Brown-Forman Corp (BF.B) 2016 Q1 法說會逐字稿

Good morning.

My name is Salima and I will be our conference operator today.

At this time I would like to welcome everyone to the Brown-Forman first-quarter fiscal 2016 earnings conference call.

(Operator Instructions).

Thank you.

I will now turn today's conference call over to Mr. Jay Koval, Director of Investor Relations.

Please go ahead, sir.

Good morning everyone.

I want to thank you for joining us for Brown-Forman's first-quarter 2016 earnings call.

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

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

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

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

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

This morning we issued a press release containing our results for the first quarter of fiscal 2016.

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.

With that I will turn the call over to Jane for her prepared remarks.

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

I plan on covering two topics today which should leave plenty of time to address Q&A after Paul's brief comment.

First, I'm going to review our first-quarter results.

And second, I am going to discuss our latest outlook for 2016.

So let me start by reviewing our results for the first three months of fiscal 2016.

Our underlying net sales grew roughly 7.5% in the first quarter.

As expected, this rate of growth came in above the range that we are forecasting for our full-year due to the seasonality we discussed on our last call.

Our underlying net sales growth for the quarter were broad-based with the United States being the largest contributor to our growth with underlying net sales up 10%.

The Company's portfolio of American whiskey brands drove these results with growth across the Jack Daniel's trademark, Woodford Reserve and Old Forester.

Additionally, the launch of Jack Daniels Tennessee Fire also helped results contributing almost 4 of the 10 points of growth we delivered in the United States.

Recall that Tennessee Fire was launched nationwide in the United States during our fourth quarter of 2015 with encouraging trade and consumer reaction.

While the brand is still in its infancy in 42 states, it continues to track very favorably against the early days of Jack Daniels Tennessee Honey in the original eight test markets.

I would like to point out one key difference between the two brands.

Tennessee Fire is seeing increased acceptance in higher relative sales in the on premise compared to Honey.

We remain optimistic about Tennessee Fire's growth potential and note the brand has expansion opportunities available to it as it is distributed in only 67% of Tennessee's whiskey off-premise accounts and 30% in the on-premise.

While the competitive environment for flavored whiskey has intensified as of the recent entrance of Canadian flavored whiskey, we still expect Fire to be a great addition to the Jack Daniels family of brands augmenting total value growth.

As an aside, we are encouraged about the early days of performance for Fire in its test markets internationally notably the UK and the Czech Republic.

So let's take a look at some of our other brands performances in the US.

Our tequila brand, el Jimador and Herradura, grew underlying net sales double digits as we continued to build brand awareness through better on-premise activation and promotion.

Southern Comfort and Canadian Mist declined in the United States during the first quarter while Korbel and Sonoma grew aggregate underlying net sales in the mid-single digits.

Our business in emerging markets continued to grow well with underlying net sales up 11% in the quarter.

The majority of our emerging markets enjoyed solid double-digit gains led by Mexico, Turkey, Brazil, Ukraine and Africa.

Poland also returned to growth as we believe we have worked through the inventory issues caused by the effects of the January 2014 excise tax increase but the competitive market and environment remains challenging there.

Russia's underlying net sales dropped 36%.

This was the result of a deteriorating economy and the devaluation of the ruble, both of which have negatively impacted consumer confidence and ultimately consumer demand.

A challenging comparison with last year's first-quarter's underlying growth of 17% also contributed to the decline in the quarter for this market.

Looking at our non-US developed markets, we experienced a 5% increase in underlying net sales growth.

This was led by strong double-digit gains in the United Kingdom, France and Germany.

Germany was particularly strong as we have successfully resolved trade negotiations with several key accounts.

While the UK and Germany both enjoyed favorable comparisons to last year's Q1, Australia's comparison was more difficult as the market declined double digits reflecting a weak economy and a challenging excise tax environment for spirits.

Travel retail's underlying net sales declined 18% due to two main factors.

The first and largest factor was related to what we believe is the timing of orders from a couple of our customers.

The second factor was ongoing softness in European travel retail which has been hard-hit by Russian consumers who have cut back on travel and are spending less per trip in duty-free.

Our underlying net sales growth for the Company excluding some of what we believe to be timing issues in travel retail, would have been over 8% for the quarter.

Moving now to the reconciliation of underlying to reported growth, our reported net sales declined 2% negatively impacted by 9 points of foreign exchange.

As an example of the foreign exchange headwinds we experienced in the first quarter, the euro was almost 20% lower in the first quarter of 2016 compared to the same quarter last year.

Other currencies have devalued even more dramatically against the dollar.

Reported sales were further hit by a 1 point reduction in inventory resulting in an approximately 7.5% underlying net sales growth.

Our topline growth was driven by strong volume gains and a 2 point improvement in price mix.

Our better price mix helped drive an 80 basis point improvement in gross margins and a 7% increase in underlying gross profit.

Our underlying A&P spend increased 3% and SG&A grew 6%.

So when we put this all together, we delivered 9.5% underlying operating income growth.

On a reported basis, operating income grew 3% and earnings per share grew 7% to $0.75 held back by approximately 3 points of adverse foreign exchange.

This leads me to my second topic, our outlook for fiscal 2016, which we reaffirm today.

Before I dig into that topic, I would like to add that while we are fortunate to have a business model that combines long-term growth with defensive characteristics, we realize that we are not immune to a further deterioration in the global economy.

So like all of you, we are anxiously watching the market gyrations over the last two weeks particularly in the emerging markets.

We believe we are fortunate to be in the early stages of capitalizing on our emerging market potential and are optimistic that over time it will become an increasingly important driver of our results.

But for now, our emerging market footprint outside of Poland and Mexico is less than 10% of our total revenues.

