Brown-Forman Corp (BF.B) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the third-quarter fiscal 2016 conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you.

I would now like to turn the call over to Jay Koval.

Thanks, Victoria, and good morning, everyone.

I want to thank you for joining us for Brown-Forman's third-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 third quarter of fiscal 2016, and this release can be found on our website under the section entitled 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 may provide useful information to investors regarding the Company's financial conditions and results of operations are contained in the press release.

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

Thanks, Jay.

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

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

First, I'll review our year-to-date results, and then I'll discuss our revised outlook for fiscal 2016.

So let me start by reviewing our recent results.

Against the backdrop of deteriorating economic conditions and foreign exchange moves that negatively impacted our reported results, we delivered solid underlying net sales growth of 4% in the third quarter.

These results reflected two different economic realities.

On the one hand, we delivered strong and consistent growth in the developed world, where underlying net sales were up 6% year-to-date.

On the other hand, we experienced decelerating results in the emerging markets and continued weakness in our Global Travel Retail channel.

Third-quarter results pulled our year-to-date underlying net sales growth to 5%.

Topline results in the United States maintained our healthy momentum, growing 7% in the third quarter and in line with the 7% we delivered in the first half of the fiscal year.

This great performance was led by the leading portfolio of authentic American whiskeys, including the Jack Daniels family of brands, up 7%, and Old Forester and Woodford Reserve, both gaining share in the rapidly growing bourbon category.

Our tequila brands delivered strong growth in the United States, with Herradura and el Jimador up in the teens.

Developed markets outside the United States grew underlying net sales 5% during the first nine months of our fiscal year.

Improving results in Australia were more than offset by Germany's third-quarter declines where our business was negatively impacted by seasonal trading patterns that we expect to reverse in the fourth-quarter.

Excluding this timing issue in Germany, our non-developed US markets -- our non-US developed markets are up 6%, in line with first-half growth of 6%.

The United Kingdom, France, Canada, and Spain, each delivered solid rates of growth while Japan was flat.

Takeaway trends in the developed world also remained strong, and in some cases, even better than our underlying depletion trends.

Three months blended takeaway for Jack Daniel's Tennessee Whiskey in the United States is steady at around 3%, and is currently lapping its toughest comparison from last year.

In the United Kingdom and France, takeaway is up almost 10%; Germany's takeaway is up over 10%; and Australia is showing slight growth.

These solid takeaway trends for Jack Daniels give us optimism about our business outlook in the developed markets.

Moving now to the emerging world where, for the first time in several years, our emerging markets business underperformed the developed world, with year-to-date growth of 5%.

Historically, Jack Daniel's Tennessee Whiskey has been growing in the mid/high-teens in the emerging markets, fueled by strong market share gains.

But the deteriorating economic conditions and worsening spirits trend have temporarily slowed Jack Daniels' underlying net sales growth into the high-single digits.

This deceleration equates to removing one point of incremental net sales growth from our underlying results.

While we don't have large exposures to any one particular emerging economy, the slowdown has been pervasive across most markets, and could persist over the near-term until economic and geopolitical pressures lessen.

In the meantime, however, we continue to lay the groundwork, seeding these markets so that when economic growth accelerates, we will be well-positioned.

And in two emerging markets where we have this ability on takeaway trends, Jack Daniel's Tennessee Whiskey is up mid-teens in Poland and almost 30% in Mexico.

In addition to the slowdown in emerging markets, our Global Travel Retail business remained under pressure in the quarter, resulting in a 13% year-to-date decline.

So while our Travel Retail business is still relatively small, this has reduced the Company's net sales growth by about a half a point.

In the aggregate, the slowing emerging markets and declines in the Travel Retail channel pulled a point-and-a-half of growth off of our year-to-date underlying net sales growth of 5%.

Looking at our results through the brand lens, the Jack Daniels family of brands led the way with underlying net sales growth of 7%.

Core Jack Daniel's Tennessee Whiskey grew 4% in the first nine months, and brands such as Tennessee Fire, Tennessee Honey, and Gentleman Jack, all helped drive even higher growth for the family.

Jack Daniel's Tennessee Honey contributed over a point of year-to-date underlying net sales growth, and depleted over 400,000 9-liter cases in its first 12 months, despite the backdrop of intense competition in flavors.

This growth has come from bringing in many new-to-whiskey consumers, a group that overindexes to millennial women and Latinos.

Our brands -- other brands with standout underlying net sales growth include Woodford Reserve, up 29%, and Old Forester, which grew over 50%; el Jimador and Herradura Tequila both delivered impressive global results; and Sonoma-Cutrer and Corbel Champagne have underlying net sales by mid-single digits so far this year.

Underlying net sales growth was dragged down by declines in Southern Comfort, Finlandia, and Canadian Mist.

As you know, we closed on the sale of Southern Comfort and Tuaca yesterday, and I'll discuss that in more detail in a few minutes.

Finlandia sales declined due to challenging conditions in two of its largest markets -- Poland and Russia.

And Canadian Mist results were hurt by competitive price pressures and the transition to new price packaging.

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

The US dollar has continued to appreciate against most currencies, which has waned heavily on our reported results.

Year-to-date, foreign exchange has negatively affected our net sales growth by 8 points.

Price mix was up 4 points year-to-date, driven largely by better mix.

And effects of fast growth in our American whiskey portfolio and declining sales of lower-price brands have resulted in this favorable mix, helping drive a 40 basis point improvement in gross margins.

Underlying A&P spin increased 1%, while underlying SG&A grew 4%.

Both line items were a few points lower on a reported basis, as foreign exchange helped our non-US-dollar-denominated cost.

