Brown-Forman Corp (BF.B) 2017 Q1 法說會逐字稿

Good morning, my name is Kalia and I will be your conference operator today.

At this time I would like to welcome everyone to the first quarter fiscal 2017 conference call.

(Operator Instructions).

Thank you.

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

Please go ahead.

Thanks, Kalia, and good morning, everyone.

I want to thank you for joining us for Brown-Forman's first-quarter 2017 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 and you should not place undue reliance on any forward-looking statements.

And the Company undertakes no obligation to update any of these statements whether due to new information, future events or otherwise.

This morning we issued a press release containing our results for the first quarter of fiscal 2017.

The release can be found on our website under the section titled, Investor Relations.

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

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

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

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

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

Thanks, Jay.

And thank you for joining us for our first-quarter earnings call.

I plan on discussing two topics on today's call: first, our first-quarter results; and second, our latest outlook for 2017.

And then Paul and I will address any questions you may have.

But before I jump into our first-quarter results I wanted to discuss a change we have made in how we present our reported and underlying net sales.

In the past we have presented our net sales including excise taxes.

Beginning with this our first-quarter and going forward we will present our net sales excluding excise taxes, which is consistent with the presentation used by our competitors.

We believe this is a small change in the presentation of net sales and reflects one of several metrics we, as a management team, look at our business.

We will continue to present excise taxes in our income statement, so the amount of information we disclose is really unchanged.

It is simply the geography in our P&L and the comparability of the net sales metrics that we will discuss and analyze going forward.

So with that housekeeping item taken care of let me now review our results for the first three months of fiscal 2017.

Our underlying net sales, using our new presentation of excluding excise taxes, grew 2% in the first quarter.

As expected, this rate of growth is less than what we expect to deliver for the full year as the first quarter of last year was our strongest quarter, up 9% on a comparable basis, meaning excluding the divestiture of Southern Comfort and Tuaca, and up 11% over the two years.

Remember that last year's first quarter was fueled by the US launch of Jack Daniel's Tennessee Fire as well as a strong start to the year in both our developed markets outside the United States and our emerging markets.

And in the first quarter of this year we stopped distributing some agency brands as we continue to focus on our portfolio.

This negatively impacted top-line growth but had little impact on the bottom line.

The trends in our first quarter were similar to those of the second half of fiscal 2016.

While our developed markets delivered strong growth, global results were weighed down by disappointing performance in the emerging markets.

In the United States, we delivered solid gains with underlying net sales growth of 5% despite cycling against an 11% comp in the same prior year period.

Growth was led by the Jack Daniel's family of brands including Tennessee Whiskey, Tennessee Honey and Gentleman Jack.

Jack Daniel's Tennessee Honey grew mid-single digits as it entered its sixth year in the US marketplace while Tennessee Fire experienced double-digit declines.

After accounting for last year's pipeline fill and activation behind Tennessee Fire, we estimate that the brand is performing better than those results would indicate, including strong growth in the on-premise.

Results in the United States were helped by our premium bourbon brand including Woodford Reserve and Old Forester as well as the summer launch of Cooper's Craft as consumers continue to gravitate toward brands with heritage and authenticity.

El Jimador and Herradura also continued the growth trajectory with both brands registering double-digit growth in the quarter.

In addition, Korbel Champagne and Sonoma-Cutrer grew aggregate underlying net sales by 10% in the United States.

Our developed markets outside of the United States also delivered a 5% increase in underlying net sales against last year's first-quarter growth of 9%.

This growth was broad-based with every developed market in our top 20 markets growing in the quarter, including the United Kingdom, Australia, France, Germany, Canada, Japan, Spain, New Zealand and Italy.

Our teams are doing a great job at growing our value share in these major markets and they continue to see a long runway ahead.

Let me now moved to our emerging markets where we were disappointed with the results in the quarter.

Our business in the emerging markets continued to slow resulting in a 5% decline in underlying net sales compared to an 8% growth in the same prior year period.

Our two largest emerging markets, Mexico and Poland, continued to expand in the first quarter delivering solid rates of growth, while several other emerging markets were down double-digits for the quarter.

This included declines in Turkey and Brazil, two significant contributors to our growth over the last few years.

Other soft markets in the emerging world included Russia, China, Thailand, Ukraine and emerging Africa, but we believe some of this softness was timing related.

We believe the majority of the slowdown in the emerging markets has been driven by factors outside of our control, including political instability, challenging economic backdrops and significant foreign exchange volatility and we are carefully monitoring the trends in our emerging markets.

Travel retail underlying net sales increased 12% in the quarter driven by easy comparisons against the prior year period where net sales declined 15%.

We are hopeful that the business has stabilized and the distribution gains will help us begin to grow again from the lower levels.

But we aren't expecting a meaningful growth contribution from this channel for the year.

