Brown-Forman Corp (BF.B) 2016 Q4 法說會逐字稿

Welcome to the fourth-quarter FY16 year-end conference call.

(Operator Instructions)

Thank you.

I would now like to turn the conference over to Mr. Jay Koval, Director of Investor Relations.

Please go ahead, sir.

Thanks, Paula, and good morning, everyone.

I want to thank you for joining us for Brown-Forman's fourth-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 fourth quarter of FY16, and the release can be found on our website under the section titled Investor Relations.

In the press release we have listed a number of the risk factors that you should consider in conjunction with our forward-looking statements.

Other significant risk factors are described in our form 10-K, 8-K, and 10-Q reports filed with the Securities and Exchange Commission.

During this call we will be discussing certain non-GAAP financial measures.

These measures and the reasons Management believes they provide useful information to investors regarding the Company's financial conditions and results of operations are contained in the press release.

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

Thanks Jay, and thanks for joining us for our FY16 earnings call.

I plan on covering three topics today, which should leave plenty of time for questions after our prepared remarks.

First, I'll review our full-year results, including a brief overview of the fourth quarter.

Second, I'll discuss our earnings outlook for FY17.

Finally, I'll share some additional color on the changes we have made to our portfolio over the past year, including the BenRiach acquisition.

So, let me start by reviewing our results.

Despite a very challenging comparison against last year's fourth quarter 10% increase in underlying net sales, which you will recall benefited from the launch of Jack Daniel's Tennessee Fire in the United States, we delivered solid 4% growth and underlying net sales during this year's fourth quarter.

Underlying A&P spend increased 8%, while a 3% reduction in underlying SG&A boosted our underlying operating income growth to 15% for the quarter.

For the full year, underlying net sales grew 5% and underlying income increased 8%, in line with the guidance we shared with you on our third-quarter call and well ahead of our estimate for the industry's rate of growth.

Our net sales growth in the year was driven by volume gains from our premium priced brands, driving 4 points of mixed benefit and 10 basis points of gross margin expansion.

Looking at our business results by geography, the developed world delivered growth consistent with last year, helping offset a slowdown in the emerging markets and declines in our travel retail channel.

We grew underlying sales in each of the top 10 markets with the exception of Russia, and believe that our balanced geographic approach in building our portfolio is one of the reasons why we consistently delivered top-tier results.

The United States grew underlying net sales by 6%, led by the Jack Daniel's family of brands, a remarkable achievement for a trademark that is celebrating 150 years in the market.

The US launch of Jack Daniel's Tennessee Fire contributed almost 1 point of underlying net sales growth to our corporate results in FY16.

Combined, Tennessee Honey and Tennessee Fire depleted over 1 million cases in the United States in FY16, strengthening the brand equity of the Jack Daniel's family by appealing to new consumers and accelerating the brand's reach across ethnicity and gender.

We believe we are uniquely positioned to benefit from consumer interest in premier American whiskey.

Our leadership position in this category is, of course, driven by the Jack Daniel's family of brands, but is also aided by our bourbon brands such as Woodford Reserve and Old Forester, both of which enjoyed rapid rates of growth in FY16.

We believe that our whiskey expertise, including our vertically integrated supply chain from barrels to homeplace experiences, positions us well to grow our brands in the coming years.

Woodford's family of brands reached 500,000 cases in FY16.

While this impressive milestone might seem like an overnight sensation, it required a strategy built on patience and consistent investment behind the creation of a new brand in the mid-1990s that leveraged heritage and our whisking-making expertise.

We are replicating this proven business model with Slane Irish whiskey, which we believe can become the next Woodford-like driver of our Company's results as we seed the next 20 years of growth.

Developed markets outside the United States also delivered solid underlying net sales growth, up 6%.

This rate of growth marks a 2-point acceleration from FY15, with particularly strong results in Western Europe, up high single digits, as well as solid gains in Canada and New Zealand.

Australia, Japan, and Spain each returned to growth during the year, while results in Italy declined.

The Jack Daniel's trademark is continuing to gain share on blended Scotch, among other categories, and our market shares remain low compared to what we have achieved in the United States.

So we are optimistic that the best is yet to come, as the Jack Daniel's benefits from its brand positioning around competence and independence, strong heritage and authenticity, not to mention it's prominence in pop culture.

Moving now to our emerging markets business, underlying net sales grew 4% in the year, a marked deceleration from what we have delivered over the last decade.

Mexico and Poland, our two largest emerging markets, grew underlying net sales by 6% and 1% respectively.

Turkey grew 17%, while Russia declined 17%.

Brazil, South Africa, and Ukraine each grew underlying net sales double digits, but this growth was offset by the slowdown in many of our other small emerging markets, including Southeast Asia where regulatory changes in Indonesia led to significant disruption in the beginning of FY16.

Our business has not been immune to the weaker economic conditions and currency devaluations that have negatively impact consumer demand.

In our other markets, which represented 15% of total sales per the table in our earnings release this morning, underlying net sales growth accelerated from 11% in FY15 to flat in 2016, effectively removing 1.5 points from top line growth.

As we look ahead, we think the challenges in many emerging markets will persist in the short term, but that does not diminish our long-term expectations for emerging markets, given how early we are in developing our brand outside of the United States.

Travel retail had a challenging start to FY16, with underlying net sales declines of almost 20%.

The rate of decline has moderated over the last three quarters.

So while business fundamentals remained soft compared to these historic levels of growth, we believe the worst is behind us.

Travel retail's 12% underlying net sales decline in the year removed about 0.5 point of FY16 net sales growth rate.

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

In appreciating US dollar, negatively impacted our reported net sales in FY16 by 6 percentage points.

While our inventories were roughly flat year-over-year, reported sales were also hit by 1 percentage point due to the two-month absence of Southern Comfort and Tuaca revenues all under disposition during the fourth quarter.