Putting this all together, we delivered 7% year-to-date growth in underlying operating income.

Foreign exchange headwinds hurt our operating income line by 5 points, resulted in reported operating income growth of 2%.

For the first nine months of the year, earnings-per-share came in at $2.65, up 4% over last year.

EPS was helped by a slightly lower tax rate and lower share count.

Foreign exchange was a $0.14 drag on reported EPS.

So, excluding FX, year-over-year growth in EPS would have been approximately 10%.

Moving now to my second and final topic, an update on our full-year outlook for fiscal 2016.

Excluding the estimated gain on the sale of Southern Comfort and Tuaca, we've revised our full-year outlook down today to incorporate the emerging market slowdown, continued weakness in the Global Travel Retail channel, as well as the impact from adverse foreign exchange.

While we typically discuss foreign exchange moods and its impact on reported results, foreign exchange also negatively impacted our underlying growth.

We see this manifest itself in a number of ways, including the decline in the purchasing power of our consumers, most notably in emerging market economies, as well as the negative impact of purchasing patterns of our trade partners.

We now expect our underlying net sales to grow approximately 5% in fiscal 2016, slightly below last year's 6% rate of growth, but well ahead of the 2% growth that we estimate of our peer group.

While we are disappointed that our growth has moderated slightly, due to the deteriorating economic conditions throughout the emerging economies of the world, our view remains unchanged that these economies will become increasingly important growth drivers for the Company over the coming years.

We believe that we are in the early stages of realizing their long-term growth potential, given our low market share today.

We expect modest gross margin expansion for the year, which helps position us for solid operating income growth as we look to continue to leverage some of the investments we have been making over the last few years to build our brands.

These investments go far beyond the A&P line.

In summary, we expect 7% to 9% underlying growth in operating income for fiscal 2016.

This one point reduction in operating income growth equates to roughly $0.03 less of earnings-per-share.

Foreign exchange is now anticipated to be approximately $0.06 worse than our expectations were at the time of our second-quarter earnings call.

And, as you know, we closed on the sale of Southern Comfort and Tuaca yesterday.

The absence of these brands from our results in March and April will pull in an additional $0.04 off of our full-year expectations.

These negative items are partially offset by $0.05, due to a lower tax rate and lower share count.

Taking all these puts and takes into consideration equates to an $0.08 lowering of our EPS range in fiscal 2016, which we also tightened to $3.32 to $3.42.

This range excludes the estimated $483 million gain from the sale of Southern Comfort and Tuaca.

Including this gain would adjust our earnings-per-share range to $4.97 to $5.07 in fiscal 2016.

Given the continued volatility in foreign exchange and assuming foreign currency cash flow exposure collectively move 10% in either direction, our EPS over the balance of the year would be impacted by roughly $0.04.

Just add a little color on our fourth-quarter, this full-year outlook incorporates the challenging topline comparisons we expect in the fourth-quarter, given last year's launch of Jack Daniels Tennessee Fire in the United States.

Fourth-quarter growth should be helped somewhat by normal trading patterns in Germany, as well as expanding Jack Daniels Tennessee Fire in the United Kingdom and Australia, where the brand has been performing well in its limited test phase.

We are currently evaluating opportunities for additional expansion beyond these markets.

This year's fourth-quarter results should also benefit from favorable comparisons on our tax rate and other operating expense items that pull down last year's fourth-quarter earnings.

Now before I pass the call over to Paul for some brief comments, I thought it would be helpful to discuss our thought process behind selling Southern Comfort.

We acquired Southern Comfort for $90 million in 1979.

Despite encountering some cycles over the last 37 years, Southern Comfort has enjoyed a dominant position in the flavored spirit category, given limited direct competition, generated substantial cash flow and return on its investment to the Company over that time.

But as you know, the competitive landscape in flavored whiskey has heated up over the last few years, including some of our own brand introductions, such as Jack Daniels Tennessee Fire and Honey.

And this competition has been eroding Southern Comfort's leading share, resulting in persistent sales declines since 2008.

So, over the last few years, we have allocated additional time, focus, and dollars toward reinvigorating the brand with limited success, and reached the conclusion that we should sell the brand and rededicate resources to brands that we believe have greater long-term growth prospects and can create more value for our shareholders.

So after a thorough sales process, we agreed to sell Southern Comfort and Tuaca for approximately $542 million.

In addition to the increased focus that we will be dedicating to our remaining brands, and expectations for faster portfolio growth once we move past the current economic malaise, the proceeds from this sale strengthened an already great balance sheet.

Our balance sheet flexibility, in turn, allows us to invest in our organic growth, consider acquisitions that meet our strategic criteria, and be opportunistic at reducing our share count, including the $1 billion buyback authorization that we announced in late January that commences on April 1, 2016.

As a point of reference, in fiscal 2015, Southern Comfort and Tuaca generated $70 million in operating income and $0.24 of EPS.

And our year-to-date underlying net sales growth would have been 6% excluding these brands.

This portfolio management has been an ongoing exercise over the past two decades, as we focus Brown-Forman's portfolio on high-margin, high-return spirits brands with improved long-term growth prospects.

Our portfolio strategy entails not just divesting brands such as Southern Comfort and Tuaca, but also taking the long-term perspective to invest in developing the brands that have the potential to drive the next few decades of growth.

This was the case behind launching Woodford Reserve and the depths of the Bourbon declines in the 1990's; acquiring Southern Comfort in 1999 and Caseyer Adura in 2007; introducing Jack Daniel's Tennessee Honey in 2011; and the reason why we are investing in Slane Irish Whiskey today.