So our exposure is significantly less than the competition.

Additionally, this approximate 10% is well diversified, spread over 100+ countries around the world.

Now for our fiscal 2016 outlook.

First-quarter results were largely in line with the trajectory we anticipated for the full year.

As such, we believe we are on track to deliver the 6% to 7% underlying net sales growth we shared with you on our last call.

We expect to continue the combination of modest gross margin expansion and better leverage through our operating costs will allow us to deliver the 8% to 10% underlying operating income growth.

We are also reaffirming our earnings per share range of $3.40 to $3.60.

While currencies remain volatile, the net FX impact is still expected to be a headwind in fiscal 2016 using rate as of late last week.

As with sensitivity, a 10% move in the dollar in either direction would impact EPS over the balance of the year by approximately $0.08.

To share a little bit more color on the seasonality of foreign exchange, I thought it would be good to remind everyone that the large appreciation of the US dollar occurred in the fall of last year so with that we expect another quarter of significant headwind on our reported revenues though less though of an impact by the time we get down to operating income due to the absence of a $10 million loss in last year's Q2 resulting from the revaluation of current assets that were reflected in other income and expense.

Looking at our full-year tax rate, we still expect it to be in the range of 30% to 31%.

In summary, our balanced geographic approach has helped us continue to deliver market-leading rates of growth fueled by robust global demand for American whiskey.

Disciplined innovation is helping to drive our results and premiumization trends continue all of which we believe position Brown-Forman for another record year of top- and bottom-line growth.

While we are investing significantly to meet future anticipated demand, our business model allows us to return capital to shareholders through growing dividends and our ongoing share buyback program.

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

Thank you, Jane, and good morning to everyone.

I think I would start by saying I was pleased with the quarter as it continued our strong underlying results from FY15.

The underlying Q1 results were right in line with our full-year guidance for both underlying net sales and operating income so in my view, we are off to a good start to the year.

One noteworthy milestone that occurred during the quarter was Jack Daniels Tennessee Whiskey surpassing 5 million cases in the United States for the first time in its 149-year history.

And to be clear here, I'm referring to the parent brand, Jack Daniels Black Label as most know it.

I've been reflecting some on this recent accomplishment so I thought I would share a few perspectives with you about it.

First, I will simply note that attaining the 5 million case level in our industry is a rare event in its own right.

This is a very high level of consumer acceptance achieved by very few brands.

Add to this the fact that that Jack Daniels is priced at the super premium price level, well above the price of most brands that have achieved a 5 million case level and the recent milestone is even more rare and impressive in my view.

And consider further that the 5 million cases are derived from just one single country for a brand that does more than 12 million cases and in more than 160 countries around the world and it elevates the accomplishment even further.

So as I think about all of this and the brand's recent performance further, it is not that difficult to imagine that a different outcome was quite possible.

While the trends for American whiskey have been a positive factor in recent years, I can think of at least five factors that had the potential to negatively impact Jack Daniels volumes in the US over these last many years.

And yet this very strong and unique brand forged ahead despite these forces.

The first factor I will cite is the difficulty the big brands have experienced both inside and outside our industry.

As evidence, consider that the largest 10 brands by volume in calendar year 2010 in the United States have not only lost share but cumulatively lost over 1 million cases in the last four years with six of the top 10 having lower volumes today versus 2010.

Jack Daniels was one of the brands that grew nicely against this very difficult backdrop from more larger established brands.

A second force was pricing.

Despite the consistent price increases by the Jack Daniels brand in the United States to support its super premium position and to reinforce its specialness, volumes have still moved forward and this is not always the case for brands who attempt to advance price.

A third factor has been the intensifying competition in the American whiskey segments as new entrants in craft, premium plus and flavored whiskey have exploded in recent years.

While some of this expands interest in the category, at the same time it is a direct source of competition particularly for the most proven and established players such as Jack Daniels.

Additionally the brand held up extremely well to its own innovation where there was the possibility of cannibalization.

It is not uncommon to observe brand innovation that will significantly cannibalize the parent but the development of expressions like Gentlemen Jack and Jack Daniels Tennessee Honey have not held back Jack Daniels volumetric progress to date.

Finally, it is often believed that older, long-standing brands are mature brands whose best days are behind them.

I find it impressive that Jack Daniels is in its 149th year in the United States and sits today at its all-time volumetric high point.

I cite these factors to illustrate that Jack Daniels is not your normal brand.

I believe it to be a special brand and often the exception to the rule.

As part of our responsibility to be excellent brand stewards, we believe it is important to consistently and persuasively tell the brand story.

Some of you on this call had the opportunity to hear parts of that story in June with your visit to the brand's home place in Lynchburg, Tennessee.

The brand's story is a story of authenticity, a story of quality, a story of the brand's heritage and history, a story of Americana and a story of a small town brand making a splash on a worldwide stage, all conveyed with a down to earth personality, genuine hospitality and with an intent to make friends the world over.

We are thrilled that many of the attributes that Jack Daniels possesses so naturally appear to be in fashion with consumers these days and we believe this bodes well for the brand both in the United States and across the world.

So thanks for indulging my recognition of this milestone and congratulations to everyone at Brown-Forman on the accomplishment, most notably our Jack Daniels and US teams.

With all of the attention that our globalization in our Jack Daniels line extensions have received in recent years, I felt it important to briefly highlight some of the impressive progress we are making with our most important brand in our most important market.

That concludes our remarks this morning and we are now happy to take your questions.

(Operator Instructions).

Vivien Azer, Cowen.

Hi, good morning.

My first question has to do with the top line.

Clearly the timing issue in travel retail was a factor in terms of the 7% plus underlying sales growth.