Our underlying operating costs increased nearly 3% in the year, but declined approximately 3% on a reported basis.

Tight cost management helped us deliver SG&A growth of only 2%, and we remain focus on leveraging prior SG&A investments.

It's worth noting that excluding Southern Comfort and Tuaca, our A&P increased over 5% for the portfolio of brands we have today, in line with our underlying sales growth.

Putting this all together, we delivered 8% growth in underlying operating income for the full year.

Reported operating income increased 49%, including the impact of the sale of Southern Comfort and Tuaca, and 3% excluding.

Earnings per share increased 63% to $5.22.

Excluding the $1.76 impact as a result of the sale, our earnings per share would have been roughly $3.46, an increase of 8% from the prior year.

Now turning to my second topic for today, our outlook for FY17.

Notwithstanding the emerging market slowdown we experienced during FY16, we expect our portfolio SKU to premium American whiskey will allow us to capitalize on favorable trends as consumers continue to shift from white to brand spirits driven by a desire for heritage, authenticity, and craftsmanship.

In FY17, we will be activating a global campaign to celebrate Jack Daniel's 150th anniversary as America's oldest registered distillery.

This activation consists of a focused campaign here in the United States called Jack Attack, including additional media spend and programming behind the trademark that we believe will accelerate our growth in the United States.

It also entails large-scale events in Lynchburg and pop-up distillery experiences in several major metro markets.

We'll introduce special edition products, including an 86 proof Jack Daniel's 150th anniversary bottle.

This intense consumer campaign extends far beyond the United States, including a global Jack Daniel's barrel hunt in over 50 countries, and incremental media support.

Our global team and partners will focus on the premiumization of this trademark through additional support behind Gentleman Jack, as well as the continued growth and rollout of Tennessee Honey and Tennessee Fire outside the United States.

In FY17, we expect underlying net sales growth of 4% to 6%, driven by sustained growth of our portfolio brands in the developed world.

We intend to launch Jack Daniel's Tennessee Fire in a few markets outside the United States, including the United Kingdom, France, and Germany.

We are innovating with high quality expressions, including rolling out Woodford Reserve Rye and Jack Daniel's Single Barrel Rye as well as introducing Cooper's Craft, our first new bourbon in two decades.

Furthermore, underlying net sales should benefit from global consumer demand for our premium bourbon and tequila brands.

We expect to benefit from both the easier comparison and travel retail this coming year, as well as the absence of the 50-basis point drag that Southern Comfort had on last year's results.

On the negative front, we anticipate moderate pricing for used barrels as the global slowdown in blended Scotch is negatively impacting barrel demand.

FY17 should be another year of volume gain and improved mix.

But with minimal pricing beyond a few select markets given the overall economic environment, this should result in flat growth margins compared to FY16.

We are investing behind our brands' growth and development and are reallocating our human capital and dollars towards the brand/market combinations that we believe have the greatest opportunities to create value.

We're forecasting another year of low single digit growth in SG&A.

And so while we are tightly controlling our core SG&A growth, we will invest where the opportunities exist, just as plans to switch to own distribution in Spain next summer, which will result in some modest costs later this fiscal year.

In total, we anticipate underlying operating income growth of 7% to 9%.

At today's spot rates, we expect the stronger dollar will negatively impact reported earnings per share by $0.07.

The benefits from a lower share count will be offset somewhat by reductions in distributor inventories.

The effective tax rate will be in the 29% to 30% range.

In aggregate, we expect earnings per share of $3.42 to $3.62.

This represents 5% to 11% growth from our FY16 baseline EPS of $3.26, which excludes $0.20 of earnings contribution from Southern Comfort and Tuaca in FY16.

You'll find additional details in a table in our earnings release that we released this morning.

Add the sensitivity on FX, a 10% move in the dollar in either direction would impact our full-year EPS by approximately $0.15.

Just a quick comment on seasonality.

We expect our first quarter to be the most challenging comparison, against 7% underlying growth in the first quarter of FY16, which was also helped by the US launch of Tennessee Fire.

Regarding our capital spending programs, CapEx came in at $108 million for the year, well below our original estimate, driven largely by timing as our long-term capital expansion plans remain unchanged.

Timing the spend for Slane Castle and Old Forester distillery in homeplace, for example, will be weighted more to FY17 than we expected at this time last year.

We are over halfway through our stepped-up investments to increase total capacity, and continue to deliver an industry-leading 23% return on invested capital after adjusting for the gain on the sale of Southern Comfort and Tuaca, the highest ROIC in a decade for our Company.

Let me move now to my final topic, an update on portfolio changes, including the acquisition of the BenRiach distillery company.

We made some important changes to our portfolio of brands over the last 12 months, including the disposition of Southern Comfort and Tuaca, as well as our reentry into the single malt Scotch category with the BenRiach acquisition.

These portfolio changes marked the continuation of a decade of portfolio evolution at Brown-Forman, following the sale of Lenox China and Hartmann Luggage, the acquisition of Casa Herradura's tequila portfolio, and the sale of our mid-priced wines Fetzer and Bonterra.

In addition to this M&A activity, we have introduced significant innovations into the marketplace, including the launch of Jack Daniel's Tennessee Honey and Fire, Woodford Reserve Double Oak and Rye, and our entry into Irish whiskey with Slane.

So let me share a bit more color on our rationale for our most recent additions to our portfolio, the acquisitions of the BenRiach distillery company and three great single malt Scotch brands, GlenDronach, BenRiach, and Glenglassaugh.

The single malt Scotch category is one of the fastest growing categories along with American whiskey and Irish whiskey.

Outside of the four largest single malt brands, GlenDronach, BenRiach, and Glenglassaugh represent the largest collective production capacity in the industry, giving us a great platform from which to build on over time.

We believe that our whiskey making knowledge, barrel technology know how, and long-term perspective will continue to serve us well.

