit of trial often times.

And so in the test markets for Tennessee Fire, we wanted to make sure that was repeatable, that people actually would get through any barriers that might been perceived.

The biggest one oftentimes for products that are labeled flavored, is whether product in the bottle is working.

Every indication we've had so far on Tennessee Fire is that it, in fact, is.

So when you move beyond that for us, it's always a consider, Jack Daniel's tends to enter at very premium price points, and that's again the case here in the cinnamon world, so you're trying to test what level of consumer interest and affordability shakes out, so that's something we continue to watch.

And with a national scale launch now, as the months unfold, we'll have more and more data to look at to see how that particular aspect plays out.

As it relates to the increasing competition and you even referenced one of them, there were no plans on our part right now, other than really implementing the Jack Daniel's Tennessee Fire and Jack Daniel Tennessee Honey plans that we have in place for FY16.

In general, you should expect us to continue to be cautious.

The Jack Daniel's Tennessee Honey global rollout took four years, and I think with Tennessee Fire, beyond the things I have already mentioned, related to what we'll evaluate there, Jane did mention these limited tests in a few of the international markets.

We are going to want to look at those and read those.

There's a lot of work still to be done, and to be interpreted and evaluated, before we consider anything beyond what we've done just now.

But we will, of course, try to study the competitive landscape related to any flavor that is out there, so we can understand how it may impact the flavor entries we've got.

So that's how we feel about it right now.

Great.

And just one housekeeping question, Jane.

I think you gave specific guidance in terms of FX impact on net sales for FY16.

I know you said that the EPS impact, or the earnings impact wouldn't have that headwind of the $30 million in translation, balance sheet translation.

Did you give specific EPS guidance as to what the year-on-year headwind would be for FX?

I did not, but you can expect it to be several cents.

Okay.

Thank you.

Your next question comes from Tim Ramey with Pivotal Research.

Paul, with respect to the list of superlatives that you rattled off, and this truly is probably the best company I've ever followed in 30 years of doing research.

I did note two things that we frequently talked about on calls that were not talked about today, SoCo and RTD and just wondered if you'd offer up any thoughts about sort of reigniting or stabilizing, reigniting growth, whatever it might be in those two?

Yes.

Thank you for compliment, number one, and welcome to the call.

We'll have you read it next time.

Honestly, the Southern Comfort one we have talked about with regularity about its challenges, and part of -- this is a very interesting dilemma for Brown-Forman.

If you go back five or six years ago, that Southern Comfort was one of the key targets of all of this competitive flavor success that other companies were having.

And to be quite honest, our entry into flavored whiskey was a bit defensive.

It was to protect Jack Daniel's and Southern Comfort and our Company in some ways, and Honey emerged mostly -- really to be fair, out of that.

And then but I think our Company and the people who launched it did a superb job of making it work in the marketplace, in the way that it has.

So Southern Comfort along the way, we've been -- we have been actually, I feel like shoring it up.

I do really feel like it would have been competitively deteriorating more, had we not been taking some of the steps we've taken.

As I look at the growth rates going back seven years ago, five years ago, three years ago, some of them have moderated, and some of that has come through what I will call innovation underneath the Southern Comfort umbrella, and some of it has just been that there really is a core Southern Comfort user who likes the product in the bottle, and is not going to be distracted by some of the flavor entries.

And so we feel like we've done some of the best work we can do there, particularly with the advertising and communications.

We felt like we put forward a good step there.

It's just competitively under assault.

So I will say that from a corporate portfolio standpoint, when you add up the Southern Comfort volumes with the Jack Daniel's Tennessee Honey volumes, and what we hope will be a successful Tennessee Fire volumes, in the aggregate, they add up to nice growth for Brown-Forman's flavored portfolio, as you can imagine.

On the RTDs, you make a point of I don't know if we -- we certainly mentioned it throughout the course of the year, but a lot of that is related to the difficulties of the Australia market, and how competitive it's become, the difficulty really at the macroeconomic level for Australia right now.

But also very much the competitive nature of RTDs down there.

There has been some impact been competition, Saturn has very done very well down there, so it's taken some of the steam out of what has been a very nice progress over more than a decade for Brown-Forman, largely under the Jack Daniel's name of RTDs, and we are not done with innovation there.