But keeping in mind that you are cycling your easiest comparison of the year.

What gives you comfort that you can hit that full-year objective given kind of where you have started the year and if you could comment on the role of expanded distribution for Fire as part of that, that would be helpful.

I can start off with the first thing.

Our actual numbers, Vivien, came in a bit higher than our range so it did come in around 7.5%.

And as you did note if you pull away global travel retail, our results would have been over 8%.

We had some other tough comps too, Russia, parts of what we saw in Russia we don't expect to repeat itself, some of which they had very tough comps versus the last year.

Australia, some of which are tough comps versus last year, some of which are just difficult trading environments, things that are going on there.

So if I wrap all those things up, if I were to adjust for all of those things, our actual growth rate would have been closer to 10%.

So I think what I'm saying to you is the three things I mentioned I think some of it, there's bits of it are timing.

The only one I adjusted for you was the global travel retail piece.

So we knew we would start out of the gate stronger, so I'm expecting those items I just mentioned to lessen as the year goes on and the timing of those orders as such and global travel retail to reverse themselves.

Does that help?

Very helpful.

And if you could comment on the distribution opportunity with Tennessee Fire given the metrics that you offered in the prepared remarks?

So just to give you a flavor, I noted a number of 67% of off-premise distribution for Fire as it related to Jack Daniels Tennessee whiskey.

As a point of reference, Honey is 81% and so we know we have got that opportunity to get there as well.

In terms of its on-premise while we have gotten faster in the on-premise, the ratio there of Tennessee Honey to whiskey and Fire to whiskey has got opportunities to I mentioned 30% of Honey on the on-premise -- and excuse me, of Fire on the on-premise and Honey is I think 39%.

So we know we've got distribution opportunities there, all in the US that I'm talking about right now.

Vivien, I will add too, while we don't try to internally here precisely nail down the quarters as we go along, we try to give enough of a flavor to them.

And one thing in retrospect that I think we have learned is that the acceptance at the trade for Tennessee Fire in our last fiscal year's Q4 because we pretty rapidly built distribution and of course we can't gauge with precision how much retail inventory there is.

We can do a really good job we think on the distributor inventory pipeline but on the retail inventory pipeline, as now I look back on it, I think we probably built it faster than we did on Honey in its early days for Tennessee Fire.

And so back when we were forecasting our fiscal year 2016 and the Q1, we would've thought that maybe some of that pipeline was going to be more evenly spaced through the first six months whereas a lot of it I think as we look back on it now happened pretty quickly for Tennessee Fire and we suspect that was because of the pent-up demand that was occurring because of the staged rollout.

That could be a factor too in the Q1 results.

It kind of is a hybrid of both your questions there.

That is very helpful.

Thank you, Paul and Jane.

Just one last one for me.

As we think about operating leverage for the full-year, it seems like that should accelerate given your full-year guidance.

So can you talk please, Jane or Paul, about the drivers of that?

Sure, I will take that on.

In the quarter we actually had some cost pressures so you will notice that our underlying gross profit growth and our underlying net sales growth were both in line, both grew 7% and we are still expecting some modest leverage there.

But we had cost pressures from wood.

I think I talked about this in the fourth quarter just given the supply-demand constraints they are in the cost of wood.

So we expect that to abate over the balance of the year and our costs to come down our cost of goods to come down more in the inflationary 2% to 3% type of range.

But we will expect to start seeing a bit of leverage through the gross profit.

And then in terms of operating expenses, we expect to continue to see leverage there.

SG&A for the quarter, there was a handful of things that were one-time in nature or things that occurred only in the first quarter that will not repeat themselves over the balance of the year.

So when we adjust for those things it was more in the 4% to 4.5% range.

We would certainly expect the SG&A to moderate from where it came in the first quarter.

As Jane said, these will be like for example had our global meeting that came in the first quarter and not had that last year for example.

So we do expect that to moderate.

Very helpful.

Thank you both.

Robert Ottenstein, Evercore.

This is Eric Serotta in for Robert Ottenstein.

A couple of questions in terms of your comment about increased competitive activity manifesting itself.

Could you give some color as to where you are seeing it in terms of countries and categories and who you are seeing it from?

Is it the upstart craft players or is it some of the large established players in spirits getting a little bit tougher in terms of the either price point or execution?

I think both.

So when we talk about intensifying competition, it could apply to any number of the reference points in our prepared remarks.

I will cite a couple.

There is no doubt that if you look at areas like flavored whiskey, premium plus, American whiskey and I will just maybe comment on the corporate level as lots of corporations are competing against each other out in the marketplace.

There is just a large number of new entrants in flavored whiskey in that one example.

And if you just think about it in a very short amount of time, it is my estimate that in the United States alone the flavored whiskey segment could be 7 million to 8 million cases which makes it -- not only did that happen fast, it makes it very large.

And so that is very exciting and a lot of people who are seeking growth want to be a part of it so you start to see a lot of entries.

So that is what makes it in some ways challenging to forecast your business to think about.

So it is -- because of the pace of its growth, it makes the management of those brands from Brown-Forman in there a much more dynamic exercise so that is something we have been adjusting to a bit.

I think at the super premium level of American whiskey, I mean it is really the craft items, there is just the regionalization of the category where there is lots of offerings in each state, many distilleries being built and all of that has a competitive collectively really, a competitive presence in the American whiskey category.

Some of it is exciting because it adds new users but for the established players, it is something you have to pay attention to.

So when we refer to intensifying competition, we are referring to that as well and that can be very much for retail space too, space on shelves, space on backbars, etc.

Then the third area really is I mean the world doesn't just sit around idly and look at how Brown-Forman is performing and then reviewing themselves and not desire to grow at faster rates.