Combined, these single malt Scotch brands are relatively small today, at under 100,000 cases in calendar 2015.

But we believe they have significant global potential as the primary markets today are focused on the United States, duty-free, UK, France, Taiwan, and Germany.

There is also a small blended Scotch business today.

Given a purchase price at just over $400 million, we paid a similar multiple on trailing EBITDA to where Brown-Forman trades today.

We believe that we acquired high-quality brands and assets, including the current homeplaces, distilleries, warehouses, and the bottling facility, not to mention valuable inventory.

Equally important, is the potential for these brands in a rapidly growing category.

We are hard at work at developing the long-term business plan of how we can maximize the value of these brands.

As is typical with any acquisition, we expect some transition and integration costs this year, somewhere in the $5 million to $10 million range.

Even after including these costs, we expect the acquisition to be roughly neutral to earnings in FY17, given only 11 months of ownership, and then will be accretive in the following years.

Let me remind you that our last acquisition of size was when we acquired Casa Herradura in 2007.

After several years of methodical investment, these brands have enjoyed solid growth over the last few years, as we believe they have reached an inflection point in consumer awareness.

Herradura's underlying net sales jumped 13% globally in FY16, while Jimador's US underlying net sales increased 19%.

And New Mix, our Mexican RTD business, experienced a 23% jump.

All in all, a stellar year for our tequila brands, but one that was years in making.

We expect that the single malt Scotch brands will also receive time -- require time and patience to best position them to help fuel our growth over the long term.

So in summary, FY16 was another great year for Brown-Forman.

We delivered solid top and bottom line growth, notwithstanding foreign exchange pressure from an appreciating US dollar.

We invested significantly in the long-term opportunities that we believe will fuel our growth over the coming decades, including our entry into Irish whiskey with Slane and the launch of Cooper's Craft.

We've made several enhancements to our portfolio of brands, including the disposal of Southern Comfort and Tuaca and the acquisition of BenRiach.

And we invested over $100 million in capital investments behind our organic growth prospects.

We did all of this while returning a record $1.4 billion of capital to our shareholders in FY16.

Steady dividend growth is the hallmark of Brown-Forman, and we increased ours by 8% this past year.

We repurchased over 11 million shares, bringing our diluted share count to half of where it was in the mid-1980s, and we recently opposed a two-for-one stock split, our seventh split in 35 years.

Our ability to simultaneously grow our business, invest in the future, and return capital are reasons why we believe we can continue to generate top-tier returns for our shareholders.

Our TSRs have outperformed the competitive set, the consumer staples index, and the S&P 500 over the past three, five, ten-year periods by a healthy margin.

We believe that we will remain an industry leader through thoughtful allocation of resources and category focus on our core competency, whiskey.

We operate in a business with aged products and multi-generational brands, and we benefit from having a long-term focus and engaged shareholder base through family control.

With our strong cash flow generation and inherent capital efficiency, we will continue to pursue a well-balanced capital deployment strategy aimed at perpetuating Brown-Forman strength and independence.

With that, let me turn the call over to Paul for his comments.

Thank you, Jane, and good morning, everyone.

My take on FY16 and our guidance for FY17 is that they are both illustrative of Brown-Forman's strong and continuing organic growth story, once you consider the effect of last year's dispositions and account for the impact of FX and inventory, which we customarily do.

Something a little less customary is the disproportionate amount of work we've been doing of late to position Brown-Forman for enduring growth in the distant years ahead.

And for sake of defining distant years ahead, I mean 2020 at the earliest and more like 2025 and beyond.

While we always strive to take a long view of our business, somewhat by necessity giving the aging horizons for most of our products, this last 18 months, in my view, has the been even more exemplary of Brown-Forman's long-term orientation.

The current time reminds me in some ways of similarly strategic times in our recent history when we made changes to benefit our long-term future.

Examples would be the early 1990s when we began a more aggressive geographic expansion, which included our initial work in emerging markets and our first experiences with international distribution ventures.

The mid-2000s, when we followed our disposal of Lenox and Hartmann with the acquisitions of Casa Herradura and Chambord.

And more recently in 2011 when we sold the vast majority of our wine business to enable us to better focus on our premium American whiskey trademarks at a time when consumer interest in the category had begun to surge.

In the last five years this shift of focus, alongside further investments in our organization and global route-to-market, contributed to successes such as Jack Daniel's Black Label's ascent to one of the industry's most valuable brands; the creation of both Jack Daniel's Tennessee Honey and Jack Daniel's Tennessee Fire, two of the Company's most successful line extensions ever; the accelerated development for super premium brands Woodford Reserve and Gentleman Jack, as both brands achieve the difficult super premium volumetric milestone of 500,000 cases; and the resurgence of Brown-Forman's founding brand, Old Forester.

Now in mid-2016, we have our recent portfolio changes in capital deployment actions as examples of significant actions and investments from which we believe shareholders are likely to benefit in the years ahead.

The investments we've made in Scotch and Irish whiskey over the last year are intended to give us brand and production platforms for what I like to call Woodford Reserve-like brand development over the next generation in exciting premium whiskey categories adjacent to the American whiskey category that we know so well.

Our patient brand building success on Woodford is certainly a source of confidence as we begin our work behind brands like [Lendronic] and Slane.

Our initial investments behind Cooper's Craft bourbon will enable us to tell the story of our coopers, the people who make our whiskey barrels and in doing so convey the importance of wood and barrels in crafting the highest quality bourbons.

The brand will leverage our distinctive know how in this very old and truly unique trade of barrel making.

We will undoubtedly seek to apply some of this cooperage expertise to our new endeavors in both Ireland and Scotland.

For these new trademarks and products to find commercial success, they need the focus of an organization that has the skill, the scale, and the time to develop them.

