Brown-Forman Corp (BF.B) 2016 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the second-quarter FY16 conference call.

(Operator Instructions)

Thank you.

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

Please go ahead, sir.

Thanks, Salina.

Good morning, everyone.

I want to thank you for joining us for Brown-Forman's second-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 second quarter of FY16.

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 operation, are contained in the press release.

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

Thanks, Jay.

And thanks for joining us for our second-quarter earnings call.

I will be covering two topics today, which should leave us plenty of time to address Q&A.

First, I will review our results, and second, I will discuss our outlook for FY16, which we confirmed earlier today.

Let me start by reviewing our recent results.

During the first half of FY16, we grew underlying net sales by 6%.

This underlying sales growth was broad-based geographically, with mid- to high-single-digit rates of growth in both the developed and emerging markets.

In the United States, underlying net sales grew 7% during the first six months of the fiscal year.

These results were led by the Jack Daniel's family of brands, which grew underlying net sales by 7%.

Jack Daniel's Tennessee Fire contributed almost 3 points of growth in the United States.

Our leading portfolio of premium whiskey brands outpaced their competitive set, including aggregate underlying net sales growth of over 30% for the Woodford Reserve family of brands and Old Forester.

Our el Jimador and Herradura tequila brands grew well into double digits, as the brand-building investments we have been making behind both of these leading tequilas are creating important momentum towards achieving our long-term growth strategies.

More on those in just a moment.

Before moving on to our non-US markets, I wanted to share some color on our blended value take-away trends in the United States for Jack Daniel's Tennessee Whiskey.

Both Nielsen and NABCA's three-month trends have slowed, as we are now comping against last fall's substantial acceleration and takeaway on the heels of the campaign in FY15 to reach the 5 million case milestone for Jack Daniel's Tennessee Whiskey.

When looking at our take-away trends on a two-year basis, which removes short-term comparison issues, Jack Daniel's Tennessee Whiskey has consistently grown value takeaway at a very healthy 9% to 10% rate each month this calendar year when compared to 2013.

In developed markets outside of the United States, the rate of underlying net sales growth improved from the first quarter to the second quarter, resulting in 6% growth during the first half of the fiscal year.

Results were up double digits in Germany, France, Belgium and the Czech Republic.

Additionally, we experienced solid growth in the United Kingdom, Canada, New Zealand and Spain.

Part of the sequential improvement was also due to Australia, which enjoyed more favorable comparisons than in the first quarter, resulting in first-half underlying net sales that were roughly flat year over year.

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

Strong double-digit gains in Brazil, Turkey, emerging Africa, and the CIS countries were offset by declines in China and in southeast Asia.

Mexico grew underlying net sales mid-single digits, fueled by New Mix.

Poland also experienced growth, albeit driven in part by easing comps to last year.

Russia's underlying results improved significantly from the first quarter large declines, resulting in now only a slight reduction in year-to-date underlying net sales.

Non-US markets now account for almost 60% of our total revenue, so I thought it would be worthwhile to share some additional color on take-away trends for some of the markets outside of the United States where we have good visibility.

Three-months consumer take-away trends for Jack Daniel's Tennessee Whiskey are up mid-single digits in Germany, France and in Australia.

The brand is experiencing mid-single-digit growth in Mexico, and is growing high teens in Russia.

While Poland is down over the most recent three months, we are gaining share in whiskey, and Jack Daniel's is up high teens over the last 12 months.

Jack Daniel's Tennessee Whiskey is also experiencing a short-term slowdown in the United Kingdom takeaway, driven in part by timing of promotional activity, but 12-month value takeaway is up 10%.

So, these consumer trends are encouraging as we think about our full-year outlook.

Global Travel Retail, which accounted for approximately 4% of our stripped net sales in FY15, continues to be challenging, driven by the decline in spend from high-income travelers, particularly Russian and European.

Travel retail's underlying net sales are down 14% year to date, a slight improvement from the first quarter, but well below our expectations for the business.

We continue to believe that some of the softness in the US travel retail channel is the result of the timing of orders.

And, in fact, we started to see some of those orders coming through during the month of November.

Excluding the results of travel retail, total Company underlying net sales growth would have been closer to 7% in the first half of the year.

Moving now to the discussion of our results on a brand basis, the Jack Daniel's family of brands grew underlying net sales by 7% year to date.

Growth for this family in the second quarter reflected a slight improvement from the 6% growth delivered during the first quarter.

In the second quarter, Jack Daniel's Tennessee Whiskey grew global underlying net sales by 4%, while Tennessee Honey, Gentleman Jack, and Jack Daniel's RTD each grew global underlying net sales at a double-digit rate.

Jack Daniel's Tennessee Honey delivered over 30% growth outside the United States, while increased competitive activity in the United States negatively impact US results for Honey.

Jack Daniel's Tennessee Fire contributed almost 1.5 points of growth to the Company's underlying net sales growth during the first six months of this year, as we continued to invest behind the US rollout of this brand.

Distribution remains well below the parent brand at roughly two-thirds of Tennessee Whiskey's off-premise distribution, and only one-third in the on-trade.

We remain encouraged by the early results from testing Tennessee Fire in a few markets outside the US, including the Czech Republic, the United Kingdom and Australia.

And we believe that our geographic reach should create significant opportunities to develop the brand on a global basis.

Our other American whiskey brands, including Woodford Reserve and Old Forester, enjoyed fast rates of growth, as our authentic American whiskey brands are well positioned to meet the rapidly increasing demand for high-quality, premium-priced bourbon.

Finlandia Vodka's underlying net sales declined 2% year to date, driven by declines in Russia, where FY16 got off to a sluggish start, though results did improve during the second quarter.