And so we feel competitive pressures from companies that are simply striving to do better out in the marketplace and often in more recent years, these have been some of the larger competitors.

And so whether it is through their innovation or through the intensity of their efforts sometimes it is spending, sometimes it can be discounts, we are just seeing sort of more of an all-out effort from some of our competition on that range.

So when we cite intensifying competition, it really spans all three of them.

As a follow-up to that, you had about 2% price mix on a (inaudible) average globally in the quarter.

How does that break down between the US and non-US?

I imagine there is some currency driven pricing in some other countries.

What should we expect in terms of price mix contribution for the US this year?

This pull back on pricing a bit, I think what we guided that year end was we were going to lean a little bit more on volume this year and a little less on price.

So we would still get a benefit from the mix, not just because of our portfolio and the more we premiumize and the faster growth rates we are experiencing on some of our higher end whiskey such as Woodford Reserve so that in and of itself gives you a benefit.

Recall that we took a couple of years of pretty aggressive pricing in the US both in 2013 and 2014.

We did some more moderate pricing last year and we expect to continue to do more moderate pricing this year.

So in the low single digits, the 1% to 2% range is what we guided to.

I don't have the actual number for the quarter but the price mix it was pretty split as I recall, pretty close to being split between price and mix in terms of contributions.

You should always expect the mix factor to be more prominent in the United States just because of the status of the portfolio and the fact that the premium items are doing so much better than our lower-priced items in that particular market.

Our portfolio just isn't as expansive as in the United States when you go to the international markets.

Great.

Thanks for your help.

I will pass it on.

Nik Modi, RBC Capital Markets.

Good morning.

This is Russ Miller on for Nik.

It seems Jack Daniels Tennessee whiskey depletions slowed somewhat sequentially during the quarter.

Could you provide some context around this slowdown for this brand specifically?

And then I have a follow-up if you don't mind.

So are you looking at a Schedule B, is that what you are looking at?

Yes.

Okay.

Yes, so again there were lots of things going on, lots of moving parts in the quarter.

I think I mentioned some of them in my prepared remarks and I mentioned some when Vivian asked the question.

We definitely had moving parts where we were down in Russia and we had customers in travel retail that didn't order.

We also had tough comps in Australia, they had a price increase last year in the first quarter or as of August 1, so there was a large buy-in there so there is some of that dynamic going on if you will.

On the flipside, there is other moving parts too in terms of looking at our developed markets.

I think I would just pull back and not get hung up on Tennessee whiskey in just one quarter.

What I would suggest soon is looking at our largest market, Paul spent some time talking about the milestone we achieved in the US in the quarter of 5 million cases.

And when I think about what we were doing in takeaway trends a year ago, that brand was actually I think it was flat to a little bit down.

And if you look as the year progressed and it has continued to hold up, the growth rates have improved and I think it was even stronger in the NABCA information that I saw yesterday but it is more in the 4.5% type of growth range.

So I think that knowing that as a backdrop and then looking at the family number I think you may be referring to too, realizing that is hugely impacted by RTDs Australia.

Again that is a tough market there right now both from an economy perspective as well as just the RTD category.

If you were to just strip Australia out of those numbers, you would see a nice number for the Jack Daniels family of brands, depletion growth it would have been up 7% for the quarter.

So as we look at the Jack Daniels Black Label numbers for the next nine months, we would expect based on the factors Jane talked about some of the seasonal stuff that occurred in travel retail and Russia is a more difficult one to try to anticipate.

But we would expect that volumetrically and hopefully from a sales standpoint to be better for the balance of the nine months in the first quarter.

Okay, thank you.

That is very helpful.

As a follow-up, could you provide perspective on your on-premise business overall and the delta in on-premise versus off-premise growth for the quarter and looking forward?

That is a country-by-country answer and of course sometimes we don't have the details to provide you.

Our business in the United States, the largest and most important country, we have actually been encouraged by our on-premise progress over the last six to 12 months where it appears our brands are performing a bit better than they were in the prior 12 months.

Some of that, a factor Jane mentioned that relates to some help from the introduction of Tennessee Fire into the on-premise.

That is a nice thing.

But it really is the skew to the American whiskeys that is doing it and the results on brands like Woodford Reserve, Old Forester, Jack Daniels continue to do well.

So I think we would be in the largest market encouraged by some of the more recent trends in the on-premise.

Honestly, something we look to for both on-premise and off-premise in this country are fuel prices and so we would -- knock on wood -- that the lower fuel prices as the expectations they would continue to help support some of the recent performance in that channel.

I thought I might just build on what Paul said too.

Something he talked about at the end of our earnings release and something he talks to us about from time to time is really we started seeing a change in consumer behavior starting right during the recession and people started not going out as much and people started changing where they had their drinking occasions.

And I think we are seeing more blur between on-premise and off-premise and not that on-premise is not important but where they drink has remained changed I believe from the when the recession hit.

Fundamentally.

We do believe that.

If you just look at the behavior of millennials where they might have spent three or four hours at a bar for an evening, they may only be spending an hour and a half and the first portion of it is in their apartment on the couch with their friends.

And so the brand selections that occur in those different environments are really important and I think that actually is a contributing factor to why the flavored whiskeys are actually doing fairly well because they are convenient to pour and consume and don't require a lot of mixers, etc.

So I think there is some changing dynamics that may be with us for a while.

That is very interesting, thank you.

A last question if you don't mind is there seems to be a lot of buzz around the industry regarding Mezcal.

Is that a category you would be interested in entering through an acquisition or with El Jimador or Herradura?

If you could just provide any context around that, that would be helpful.

I can take a little bit of that and let Paul jump in.