Brown-Forman's global route-to-market platform is a strong asset in this regard, and with the sale of Southern Comfort and Tuaca in FY16, we have enabled our sales teams to shift their focus to existing brands with greater growth prospects, as well as the newer brands that I've just mentioned.

Since we are not reducing overhead costs dollar for dollar to cover the lost profitability of the brands we recently disposed, I consider this an incremental organizational investment against big ideas like Jack Daniel's 150th distillery anniversary this year and Cooper's Craft and BenRiach in the years ahead.

We made a similar type of hidden investment behind our American whiskeys after the sale of our wine brands in 2011, and it served them very well in the years that ensued.

Beyond these portfolio and organizational investments, quality capital deployment, long-haul market Brown-Forman, will continue to be important to the next 10 years and beyond.

We are fortunate to have a very capital efficient business model, as evidenced by the 23% return on invested in capital that Jane mentioned in her comments, as well as excellent financial flexibility.

Beyond the acquisitions I've mentioned, we are continuing to make significant investments in production expansion and homeplace marketing at Jack Daniel's, Woodford Reserve, Old Forester, and Slane, and in the years ahead, we will incur appreciation costs associated with this additional capacity.

These investments are intended to enable us to grow going forward in a manner similar to our last 10 years.

Considering the margins, returns, track record of growth, and the potential we see ahead, I believe these capital expenditures are excellent investments by the Company.

Finally, through our more ambitious share repurchase program of late, shareholders are essentially given the options of liquidity for those who choose to sell their shares, or a slightly increased percentage ownership of Brown-Forman for those who choose to hold their shares.

For non-selling shareholders, your decision means the repurchase program therefore represents a long-term investment the Company makes on your behalf in the future of Brown-Forman, and that is something that we believe in and I hope that today's results and next year's outlook as well as our discussion of the investments we're making to enable our continued success, give you a similar belief in the Company's prospects for continued value creation.

That concludes our remarks.

Thank you for listening, and we are now happy to take any questions you have.

(Operator Instructions)

Dara Mohsenian, Morgan Stanley.

Just wanted to get a bit more detail on the interplay between volume and price.

Look like total Company volume declined on a year-over-year basis in the back half of the year, ex-price mix, which is the first time I can remember that in recent history.

It sounds like you are expecting volume growth next year, but can you give us a little more specifics on the balance between volume and price mix?

And on the price mix side, it sounds like you're looking at more mix than pricing.

Is that fair?

Yes.

Let me talk about this year.

I think what you're seeing in the back half of this year are a couple of things that happened.

One, we are cycling against the Fire launch in the United States.

That happened, if you recall, last year's fourth quarter, so we didn't repeat that big buy-in that sold all the way through to the retailers last year's fourth quarter.

So we think that's one of the things that's driving it.

The second thing is we continued to have declines in Finlandia.

It's the low price brand, so a low margin brand.

It really hits your top line, not so much your bottom line.

It continues to be hurt in markets like Russia and the CIS.

Some of the markets where the economic conditions have just continued to be very, very poor.

So we saw some acceleration in the back half of the year on that brand, and then again the other piece being the absence of the launch in the US on the Fire.

You did see a slowdown because of those two factors, if you will.

They netted again the gains that we had on the rest of the portfolio that continued to grow nicely.

Our super premium bourbon brands continue to grow nicely, our tequilas did, and Jack Daniel's did as well.

In terms of -- as we look to next year, we are expecting really very little if any pricing, just in a few select markets.

It will be more mix.

What's coming along next year, as Paul alluded to this a little bit, we've been making investments for a number of years.

Last several years behind our production facilities, expanding capacity so we can meet the demand that we think will be there in the not so distant future.

We are going to have a bit higher cost than our price will come through.

That higher cost will offset the mix benefit that we saw this year.

So, most of it will be coming from pricing -- volumes next year, most of our growth.

And the benefit on mix, it would be evident in this past year's results, but you'd expect it to continue where you get more mix benefit than pricing.

If you just think about Jack Daniel's and Woodford Reserve growing and brands like Finlandia and Canadian Mist and the absence of Southern Comfort declining, just the mix of profitability improves for Brown-Forman overall.

There's one other thing I just thought of too.

Our table is somewhat misleading in the volume.

I think this is where you are looking at is the table.

We've got SoCo volume, so SoCo is in the table, and we did not adjust for the two months of last year's volume.

We adjusted for the two months of the revenue.

It's not out there for the volume.

That's probably the biggest piece, then Fire, and then Finlandia.

We need to figure those number out.

That's helpful.

On the flavored whiskey side, Paul, can you discuss, as you look out over the next few years, you've obviously had a lot of success with Fire and Honey.

Are you planning to launch additional flavors in that category?

And as you look out over the next few years, given we're seeing such strong growth there and a lot of competition ramping up, how's your portfolio position to compete versus that expanded category?

Well, the two that we've discussed in our results today, we continue to have very high hopes for.

I think I've mentioned this a few times, we have no plans at this time, particularly on the Jack Daniel's brand, to be bringing out any additional flavors.

What we think is the best approach for our Company is, and we've been encouraged so far by what we've seen from the success of Jack Daniel's Tennessee Honey globally, but also the early and limited tests we've done on Jack Daniel's Tennessee Fire outside the United States, that for us we think global expansion versus additional flavors is the more effective tool for us in expanding our flavored whiskey business.

I think we are going to stick to that.

And actually I think some of that is incorporated in this year's plan for Jack Daniel's Tennessee Fire as it enters either more full distribution in the markets where it was tested or some additional countries as well.

Okay.

Thanks.

Last, in emerging markets what we've seen in your business recently is a pretty rapid slowdown.

Also, your business didn't really slow as much early on as some of the competition.

I'm just kind of curious why you think your business has seen a more rapid slowdown recently in emerging markets, given if we go back over the last few years it looks like macros have really been consistently slowing in emerging markets over time.