Poland, our largest volumetric market for the brand, registered slight growth.

The Southern Comfort family of brands saw underlying net sales decline 7%.

While weakness in the United States was the driver of underperformance, the brand is seeing positive take-away trends in markets such as Germany, the United Kingdom and South Africa.

Sonoma-Cutrer, Korbel and Chambord each grew underlying net sales by low-single digits in the first half of the fiscal year.

Now let me circle back to our tequila brands, which have been delivering accelerating rates of growth over the last year.

During the first half of the fiscal year, el Jimador's global underlying net sales grew 8%, Herradura grew 7%, and New Mix jumped 31%.

New Mix's take-away trends are showing solid growth year to date, and underlying sales were also helped by low trade inventory levels at the beginning of the fiscal year.

These aggregate results were well balanced by geography, with 15% underlying net sales growth in the United States and 10% growth in markets outside of the United States.

We believe that our tequila brands are early in their development in the United States, as consumers are increasingly interested in 100% Agave tequilas, particularly ones with the heritage and authenticity of our Casa Herradura family of brands.

I'd like to take a moment and look at Herradura's recent momentum in the United States, an extremely important market for the brand, and to share with you some of the drivers of these strong results.

First, let's look at our outperformance where, during the last 12 months, ultra-premium tequila has grown value by roughly 14%.

Herradura has been gaining share, with Nielsen takeaway growing 16% over the same period.

We believe this growth has been driven by a combination of factors, including the first large-scale media campaign behind the brand since 2007, which helped drive faster velocity in established accounts, as well as distribution gains.

Thoughtful innovation such as the introduction of Herradura Ultra and ultra-premium-priced filtered anejo tequila is also helping us better address the high-energy occasion.

We believe the run rate is long for this brand, as brand awareness among our target consumers is only one-fourth of Patron's.

El Jimador has also been growing nicely in the United States, with consumer takeaway on a value basis accelerating from 14% over the last 12 months to 19% over the most recent three-month period.

This is double the premium tequila categories rate of growth, as new packaging and more effective on-premise activations are fueling off-premise trend through increasing brand awareness.

We are optimistic about both of these brands' growth potential over the coming years, given the brands are early in their development in markets outside of the United States.

Let me now reconcile to reported growth for the first six months of our fiscal year.

A strengthening US dollar continues to negatively impact our reported results.

These FX headwinds dragged down our reported sales by 8 points during the first half of the fiscal year.

After a brief pause over the summer, the US dollar resumed its appreciation against other currencies, which will continue to dampen reported earnings growth over the near term.

Our top line grew 6% on an underlying basis, fueled by almost equal contributions of volume growth and price mix.

Underlying gross profit grew in line with sales growth, up 6%, as better price mix was offset by higher costs in the first half.

We expect the rate of cost increases, particularly related to wood, to ease in the back half, and help drive modestly better gross margins for the full year.

Underlying A&P spend increased 1%, while underlying SG&A grew 3%.

So, putting this all together, we delivered 9% underlying operating income growth in the first half of FY15.

Foreign exchange headwinds hurt our reported operating income growth by 4 points.

And lower inventory levels, primarily related to Tennessee Fire, pulled another 3 points from our reported operating income.

On our other income and expense line, we enjoyed favorable comparisons against last year's losses related to the revaluation of net [current] assets denominated in foreign currencies.

For the first half of our fiscal year, we delivered reported earnings per share of $1.72.

Adverse foreign exchange was a $0.07 drag on our EPS, a couple of cents worse than we had anticipated on our first-quarter call.

Let me now move to my second and final topic for this morning, an update on our outlook for FY16.

Year to date, our top-line growth of 6% and operating income growth of 9% are consistent with the results we delivered in FY15.

This growth reflects the strength of our premium portfolio, focused on American Whiskey, and led by the Jack Daniel's family of brands.

Our brands are enjoying broad-based global demand, evidenced by the balanced geographic delivery of our results through the first half of the fiscal year.

Additionally, disciplined innovation has allowed us to attract and target new consumers and drinking occasions.

So, while we are in the middle of the all-important O&D selling season, which drives up disproportionate amount of our annual sales, we are encouraged by the balanced geographic growth we have delivered so far in FY16, and are reconfirming the ranges we shared with you on our last call, as we still anticipate full-year underlying net sales growth of 6% to 7%.

We also expect to deliver 8% to 10% growth in underlying operating income.

Somewhat better gross margin expansion in the back half of the fiscal year will likely be partially offset by higher growth in our operating expenses.

But we continue to expect solid leverage to the operating income line in FY16.

Moving now to FX, assuming current spot rates, we now expect adverse foreign exchange to be approximately $0.05 worse for the full year than we had anticipated on our first-quarter call.

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

In summary, the first half of FY16 keeps us on track to deliver another year of strong growth.

Notwithstanding the capital investments we have been making to ensure we are able to supply our growing base of consumers with our high-quality products, our operating cash flow has been strong and growing.

This cash flow and balance sheet flexibility has allowed us to return significant capital to shareholders in the form of buybacks and dividends.

Over the last five years, we have returned $3.6 billion to our shareholders, with almost $900 million alone during the first six months of this fiscal year, as we aim to consistently deliver top-tier returns for our shareholders over the long term.

So, with that, I'm going to turn the call over to Paul for his comments.

Thank you, Jane.

And good morning, everyone.

I'll be pretty brief here.

FX headwinds aside, I'm pleased with our first-half underlying results, particularly the performance of our premium American whiskey portfolio, which, of course, is led by the Jack Daniel's family, but was also bolstered by strong performances from both Woodford Reserve and Old Forester.

I also appreciated, in the first half, the broad and balanced geographic performance.