We think there's still a lot of opportunity there, particularly when you consider that against the dominator of all single-serve beverage alcohol, which brings in the category of beer.

So we don't quite have news to share on that today, but just trust us that there is a lot of work going on to make sure our RTD business remains healthy.

And just one follow-up for Jane, if I could.

Sure.

The discussion of the fourth quarter tax rate, obviously the quarter would have been a much better if you had a more normal rate.

And also, Old Forester, up 30%-some?

Right.

There you go.

Can you elaborate?

It sounded like you made comments, I think, in the release, that suggested that it was getting more on premise feature, is that correct?

Yes, I will comment on Old Forester, and let Jane tackle the taxes.

Yes, the Old Forester, there is this irony, since you've known us for so long, the brand in some ways became so small that it became cool and relevant again.

Because, that's our founding brand.

It has been chugging along at the 100,000 case mark for a bunch of years, and of course everybody of Brown-Forman's very passionate about it, because of what it represents to the family.

But it has met its time, is the way I'd say it.

It is an exceptional value in the marketplace for the quality of bourbon that's in the bottle, and the price that the consumer pays.

And I think that recognition has come about.

There's certainly some retro appeal to it, and I would give a lot of credit to the teams that have worked on Old Forester, because the expressions of Old Forester birthday bourbon that has been out there now for many, many years have reminded people of the quality.

And I was struck just within a very short amount of time this spring.

We -- I observed somebody sent me a copy of people standing in line to get the latest release of Old Forester birthday bourbon, right around the time that we announced that Old Forester would be flavored, and be the mint julep of the Kentucky Derby.

So there it was working both dimensions of the appeal of the American whiskey, both premiumizing, but also adding flavor.

So I'd say Old Forester is at the sweet spot of opportunity for American whiskey at Brown-Forman, and that's why we're investing in the way we are down the Historic Whiskey Road behind the new distillery.

Okay.

And, Tim, just to follow up on your question, as it relates to the tax rate.

It did come in a couple points higher than what we had anticipated, too.

And the point of it was to really do a higher mix of our US business, if you will, which unfortunately is taxed at a higher rate than we had anticipated, but if we had more earnings outside the US.

So said another way, our earnings outside the US were a little bit smaller than we had expected.

That's about 1 point.

The second point is what I would call more discrete in nature, more one-time in nature, and it relates to the foreign exchange transactions.

And again, we wouldn't expect that to continue next year, assuming the rates stay where they are.

So just as a reminder, I gave the forecast of 30%, 31% for FY16 is what we are assuming right now.

Thanks so much.

You're welcome.

Thanks, Tim.

And your next question comes from Bill Chappell with SunTrust.

Just a couple quick questions.

One, can you give a little bit more color on el Jimador and what was alluded to in the change of the pricing in Mexico, and how that's expected to play out over the next few months, or few quarters, I guess?

I will start it and Jane, you can add to it.

I think part of it -- our Company is not largely in what I will call the big local market categories.

And the lone exceptions, actually we probably would have referenced over the last fiscal year would be the very sizable, at the popular price point, el Jimador business in Mexico, and the closest thing to that might be the Finlandia business, even though it's premium in that market, to the -- in the Polish market.

Worldwide a lot of those segments are -- have been under pressure for a while, and so we are not exposed to them too much, and I think it's actually one of the reasons why we have such competitive outperformance.

But when we do have them, we try to improve them is the way I'd say it, and our teams in Poland and Mexico have been busy working on corrective actions.

In the case of el Jimador down in Mexico, it has our attention, because we just think it's not that great a business for Brown-Forman at that price point.

And so you get extra motivated to make sure the economics of the business improve, not only trying to get the thing to grow, but also the economics of it improve.

And that one is unique, because at that price point, it's 100% agave product, which means it has a pretty significant amount of raw material commitment behind it for multi years, and the way I say it, just sometimes the math doesn't work for that, unless you go fix it.

And so part of it is, like the Herradura business at a very super-premium price point, works pretty well, the math for Brown-Forman, but down to lower price points doesn't work as well.

Even the el Jimador business in the United States works reasonably well.

And it's a much more attractive price point than the Mexico price point.