Can you talk a little bit about the pace of improvement next year and when that plays out, in terms of emerging markets' organic sales growth?

We'll maybe hit on a couple of those.

I think part of it was the early part of the slowdown, so much of it was associated for some of our competition in China where we just -- our presence is relative, on a percentage basis, smaller than many of our competitors.

So maybe that -- particularly the cognac players, they were impacted by that going back a few years.

I think more recently for us, we've seen that in places -- Jack Daniel's is so geographically diversified and spread, and for many, many years it has been developing its business.

For example in the emerging markets we never singly focused on brick.

We looked to all kinds of smaller markets that were also emerging, and we just felt that those were more appropriate developmental efforts on behalf of the brand, even going back 10 years ago.

For example, Eastern Europe has slowed down in some markets, some of the smaller markets, those related to oil and just their economies and their currencies have been so difficult.

Just this round of emerging market difficulty, because there's always -- it seems to me that there's some markets going up and down and that's why we like the geographic diversification we have.

This particular year, with emphasis on Russia and then some of the smaller markets, other markets tied to, particularly tied to oil, seemed to hit us more than they had in past years.

It doesn't really take away over a longer period of time our viewpoint that these will be important markets for Brown-Forman.

It's just that you have to be patient while those economies wrestle with what's happening locally.

Building on what Paul said, you are asking about -- also asked about what we thought about in FY17 as it relates to these.

We really don't expect much improvement in the short term.

We're not expecting big bumps, big increases from the emerging markets.

We still, like Paul said, believe in the long term of these brands, or of these countries.

The one thing I would say, just to add onto what Paul said, he talked about the oil and obviously that had a big impact on currency.

We found that currency hit us in many different ways in emerging markets.

Whether it was that the consumer could -- that the price -- that the valuation of the currency had gone down so much, making our products so much higher.

Maybe the purchasing power in this situation caused that to happen.

For some of our trade partners margins were screwed.

It was pretty widespread, and I would say a lot of the currency stuff hit starting last summer, when the big devaluations in the Brazil real and some of those other currencies, and they just kept going everywhere.

I think it's just --

I think the thing too, if you are looking for something unique to our company, because we play relative to our competition, things are concentrated in terms of our sales and profitability at higher price points.

An impact like what we're seeing in the emerging markets might hit us.

For example, we don't own a lot of local brands in these emerging markets.

They might have a hedge or something against the devaluations in purchase power that you see.

That could be a point that helps explain it as well.

That's very helpful.

Thanks.

Judy Hong, Goldman Sachs.

I wanted to get a little bit more color on how you're thinking about the US outlook for FY17, in terms of the underlying sales growth.

Obviously you're lapping the Fire launch, which will be pretty challenging in certainly the first part of the year.

I think you've talked about some of the competitive dynamics in the marketplace.

It sounds like you have a lot of the consumer campaigns planned for this year.

I'm just curious, as you think about what you did in terms of FY16, the 6% underlying sales growth, how sustainable is that kind of growth lapping Fire?

And are a lot of these consumer campaigns that you have planned really aimed at driving growth more in the near term, or more really building the equity in the longer term and enduring growth on the Jack?

I'll touch on that, the second question you've got there.

I feel like what we are planning for the US is sustainable, I really do.

I would segregate my answer to your question.

There are some investments we'll be making, for example this year in Woodford and Old Forester packaging for example, which I think could benefit those brands.

There's usually some initial interest in it, but I think those things tend to benefit brands in the years ahead.

Clearly the most significant thing that will have a timely impact, probably the most significant thing we are doing this year, is the promotion and marketing and selling around the Jack Daniel's 150th anniversary.

I think that is pointed toward -- a lot of it is already under way, but also will have really here in the second half of the year we think a pretty significant consumer impact.

That is one of our bigger ideas for ways to sustain the growth both in the US and at Brown-Forman.

Just building on what Paul said and just to emphasize that Woodford Reserve, Old Forester and our tequilas are doing very, very well and they continue to grow nicely and we expect them to continue to grow nicely next year.

We've alluded to some of the double digit growth on all those [categories].

So we feel we're at an inflection point and good consumer awareness is happening, so we are continuing to see nice gains and nice contributions out of those.

Those will continue as our expectations on the --

One of the offsets, just to repeat something I said just a few minutes ago, one of the offsets to cycling the initial interest in trial on Jack Daniel's Tennessee Fire in the United States is the fact that we'll be introducing it to new countries.

That is clearly a partial offset.

It's not diminishing the fact that the US market for this category is really competitive.

In this particular year, in year two of Jack Daniel's Tennessee Fire, it reminds me in some ways of prior years where there was such interest in the prior year on the launch of something where there was some pent-up demand, which I felt last year in the spring particularly after we'd done that staged rollout.

There was a huge surge in interest in trial associated with this product.

As you can imagine, I just feel like in its just composition as a product, it's not going to be for every straight whiskey drinker because it's in fact a flavored whiskey.

So, I really do, it doesn't surprise us that there are tough quarters following a launch like that in a particular country.

But I do feel that we have the benefit of expanding it geographically to partially offset that.

Okay.

If I can just follow up on that, Paul.

When you compare the Honey geographic expansion to the Fire expansion, how should we think about the impact?

Maybe also you can just remind us how big Honey is in some of the markets that Fire is getting launched this year, the UK, the France?

I think, on a global level, the volumes are about half/half for Jack Daniel's Tennessee Honey, isn't it?

A little bit more outside the US.

A little bit more outside the United States, if it gives you any indication.

We are in no hurry to go get as -- I think Jack Daniel's Tennessee Honey, it took us the better part of four years plus to get to I think where -- I'm going to rough this number, we're something like in 80 countries where we are doing most of the business for Tennessee Honey today.

I don't anticipate us getting that fast next fiscal year, even the next two fiscal years on Jack Daniel's Tennessee Fire.