In my view, this is a major asset for Brown-Forman, and a very beneficial attribute of the Company for investors.

I will say that there is nothing easy about the current business environment; not that we ever expect it to be easy.

At a time when the threat and reality of global terrorism is increasing, emerging market economies have softened somewhat, and industry competition has intensified, particularly on the innovation front in the United States, I feel our underlying Business continues to perform very well and, notably, very consistently.

I'll make this point related to this consistency by noting that Brown-Forman's FY15 full-year results from last year saw a 6% growth in underlying net sales and a 9% growth in underlying operating income.

With today's mid-year results, we have posted a 6% growth in underlying net sales and a 9% growth in underlying operating income.

Further, in confirming our full-year EPS guidance this morning, we are anticipating that underlying sales and operating growth will roughly continue at these same attractive rates.

And if they do, we estimate that Brown-Forman's underlying results will continue to compare quite favorably to our spirits competition.

So, while we still have the last half to navigate, and this includes our important holiday season, I'm pleased with where we are at this year's mid-point.

I will also note that our earliest read on November's business, which, of course, was not part of this morning's first-half results, is quite positive and serves to further strengthen our confidence in our underlying growth outlook.

Before closing, I'd like to note one other item that I believe reflects Brown-Forman's ongoing progress, as well as our belief in the continued growth prospects for the Company, and that was our announcement to increase the annual dividend by another 8% in calendar-year 2016.

This marks the 32nd consecutive year that the Company has increased its annual dividend, and this, I believe, stands as another testament to the consistency to which I'm referring.

Thank you.

That concludes our prepared remarks this morning, and we're now happy to take any of your questions.

(Operator Instructions)

Our first question comes from Dara Mohsenian from Morgan Stanley.

Hi, good morning, guys.

First, just wanted to get an update on the positive offset to keep full-year EPS guidance the same, just like the incremental FX hit.

Is there something specific on the positive side giving you confidence there?

Or is it more related to having a range around earnings and maybe where you land in that range is a bit different?

And then second, Paul, was just hoping for some more detail on the competitive pressures you cited in the US around innovation.

How big a concern is that going forward as flavored whiskeys proliferate?

Obviously you guys have been very successful with the flavored products so far, but do you worry competitive risk ramps up going forward as some of your competitors catch up to you?

It looks like a number of the Canadian Whiskey brands are revitalizing themselves as they move into the flavored product.

So how big a risk is that and how do you manage through that?

Thanks.

I'll take the first.

Your question was really around our full-year outlook.

Really, the biggest change that's happened from what we gave you back in June and what we reconfirmed in August and what we're saying today is FX.

Excluding FX, I think, as we confirmed today, we're on track for the top line 6% to 7% growth, and the bottom line 8% to 10% growth.

The only change has been FX and FX still falls within the range that we gave you.

And to Dara's question related to competition, this is something we started to emphasize a bit more at the conclusion of our first quarter when we were discussing results, so let me just maybe build on that a little more.

I think this referenced the competition.

Look, companies always have competition.

It's not like that's new.

I think the thing that I would emphasize -- and I might break it down, particularly as I think your question related to the United States, which is one of the most competitive markets just because of the structure of the system and the ability to innovate within it, which is both, of course, a blessing and a curse depending upon which end you're on.

When I think about what's been happening in the last six months or so in the United States, going back a few years many of the really global competitors had, what I'd say, more balanced geographic earnings profiles than some of them have enjoyed here more recently.

If you think back four or five years ago, a lot of people were dependent on the emerging markets for growth; whereas, their developed international markets may not have been growing as robustly.

In the US they could expect maybe industry competitive levels of growth, but the emerging markets were really helping drive them.

Obviously what we've seen from a number of our competition is that's just more difficult these days.

I think a lot of them are turning to a very attractive US market where innovation is possible.

It's a very premium market so the ability to influence your margins and the growth of your company is probably a little more rapid in the United States just because of the structure and profile of the market.

These are good competitors and they want to grow.

As we forecasted back in the first quarter, we expected levels of increased competition just generally to go up.

So, I think that is an influence on one level.

You've got highly motivated competitors who want to grow at rates like Brown-Forman's, right?

I think the other thing is just the existence of the flavored whiskey phenomenon that's going on.

What we've seen is a lot of different strategies people are deploying for trying to be successful in that particular segment.

For us, for example, I'll just heighten the Jack Daniels Tennessee Honey competition.

And I think this will help on Dara's question.

Just in the last year what we had seen, whereas the category was really developed along the lines of primarily cinnamon and honey with just a little bit of cherry-flavored whiskey out there.

What you see just 12 months later is the development of both an apple-flavored segment, which increases competition, but also, for Jack Daniels Tennessee Honey, has been more what I'll call popular- price competition.

Whereas we held the premium position within the honey segment, now there are new competitors in there that are at lower prices.

So, I think we've started to see, within particularly cinnamon, apple and honey, stratification between popular- and premium-price leadership.

When we refer to intensifying competition, it's really along those lines.

The things we'll continue to do, we talked about this on the first quarter, I think it continues to be our posture, is that our great advantage in playing in flavored whiskey, I feel, today is to be focused on fewer flavors but broader geography, and less on lots of flavors and narrow geography.

Of course a lot of the data that you observe and are interested in, which we are, as well, because it becomes an important piece of the distilled spirits market in the United States, is this US flavored whiskey segment.

But I really continue to believe, and it's been our experience on Tennessee Honey, that a lot of gold is there to be mined outside the United States.