Now we go in there with our eyes wide open, knowing that the Mexico price segment that we are in right now is ultra-competitive, and so I think it's a pretty courageous thing by our Company and particularly by the Mexico team, to take on a very high quality product in that segment and try to generate incremental value through pricing in a different blend of pricing and volume.

So that's the whole idea there, and anywhere we see that in our Company, we try to make sure that the businesses are attractive to us, and in that particular case, it needed some improvement.

And just so I understand, is it -- there's new packaging, marketing that comes with it, or is this all of a sudden --?

Absolutely.

Oh, no, you try to work the whole mix, the product continues to be 100% agave.

The el Jimador product is exceptional, it really is, across all three expressions.

So getting the value for it in the marketplace, and of course we did repackage it here -- I guess within the last 12 months.

So there's some packaging work, and a lot of what I would say trade relations and public relations that go with it, the sales force gets retrained on how to sell it.

Then you try to give it the support it needs of the can actually justify itself.

In some of these instances, you are actually willing to accept lower volumes going into it.

You sort of expect it, that there's a customer who won't travel with you to the higher price point.

Got it.

And just on the Slane Castle acquisition.

Are there any dilutive costs to EPS this year?

I understand the $50 million is largely CapEx, but didn't know if you have start-up costs or other financing costs or stuff like, which will be net dilutive to your guidance this year.

Very immaterial.

We always are working -- we're working on brand positions and some of these initial development work, and we're doing that kind work all the time.

But it's immaterial early on.

Perfect.

Thanks so much.

You're welcome.

And your next question comes from Ian Shackleton with Nomura.

Good morning.

Paul, congratulations on the Irish deal.

I had a couple of questions around it, if I may.

Can you give some idea of the size of the distillery?

I know the family originally were looking to a much smaller investment a couple of years ago back, and your $50 million is a lot more.

Can you give us some idea of how large this could be?

And secondly, just from the phasing of the spend there, if I understood Jane rightly, within the $200 million this year, there will be a reasonable amount of the $50 million but not all the $50 million.

Is that correct?

Yes, Jane, do you want to answer that last question and then I'll talk about the?

Yes, and we plan on starting on construction this summer, and the amount of money that I announced, the $50 million or mentioned, it's not only for a distillery, but it's for building a couple of warehouses, which won't all happen right away, as well as the home place.

So of the $50 million, not even half of it would I anticipate being spent in this fiscal year.

The initial investment there, around the hospitality and enabling your distilling, those are the two big ones.

And Ian, I think I've got this right.

I mean, I think it would enable -- you're going to build it for success, it would enable us from a total capacity with that initial investment to do in excess of 0.5 million cases.

Nine liter cases.

So I think we would plan for success.

And just to give you a scale of it, Woodford Reserve is not that large now.

And so we have been at that for 20 years, so just a frame of reference, we will be enabling a generation of development maybe is a way to think about it.

Thank you, Paul.

Just one quick follow-up.

Jane, you answered the question on FX to EPS and you broke up, could you just please repeat what you said?

Sure.

What I has said was it would be about -- he had asked -- we're going to be hurt by transactional, as I said.

We're still going to be hurt, as you know the freights fell throughout the year, so we're still expecting a transactional negative impact.

But the translational absence of the $30 million this year will offset some of it, but not all of it, so we're still expecting several cent hurt to EPS for FY16.

Very good.

Thank you for clarifying that.

And your next question comes from Bill Marshall with Barclays.

I'm just wondering if you give us a little more color what you're seeing on the on premise versus off premise.

I was hearing that maybe we are seeing a little bit of a slowdown in May, I don't know if you had seen that, and just generally what you're anticipating going forward?

I haven't looked closely at the May numbers.

I assume you're talking about the United States.

Yes.

It's something is a metric.

Yes, I mean.

It's been ebbing and flowing a bit.

Sometimes I try not to get too fixated on it, because of the weather and some of these other things.

But our assumption right now is that in the US market, the off premise will continue to be the driver, with the on premise -- at least the numbers I saw last time looked more flattish as it related to traffic.

But I would continue to remind you that I just think the study of that is so interesting, in the world of social media today, because of the way -- at least in this country, it appears to us the consumption formats and locations have changed, and have been enabled by what I call the crowd sourcing ability of social media.

And we've traditionally, because it's convenient to do so and very important to do so, bucketed it between on and off premise.