We are playing it a market at a time to see where there seems to be appeal.

As we go along, we know that one of the differences between Jack Daniel's Honey and Fire are the way that they are used.

And so going into it, we knew that Tennessee Fire would skew more toward shot or straight consumption, whereas Honey, while it has some of that is also used in mixed format equally.

So, I think we're just going to learn as we go and try to promote this -- we've been encouraged, I will tell you, from what we've seen not only in the United States; I just feel like we had a great first year there against a pretty tough competitive environment.

What we've seen where the competition is not the same in these international markets as it is in the United States, that Jack Daniel's Tennessee Fire is doing very well sufficiently enough that we would either expand it within those countries, or introduce it into new countries.

Okay.

My last question is obviously you've made significant changes in terms of the portfolio over the last few years.

If I look at your brand performance, certainly Finlandia and Canadian Mist screen as continuing to be a drag in terms of your growth.

Not asking what your intentions with these brands are, but are you investing behind these bands at this point?

Is it just more of macro dynamics that are pressuring these brands?

Are there other strategic considerations as you think about a brand like Finlandia, given its size in the Russian market, that you need a sizable brand like this if you're going to be in that market?

Yes.

You kind of answered your question.

I agree with you.

I think there are always strategic considerations.

We don't have the largest portfolio, by any means.

As a general bias, we are brand builders versus brand sellers.

I really do feel like almost any brand in our portfolio, we are going to try to do the best job we can with it.

Oftentimes they do play strategic roles.

Finlandia has been very important to particularly Jack Daniel's development in Eastern Europe over the last decade.

Finlandia has been, on its own merits, a very successful brand in that part of the world.

It's just a very difficult time for the vodka segments in those Eastern European countries right now.

We've seen this before with categories, where they go through some rough times.

It doesn't mean we don't put our best foot forward.

Actually we are -- right now we've continued to work on Finlandia.

I don't know that it will hit this year, but maybe into the next fiscal year, because it takes a while to make these changes, we are enthusiastic about some packaging changes there.

We have the latitude of being patient here.

Because it's really, in the grand scheme of things, the brands you mentioned are not that significant a drag on Brown-Forman.

They are relatively small when you get down to the bottom line, as it relates to the degree of their impact on our performance.

Yes, they might pull you up a quarter or two on the sales line or even on the operating income line a little bit from time to time.

But the story at our Company, because of the development that I mentioned over the last decade or more around Jack Daniel's and our American whiskeys, is really where we're placing our emphasis today.

Having said that, it doesn't mean we're not going to develop brands in the tequila space, which we are very excited about what's been going on with them in the last 18 months or so, but also do the best job that we can to shore up brands that are having difficult performances like Finlandia and Canadian Mist.

Got it.

Okay.

Thank you.

Bryan Spillane, Bank of America.

Just a couple of quick ones.

First, I think -- when you went through the components to the revenue billed for 2017, you referenced barrel pricing not being as good as it was last year, and also some reduction in distributor inventory.

Can you just give us a sense for how much of a drag you expect that to be in 2017?

I'll take the distributor inventory one specifically.

We've estimated somewhere around $0.05 for it to be a drag on our reported top line growth.

That's the answer to that.

What I would say with the other pieces of the sales growth, I would focus on things that were drags this year that won't be drags next year.

For instance, the Southern Comfort/Tuaca drag on our top line, which was about a half a point; Global Travel Retail, which we think that the worst is behind us, that was about 1 point.

So both of those things we don't expect to repeat again.

In terms of the barrel sales, it's not material to our top line sales number.

Okay.

So the message there is that those things are generally washing themselves out.

Is that the way we should look at it?

It could get there.

There was also the mention about I think in the out year, changing over to self distribution in Spain.

Did I catch that?

Yes.

You did.

That's in 2018, so we'll have some costs that we'll start to incur in the latter part of next year.

But the actual transition to it will not happen until next summer.

In terms of order of magnitude, I remember when you did this transition in France, it caused a lot of noise around the fourth quarter, if I'm remembering this correctly, of the year before and then in the year that you actually made the transition too.

Just order of magnitude, do you think it would have that similar types of effect on the flow of things?

No.

It's definitely not a net 2017, for sure.

The size of the market is not as large as France either.

We don't expect, even when we do transition that it will have that kind of magnitude.

We will have a transition and it will have some small impact, but not as significant as what we had in France.

And we'll make that more visible as we get closer to it.

It's intended to have similar long run and impact as it relates to bringing focus to our priority brands in that market.

It is an excellent whiskey market that seems, from at least a few of our vantage points, to be turning the corner as it relates to their economy and their disposable income, relative to what they've been experiencing the prior few years.

We think it could be well timed to go and make this move, which is familiar terrain for us.

In each instance they've been differently scaled investments and operations.

And as we get closer we'll give you all visibility to it.

One last quick one.

Does the EPS guidance range for 2017 include or include any share repurchases, or would that be -- if you did any be above and beyond?

It only would include what's been done thus far.

Okay.

Great.

Thank you.

Bill Schmitz, Deutsche Bank.

Can you talk about the gross margin outlook for next year?

It seems like commodities are still relatively favorable, the currency environment is a little more tame, and it looks like there's going to be a ton of positive mix.

Is that a fair assessment?

I'm sorry, can you repeat that question?

I was just asking about the gross margin outlook for next year.

It seems like there's a lot of favorability going into 2017.

We aren't expecting -- we're actually expecting our gross margins to be flat next year.

The reason why that is, we're not expecting much in the way of pricing and our costs are going to go up modestly to more than offset the pricing and that's going to offset some mix.

We're not expecting margin expansion.

Some of our cost increases, I mentioned this earlier, are starting to come through as we've made these investments behind our stepped up capital spending to expand our capacity.

The moderation in currency is not going to help?

You are talking about on a reported basis then?

Yes.