So, it doesn't mean we don't have to compete in the United States, and we'll sharpen our sales and marketing efforts there, but I still continue to believe that, while there's great runway ahead for the two flavors that we've got on the Jack Daniels franchise, and those opportunities exist both in the United States and overseas, we have really continued to have some advantage because of the strength of the Jack Daniels trademark and our route to consumer around the world in developing beyond just one country.

So, that's the current way we're thinking through this.

I don't expect us to do this introduction of multiple flavors at one time or sometimes what people are referring to as the flavor of the month thing.

I just really think we want to build these as Jack Daniels brand extensions.

Okay, that's very helpful, thanks.

The next question comes from the line of Bill Marshall with Barclays.

Hi, good morning.

Thank you very much.

Not to belabor the point but just building off of that, on the flavor commentary, we do have examples in other categories, vodka, maybe even craft beer, where the consumer does jump from one flavor to the next, looking for the next thing consistently.

I'm interested in your commentary around focusing on fewer flavors.

What is the risk that the consumer just moves away from the flavors you've emphasized?

And is there anything different about the whiskey category that's unlike vodka or beer, these other categories which have been a little bit more fickle, as we look forward in the sustainability of this growth?

And then, secondly, digging into that even further, how do you view the flavor phenomenon impacting the core Jack Daniels style?

And do you feel you're cannibalizing the core brand?

And will consumers come back into that brand if they do move away for some of the flavor expressions?

Good questions.

I think the data would show that people are showing an interest in flavor variety.

I think the key to not being susceptible to dramatic declines in your volume, it goes to, one, the strength of the trademark; two, the quality of the product offering itself.

And continuing to offer a product that really holds up in the glass, I think, is really critical to this, because not all of them will.

And then just the way that you sell and market the brands.

You just don't want it to actually feel like sometimes -- and it's often a reaction to short-term conditions, studying something maybe perhaps that happened last month or in the last 12 weeks or six months, the reality is to really treat these things as brand expressions.

For us, the size of Jack Daniels Tennessee Honey today, it is a pretty significant brand on a global scale.

I think we've mentioned this from time to time.

There's fewer than 20 brands that we know of that are at its price point and above 1 million cases globally.

So, we don't treat it as, what I call, a flavor extension from which we've now got to go replicate it over and over again.

I think that can be a self-fulfilling prophecy.

On the balancing act of cannibalization versus what I'll call the gateway of introducing someone through, say, Tennessee Honey or Jack Daniels Tennessee Fire to the whiskey category where they might not have been a participant in the past.

We are seeing, I think, really nice evidence of, particularly now with the passage of time, because we've got more data on Honey, it's newer still on Tennessee Fire, but it actually exposes people to the Jack Daniels brand in such a positive way.

And it's a way for them to build their palate toward the appreciation of what I'll call straight whiskey.

So, I feel like, yes, you can accept modest levels of early cannibalization to the extent it exists.

We've been very comfortable thus far with both of the expressions at the level of cannibalization.

You expect a little bit.

And, frankly, we feel like, on Tennessee Fire, just because of the shot nature of that occasion, that it has the potential to do a little bit more cannibalization than Jack Daniels Tennessee Honey did, although both are at what I consider to be modest and acceptable levels, and more than offset by the potential gateway and marketing value they create.

The way I like to think about it is, as people switch flavors, as you say, one of the things that we expect is that they switch flavors from, say, Jack Daniels Tennessee Fire to Jack Daniels Black Label.

And I just don't anticipate us getting caught up in a very exhaustive flavor by flavor exercise.

From time to time, compared to other people who are building distribution or getting trial with any number of flavors, we are just going to have to deal with it.

The way we would be successful is to focus on the flavors we have and try to get them to be as successful in the marketplace as they can.

And I continue to think a huge piece of that for us is a global marketplace versus just a US marketplace.

Perfect.

And if I could just ask one quick follow-up -- it looks like your price/mix accelerated pretty nicely in the second quarter.

I assume that's predominantly, if not wholly, on the mix side.

I'm curious what the puts and takes were there, if it was an acceleration in some of your premium products selling through or a slowdown in maybe some of the more value products.

And how we should think about this for the back half of the year on the price/mix side.

Thank you.

Sure, I'll take that.

Just to talk about the split on the price/mix.

It was more mix, as you said, than price.

Think as one-third, two-thirds, if you will, or in that range.

And it was driven, as we looked through it, by definitely higher growth from our premium portfolio of brands.

So, our reserves, our Jack Daniels family of brands definitely contributed.

To a lesser extent we did have some of our lower-margin products not do as well -- Finlandia and Canadian Mist -- but to a large extent it was due to the premiumization of several of our products.

As we look forward in terms of the rest of the year, as we were consistent and said throughout the year, we're not really expecting much from pricing the whole year, very modest pricing.

So, anything that we get will be more mix related.

I think at the beginning of the year we said it was going to be in a couple percentage points, is the message that we've had.

So, I would assume that it would stay in the 2% to 3% range for price/mix in totality.

Perfect, thank you very much.

Appreciate it.

The next question comes from Bill Schmitz with Deutsche Bank.

Hi, good morning.

Just a modeling question to start and then a real question.

Do you have a share repurchase target for the year?

Because it was much higher than we thought or at least modeled for the quarter.

And then also CapEx is a little lower than we thought given all of the initiatives you are doing.

And then, lastly, your comfort level on the leverage ratio where you think you could take it and still be within your comfort zone.

And then any commentary on divestitures or acquisitions, because there's obviously been some stuff in the press about some of the brands you may or may not be parting ways with.

You asked a lot of questions.

I'm not sure if I got them all but I can do -- what was your specific question, do you mind saying, on the share repo again?

Do you have a share repo target for the year, because it came in much higher in the quarter than we thought?

We don't target a share repo.