But I can continue to observe more anecdotally that the off premise environment increasingly becoming, and many on premise environments, as people host others.

And some of that is affordability.

Some of it is just buying supportability pick some of it's just the bang by the bottle versus by the drink is more affordable.

And one thing, you hear this phrase of people warming up, so they will assemble at each other's residences or whatever, and have a drink or two, before they go have dinner or go to a restaurant or go to a bar.

And so it's almost like there's changing patterns of consumption in the US market, that I think are influential to trends, and brands that might be relevant, but they also will change in show up I think over time to these metrics called just on premise and off premise.

That's a good point.

I would build on what Paul has said.

We have seen our numbers, they just came out this morning as it relates to the on premise, and I agree with everything you said in terms of the change in where people are consuming and so forth.

But for us, I will say through April, our results were actually trending quite well in the on premise, where we were flat over a year ago, and we've been trending, continuing to improve month after month, in both Jack Daniel's and our overall Company itself has been above the median.

And I think one of the things we talked about earlier is Old Forester.

Tim Ramey mentioned Old Forester growing 35% and it actually is the fastest-growing brand we have in our portfolio, and the outcomes seem to be doing quite well.

We would expect, I will tell you, compared to the early experience we had on Tennessee Honey, we would expect Jack Daniel's Tennessee Fire to have a little bit more of a skew to be on premise versus the off premise.

I think it will still be very off premise successful too, but I think the early reception to -- and from what we've seen the Tennessee Fire is a little bit better development in the on premise than what we've experienced from Tennessee Honey.

Perfect.

Thank you, one last question.

I don't think I heard you give an update on the situation with the wood cost and the barrel making costs, and if you could just give us an update on that situation, and then how that plays into your 2016 outlook and guidance?

So our -- what we've done as it relates to that, we've taken more things under our control.

We mentioned that we were investing behind a new mill in Indiana this year.

And that along with being able to be supplied with the logs around it will help us in terms of the availability as well as cost.

I think right now just the overall dynamics with the bourbon and whiskey just growing like it is, and the demand out there for new barrels is putting pressure obviously on the cost of wood.

And so with that, we've seen some stabilization, but it's definitely higher than what it's ever been.

But if you flip it around and look at the other side of it, we also benefit from selling our barrels when they become used, if you will.

So there is a two-sided coin to this if you will.

We have those higher costs, because they were already occurring in FY15 and we have those incorporated into our estimates for FY16.

They would be incorporated in our guidance

And yes, just I think maybe you weren't -- if you're looking for what our cost increases for might year might be, I think it will probably be still inflationary, 2% to 3% range.

Perfect.

Thank you very much.

And your next question comes from Mark Swartzberg with Stifel Financial.

Thank you.

Good morning.

As good as the growth is, and I think we can all see it, and it has been very reasonable for you to have the optimism you have, I want to probe on a couple areas of risk that are on my mind.

One is the cinnamon whiskey category here in the US.

You are off to a very good start.

Of course Fireball started the category, but when you look at the momentum for the category, nevermind whether it is Fireball or you or another smaller brand, what are you seeing in terms of momentum in terms of consumption at the point -- momentum at the points of consumption for that category?

Is it picking up, is it slowing down, is it holding steady?

That's one question I have, as I kind of think about the effect of your performance a year from now, with Fire.

And then the second is on the subject of advertising, Paul, when we talked last quarter, I think you made a very compelling case that even if you yourselves grow mid-single digit in terms of advertising spend, which is lower than anticipated rates of revenue growth, that's superior to your competitors.

Can you talk a little bit about what is the anticipated rate in the guide for FY16, and whether there has been any change in your assumptions and planning for ad spent, given the anticipated rates of revenue growth?

Okay.

I will try to tackle those, and Jane, chime in as you feel.

On the slowing down, I think you would expect that the -- it will be interesting to see how Tennessee Fire adds to the -- if you were to define the subsegment called cinnamon, or if you were looking at it broadly as flavored.

I would say that flavored generally, the leader in flavored whiskey has been decelerating, but also very high levels.

But then you would have the infusion of new entrants, like Tennessee Honey being one that continues to grow nicely, but then our new entrant in cinnamon and then I think the aforementioned Crown Royal entrant, all those will be adding to the mix, if you defined it as flavored.