Regarding barrel sales, I mentioned on our last call that we expected moderating prices for our used barrels as global demand has softened significantly over the last 12 months reflecting weaker demand from blended Scotch industry buyers.

This combined with some lumpiness in order timing drove a large reduction in barrel revenue in our first quarter.

Moving now to a reconciliation of reported to underlying growth.

Reported net sales declined 5%.

Reported results were pulled down by 2 points due to a strengthening US dollar as well as a 2 point reduction in distributor inventories, which relates largely to destocking in Russia following some inventory build there in the fourth quarter of 2016.

The absence of Southern Comfort and Tuaca following last year's sale of these brands resulted in an additional 3 point hit to reported sales.

Excluding these effects, underlying net sales grew 2%.

Sales growth was split evenly between volume and price mix and resulted in a 2% increase in underlying gross profit as underlying gross margins were flattish.

Reported gross margins were hit by combined effects of last year's divestiture and adverse foreign-exchange.

Underlying A&P spend in the quarter declined 1% due in part to the comparison of last year's launch of Jack Daniel's Tennessee Fire in the United States.

And underlying SG&A declined 2% as we remain focused on controlling cost and leveraging prior route to market investments.

In the aggregate underlying operating income grew 6%.

On a reported basis operating income declined 6% and earnings per share decreased 2% to a split adjusted $0.36.

This leads me to my second topic, our outlook for fiscal 2017.

Our results in the first quarter were the tale of two cities with growth in the developed markets offset by disappointing performance in the emerging markets.

Our developed markets business today represents over 80% of total revenues and has been sustainably growing underlying net sales by a mid-single-digit rate of growth for several years.

As you know, the first quarter is our seasonally smallest of the year and can be disproportionately impacted by timing issues such as: barrel revenues, as they were this quarter; volatility in emerging markets, such as Turkey's unforeseen coup attempt in terror attack; not to mention foreign exchange swings.

But net-net we delivered 11% underlying net sales growth on a two-year stack and we believe we remain on track to deliver 4% to 6% underlying net sales growth in fiscal 2017.

Take away trends in our non-US developed markets remain strong including high-single-digit growth in Western Europe.

In the United States take away trends remain solid and the Jack Daniels 150th birthday execution is well underway, which, when combined with incremental media investments and a commemorative gift, should drive a moderate acceleration in the United States.

And while we are carefully monitoring the challenging off-premise trends for Jack Daniel's Tennessee Fire in the United States, we are encouraged to see Tennessee Honey growing again as we move past last year's new flavor whiskey launches.

On the margin front we expect cost increases to slightly increase more and offset the improvement to our price mix in the year.

But SG&A cost-containment efforts should allow us to deliver solid leverage to the operating income line in the year resulting in 7% to 9% in underlying operating income.

After accounting for our recent 2-for-1 stock split we still anticipate earnings per share of $1.71 to $1.81 including a $0.03 headwind from adverse foreign-exchange.

Full-year tax rate is expected to be between 29% and 30%.

And as a reminder, a 10% move in the dollar in either direction would impact EPS over the balance of the year by approximately $0.05.

In summary, we continue to deliver solid rates of underlying growth year after year.

This growth is being led by the Jack Daniel's family of brands as well as our other premium bourbon and tequila brands.

We have and will continue to take a measured approach to innovation that allows us to maximize our brand equity over the long-term.

In addition to delivering solid underlying rates of growth today, we are continuing to invest in our long-term business prospects, such as the build out of the Slane Irish Whiskey distillery which is on track to launch in spring, as well as the integration of BenRiach.

In the quarter we issued our first non-US tranches of debt at very favorable rates thanks to our balance sheet strength and track record of growth.

We also returned over $0.25 billion in cash to shareholders through the combination of a growing dividend and ongoing share repurchase program, which in effect allows us to invest in ourselves.

We believe that our success at balancing the short-term and long-term is a major reason we have been able to deliver leading TSRs over long periods of time and we are focused on continuing that legacy for all of our stakeholders.

So with that, unless Paul has any comments, we will turn it over to the operator.

You okay?

Yes, let's just go straight to (multiple speakers).

Okay, we'll go straight to the operator and address any questions you all may have.

(Operator Instructions).

Vivian Azer, Cowen.

So, just in terms of your outlook, Jane, I think you were real clear about the puts and takes.

But you did indicate that some of the EM softness was timing related.

And clearly you are going to need that to stabilize I would think a little bit in order to hit the full-year guidance.

So a two-part question.

Number one, can you quantify how much of the drag to EM was timing related?

And number two, just help give us a little bit more confidence on any kind of stabilization that you are looking for from emerging markets, please.

Certainly, I'll take (technical difficulty) let me -- just talk about emerging markets in general.

So, while we were down for the quarter, as we noted, we were down 5% and it was a little bit more than we expected, it should be noted that we had very tough comps versus last year.