I'll remind you that we have a $1.25 billion authorized share repurchase that was effective last March 24, I believe.

And we have repurchased about $1 billion against that so we've got $250 million or so left on that initial approval, if you will.

But the way we approach share repurchases are opportunistically, so we're looking at it as an investment.

So, as you saw, by a significant amount in our second quarter where we felt like the market wasn't real understanding, and realizing some of the underlying growth that we see in our Business and how we see it going forward.

It was being masked somewhat by foreign exchange.

But we don't have a target for that for the year, if you will.

It's more of an opportunistic as several factors go into play when we do it, both the price of the stock, what our own needs of our business are, funding our own business.

A whole host of things go into that.

But we do have about $250 million left on it.

In terms of the CapEx, you did see it, it's lagging where we thought it was going to be for the year.

We expected it to be about $200 million for the year.

I think some of it's going to get shifted over to next year.

So, right now we're expecting somewhere in the $150 million to $160 million range for the year.

It's timing only, so it will be pushed into next year.

When we get done with all of our capital expenditures, the major ones behind expanding our distillery, adding the cooperage to mills, adding bottling, we will have spent well in excess of $300 million on those expenditures.

And then you asked the question about --?

The leverage ratio.

We're very comfortable at the levels we're at right now.

As you all would know from following us we have a pretty conservative posture about that historically.

Some of it's just what opportunities come along.

It's not that we're not willing.

I will say that, in addition to what Jane said there, the attractive borrowing rate, paired with the long-term prospects we feel for the Company, combined to motivate us a little bit on the share repurchase activity right now.

The ability to, if you just think about it for a very long-term investment to buy back shares today and to have a view of the Company in the way that we do as managers, and then just be able to support it with very low price debt today by historical terms is a wonderful combination of factors.

And to boot, you're always looking at what your alternative investments might be.

As we scour the world and think about the things we can invest in, investing in our own business is right near the top.

And that occurs both through the CapEx that Jane mentioned, but also through the share repurchase program.

And then you'd also mentioned about rumors in the marketplace.

As is our typical posture, we just have been really well served by not commenting on rumors that are out there related to things that we might either be -- somebody's prospecting that we might be selling or buying.

We just really appreciate the fact that over the years, the no comment on that has served us well.

So we'll continue to hold by that today.

Totally respect that.

And then more on the business side of things, how do you balance market share versus profitability?

Because if I look at the US data, and admittedly the data set is pretty limited for us because we really only have the Nielsen data to go on, but it looks like the incumbent brands are losing quite a bit of market share, at least year over year on the whiskey and bourbon side.

And you have pretty substantial share growth from [bullet], and then that all other category which is probably some of your rents are in there, as well.

But it seems like it's accelerating a little bit.

And I know the margin mix obviously is improving quite a bit with Woodford and some of the other variants.

So, how do you manage that?

And how important is that market share data?

And, again, I know it's a short period of time, so maybe it's just not a broad enough data set.

It's important to study, I think, over time, mostly to make sure the opportunities you see for your Company you're not letting others have; although I will say, it's been my experience in this business to be more growth oriented and not size or share oriented.

We typically don't set scale-based or size-based ambitions relative to competitors for our Company, because I think that can lead to oftentimes the wrong sets of behaviors.

It's not that it's not useful.

We're as competitive as the next person so we like to look at share data.

But I think the criticality of growth and enduring growth is what we continue to focus on.

I really don't feel like we lose sleep.

For example, it will be a fact with the size of the Jack Daniels Black Label business in the United States, it will have a very difficult time growing at the growth rate that Woodford Reserve is.

It's an earlier stage of development.

So, what we tend to do when we look at share data is we look at it with and without Jack Daniels, we look at it in ways that can inform us and illuminate where there might be growth opportunities for us.

But we are competitive.

I will tell you that we want -- like, for example, at the price point above Jack Daniels in the US American Whiskey market, we want to be a leader.

We want to have our fair share of it.

That doesn't mean we would do anything at any cost to be the number one volumetric player at the ultra-premium level.

But I will tell you that we really feel like that's an area we know well.

We have the assets, the production assets, and the know-how to be part of that.

And the same thing is true of flavored Whiskey.

It would be rare for you to hear us say something like we need to be number one in flavored whiskey in the United States.

I'm just not compelled by that and I don't think our Company is.

We don't like to see other people get consumption that we don't have, but when you have, as our Company does today, in our largest markets, something like a 6% or 5% market share, and when you have across the globe less than 1% of the market share, you're going to be really frustrated for a long time if you measure yourself on that basis.

So, we think we can be an enormously successful company building value for shareholders without having to dominate any particular category or segment.

Great, thanks very much.

The next question comes from Judy Hong with Goldman Sachs.

Thank you.

Good morning.

Jane, on your full-year underlying sales guidance, I know you're continuing to stick to the 6% to 7%.

You did 6% year to date.

Last year you also did 6%.

If I look at the fourth-quarter comp being pretty tough and US comps are probably going to be tougher in the next quarter or so.

So, I'm just wondering, I know it's 100 basis points to get to the high end of it, but are there anything in the back half that you expect some acceleration, whether it's markets or brands, that gives you some confidence that actually we could see some acceleration in the back half?

Great questions.

And, again, we're looking at our full-year forecast and we do see, as Paul already alluded to, getting off to a good start in November.

So, we are seeing an acceleration from that perspective.

We had pretty soft third quarter last year, so we are expecting soft comps against that, or easier comps against that quarter, and expect that to be a good quarter for us.

You do point out that we did have a nice quarter in the fourth quarter last year, with the national rollout of Tennessee Fire in the US.