Cinnamon I would expect, just because a very large volume level of Fireball to slow down with the passage of time, and whether or not Jack Daniel's Tennessee Fire more than makes up at the category level will have to be seen.

But I would just -- if you just added up the volumes associated with these leading brands.

I mean, you start to get bigger than -- entire categories that have been in existence the United States for decades.

So, it really is a very interesting development, phenomenon for the industry, that you have to pay attention to, but be very responsible about.

And I think there's -- I'm sure a part of your question about is this stuff just a trend, is going to bust and go away.

I mean, there's nothing we can do about the category's marketing as it relates to that, or the way that the consumer experiences it.

We can control that a little bit in the way we market our brands.

And so one of the reasons we're being so focused on the particular two that we have out there right now is to try to make then enduring brands, and there are ways you can market these things that give you a better chance at that than others, and I think being at the premium end of the category helps in some levels.

I think encouraging versatility and mixability in the products is another attribute.

To the extent that they engage in new consumers is another attribute that can make these things be more sustainable.

So there are a lot of things that we'll continue to study.

I'm a bit probably like you.

We're looking at it, observing it, in our case, we're trying to compete within it, but also we didn't really don't know.

But I would say so far, it continues to be ultra-impressive as it relates to the sheer volumetric scale in this country particularly, related to flavored whiskey.

On the A&P, I think it is just continuation of what we've been saying.

The alone exception to this year's probably more immediate around launch of Jack Daniel's Tennessee Fire as our new item, so you would expect that within the mix of Brown-Forman's investments.

So -- if we are growing in a way -- as I think back over time if I was looking ahead, if we were growing at the rate we are in the 6% to 8% range of the sales line, I think feel like, as focused as we are, and with some of the influences like Jane mentioned of dark markets, and the line extension benefits that you sometimes get, I think mid-single-digit levels of A&P for right feel about okay.

I do think, versus at least past practices, that would gain share of voice.

I don't know what our competitors will do in the coming years, but over the last couple of years, I would still assess that we have gained some share of voice.

That's very, okay great.

And if I could just kind of continue from a US perspective, ask about, a question that pertains to the gross margin evolution, we just got some color that was helpful on the wood cost.

But on the last call we also talked about, and in this call, you've talked about wanting to expand the consumer base, which brings a certain incentive not to raise prices, and even to promote a bit more.

As we think about the gross margin evolution here in the US for the total portfolio or the Jack Daniel's family, can you just talk a little bit more about how you're thinking about that average selling price at retail and what you need to do with the family, given what's going on within the larger bourbon segment, but of course, also what's going on in the vodka segment.

Yes, I mean that -- you basically reference the most artistic exercise that goes on in brand management.

It really is.

On balance, so you think about that challenge within the Jack Daniel's framework, and just use the example of United States.

Simultaneously, what we're trying to do is to continue -- and by the way, the brand Jack Daniel's Black Label finished in the United States in FY15 at its all-time volumetric high level.

It just is a wonderful attribute of the brand that next year will celebrate its 150th year in the United States.

So it's sort of staggering to think about that, and had some pricing, and also was the basis for the success of Jack Daniel's Tennessee Honey.

Gentleman Jack, Jack Daniel's Single Barrel, Jack Daniel's Sinatra, and so the ability, the delicate balancing act is continuing to advance Jack Daniel's Black Label's brand equity, its net sales, its volumetrics, while also advancing these other consumer opportunities that maybe Jack Daniel's Black Label can't so readily or easily accomplish through its own programs, and are more efficiently accomplished through line extensions in these cases.

And you have to be very selective, you have to be very thoughtful.

In our case, we sometimes are little bit more patient than people would like.

But it works very well for us.

And the thing I would point to is the level of cannibalization that we experience is so minimal, and it's because we will continue to support Jack Daniel's Black Label while we are introducing Jack Daniel Tennessee Fire, for example.

And when the line extension emphasis is on items that have higher gross margins, you effectively take the pressure off Jack Daniel's pricing, and permit it to grow a little bit more volumetrically, because what you end up doing on the mix of Jack Daniel's whiskey is get a mix increase.

You get an effective price increase because of the mix.

And so elements of that are at play right now, and we like it.