I would say just in general when we look at acquisitions, we are not necessarily looking at categories, we are looking at businesses and we are looking for brands and we are looking for good businesses and good brands.

So what I mean by a good businesses is does it have attractive economics, are the margins well, the returns well, are they capital-intensive?

Hopefully not.

Are they growing, are they sustainable, can they be globalized?

And so we look less at the category if you will versus a brand and looking for a good business.

I would start off with that.

Given our portfolio we have now, we have spent the last decade really tweaking it and more than tweaking it, I should say because we sold off our consumer durables business, we sold off our low-value wine business, we brought in some brands in the portfolio too, mainly the tequila brands.

And so we have what I call now a pure play spirits portfolio skewed to the premium end.

And so that would be something else that we would obviously look for and it is obviously we are skewed through American whiskey which happens to be the place to be right today.

I think you will find us being fairly focused relative to our competition on particular trademarks and probably my most direct response to the interest that is out there in Mezcal is that our response would be to focus evermore on Herradura.

I mean I think that we have so much work still to do to build awareness, distribution, velocity telling the story of Herradura remains very important to us.

We think it can be a very significant piece of business for us in due course.

It is actually showing nice traction of late and we think that interest in Mezcal might create interest as well in the tequila category because of the flavor profile.

But to your point, I think it would be shortsighted on our part not to pay attention to emerging categories and see how they might impose competitive tension or distraction for our brands in the marketplace.

And these have come up from time to time whether they are Mezcal or the cachacas or the Japanese whiskeys are showing in this country some interest.

So I think it is worth always having a little bit in your peripheral vision these categories so you can see what you can learn for them.

From what I can see so far from Mezcal, it makes me want to work even harder on Herradura.

Excellent.

Thank you very much.

Bill Schmitz, Deutsche Bank.

Good morning.

Do you see any short- or long-term benefit from what is going on with (inaudible) in the US on the investigation?

I will start off with that.

You probably have read as much as we have read on that and so we only know what we have read.

The only thing I can really talk about is ourselves and how we address our own business and something that we have always done probably for two decades now is measure ourselves on a depletion basis not a shipment basis.

And with that being said, we also not only do all of our management reporting here on that basis, but we also hold all of our sales force and employees accountable on a depletion basis so they are incentivized if you will on that same basis.

When of course when you are in the business that we are in which is the whiskey business, the whiskey making business, something we have been in the whole time we have been around, it is very important to -- there is really some art and science to it, but we have many learnings over the many year if you will to be careful of how much you lay down, when you lay down, what you lay down.

And so it is not like the white spirits if you will.

So we pay a lot of attention to what the inventory levels are, at the distributor level and we try -- well we have information on consumer takeaway which would be the best information obviously if you had that to see what is going on in the retail level to see when things get out of whack.

So that is something that we constantly are looking at and are constantly aware of.

I will just add that the idea that -- I mean I've referenced this a little bit with the point I made earlier about corporate competition.

I think the effect of that amongst many other factors perhaps for Diageo who you cited is they are probably a more motivated competitor as a result of really a couple of things; one, the desire to continue to be a better company and grow.

So if they are doing that, of course for a company like Brown-Forman and everybody else in the industry, it creates competition.

I think the test would be whether or not it is any more significant than what we have experienced historically.

Because we always find that there are some competitors who are out in the marketplace, whether they manage their business by shipments or are really trying to preoccupy the retailers by getting them to spend more of their dollars on Diageo brands or somebody else's brand.

That has always been a competitive force, and people who manage their business at retail differently than we might, I can't say that it is any different today than -- I've seen them over my career in many countries around the world people who will do things that cause what I call competitive distraction.

I think a more important factor are companies who are striving to grow at rates that are higher than they currently are experiencing.

And when you attempt to do that, whether it is an investment or innovation or some of these others, you just get sometimes a more formidable competitor in the marketplace.

I don't know that is any more difficult than we encounter all the time and so my advice to our own people is to keep our heads down, do the right things that are right both short-, mid- and long-term for our Company and our brands and adjust where you see there is something new particularly on the innovation front.

I think that is a more compelling competitive force sometimes than the heavy discounting or stealing the retailers' dollars through loading or something like that.

So in any event for us, we pay attention to it but we are not going to be preoccupied with it.

Okay, that is very helpful.

I just had a question on the guidance.

I think you said only 10% of your [scales] are emerging markets ex Poland and Mexico.

So why do you feel that you have been a necessity of sort of caveating the guidance based on global economic environment?

It seems like by and large most of the developed markets which are the bulkier business are still -- I mean they are not great but they are not any more volatile than they have been in the last two or three quarters.

Is that fair?

Yes, I think you make a good point.

I think it is more the uncertainty around what might occur going forward as a result of just the skittishness that we have seen over the last literally week to 10 days.

More impactful for our business are countries that undertake aggressive excise taxation as some policy of the country to raise revenues or whatever that can directly impact us.

No, you are absolutely correct.

There is always macroeconomic forces that are working both for and against you but we are reacting a little bit more I think to just the recency of some of these market sell offs.

At this stage and we will see what happens I am not obsessed with what is going on out there.

And a lot of it is because our geographic diversification at the Company has really been a big help for us.

I mean the country we have been talking about here just a little bit today, Australia, which has been a difficult economy.

It has been a difficult distilled spirits environment and been not the leading performer for Brown-Forman more recently.

But I will cite that a while back while countries were having difficulty whether it was an Europe or maybe the United States was not performing the way it is today, Australia was leading Brown-Forman in some ways because of the growth of our RTDs and our main line whiskeys down there.

I always try to reflect on how this geographic diversification and not putting all of our eggs in one basket can help us and it is at times like these that I am particularly appreciative of it.

Okay, great.