But we also have some markets overseas that we've been testing -- not that we're rolling them out further but we've got further tests to do in some of those markets, so there will be some offset there, too, so it won't be a one-for-one kind of thing if you're thinking about it going out, and we've got to cover it all.

But our full-year forecast anticipates all this, Judy, and we think the 6% to 7% range is acceptable and reachable given the environment we're in currently.

Thank you.

Just following up on the November trend, I know you had a pretty weak trend in Poland in the third quarter last year.

Is the acceleration driven by Poland or are you seeing broad-based acceleration in November?

Pretty broad-based right now.

Yes, it's early now but it looks broad-based.

Poland is a top 10 market for us, but it's rare that it would drive the entirety of Brown-Forman.

Oftentimes the numbers, you can get that from sometimes the United States because of the size of it within Brown-Forman.

And periodically you'll get the UKs or the Frances and Germany, particularly when they combine.

But right now -- and, again, it's early, we've still got lots to see -- we're encouraged by what we've seen broad-based out of the November.

I would just like to add one more thing to it -- I alluded to it during my script -- travel retail.

It's still tough sledding there, if you will, but we do know that the US travel retail business had some timing issues.

We kept waiting for them to come and then we started to see them come through in November.

We are expecting the rate of decline in travel retail not to be what it is for the full year.

At best, we are expecting acceleration there, from what we have had year to date, so that will add to some of the growth.

That's why we've been pointing out and pulling out travel retail, both in the first quarter and the second quarter, to show what it actually has done to our growth rates.

And it's been fairly significant in both the year to date, as well as our first and second quarter.

The other thing I'll mention is I think the travel retail piece, we still have some determinations to make inside the Company as it relates to geographic expansion on Jack Daniels Tennessee Fire.

So, we'll be getting into those in the next probably few weeks or so.

But the other thing is, as the calendar year turns, once we enter into 2016, it marks actually the year where the Jack Daniels distillery will begin to celebrate its 150th anniversary.

So, you can imagine at a company like Brown-Forman, it's just a great milestone.

I don't know how much impact that would have on this fiscal year but it's something that we expect to be something that's a really nice mobilizing event for the calendar year 2016 period.

You can imagine us having a lot of fun with that, but also consumers getting to have a lot of fun with it, as well.

We'll be talking probably a little more specifically about that with the passage of time, maybe a little bit more at the end of Q3, but that's another point I'd note.

Got it, okay.

And then, Paul, I know obviously you don't want to comment on any of the market speculation about M&A, but if I just look at your portfolio, it sounds like you're definitely stepping up your focus on the premium tequila with the Herradura brand, and that makes perfect sense.

But as you think about your broader portfolio and thinking about some of the declining brands and the lower-margin businesses, what are the puts and takes from a strategic standpoint of keeping those brands so that you have scale versus perhaps maybe pruning some of the portfolio so you can focus your portfolio to really be more of a whiskey, premium tequila brand portfolio, even if there is some potential dilution in earnings?

I think our portfolio management generally across time, I think you could just observe it, I think it's stood the test of time.

We've increasingly become more premium and more whiskey, would be the observations if you go all the way back to the consumer durable days.

And wine.

But I think it would be evident that when we even chose to exit wines we chose to stay in Sonoma-Cutrer.

We have found the benefit of focusing on fewer trademarks that are excellent businesses that have great growth profiles.

The story of Brown-Forman today, and a lot of companies will have brands that are smaller in terms of their contribution in the modern day than they might have been 5 or 10 years ago, and we always talk about it at the company as Old Forester, that here it's enjoying remarkable success, both on and off premise.

But it is a little brand, still, in the scale of Brown-Forman, and probably endured about a 50-year decline.

So, you could call that patience.

We waited for it to get small enough that it could be termed craft and retro and all these other things, that it's enjoying this renaissance that it is today.

There is an example of staying with brands.

And I really do feel, when you bake Brown-Forman's portfolio overall and compare it to many of our competitors out there, we just have one of, if not the most focused portfolios in the spirits industry.

And I do think we benefit from that.

Again, going back, I think it was in your preface, we just don't comment on things that either are incoming or potentially outgoing.

It just doesn't serve us well.

So, we let the rumors be the rumors and we keep focused on our Business.

I know some of you all, people have speculated.

I will say I'm really encouraged by, there's some recent marketing on the Southern Comfort brand that is literally occurring in last week or so where some viral advertising, I'll call it, associated with Danny McBride has gone out there and Spotify is noting it as one of the top 10 viral efforts in the United States.

It's actually gone global, as well.

I think that's evidence that the brand continues to get support and we continue to try to put our best foot forward in a really competitive environment for it.

Got it.

Okay, thank you very much.

The next question comes from the line of Eric Serotta with Evercore.

Good morning.

Not to belabor the competition point too much, but wanted to approach it from a different angle.

Paul, last quarter you made the distinction between increased competition for shelf space at retail and back bar space on premise as opposed to competition, price competition, either at retail on premise saying you'd clearly seen a pick up in the former, but the latter was in line with historical trends.

Wondering whether you could update us on that, particularly price competition in the off premise.

We've seen some hot price points from particular markets.

And then related to that, in response to Dara's question you mentioned some popularly-priced flavored whiskeys.

I'm just wondering whether you're seeing more or less or the same discounting of the premium core brands from your competitors.

So, two related questions.

I think it's fair for us to comment on that.

Certainly there's two forms that we're seeing, just to go back and be clear.

There's two forms of the competitive effort.

One is level of entries into the marketplace.

There was an internal report we were looking at here just this week, and this is a pretty interesting statistic, that in the United States, in the US alone, whiskey market above the $20 price point -- so $20 price point and above -- over the last four years more than 500 new entrants.

That would be -- now where are you going to put all those?