We actually like it.

It's not that we're anti-price increase, because we believe one of the elements of making Jack Daniel's continue to be exceptionally special, well-valued is to keep its price premium.

I would even refer to it today most markets around the world as super-premium.

I hope that gives you a little bit more color on it.

It is a really artistic exercise, as you can imagine.

I wish we could write even a roadmap for ourselves, but you are always dealing with the influences of the competitive environment around you, and so far so good, and I think it's in our results, but it's why we get paid to do what we do everyday.

Fair enough.

Very good.

Thank you, Paul.

And your last question comes from the line of Brett Cooper with Consumer Edge Research.

A couple questions.

Can you just talk about the phasing of how we see Slane Castle come to market?

Phasing of coming to market.

The Irish whiskey project.

The plan on the Irish whiskey project, if you will, is to purchase some new whiskey, if you will, that we can make our own product line.

From the bulk market.

From the bulk market, so we plan on starting to do that in FY16 hopefully, go to our proprietary blending and so forth with it, and go to market probably in FY17, if you will.

What we're actually building now in terms of the capital, and we won't have that all completed probably until FY17, early FY18, so we won't be distilling, making our own distillate, if you will, until about that time.

So that actual whiskey that we'll be producing for the $50 million investment that I referenced won't be available till 2022.

But in the meantime, we'll continue to purchase on the bulk market.

So we'll have a product that we're very proud of, that we haven't constructed yet that would be made and available for the five years while we are aging the product that we can in fact distill after 2017.

Some of this -- at least in my time, we've only done it once, which was Woodford Reserve, when we renovated the distillery and built out the distilling capacity, you wait a few years before the distillate comes in.

And so I think the key thing is to make an excellent product.

And that's one of the things -- Irish whiskey, there's very few competitors and the product themselves are -- generally, and very genuinely of very high quality.

So you are going to want to make sure you put something out there that works very well in the marketplace, so the standard I think for Irish whiskey fairly high.

And I may if I on the pricing question, if you think about the mix that's going in the US specifically within US whiskey, you are seeing average price per volume increases of 4% or more.

How do you balance Black Label pricing with the goal I assume of never having black label be the equivalent price to average price volume for the average US whiskey?

Well, I would have to look at your data, but it traditionally, number one, it's so big within American whiskey, it helps to set the price for American whiskey.

At least it certainly makes a big contribution.

But again, I go back to that how do we do it.

I mean, we look at it literally each half year or so, to make sure we're comfortable with the pricing and there's a -- if you think about this American whiskey market, most of the excitement right now is -- if you just think about it on two dimension, price up and down and flavor sort of going, views that across or horizontally.

There's so much interest in flavor, we talked about earlier on the call, and how large that segment.

Jack's participating that, and those brands by the way have excellent gross margin.

We also are very much participating in the super-premium and ultra-premium expressions in the United States above us, and that's where a lot of the growth is, too.

There's been less buoyant growth in this category down at the very low price points.

They are getting some halo effects on it, but it's really been the premium plus, ultra-premium arena where we are playing, where a lot of competition is playing, and then in the flavor, where we've also been successful.

So I think all told, we will be advancing our sales dollars through the combination of -- and also because we also take price increases from time to time that we think are reasonable on Jack Daniel's, on Gentleman Jack, on Tennessee Honey, we take price increases on Woodford and its expressions.

I can't tell you how impactful it is too, when you look at an individual brand.

The example of Woodford Reserve which is going very, very well, been growing 30%, very premium price, periodically takes price increases, but the impact of introducing Woodford Reserve double oaked at about double the price.

What that does to the Woodford Reserve family's overall pricing is really exceptional.

And so we're getting it through a combination.

I think what we are highlighting a little here today is an FY16, which is saying to expect a little bit less from pricing, more for mix and in the sales composition, a little bit more from volume.

Great.

Thanks.

You're welcome.

Thank you, Paul and Jane, and thanks to all of you for joining us today for Brown-Forman's year-end earnings call.

And for those of our who are planning on attending our Jack Daniel's distillery and cooperage tours at the end of June, we ask that you please RSVP by the end of this week so we can make sure that we have accurate counts.

Thanks again for the time, and have a great week.

Thank you, all.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and asked that you are please disconnect all lines.