Exactly.

Right now, what we have forecasted in there, no.

Okay.

Thank you.

If I look at some of the flavored brands in the US, and this is obviously just in the scan channels, it seems like some of the sales trends are declining pretty rapidly.

Is that what you are seeing as well, and maybe what's driving that?

Is there a plan to get that moving in the right direction again?

I think it's been such a dynamic category.

When you look at any short-term period, whether it's a month or a quarter, there could be all kinds of explanations for why they might be showing big gains or big losses.

We have a number of entries that are going in there.

As we explained for our business, we are currently on the Jack Daniel's Tennessee Fire, up against some significant introductory promotion and trial from last year.

For us, that would be the case.

I can't speak to every single competitor, but I suspect that -- remember this category is still relatively new, so there's been a lot of new introductions just in the last two years.

I remember thinking about it I guess as we turned the calendar year this year, how much it had changed even since we began with the launch of Tennessee Honey, and then how we had methodically been testing Jack Daniel's Tennessee Fire and how rapidly the category changed, just from the test markets on Jack Daniel's Tennessee Fire to the national launch.

It's the nature of these categories that rapidly develop.

We think we are smart to be in it in the way that we are in it.

It's been a very nice business success for us, to date.

But also plays, just as we were referencing on the roles brands can play and perform in places, a very strategic role, in some ways defensively, but also very offensively as it relates to giving people an opportunity to try whiskey in a way that they might have before.

The straight whiskey can be an acquired taste, and we find that this category, particularly for our brands, has been bringing in new consumers and it generates an interest in our other whiskeys, most notably Jack Daniel's Black Label.

It can play a strategic role, as well as being a bona fide business in its own right.

Got you.

That's helpful.

So, do you think it will start inflecting positive in the sell-through data as we see the data come out?

Are you talking about the category or for our brands or what?

The category and your brands.

I think the category is continuing to grow just because there's been -- there's really, it's concentrated right now around three predominant flavors, but I think the category will continue to grow.

Within the category, you'll see trademarks in certain flavors be more volatile than you would, say, a normal bourbon or gin or vodka category, just because the category is so dynamic right now.

As it relates to Jack Daniel's Tennessee Fire, I think once we cycle through some of these comparisons, the impact won't be as large.

I still expect you all -- I really do feel like that first year with, particularly a brand that's participating in a category where the flavor is cinnamon, I really do expect that there in the first half of its national launch there were absolutely -- just think of it this way, I know there were a bunch of Jack Daniel's drinkers who were straight whiskey drinkers and were not participants, per se, in the cinnamon whiskey business, who tried it and decided it wasn't for them.

They prefer straight whiskey.

I think there were also a fair amount of Fireball -- which was obviously the large volume, lower-priced brand, that tried it and then maybe didn't see fit that they could afford it on every single occasion when they were consuming cinnamon flavored whiskey.

So, I think those things, they end up being what I call trial influences in those early days of a brand's existence in the marketplace that just don't get repeated.

So until you work through some of that, and then also begin the marketing and selling process to introduce the brands to new consumers, which the most encouraging thing we are seeing in our numbers, which don't really get reported a lot in the syndicated data, are the results in the on premise.

It kind of started okay, I felt.

I thought it was going along pretty well.

With the expanded distribution and the momentum that sort of happened out in the marketplace, the Jack Daniel's Tennessee Fire brand is doing very, very well right now in the on premise, which might surprise you because the off premise is not doing as well against that introductory launch.

In any event, it's the thing that gives us encouragement and tells us we need to continue to sell it and market it and promote it in a way that can make it the choice for more consumer occasions.

It just comes down to that.

And knowing full well that it's going to be a competitive environment in which you are attempting to do that.

Great.

Thanks.

That's very helpful.

Thank you.

Mark Swartzberg, Stifel Nicolaus.

Couple of operating income questions.

The first is when I look at FY16, Jane, you've had this nice reversal.

You've gone from an other expense item in FY15 to an other income item.

I think it's about a 3-point benefit to your total operating income growth, so it's pretty significant and I don't quite understand what's going on there.

Is my math right?

If it is, can you give us some understanding of what is going on there?

Just to clarify, you're talking in the fourth quarter, correct?

Well, it's clear that it's more of an impact in the later part of this fiscal year than in the earlier part of the fiscal year.

But I'm really looking at the full year and just saying you are incentivized on operating income performance.

You got to your 8, but 3 of those points came from this reversal from another expense in FY15 to an other income in FY16.

Yes.

The largest component of it is FX related.

So, we had some fairly sizable losses last year that we had talked about throughout the year that wouldn't repeat itself this year.

Coupled with, as the year went on, particularly in the fourth quarter of this year when we got to April, we had a nice gain.

These are on cash and other current assets and liabilities that are not denominated in US currency.

That's FX related, a big piece of that is.

Probably about half of it, actually, is due to that.

More than half of it is actually due to that.

About two-thirds of it is due to that.

Then, we also had an asset that we wrote off last year's fourth quarter that was a low value vodka brand.

It was a write-off that we had and last year that didn't repeat itself, and that's the other piece of it.

Those are the two pieces.

Got it.

That FX component, how much discretion do you and your team have with that, and to what extent is it just what the market deals you?

It's what the market deals us, generally.

We do hedging, but our hedging is largely against another line item and our P&L is more against our self.

Got it.

Okay.

And as I think about FY17, the 7% to 9%, you talked about SG&A.

I'm still not quite there because you're talking about a volume-driven revenue performance, you're also going to get this distributor draw down effect.

You're also saying gross margin is going to be flat.

It all really comes back to SG&A, and perhaps if you have some optimism about this other income line as well.

Can you just help me better understand how you think you get 7% to 9%, given what's going on from the revenue down to the GM percentage line?

Just step back for a moment on the distributor inventory number.

That's a reported number, not an underlying number.