It's shelf space, back bar.

And, of course, those are, in many instances, highly regional, so those aren't going to be full-blown national brands immediately, unless they're large trademark line extensions which have the capacity to do that.

But in addition to that -- I don't know, I almost feel like every year for the last 10 around October, November, December we start to observe increased price competition.

It differs from brand to brand or company to company.

It feels like every year.

But I don't know that this year is anymore competitive than 2014 was or 2013.

I always feel like, both anecdotally and when you study the data after the fact, some brands chose to go deep on their 175 or to put IRCs or coupons out there.

It all depends on the motivation of those particular competitors.

We have seen some spread difference in the US market between, say, Jack Daniels and Jim Beam.

That would be an example for this year.

But in prior years we've seen other brands go deep on discounting.

And all of it is just a reminder of the balancing act.

I actually think one of the things that will be interesting to see over -- this is not a comment about 2015, but as I look out at 2016, 2017 and 2018, some of this will be dependent upon the stocks available if these rates of growth for the category continue and these entrants continue to go in.

We never have quite a good enough feel for how much supply is actually out there.

So, if demand outstrips supply out there, I think you'll start to see pricing go up, not down, with rational competitors.

We don't have any indication of that now but these growth rates have been running pretty solid for awhile now in the industry, and I think that can be an influence to the pricing and the pricing competitiveness out there.

Great.

And just as a follow-up, Jane, I'm wondering whether you can give us anymore color or an update in terms of the COGS inflation?

I think last quarter you were talking about 2% to 3% for the year.

I believe last quarter you talked about some moderation in wood that would happen in the second quarter.

It now looks like that's more pushed to the second half.

Just wondering whether I'm remembering that correctly or if you could give us an update there as to what happened?

Sure.

I think we still would expect COGS somewhere in the 3% range for the year.

But in terms of what I've said, I don't know if I referred to a second quarter or not, but let's just focus on the wood as we go forward.

What we are expecting some moderation in the rate of increase to occur over the back half of the year.

That's one of the big drivers of the increase of the COGS growing a little bit faster than it has historically for us.

The reason why it's going to moderate is because last year at this time the cost of logs, the cost of stays, the cost of headings, if you will, all components that go into making a barrel, took a pretty significant increase.

And it's continued to increase, but the rate of increase over the balance of years is expected to moderate.

Going a little bit back to that earlier question, are any price/mix benefit that we would have been seeing through the years being offset somewhat by some of those higher wood costs, as we start to cycle them we'll get more benefit from our price/mix in that second half because we're cycling a higher base.

So, that is a positive for the Company in that second half.

Great, thanks a lot.

I'll pass it on.

The next question comes from Nik Modi of RBC Capital.

Yes, thanks for the question.

Paul, I was wondering if you can help confirm something we recently picked up in the trade regarding Bacardi putting its distribution out to RFP, breaking the alliance with Remi and Brown-Forman.

And if that is true what would be the implications if the distribution alliance actually broke up?

Would that benefit you or would that hurt you?

Any thoughts on that would be helpful.

It would be premature to even assess that.

We're aware there are some RFPs out there that Bacardi has initiated.

But as far as we know, we're continuing to partner with them in the same ways that we have historically in the United States.

And just to remember, part of that partnership we do altogether and then the respective companies go and do their individual brand building work.

And then within each company people are building their own individual brands.

I think no matter what happens -- and I always feel this way about the US environment, whether it's wholesale consolidation, supplier consolidation, people changing distributer alignments, et cetera -- I really have a high level of confidence in Brown-Forman's ability to navigate the US system.

I really do.

We do that.

We really don't have a one single way of doing it in the United States.

There's literally 50 different ways you can go to market in the United States.

I just like the flexibility along with the stability that comes from Brown-Forman's historical approach to the US distribution system.

We really do, have always, there's still a lot of markets where we go to the marketplace with Bacardi, not only in United States but outside of the United States, as well.

Where that's appropriate we will continue to do it.

Great.

Thanks so much.

The next question is from Tim Ramey with Pivotal Research Group.

Good morning, thanks.

Paul, just to recapitulate something you said a few minutes ago, but I think it bears thinking a little bit more about.

Consumer behavior in alcoholic beverages has always shown a tendency to more complex flavors and more crafted flavors, if you will.

Light beer drinkers go to beer drinkers, become craft beer drinkers, and so on.

I think it really is the right way to think about it, to think that the best thing about Tennessee Fire is Jack Daniels Black Label.

The best thing about Jack Daniels Black Label is Woodford Reserve or Gentleman Jack.

Am I thinking about that right over a 10-year outlook?

Yes, I think that's one aspect of it, Tim.

I think there's a phenomenon that's really interesting in the spirits category relative.

We often get compared to beer or wine.

One observation along the lines of what you're thinking is, first, to ground you, remember that the core offering of distilled spirits, more often than not, it's consumed in its final format in a varied or flavored or mixed way.

So, it's even more natural, in my view, for flavored spirits to exist.

In some forms that's providing convenience, in other forms it's providing a little more prepared form of what they ultimately enjoy anyway.

And that's not true -- I mean beer is not an ingredient in a broader-based beverage, for example.

So, I think that's one thing to think about, which I think bodes well for the longer run.

The two factors that I think will make flavored whiskey have a longer life versus shorter are that it's inherently the way the core whiskey category gets consumed anyway; and, two, is that they are aged products that have a moderating and regulating mechanism to the boom/bust phenomenon that can happen.

I think those are two contributing factors that, they don't guarantee that some brands won't go away or there won't be some bubble or something like that, but for our business it's why we believe they can be very strong, enduring brands.

Then the other pieces, which you're talking about, which is -- and I'm just going to give you an anecdotal one because I saw it over these last.