Appreciate it.

Thank you so much.

Ian Shackleton, Nomura.

Good morning, Paul and Jane.

Can I go back to what you were saying on FX and I guess with what is happening in markets in the last couple of weeks, the FX headwinds have become a little bit more severe and you basically kept your EPS guidance range intact.

Is it a comment that the FX really hasn't moved that materially or is the fact that despite this more negative FX, you have got other positives running the other way which allows you to keep that guidance?

Actually if you were to look at the rates earlier this week which actually went in our favor, what we ran our analysis as of was that the rates hadn't changed much from when we gave the guidance at year-end.

So we really haven't seen much movement at all as it related to or forecasting for the year which is a few (inaudible) FX.

With it being very focused on the first half of the year.

It is very focused on the first half of the year.

Understood.

Thank you for that.

Just a follow-up, with what is happening in (inaudible) emerging markets and elsewhere with currencies weakening and the expectations of valuation coming down, do you think this starts to open the door to be a bit more aggressive on M&A in the spirit space?

Yes, I think there is certainly unique opportunities that the currency can create.

I totally agree with you there.

I think the trick still becomes whether or not what you might be pursuing is really on two fronts of our four As, whether they are available and in fact attractive.

So as far as I am concerned that hasn't changed that much.

The things that we would find most attractive are pretty strongly unavailable and so we are not going to be preoccupied with it.

It is one of the reasons we have become so focused on innovation with sort of the example of entering Irish and trying to do with that initiative something perhaps similar to our experience on Woodford Reserve over the last 20 years.

So I think the industry continues to be an attractive place.

It can change and it has for some of our competitors and whether or not that creates some impetus for M&A or some opportunities for us remains to be seen.

And just finally, is there any update -- I know the island thing was quite a long-term project but is there any update on how that is progressing?

Yes, I think at the end of September, we are doing a groundbreaking over there and so from our original sort of 12-month plan I think we are on track which it is sort of exciting around here.

We are getting some product and initial packaging and brand identity work done so that we can do something concurrent while we are building out the distillery and starting with the distilling of the product and the aging of it.

It will be a concurrent process, very much the way it was at the company for Woodford Reserve back 20 years ago.

I think we are targeting spring of 2017.

So maybe a year from our fiscal year, we might be entering the market.

Very good.

Thanks for that.

Thanks a lot.

Judy Hong.

Judy?

She may be on mute.

Judy?

Bryan Spillane,

Good morning.

You know I guess just one question and I guess it is a little bit of a follow-up to Bill Schmitz question.

If you look at what has happened in the currency markets, the commodity markets, the equity markets in the last couple of weeks, markets are essentially trying to suggest that there has been some change, that either growth has slowed in some of the emerging markets, China especially but also maybe even you are beginning to hear a little bit of concern that may be there is a risk that you even see a slowdown in the US.

So I guess my question is as you are doing your planning going forward now from maybe where you were when you set your plans at the beginning of the year, is there anything at all that you are seeing that suggests that there has been any kind of change as the year has gone on?

Just trying to get a sense for whether or not there has been any signals, any indications, anything that you are seeing as you look into your markets into your plans that suggests maybe the market has shifted a little bit?

It is a good question.

Actually I think next week I am looking at our distillery production plans which is always the point in time in our process to review and reflect on whether your plans have changed because you obviously unfortunately have to look out many years which means you are going to be inaccurate.

But here is the way I would say it.

I would say that I will do it by three large sort of pieces of business we sometimes dissect our business into.

In the United States generally, I think it is a continuation of what we would have felt and seen.

I think the only factor which it could be macroeconomic indirectly has been some of the intensifying competition I think would be a point I would make.

But otherwise we are continuing to -- we really like the growth rates that we are experiencing and the performance of the Company relative to the industry in the United States and we are sort of sticking with those plans.

There is always uncertainty around innovation like Tennessee Fire and where it will settle out and all that but we are putting forth our best effort on that.

So that would be one bucket.

Another bucket would be how do I feel today versus maybe a year ago or so or even six months ago?

I know your question was about versus three weeks ago, about the developed market.

But actually better about what is happening for our company this sort of summary and going into the fall in Europe than I did previously as we have seen the UK continue to do well, Germany, France which has continued to be just a great market for us and coming off of a year that was in our financials had a lot of transitional things going on because of the start of the company.

Emerging markets, Russia, you couldn't feel better about.

Now part of that is because to protect our margins took a pretty large sized price increase that was related to currency which is rare for us to take currency directly related to currency price increases.

And I think we will have a pretty uneven month to month business in Russia, some because we will be trying to figure out what is going on in that economy, how our business is being affected by it and as people sort of acclimate to our new price level over there.

In the same vein, some of the other emerging markets are doing very, very well and again, the diversification we have across many emerging markets is a help in that.

We are paying particular attention to Australia, it is an important country for us and it is having some difficulties and I think as Jane said, I mean we are just trying to understand better what is going on in our travel retail.

We think there is some seasonal impact as she explained there but that has been a very consistent and strong performer for the Company for the last many years.

So we will be paying more attention to it.

But on balance when you put it all together, here is the way I would say it.

Our first-quarter underlying sales and operating income basically mirrored what our forecasts are for the full year and are also a continuation of basic results we had last year.

So I don't see anything right now.

We could change our minds if we have a global financial crisis or something like that and I think that was the point Jane was trying to make.

Nobody really knows where this is headed.

We are trying to stick to our own very focused plans around our business until we see something else.

Thanks, Paul, and just one follow-up and I think you might have addressed this in an earlier question.

But just when you talk about intensifying competition in the US, you are talking about just a lot of new products hitting the market not price competition or discounting.

I think that is the dominant piece.