So, in closing, we continue to deliver industry-leading underlying growth in net sales and operating income.

We attribute this topline outperformance to our portfolio focus on Jack Daniels and our American whiskeys against an excellent global opportunity for them.

While skewed premium price points allows us to deliver high margins, and with single-point production efficiencies, we have been able to generate great returns on our investments and strong cash flow.

We have maintained a consistent long-range perspective to investing this cash flow, focusing first and foremost on investing in our organic growth opportunities.

We are doing so today through distillery expansions, adding barrel-making capacity, and making homeplace investments.

We have used our growing cash flow to consistently increase the dividends over the last 32 years, making Brown-Forman a member of the prestigious dividend aristocrats.

We maintain an active approach to portfolio management, and we generate substantial free cash flow, which allows us to continue returning cash to our shareholders.

And so, with that, I'd like to turn the call over to Paul for some of his comments.

Paul?

Thank you, Jane, and good morning, everybody.

As a summary, I thought Q3 was a pretty solid underlying quarter for us, given that during the November through January time period, we witnessed the terrorist attacks in Paris, the continued difficulty for emerging market economies and currencies, and a very rough start for the calendar year 2016 equity markets in January.

By contributing to a halo of uncertainty, these forces play a role in moderating the consumer and trades' willingness to purchase in the short-term.

As a result, and despite Brown-Forman's favorable geographic diversification, we were not immune to these factors as they weighed somewhat on the quarter's underlying sales growth rate, which was still a very nice 4%.

Our year-to-date underlying growth in sales and operating income now stands at 5% and 7%, respectively, and our 12-month return on invested capital remain very strong at 22%.

These growth and return metrics remain ahead of our industry competitive set.

As in past quarters, and consistent with other US-based companies, these very nice organic year-to-date results are being offset by a strengthening dollar.

And this continued to weigh on reported results.

In our case, it had the effect of reducing our year-to-date underlying operating income growth from 7% to 2%.

With these factors present as current headwinds, you might be wondering if we are altering our course in any way.

Let me touch on that briefly.

Looking back on other challenging macroeconomic environments we've encountered, I feel that we've been very well-served by prioritizing three things.

First, keeping our long-term perspective; second, intensifying and narrowing our focus on the very best growth opportunities we foresee for the Company; and third, bringing new ideas that can capitalize on those opportunities.

Here are a few examples.

Despite recent emerging market challenges, it is estimated that these countries as a whole still had 4% real GBP growth in 2015.

And despite Jack Daniels' excellent progress over the last 20 years in these advancing economies, the brand still has a very low market share.

As a result, we remain very bullish on the opportunity that exists for the Company across this very large number of countries where most of the world's population resides.

So as these markets grapple with their current local challenges, we intend to be patient by leveraging our Company's long-term view.

While we do this, we will simultaneously intensify our focus on growing our American whiskey brand priorities in parts of the world that are a bit more conducive to growth just now.

To be clear, this does not imply some radical reallocation of resources or exiting of investment positions in emerging markets.

It's a more subtle shift in the expectations we will have for where we are likely to derive our growth in the short-term.

For example, we are likely to expect more from the US and developed international markets, where premium American whiskeys are enjoying excellent momentum and consumer appeal; or, as another example, we will also strive to accomplish more in our premium tequila brands at a time when tailwinds are strong for them, particularly outside of their home country.

In doing this, we will be leveraging the benefit of our excellent geographic diversification.

This strengthening of our focus will be partially enabled by our recent sale of Southern Comfort and Tuaca, not unlike the focus that was previously enabled by the dispositions of our consumer durables and popular-priced wine businesses.

This most recent disposition will permit us to allocate more of our creative time and energy to Jack Daniel's Tennessee Whiskey, Gentleman Jack, Jack Daniel's Tennessee Honey and Tennessee Fire, Woodford Reserve, Old Forester, Herradura, and Sonoma-Cutrer -- some of our most attractive and immediate growth opportunities.

And with this sharpened focus, I expect that we will generate new ideas that can be impactful to the top and bottom-line over time.

This will be most evident through smartline extensions -- like Jack Daniel's Tennessee Honey and Tennessee Fire -- but as well, an example would be our forthcoming Jack Daniels Single Barrel Rye, which represents the distillery's first significant effort to date within the exciting US rye category; new product development, like our Slane Irish Whiskey project; improved packaging, like our recent success with el Jimador and forthcoming enhancements on both Woodford Reserve and Finlandia; the strong appeal of the liquid we put in the bottle, like Old Forester Birthday Bourbon and Herradura Ultra.

We'll be emphasizing new formats that might better meet consumer needs, like our successful Jack Daniels and el Jimador RTD businesses.

We'll be looking at enhanced marketing communications, like Jack Daniels' 150th anniversary and our investment in the Old Forester homeplace; and well-timed route to market investments, similar to the France example from a couple of years ago, and many others before it.

I really do feel that this sharpening of our focus and the ideas that will come from it, along with keeping a proper long-term perspective about the business, will serve us well, as it has before.

That concludes our prepared remarks for the morning.

And we're now happy to take any questions you have.

(Operator Instructions) Vivien Azer, Cowen and Company.

So, in light of a very tough macro backdrop -- I think the underlying numbers actually look pretty good -- but as I think about the outlook, Jane, I know it's very hard to get a read on inventory levels in emerging markets.

But as we think about the new outlook for sales growth can you talk about how you guys are thinking about inventory levels?

Do you think that there's more destocking to come?

Do you think inventory levels are right in emerging markets?