I'll give you an example of my wife who literally does not drink whiskey and never has.

With the introduction of Tennessee Honey and Jack Daniels Tennessee Fire, she said -- well, that really tastes good, for example, on the rocks.

Literally over the Thanksgiving holiday, she was stealing my Gentleman Jack on the rocks.

So, here is an example of somebody who's developed a palate over a period of time, somebody who never would have been interested in the category, and I think is an example of what you're referring to.

Now, whether or not she will trade up to Woodford Reserve or Double Oak, I don't know, but in any event I think there's real foundation to the premise that you suggested there.

At the end of the day, the ultra-premium is where everybody is going.

They might get stuck along the way, but they might end up going there.

Tim, the other thing, is it's a really affordable luxury.

You can get on a liter of, say, Woodford Reserve, you're getting right there, there's 20 standard drinks in a liter of Woodford Reserve.

For the money, compared to where you might put your entertainment dollar, particularly if you're entertaining people at home, it's a real value.

Just a quick question on barrel making.

You do all that in house, I believe, so other than just the raw material costs, as you expand barrel making activities, should we think about that diluting COGS from higher depreciation and so on?

Or should we think about that as a benefit to COGS from greater efficiencies?

How would we think about that?

We're definitely building all of our new facilities with a couple things in mind.

One, to make them as efficient as possible; and, two, make them scalable.

So, we're not necessarily building it to be double what we need today.

We're building it and scaling it as we go.

So, I think the answer is in the middle.

There will definitely be some incremental depreciation as time goes on from some of the investments that we're making, but we're also being very thoughtful in terms of how much we're investing now to minimize over-constructing and over-making something that we don't need at this point.

A couple things in addition to what Jane is saying there is, just remember, from a traditional economies of scale thing, you don't run these down a line in the way that you get that ramped up.

These are made by human beings.

That's one of the tricks of the barrel-making operation.

We do get some benefit, I think, a little bit on freight because we're down closer.

The new cooperage is a little closer to Jack, which is the primary customer.

A lot of it would depend, too, on how you account for the used barrel sales a little bit.

Do you count that as efficiency or do you count that as a sale?

And of course we've been benefiting from the used barrel sales these last couple of years because the market's been so buoyant.

A lot of it depends on how you account for that aspect of it.

I will say the other piece that relates to that is it really was, in part, a, I'll call it, risk mitigation move by the Company to insure we had two cooperages spaced in different locations, et cetera.

We learned that long ago with warehouses and other aspects of the business, that it really was, it bought some insurance for us, as well, because our business is so attractive we would not want to have any limitations as it relates to getting wood.

I would just say anecdotally in wine, used barrel prices are up 100% because there's so much demand from craft distillers and craft beer makers that want to put the beer in oak.

You bet.

That's one of the reasons for the cost of our own wood that we were procuring went up because some of the wood was going to the craft beer.

A lot of competition for people who want to use Coopers.

Thank you.

The final question comes from the line of Bill Chappell with SunTrust.

Thanks for squeezing me in.

Just a couple things on the cost front I just wanted to clarify.

You'd said wood prices would get better in the back half.

Is that the start of a longer-term trend as we move into 2017 or is that just very small changes year over year?

Bill, that's actually what I was referring to is a year-over-year comparison.

The rate of change that we have experienced in the first half of the year is abating over the rest of the year.

It's not that the costs themselves are coming down at this point because of the supply/demand.

The demand for it is still outstripping the supply.

They are just comping the higher pace in the second half.

They started to go up in the second half of last year, so you won't have as negative impact as you did in the first half.

Okay.

And then I missed the commentary.

You'd said also SG&A would accelerate faster in the back half.

Is there something behind that in terms of, like, marketing advertising or is that just the normal flow?

It's referring to operating expenses.

So, if you look at our operating expenses from the first half of the year, they were up modestly.

A lot is due to easy comps, if you will, versus last year.

We had pretty high spending in the first half of last year.

So, we're flipping it in the second half so you'll have tougher comps, if you will, that's all.

Okay.

And then last one, just in all of the talk about price competition, does this impact the goal of trying to raise price a couple percentage points every year as we look to the June price increase?

I don't know that we've ever had that programmatic approach to it.

We do like to try to advance prices but we do it -- I haven't recalled -- now, we did some June and July pricing three years ago, I think, where we thought that was the right timing to do it.

Not all markets did it then but a large number of them did.

Sometimes they are associated with input costs; other times they're associated more with price positioning, just the desire to continue to price the brand at the premium level around the world.

We'll probably be taking here in the next, I don't know, 90 days, start to look at what our expectations would be for FY17 as it relates to pricing.

But we don't have any early thoughts.

As you sell -- I'll just use the example -- more Woodford Reserve and less Canadian Mist you'll continue to get mix, though.

That will continue to roll.

But in terms of what you were saying, the current price competition in the US doesn't alter your plans at this point.

I mean, you've got to look at it.

The reality is that a lot of that competition I'm talking about is above the Jack Daniels price point.

So, as it relates to Jack Daniels we're as motivated to make sure we're not seen as too lower-priced related to a lot of these new entrants because pricing, in addition to being an economic tool, is also a marketing tool in this business.

I just feel like we'll be weighing that as well as we do what the price spread is between us and, say, Jim Beam.

We'll be looking at both factors.

Got it.

Thanks so much.

Thank you, Paul and Jane.

And thanks to all of you for joining us today for our second-quarter earnings call.

And please feel free to reach out to us if you have any additional questions.

Thanks and have a great week.

Thank you all.

Thanks.

Thank you.

This will conclude today's conference call.

You may now disconnect your lines.