You always have pricing competitiveness but I don't see that is some level of intensity.

I just think that because of what is happening with American whiskey and flavored whiskey and our positions in both of those so predominantly, you take note when there is a lot of new entrants so it is mostly on the innovation front.

Okay, thank you.

Mark Swartzberg.

Thank you and good morning everyone.

Kind of looking at it from a different angle, Paul, when I first read this press release I looked at this 3% depletion number for the JD family and I was concerned.

But when I see the plus 7 for the total portfolio and the plus 4 from last year, it seems like el Jimador is a part of that.

It seems like one can make the case that these are end demand statistics that your portfolio is actually getting stronger on a total underlying rate of growth basis.

So it is a bit of a softball I realize but is that a reasonable way to look at it and then I do want to address some of the questions I have about the slowdown in JD.

There certainly was an element of what I will call rest of portfolio outside of the Jack Daniels brand having a very good quarter.

I say rest of portfolio, I know you are referring to Schedule B. I am talking about everything other than Jack Daniels.

And the tequila has had a really good quarter, that might be one of the contributing factors.

Woodford Reserve gets larger and the larger it gets and the more it grows at 26%, the more it makes contributions.

It is not specifically called out here but even contributions from brands like Old Forester, Sonoma Cutrer, etc.

Yes, it was a good quarter for the non-Jack Daniels brands but I also don't want to take away from the fact that we expect the Jack Daniels family, and particularly Jack Daniels Tennessee whiskey over the balance of the year to post better numbers than the 3% that was in there.

I think it is a fair comment.

It was a good quarter and there were some -- as all these brands have, when you just look at 90 days at the beginning of the year, you have all kinds of things that are influencing sort of a quarterly number.

So I wouldn't expect for example our tequilas to continue to run at those rates for the full-year but nonetheless, we do think they are performing better than they were in the recent past.

And you did have a comparatively easy compare.

To your point about JD, I want to make sure I'm hearing you accurately.

So you think this plus 3 in the quarter from a depletion perspective accelerates as we move through the year and that necessitates that the Black Label certainly accelerates but perhaps too Honey accelerates.

Can you just tell me what the planning assumption is and I presume that is supported by August trends?

One of the big things that is driving that 3% decline that you are referring to on the family are slowdowns due to (multiple speakers) decline in the RTDs, RTPs.

Which are in there not at equivalent cases but at their volumetric cases.

We don't expect that to be the number.

We will still have tough comparisons coming from Australia.

(multiple speakers) When we strip out Australia, the number is 7%.

But you look at it, I think we have already commented on Tennessee whiskey, on Tennessee Honey, we at least hope and plan that it will grow double digit.

I mean it posted 14% underlying 18% for the quarter.

I mean I think it is off of a very large base and the growth rates have moderated in the United States somewhat.

But also internationally, if I look at countries like Czech Republic and Brazil and others, Tennessee Honey continues to do very, very well and it is always a challenge when you have new excitement for a brand like Jack Daniels Tennessee Fire to make sure everybody is also continuing to focus on Tennessee Honey.

I will also add that it hasn't been a premier focus of the Jack Daniels Tennessee Fire launch this year but we thought it important to do a few international market tests even if they are channel specific or within a country even regionally specific.

Some of the early results we are hearing back from particularly the UK and Czech Republic are quite encouraging as it relates to acceptance on the Jack Daniels Tennessee Fire business out in those markets.

As you will recall, we did some of this with Tennessee Honey years ago when we launched.

We started in the United States but then began to test interest in the international markets.

We used to have far more ability to control some of this but with the social media and the way that word travels today, an introduction for example in the United States by Jack Daniels is instantly known amongst a lot of the devotees to the brand all over the world.

So it becomes a little bit harder for us to manage some of that.

But right now I would say even though it is more qualitative than anecdotal to these tests, I feel like the acceptance for Tennessee Fire in the international markets is perhaps a little better than we might have anticipated.

So there's a lot of factors that could influence the family's continuing performance over the balance of the 9 months and I will remind you that the seasonality for our Company really picks up in the next six months over the fall and then through the holiday periods.

So those will be more important to the full year than just even the first quarter.

That is great.

If I could ask two quick ones on JD.

Did you give us the US rate of growth just for the Black Label?

If not, could you give us that?

And then are you saying RTDs at negative 4 you think moderates or do we have several quarters of that continuing?

I think it will moderate.

I think we may still see tough declines there but I don't think it will be what we saw in the first quarter because it is going up against a price increase that we took a year ago where we had a buy-in.

We did not talk about Jack Daniels.

What I refer to as NABCA's information yesterday that showed volumetric growth on Jack Daniels Black Label being up 4.5%.

Yes, I will direct you to some of this publicly available data.

Here is just the trend line that I noted once we were sort of prepping for this is that using just the NABCA data, not the Nielsen data for the United States, that a year ago the 12-month trend for Jack Daniels approximated minus 1. Today the 12 month trend is plus 4 and the three month trend is plus 4 and the one month trend was plus 6.

As you see as you are traveling along, there has been some strengthening and so it is very much in line with what Jane was directionally saying about the improvement in the parent brand's performance over the last 12 months.

That is very helpful.

Excellent.

Okay, thank you, Paul.

Thank you, Jane.

John Faucher.

Thanks.

Good morning.

Wanted to go back to one of the earlier questions which was about the growth in the flavored whiskey category.

And one of the questions we get from investors a lot is how do you guys avoid sort of the peak and then the fall off in flavored whiskeys that we saw in flavored vodkas from a number of years ago?

I understand the supply constraints can be different on whiskey but can you talk about the differences you are seeing in either the development or the management of the flavored whiskey category so that you avoid a boom-bust type cycle like maybe we saw in flavored vodkas?