I know it's hard to gauge, because FX is going to drive that going forward.

But any color you could offer there would be helpful, I think.

That's a great question.

We were actually having this conversation yesterday as it related to our inventory levels in the emerging markets.

And we do feel like -- and we alluded to this -- that the foreign exchange has definitely impacted our trade partners' buying patterns, and likewise, probably has reduced some of their inventory levels.

And we don't -- that part of the world, we don't have a lot of visibility into the trade environment.

We do believe that is one of the drivers of the slowdown that you saw and we felt in the emerging markets.

Obviously, it's been driven, though, by the economic malaise that's going on there in the foreign exchange devaluation.

Do we expect more to come?

I don't know that I can predict that right now either.

I think there's some markets that have held up pretty well for us -- Brazil, Turkey -- places like that are continuing to do very well -- Mexico.

And we quoted some takeaway numbers in Poland and Mexico on Jack, and they are very strong at this point.

Yes.

I mean, I think -- the only point I'd add -- I mean, it's just so hard for us to get a single metric that can help us, first of all, and then help you all understand what might be underlying the results.

I mean, we do think it's a blend of both consumer and trade impact, particularly on the short-term.

And the reason it's important, of course, is that the trade impact can be one-time and can rebuild with, depending upon what the circumstances are in those countries.

I do think it's always -- I'm always reminded of the impact that's unique to either our industry and -- but in this case, our Company -- where you have single-point production.

Because it's -- the inventory adjustments that occur happen over a little bit longer period of time.

That's because you have time on the water, you have time going from -- because we don't sell as our company in a lot of these countries direct to retail; you go to importers who go to agents who sometimes go to sub-wholesalers.

And so the trail of inventory can be longer for a single-point producer who has a multiple-tier distribution system.

And so that complicates it even more.

I suspect some of this -- if I think about weakening emerging market economies -- I mean, on some level, if you look at the real GBP growth going back -- I mean, they were growing at more like 8%, go back four or five years ago, and now down to 4%.

So, I suspect some of it has been making its way into our results over time.

And then when you have these devaluations of the currency that really impact it, you see it a little bit more dramatically.

So, those are qualitative comments to a quantitative question, I know you asked, sorry, but we don't have great visibility into it.

No, and I appreciate the challenge there.

But maybe if I could ask it a different way.

Sure.

As you think about setting external expectations for the investment community, does the 5% new outlook assume further destocking?

Just out of an abundance of caution, given the difficulty in the read?

It does not.

I don't think it does.

Yes.

I mean, I think it would reflect -- or to the extent -- it would be maybe a continuation of the trends.

And to the extent that it had some destocking and some consumer, it might be in the same proportion, maybe is a way to think about it.

Okay.

Perfect.

That's helpful.

And just my second question, as I think about the composition of the sales growth -- you know, very heavy to price mix, less so on volumes.

And as I think back to some of our discussions earlier in the fiscal year, it strikes me that perhaps the balance of price mix to volumes has not played out exactly as anticipated.

I recognize some of that has got to be pricing to offset FX.

So can you talk a little bit about your pricing strategies in emerging markets?

And specifically, I think, in Russia, where I think one of your competitors has taken pricing in the last few months.

Thank you.

Yes, we've actually taken pricing in Russia ourselves quite a bit.

And so we're looking at each market in the emerging markets on a case-by-case basis in terms of how we -- whether we should take pricing or not.

And we have taken it not just in Russia; a couple of other markets.

We've taken it in Brazil, some other places as well.

So again, our product Jack Daniels was already pretty highly priced for the consumer down there to start off with.

And so with the devaluations of these currencies significantly, of course, it makes -- as we were talking about in the earlier question -- the affordability of our products a little bit less so than it has been.

But as we look forward, again, we'll continue to look at these countries on a market-by-market basis.

We'll figure out what's best, really market-by-market is what we've been doing.

We did, just for historical reference, the one thing that would influence our posture about some of these emerging markets, of course, the affordability factor when you have the difficulties they have.

But I'm influenced a bit on my posture toward it based on -- and it would be hard for everybody to remember this, but back in the FY12, FY13, and even a little bit even into FY14, in a lot of these emerging markets, we took pretty significant price increases, mostly for price positioning and premiumization.

You know, there's not as many big global brands in a lot of these countries outside places like Africa.

Even in a country like Mexico, we felt at the time there was an opportunity to go up.

But we found that it was better for us to do that with sort of large increases versus a bunch of small ones at the time.

So, in some of these places, we went up 10% or 12%.

And so -- and those will soften your volumes a little bit.

They'll have that impact.

But, in any event, in those cases, we've been a little more cautious about raising prices today, particularly given the environment we are in.

Understood.

Thank you very much.

You're welcome.

Bill Marshall, Barclays.

So on the last -- the second-quarter conference call, you guys sounded relatively optimistic.

You cited some positive November trends.

And also it sounded like you were a little bit more optimistic on Travel Retail at that point in time.

So I'm just curious, first of all, on that November data point, it sounds like it must have kind of decelerated as you moved through the quarter.

So I was wondering if you could give us a cadence of how that has materialized and into the fourth-quarter?

And then on Travel Retail, was that more on the US side that you felt more confident, and maybe it just didn't come through the way you had expected?

And if you could just unpack kind of what was going on in that channel in particular.

Thank you.

Yes.

So on the Global Travel Retail channel, I'll start on that one first.

I think we did allude to we had insights into what our November results were looking like.

And then it was a very good November for Global Travel Retail and for the Company at large.

And what we found, though, was the results did continue to soften in that channel over the remaining two months of the quarter.