That's not going to affect the 7% to 9%.

Fair enough.

Good point.

That's probably you're biggest piece.

Let's talk about SG&A, as I alluded to.

We had a couple percentage point increase in underlying SG&A this year; we expect about the same next year.

If we're going to really leverage our prior investments that we've made en route to consumers, Paul alluded to this in his comments as well, the reallocation of resources is added too from the folks that were spending time on Southern Comfort and Tuaca, that we're reallocating that time and energy to some of -- to new brands that we brought in to our portfolio as well as other opportunities for better value creation.

So you're getting leverage from the SG&A.

Do you have a view about what will happen with this other income line, or do you just kind of see what happens with that line?

The other income line, we don't forecast the FX per se on that line.

So it won't -- whatever was in there that was related to FX this year won't repeat itself, other than whatever happens at the spot rate.

Sure.

As you said, are you at the mercy, and we are at the mercy of whatever the spot rate happens on our balance sheet.

We do think based on where currency rates are today versus last year, we know that the currency is net-net and our EPS forecast a bit of a drag on the overall.

We do forecast that, but we just do our plans at a consistent rate, and then we report to you all as the year goes on if fluctuations occur.

You can probably tell, what's driving my questions is the rate of operating income growth for a lot of companies is coming down because of the nature of the marketplace.

But you have this incentive comp structure that changed a few years ago.

If eight is the magic number and you got there in FY16, and FY17 has got incremental challenges on the top line, I'm just trying to understand how you're thinking about the cost flexibility you have as a result.

Okay.

Then just -- when you think about distributor intention, how are you thinking about your own promotion rate vis-a-vis either your more expensive brands or some of your lower tier brands?

I would think there's an incremental incentive to promote a little more, given that you do want to improve volumetric performance.

Am I thinking about that right?

That's a US question.

I'm just trying to better understand how you're thinking about that.

I don't have a higher level of discounting our promotional activity plan for next -- it's irrelevant.

Got it.

I think it's --

It's more when they do it and how they do it.

I think it would be consistent from year to year.

I actually think the thing that will drive more promotion this year that will assist, and it might help you with your answer, is this Jack Daniel's 150th anniversary.

It is significant news for our trade system.

We just happen to have a very, and we're fortunate to have such a loyal and affiliated Jack Daniel's consumer base around the world.

We can already tell from their early reaction to some of the initial PR that they are very enthusiastic about the things we are planning and will be undertaking, which include new to the marketplace special offerings and packages in the latter half of the year, from which we should benefit.

But I also think you'll just see more Jack Daniels Black Label on displays because of the event itself.

We sometimes call this a gift from the calendar that we've lasted this long.

We think that there's just the energy and emotion around it.

We had a bunch of the US distributors in here about three weeks ago, and I can tell you the reaction to what's forthcoming and the expectations that we're placing on our US system, they didn't balk at them at all.

Great.

Very helpful.

Thank you.

We have time for one more question.

Tim Ramey, Pivotal Group.

Thanks so much for squeezing me in.

My question was really about triangulating how impactful the 150th anniversary might be.

I can see this being quite a gift from the calendar.

But I don't know how, and you probably are not ready to tell us how big your promotional plans are.

Will the average consumer be aware that this is going on, or is this sort of an insider cult anniversary?

No.

Look, our advertising and promotional budgets aren't of the scale of some industries.

But, there will be quite a bit that will be targeted through our social media means.

That allows you to be efficient, but there will also be mass media.

The public relations piece of this, which is more significant than in past years, will also expose it to larger populations of people.

The special packaging, of course, will be more devoted to the retail environment where that's offered.

There's a couple of offerings.

There's one that is a little bit above the price of Jack Daniel's Black Label on an every day, and there's one that's going to be more limited.

It's I think $100 a bottle.

I mean, these are unusual events for us because you don't come along them that much.

And so when you treat them like a milestone, and I actually expect, when I sit and look at it, can you get another point of growth out of the Jack Daniel's Black Label franchise over a year because of an event such as this?

I sure think so.

Or I'd like to hope so.

We'll keep you updated as we go, and some of it will become more visible as the marketing and selling makes its way out into the environment.

We wouldn't put forward a forecast that we didn't have some level of confidence in.

We always do a range because we can't predict what the world is going to do out there.

As I said in my comments, I really do feel like what we are considering, even though the puts and takes are a little bit different, what we are forecasting in our outlook is really a continuation of the good year we think we reported this morning.

Right.

Is the $100 offering you mentioned a special product or a special package?

Both.

It would be hard to get.

I know you are going to want one, aren't you?

(laughter)

I will.

Put me down.

I don't even know if I can get one.

Those will be much more limited, as the market for them is.

But nonetheless, we think it's something that honors the 150th anniversary.

I tell you, it's really important, not only just an important thing for Brown-Forman, earnings, as we are discussing here today, but it's also really important as an opportunity for Jack Daniel's against a competitive backdrop where there is everything from craft whiskeys and bourbons out there, to some of these waves and trends, where big is bad and small is cool and all of that.

I just feel like this is a really important opportunity for Jack Daniel's to tell its authentic story in really, really compelling ways, which will go way beyond calendar year 2016.

I think that it is an inflection point for the brand, to remind everybody that it's one of the most special brands of any kind in this industry, and I think across a lot of categories of consumer goods.

As you all have observed across a lot of companies and a lot of categories, it's hard out there right now for established brands.

We've largely continued to be successful against that backdrop, but this gives us a really unique opportunity to, what I like to say is just to tell our story.

It's a story that should fit beautifully with why people are choosing American whiskeys today and drinking whiskey, generally.

And so it's just a great opportunity for us to get out and tell that.

Thanks, Paul.

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

Please feel free to reach out to us if you have any additional questions, and we hope you all have a great week.

Take care.

Thank you.

This concludes your conference.

You may now disconnect.