Thanks.

I don't know that the boom-bust on flavored vodkas.

Flavored vodkas boom was 20 years and its bust has been more recently but the initial entries into flavored vodka back at the early days of Absolut and Stoli, to some extent Finlandia was back around then in the United States, goes back quite some time and it became a prominent part of the category growing to what I recall being something like 20% or something of the total category.

I think flavored vodka today if you were to independently review it as a category would be huge.

And of course that took some time as well.

What can we do?

I can't speak as an industry, I can only speak to what we can do as a corporation and how we responsibly develop the category and the brands and the way that I feel about it is to treat the entrants in there even though in these cases might be line extensions as bona fide brands.

And when you do that, it takes you into a consideration of how are you managing in this case to get truly new consumption to the category?

And I kind of referenced in my comments that were prepared that the success we have had and I will just use the United States in this example, of being able to attract new consumers through both Jack Daniels Tennessee Honey and from what we are seeing in the early days of Jack Daniels Tennessee Fire to not only the whiskey category but to the Jack Daniel's brand without cannibalizing Jack Daniels Tennessee whiskey, I find that -- and we are looking at it from a bunch of different angles.

It is very different than say in the soda business of diet sodas versus mainline sodas or light beer versus mainline beer where with the passage of time was considerable cannibalization as one went up and the other went down.

So far because these are occupying quite different drinking occasions, we think if you build the brands in a constructive way and have that in mind you will have a more prolonged existence as an expression of in this case the Jack Daniel's trademark.

That is what we can do.

I can tell you we are not going to be introducing a brand every three months in order to chase numbers or something like that.

It is it would be irresponsible to be Jack Daniel's trademark.

I think there is a statistic we have been using that Tennessee Honey by itself when you consider brands that average retail around the world for $25 and above, is something like the 16th or 18th or something like that largest brand because it occupies I think at year-end was about 1.4 million cases and that is a very significant amount of business.

And I don't want to really treat it as some line extension of Jack Daniels.

You really have to think about how it can continue to be a prominent brand in the global marketplace.

I think the other thing we have had some unique experience with here is that there is a lot of course natural focus on this emerging 7, 8 million case and growing flavored whiskey market in the United States.

When you leave the United States, Tennessee Honey has played a very prominent role if not the lead role in developing the flavored whiskey category outside the United States.

And so we think that is why we continue to test and read it very closely so that we can expand the world that is possible for flavored whiskey from just over 300 million people to perhaps 7 billion people.

So we really are taking a very long term even though it is a really dynamic category where there is a lot of competition and a lot of change and a lot of new entrants that will make a bunch of noise, I think we intend to continue to build it along the lines of the way we've treated Jack Daniels Tennessee Honey with a very long-term view and trying to create incremental value for Brown-Forman.

Does that help you?

It does, thank you.

One follow-up and I apologize for pressing on this.

Can you walk us through -- I know you talked about some of the impact of FX on the bottom line versus the top line for the year.

Can you talk a little bit about what drove the positive leverage this quarter?

Was it recycling some of the changes last year and then can you give us an idea on the full-year just the difference that you are thinking now?

You talked about this on the last quarter, the difference that you are seeing in terms of impact on revenue versus impact on EBIT and EPS?

Thanks.

Just to clarify, are you talking about FX only, is that what you are talking about?

Yes, FX only.

And a little bit of the view in terms of the impact -- transactional impact on the gross margin versus offsets that you are seeing below the gross margin line?

So I think if you refer to the table that we have in our appendix, you will see the impact on our reported results from FX of 9% decline in net revenues and then you will see the gross profit, you will see all of the pieces as you go down and as you said, it gets less as you go down obviously because we have expenses offsetting our revenue line items.

The one big thing that you are not seeing on there is something that was in our other income and expense which is also what I was referring to that we expect to not happen again in Q2 or Q3 and a little bit in Q4 but was mainly Q2 and Q3 but we had about a $5 million number or so in the first quarter of this year in other income and expense that was is not repeatable.

It was one time in nature if you will.

So that is what you will see if you take all the numbers of the schedule at the end and then consider that $5 million going the other way or the absence of last year's hurt because of that.

Does that answer the first part of your question?

Yes, it does.

Now repeat your second part again for me.

Mapping out that gap and how the rough order of magnitude of the gap revenue versus EBIT and EPS over the balance of the year?

So again if you think about headwinds, we said we were going to have a few cents of headwinds by the time we get to the end of the year.

We had $0.03 or so in the quarter so maybe a couple of more cents what you're going to see.

What I was trying to point out is in the next quarter because if the rates stay essentially where they were as of last week, we had another pretty good hit versus last year's second quarter at the top line.

You will see another pretty good sized hit on a transactional basis if you will for our revenue line.

So I was pointing that out but I think it will be much less time you get to the bottom line for the second quarter.

You won't see a whole lot more coming through but I wanted to make sure that you understood that your revenues for the first half of the year are going to be challenged because of the FX comparison and then set aside the absence of the other income and expense item.

I don't if that helps or not.

So it is just that -- the only thing we really need to worry about from a comp standpoint is simply that that Q2 comparison?

Well, yes.

Think about it as we go into the third and fourth quarter, if the rates were -- if the euro was somewhere around 1.11, 1.12 that is similar to where it got to in the third and fourth quarter.

So it is (multiple speakers) as an example.

Great.

Thank you.

Thank you, Paul land Jane and thanks to all of you for joining us today for Brown-Forman's first-quarter earnings call and please feel free to reach out to us if you have any additional questions.

Have a great week.

Thanks everybody.

Thank you.

This will conclude today's conference call.

You may now disconnect your lines.