Again, they are not disconnected to the emerging market economies; there's some interplay going on there too.

We know the Global Travel Retail travelers, if you will, come from -- the high spenders come from Russia.

We know what's going on in Europe overall.

And so that definitely continued.

Paul alluded to, in his talks, the Paris attacks.

So, all that activity going on, the confidence going down, I think it just continued to hit the Global Travel Retail business.

And our overall results for the quarter -- again, we still think they were very solid, again, against the backdrop of what's going on in the world.

And the results in December and January were off a bit -- again, due to the emerging markets in the Global Travel Retail that we've been referring to throughout.

I think the other thing that I'd add is, one of our top countries -- and Jane referenced it in her opening comments -- Germany had -- I mean, just had a really rough Q3 that we think is seasonal, I mean, in terms of the trading patterns, and it will come back in Q4.

And I do think -- look, we were commenting only have at that point were early indications for November.

I mean, I'll remind everybody that the November/December/January period for us is a big one, because it includes all our holiday and the gifting, which is seasonally disproportionate for our industry.

So I think more than anything, it was the headlines we've provided you -- that this large group of emerging markets for the quarter saw more of an impact than we would have anticipated either through early reads on November or through the full quarter.

And going December/January, any early read on how we should be thinking about February?

(laughter) I wish --

I wish we could provide that, yes.

I think it's reflected in our guidance.

Okay.

Fair enough.

And then just one quick housekeeping item.

I just want to make sure I'm understanding the puts and takes on foreign currency.

I know you called out the $0.06 additional impact.

That's all from spot rate movements.

Jane, you mentioned the purchasing power impact.

Imagine that's on the underlying side of the guidance, and the $0.06 is just purely on the way spot rates have moved?

Is that a fair assessment?

Yes.

That's correct.

You are exactly right.

Perfect.

Thank you very much, guys.

I appreciate it.

John Faucher, JPMorgan.

Just two questions here.

First, just to follow-up on the last question, which is, it sounds like what we should look at is, since November -- I hate to use this term, but more of a step function down to a lower level, and it seems to have stabilized there, as opposed to a continued deceleration and sort of a worsening of the trend.

Is that kind of the right way to look at it, where you just had that sort of step function down?

Yes, so included in our full-year outlook is what we're expecting for the -- is embedded in our outlook for the rest of the year.

So we're expecting 5% topline net sales growth.

Yes.

And that (multiple speakers) would apply to the sort of remainder of our fiscal year, and just would not reflect, because we have not yet looked out at the 2017, and we'll provide that when we come out with updated guidance in early June.

But that -- certainly, your comment would apply for the balance of this fiscal year.

You didn't build it on with offsets just so to have some thoughts as you go forward.

We did talk about the SoCo sale, the SoCo Tuaca sale, and the impact it had on us in the quarter.

We said our results would have been -- our year-to-date results would have gone up almost to 6%.

So, it was a half-a-point or better.

So not having that drag on our topline going forward.

What will happen in Global Travel Retail in the emerging markets?

We pointed out a point-and-a-half drag on our results.

Hopefully, those start to stabilize and then you won't continue to have that as you go forward.

And then we did build, therefore get a benefit from the JD Fire of about -- a little bit over a point.

So just some things to think about.

And as Paul said, we'll be giving you guidance out for FY17.

We're in the midst of our planning process now and we will talk to you in June.

I would add too, I mean, here just because if you take the 5% sales growth rate through the fiscal year and finish the year at 5%, having to go up against this launch of Fire last year, you could read that as a little bit of optimism just by actually -- because we have to overcome it.

You know, right?

So, I think there's something in that that you can read a little bit that -- I know expectations are always high for Brown-Forman.

(laughter) I always feel that way.

And so, in any event, I don't -- and Jane and I's comments reflect that I don't feel like the results we're talking about here today diminish our optimism in any way about the business, which some of these temporary circumstances that we feel are out there, related very much to the economies where we're doing business, so.

Got it.

And that actually was my second question, which is sort of thinking about the Fire comps.

And earlier in the commentary, you highlighted how Honey -- I think you had said this was sort of the peak comp quarter for Honey.

You've got Fire now that you have the comp.

But again, you do get the benefit from the other brands.

So, it sounds like you kind of feel like, net-net, the puts and takes from a comp standpoint as well as the divestitures should even out pretty nicely as we look through the balance of the year?

I think our topline growth for the year is 5% again.

So that's where we are year-to-date, so.

And I'd really go back (multiple speakers) and look at the -- focus on the adjustments Jane was talking about on that, that accounted for that sort of $0.08 reduction today.

I think that those give you the best insight to the moving pieces that remain, I think.

I think what you're asking about a little bit more, let me -- is that you were talking about the fourth-quarter only.

So, we -- our outlook does reflect the challenging comparison to last year's fourth-quarter.

So, in other words, the absence of the national launch of Fire.

We did note, though, that we are expanding in a couple of markets overseas where we've been testing the brand.

So, in the UK market and in --

Australia.

-- Australia.

We also -- Paul just talked about and I'm going to talk about in my notes too, that the drag on our topline -- one of the drags in our topline in the third quarter was Germany-related.

And we expect those trends to reverse themselves in the fourth quarter.

So there was a timing trade pattern -- buying pattern.

So we expect that to come back.

And then we have a lot of puts and takes up and down throughout the rest of the P&L; we expect costs to be more favorable, as they've started to become, in the third quarter, as we've lapped the wood costs that were so high last year.

They are still high, but we don't have the increasing hike of growth of them.

You know, in SG&A benefits.

Fewer operating expenses -- or in expenses, and then of course the tax rate is expected to be lower.

So all those things combined give us confidence in our underlying operating income forecast and our EPS forecast for the year that we know today.

Got it.

Yes.

I think -- well, my question was really more sort of about the topline and not as much Q4, but sort of looking out sort of next 12 months, right, as you deal with the Fire comps and the divested brands.

But do you feel like kind of, from a net standpoint, you are in a good situation in terms of how those things are going to balance out, is what you're sounding like?

Yes, absolutely.

For the -- for Q4, and again, we will update any other new news as it relates to things that would have a positive or drag on the topline when we come out with full-year FY17 forecast.

Great.

Thank you.

Judy Hong, Goldman Sachs.

So, one is just -- first, is just a modeling question, Jane.

Just as we think about 2017 in terms of the SoCo impact as well as the buybacks, so I think you had said $0.17 that were lapping in terms of the divestiture?

And then is the intention with the $1 billion new buyback sort of to fully offset that dilution?

Or is it the $1 billion really more phased kind of throughout the year in 2017?

So, Judy, just -- both questions, I'll do the SoCo, first of all.

The impact on this year, we noted in our earnings release this morning -- you're right -- through January, the results were $0.17.

We will obviously have the month of February, still to be added in there.

So, that's why we gave you the FY15 full-year impact, which was $0.24, so that you would have two benchmarks, if you will, to understand the absence of the SoCo Tuaca numbers.

So that's -- just to get that clarity out, first and foremost.

The second thing you were asking about was our share repurchase that we announced the $1 billion -- new $1 billion one as of January.

I just want to take a moment and step back and talk about how we think about share repurchases in the first place.

We consider these really opportunistic investments.

If you look over the past history, sometimes we announce these things; we don't always complete them, so we remain flexible with these.

We generally do them through open market purchases, that allows us the flexibility to start (technical difficulty) expansion homeplace investments, as we talked about.

And, of course, our dividends have been increasing for a number of 70 -- for 32 years, and we've given them for 70 years.

So we've done all that side, but we also then want to make sure if there's acquisitions that come about that meet our strategic criteria.

We have that flexibility to start and stop things as we go.

And then, of course, if we decide to do -- returning cash to shareholders, we can do that too.

So we've got that out there.

Just wanted you to know you aren't forecasting -- it will not -- if you do a calculation, even if we were to complete it all, it does not offset the dilution from Southern Comfort.

That specific effort doesn't.

And so let me elaborate too, because I agree with Jane.

(multiple speakers) Yes.

And I just -- here's a way that you -- at least if you want insight into how I think about it -- let me give you an example of how the sale of Southern Comfort that we announced yesterday -- I can think of at least three pretty direct ways that it will benefit Jack Daniels.

The first is, going forward, is the absence of drag on the Corporation's growth rate that, disproportionately, Jack Daniels, over these past few years, would have to cover.

So, that absence of drag is a benefit to Brown-Forman Corporation, and also very much takes some pressure off of Jack Daniels to grow that base of operating income.

The second is, with the absence of Southern Comfort and Tuaca, our ability to take the time that we were devoting to those brand-building activities and rededicate them to our highest priorities.

I made the example in my opening comments -- but let's just say in this example, Jack Daniels Tennessee Whiskey will benefit by us being able to redirect some of our time and attention and creative energies to that particular brand.

That becomes, in fact, a multimillion dollar investment behind the Jack Daniels business.

And then the third is -- a little more subtle -- is that the proceeds from Southern Comfort -- which we had a nice gain on the sale -- to the extent that you attribute that we would be going and using some of those proceeds to do some of the share repurchasing that is available to us.

In effect, the way I like to think about that is, for a non-selling shareholder -- a shareholder does not sell into a share repurchase and remain -- what ends up happening, in effect, for them is that they, through Brown-Forman's activities, have sold Southern Comfort and made a reinvestment in Jack Daniels -- for them.

So I actually feel like this ends up being a multi-dimensional benefit for the -- for our long-term shareholders; people who are very interested in Brown-Forman's progress over generations or a five and 10-year period.

And in doing so -- we've done this several times before with portfolio reshaping, and not always has it had this other dimension of repurchasing shares, and the remaining shareholders owning a little bit more of Brown-Forman as a result of it.

But, in this case, I actually think it's a wonderful use of proceeds or reallocation of our time that benefits that particular brand and the shareholders.

So, it's a way that you might connect a couple of the dots that are in our news today.

Okay.

That's really helpful.

Paul, just maybe US -- on the US market, just thinking about Jack over the last six months or so, just -- obviously, the comparisons have been pretty tough.

The NABCA data has been a bit choppy.

Obviously, the flavor whiskey competition continues to intensify.

So, can you just give us some sense of -- obviously, perhaps there is a reinvestment component that you're looking at to kind of drive more of an acceleration, but just broadly speaking, your view of where kind of Jack is today?

And the incremental contribution that you're getting from Fire, and how much of that you think will sort of be still an incremental to the broader franchise?

Sure.

I mean, you gave a very nice summary of some of the prevailing influences.

Here is just a way that you might think about it.

I think in the end, if I were to summarize, is to say that, because your question is specifically about the United States, a lot of this comes down to what do you foresee as possible for the brand development?

And what are the best ways to achieve it?

And I'd start with that thinking about the full trademarked Jack Daniels.

Because, of course, these line extensions do play a role in it.

And I want to say something about that as well.

But here's something you might think about as it relates to Brown-Forman and this American whiskey momentum that exists.

And I actually feel like -- because we have difficulty even inside of our own Company or through our trade system, to get our mentality just right on our expectations.

And so let me just use this example -- Jack Daniels is roughly 5 million cases in the United States.

When it advances in a year, a typical year, say, 3% on volume, it generates 150,000 cases of incremental growth in the United States.

I'll use the example of a 500,000 case brand, which is a pretty sizable brand in the US market, and we've got a couple of them.

And they're just short of that, actually -- I mean, Woodford Reserve and Gentleman Jack.

And in Woodford Reserve's example, it's grown about 30%.

So it's growing 150,000 cases in the US market.

And then you'd use the example -- I mean, the one that's been the most resurgent here -- and just to show you the scale of us getting what we consider to be our proportionate growth in this market, even Old Forester, which would get more headlines today, relative to even Jack Daniels, because it's growing at 40%, but it's also the 100,000 case base which gives you about a 40,000 case growth per year.

So I'd just use these for scale of magnitude.

Now think about Jack Daniels Tennessee Fire.

In its first full year this year, we are anticipating it will be something like around 400,000 cases.

So, I mean, if you start to add these up, I really -- I mean, it is so hard when you're the leader -- as Jack Daniels Black Label Tennessee Whiskey is, and Brown-Forman is -- to expect to grow at 25% or 18% or some of these really superb growth rates that get quoted out there, particularly around some of the upstart brands.

But I can, in my own math there, given the examples I give you, see that if Jack Daniels grows 3% to 4% in the United States, it gets 150,000 to 200,000 cases of growth, which is about the same amount that are our high-flying Woodford Reserve and Old Forester are contributing.

So those are ways we think about it.

We use a lot of different metrics, not just Brown-Forman's share or Jack Daniels' share of the market.

And I think we have realistic expectations about it.

You've heard us talk in the past about how to think about these flavors.

I think one of the hardest things for the supplier-owner to do is to get the right attitude about these.

And it's my view that we will do fewer flavors on Jack Daniels, but try to sell them in more places.

So think of global expansion.

I think that is a more unique opportunity for Jack Daniels than it is many of these other trademarks that are participating in flavored whiskey.

And having said that, we are going to set ambitions for ourselves that don't just launch and then let sit a new flavor.

We intend to treat them as brands and -- which they are.

I mean, Tennessee Honey today is a -- roughly a 1.4 million case brand at global average price of about $25 or higher.

And that is a very rare accomplishment for any brand in our industry.

And so, internally, we have to think about it as a very valuable brand and not just sort of a flavor extension from Jack Daniels.

And so it's our intent, with the marketing mixes and the investments we make behind those flavors, to treat them in the same way you would expect us to treat a Woodford Reserve or some freestanding brand.

Great.

That's very helpful.

Yes.

Thank you.

Does that help you with a little more color on it?

Definitely.

Thanks.

Thanks for the question.

Thank you.

You're welcome.

Mark Swartzberg, Stifel Nicolaus.

Good morning, Paul.

Good morning, Jane.

I guess a couple of questions.

One is -- and it was helpful hearing your responses to John.

Can you give us some sense today about how you're thinking about the budgeting for fiscal 2017?

And by that I mean, you've had a pretty steady trend of high-single, even low-double digit operating income growth on an underlying basis.

And you're seeing some issues from a growth perspective.

Is it in any way reasonable in your mind to think of fiscal 2017 as kind of an investment year, a transition year, a year where you do need to slow down that rate of organic operating income growth for the sake of organic revenue growth longer-term?

Or is that not necessary in your mind?

If I felt that changing the mix of investment for some reason would have a beneficial short net or even long-term benefit, you would expect us to do it, of course.

I mean, we will sit and really nail down the specifics of this in the next few weeks here.

But I will tell you how I'm thinking about it, because this is one of the wonderful things for all of you who get to, when you ask these questions, honestly, we have to make decisions about what to make, which literally drives some of our views.

And, of course, we worry about one-year trends.

But in these cases, you've got to worry about four, five, six, seven, eight-year trends as well.

And I'll just tell you, even with what we are observing out there in terms of difficulties and things like that -- and we'll tighten up what we think for 2017 -- I have not altered in one way my view of, if I look backwards at Brown-Forman's sort of three, five, seven, and 10-year results and then look ahead, I haven't seen anything that makes me want to change those viewpoints.

Got it.

Okay.

That's helpful.

And then on the US, could you give us a little more color on what you're actually seeing in the way of -- and takeaway for Honey specifically, which I think is down, and Fire -- which, of course, has gotten this big distribution gain?

But kind of -- and takeaway dynamics.

And then -- and this is very imperfect, we know.

But when we look at the IRI data, and back out Honey and Fire, and look at the total Brown-Forman portfolio, volumetric year-on-year trends in those tracked markets, we see a slowdown in those -- in that large portfolio, ex these two extensions -- which seems a bit disconcerting if I'm in your shoes.

But it could have a silver lining, in the sense that you've been so focused on these innovations, that there's opportunity there to simply refocus on these other brands.

So I realize it's a fairly involved question, but can you speak to that?

Yes.

I think -- I mean, your insights on that I think are correct.

When you start to move pieces in and out, you get different insights.

But I mean, I also could do the same thing a little bit on -- if we just focused on Woodford Reserve and Old Forester, our growth rates would be exceptional.

And I think that this whole concept of portfolio management is one that any company that decides to sell more than one brand has to wrestle with.

I think a way I would answer yours is the things that would be dragging down our topline in IRI -- you couldn't be more correct there -- brands that are lower priority to us, say, than the new things.

But what it isn't reflecting what's happening at the bottom line.

And I actually think that it's important for people to know that, even if you get a drag on a Southern Comfort or a Canadian Mist, for example, in a -- using the US as an example -- its impact at the bottom-line will be far less significant than the focus -- the increased focus you might provide to a very high gross profit per case item like a Tennessee Fire or a Woodford Reserve.

Related to your -- but nonetheless, you want to reduce drag wherever you can; is either through the improved performance on the example of Southern Comfort and Tuaca, through literally the disposition of the business.

I mean, so in those cases, you reduce drag -- the stuff we keep, I mean, you -- we absolutely have to put our best foot forward.

And so you can expect us to try to do that.

I don't think it would be in the best interest of Brown-Forman's long-term value creation to take our eye off of Jack Daniel's Tennessee Whiskey in pursuit of trying to improve Early Times, for example.

They are both great brands in their own right, but Jack Daniels is decidedly more important at Brown-Forman.

And it's -- so it's something that we would continue to prioritize.

I do think on the Honey -- the Jack Daniels and Tennessee Honey and Tennessee Fire comments that you opened with there -- I do think it's important for you to know that the Tennessee Fire -- yes, it has had some both wholesale -- which would be inventory build, which would be reflected in our earnings-per-share, and retail, during its first full year, but it's also had very nice consumer velocity as well.

It hasn't just been a pipeline shove and it's just sort of sitting out there.

I mean, but the data we're looking at tells us it's a very successful brand in its own right.

Because our own internal benchmarks at times were against Tennessee Honey or our most competitive people in the Company were actually aiming at Fireball.

(laughter)

So, depending upon what your frame of reference is, you might be a little bit more disappointed than others.

But brands that achieve, in the first full year of national distribution, 400,000 cases are sort of runaway successes.

And to do it with limited cannibalization, bringing in new consumers, very premium price points, and having both defensive and offensive properties, it's a very big success for us.

Now -- now that we've got it out in the marketplace, the big challenge for all of us -- our sales and marketing teams particularly -- is how do we grow it in the United States?

We know we can expand it geographically, because there's more call for it today than we've supplied.

So that will be something that will be interesting for us to explain to you as we get out into June, and update you on our expansion plans.

But a big thing, just as it was for Honey in its second and third years, are how is it going to grow in the United States?

What levers do we pull to ensure that it continues to be treated like the regular strong consumer brand that we think it should be?

That's really very helpful, Paul.

And if I could just follow-up on the specific case of Honey, which it's even an obvious success, but with success comes the higher bar.

Can you just give us some sense of -- I believe it continues to be down year-on-year for now two quarters in a row in the US specifically.

Can you just talk about how you're thinking about the velocity for that brand and the opportunity for it here in the United States?

Yes.

I think in year -- what are we, four, I guess it is?

Five [in 2015].

Five -- year five.

(multiple speakers) Yes, so we are in year five.

You are accurate on the -- I think the three and six month trends, it's gone slightly low-single digit negative.

And I would attribute -- I mean, if I were diagnosing it, I don't have the component pieces here -- I'd say the contributing factors would be the big halo of competition, and some of that from within the Honey flavor segment within flavored whiskey, there's been an increase of honey competition.

But then also, just within flavored whiskey, as particularly this Apple category took off here in the last year.

So those would be some contributing players.

I also think -- and it would be silly for us not to say there hadn't been a little bit of cannibalization that could contribute to Tennessee Honey from Fire's launch, and that could be a little bit consumer.

It could also just be focusing attention or sharing displays and some of these other things that go on when you are selling things from the same family.

But it still presents the same question -- how do we, in year six and beyond, in the United States, continue to build the brand in a way that competes better versus what the competitive references are out there?

So it's the -- for our Brown-Forman employees who are listening, that's the question we're focused on.

(laughter) Yes, it really is.

I mean, it's very true.

And the same things are going to be true with the ensuing -- we are already looking at sort of Jack Daniels Tennessee Fire.

Remember, it had some test markets that go back more than one year, so you could start to learn a little bit more from those markets as well.

And with the passage of time, all, I think, new brand entries have this sort of challenge.

And I think, in my view, the answer isn't to go put five more flavors out in the market.

It's to really focus on building these brands.

Well, you can bring your wife in, Paul, and maybe, Jane, you can be part of the consulting team to help kind of restore growth in your sixth year for (laughter) --.

There you go.

We'll do that.

I've learned a lot over the years from listening to my wife about the consumer trends in my business.

(laughter)

(laughter) All men do.

Thank you for the suggestion.

Yes, we -- all men do; you're right.

Thank you for the comment.

Thank you, Paul.

Thanks, Jane.

You're welcome.

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

This is actually Stephanie on for Bill.

Just a quick question.

I'm just kind of looking at your updated FX guidance.

Can you give us just a little more color on kind of which countries were the meaningful drivers of some of your lowered outlook?

Thanks.

I could hear you -- for FX?

Which countries contribute to the FX lowered outlook?

That's right.

Kind of which were the main ones that changed materially from your last guidance?

The biggest one was the pound.

Yes.

You've seen the dramatic change in the pound over the last month.

We are using the spot rates as of last Friday.

So that's the biggest --

And that's our largest non-US market also, yes.

Yes.

[Euros] are the largest currency and pounds is the next largest, yes.

So that's a big influence.

But also -- and because we're so geographically spread, you do get little components --

Oh, everywhere.

-- from just about everywhere.

Yes.

Got it.

All right.

Well, thanks so much.

Thank you all.

Okay.

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

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

Have a great week.

Again, thank you for your participation.

This concludes today's call.

You may now disconnect.