And I would like to step back and remind everybody how much emerging markets makes up of our total business.

So it's around 20% of our total revenues.

And so, to really understand it there is a lot of moving parts within it and you have got to peel back the onion, so to speak, to understand it.

As I said in my script, our two largest markets are Poland and Mexico; they represent well in excess of 40% of our emerging markets and they are growing quite nicely at 8% and 17% respectively.

And we expect them to continue to grow, so we do not expect them to be a drag on our results.

Then we talked about our two -- two of our larger contributors of growth over the past couple years being Brazil and Turkey being a drag on the quarter.

And they very much were a drag on the quarter.

And that is not surprising given the political instability, the economic woes, the terrorism, that huge excise tax increases in both countries, but primarily in Brazil last year.

And so, these really did have a significant drag on our results.

We have other parts of emerging markets that is continuing to grow.

And then we have some emerging markets that have what I would call -- I think they are stabilizing; they are not necessarily getting better.

And so, as we look on to the rest of the year I think we don't expect, as you said, and you are right, it is one of our key drivers, not the most important, but one of our key drivers to get to our full-year forecast is that we won't have as big of a drag as we did in the quarter.

You mentioned the timing issue and you are right, timing was an issue.

I would say it was about a point of timing issues.

And I would say the rest of it was that we also expect significantly easier comps as we go throughout the year, particularly if you look at the last half of the year and most notably the fourth quarter of the year where emerging markets were down.

And that is where you will start to also see some of the things that we were talking about where I believe we have hit a bottom, if you will, so to speak, in some of these markets that have been down for a while.

Russia would be an example of that where I think we are close to getting to the bottom on that.

So, I hope I have answered all your questions there.

Yes, that is perfect.

Vivien, I will just add too, there are -- I mean in any three-month period you always have I will call it these fluctuations.

I will give you an example of one which is like these discontinued agency brands that Jane mentioned.

Once you cycle against not having them, and in this instance it would be -- I think those affected Mexico and Czech Republic.

So as an example, you won't to have the detriment of that going forward; there is several examples like that.

That is helpful.

Thank you very much.

If we could just turn to the US.

Clearly for you guys the plus side was good.

It does feel though that, at least in the syndicated data, the AC Nielsen data, that the category does seem to be softening a little bit.

Are you guys seeing that as well?

And if so, what do you think is driving that?

Thanks.

I mean, it is a good question.

Paul probably takes this again.

I think we might say it is hard to look at any three-month trend to draw a lot of conclusions from it.

We were talking earlier if we had seen increases in other industries as are alcohol industries, beer or wine, which we haven't necessarily seen or we haven't seen.

So we don't see beer growing.

So I think it is just -- I wouldn't over read the trend at this point in time.

We are definitely looking at it and watching it, but that is (multiple speakers).

Yes, I think the hardest part is because it doesn't measure the whole market you are always trying to estimate what is going on in the on-premise or in the geographies not covered by it.

But I think as a general thing I have seen some speculation that it is going to potentially be lower than it historically has.

But I think we are still estimating in the mid-single-digits, something in the US --.

In value.

Yes, value growth, something in the 5% range, which I think isn't too far off what -- and again, the most important thing for us is that has been driven in good part by the American whiskey business.

So I mean, I think I would need a little bit more time to see in either softness and trends or something to start to forecast it forward in a way different than history.

That is great.

Thank you very much.

Judy Hong, Goldman Sachs.

So, just maybe a couple of follow-ups on the US.

If I kind of look at your 5% underlying sales growth, can you give us some color just in terms of volume versus price mix within that figure?

And then just on Tennessee Fire, obviously you are lapping the launches there and some of the -- I guess the syndicated data does show some weakness as you are lapping it.

So maybe just a little bit more color just what you are doing to maintain some of the momentum you have seen in maybe the other channels.

And it also looks like your pricing has come down on that brand and sort of just curious too kind of what the rationale was there.

Well, I will tackle at least a piece of this.

I think going back to much of the interest in this category literally over the last -- as we have received interest and questions about it.

I mean I feel like we are pretty much sticking to our plan as it relates to knowing first that we are cycling last year's launch, which of course had pipeline in it but also a lot of investment, that of course generated quite a bit of trial.

And with any of these pent up demand launches we have had over the years with Jack Daniel's we experience that there is -- particularly with premium prices like Jack Daniel's is, that there are triers who sometimes don't convert that to full monthly usage.

So I suspect we are going against some of that.

As I think you inferred, the on-premise is doing much, much better.

It didn't ramp up as rapidly.

So it of course doesn't have the pipeline build that the off-premise channel does.

And then I think very importantly, as we said, is that versus introducing an additional flavored whiskey from Jack Daniel's or two or as some of our competition has done, our main focus was on geographic expansion.

So trying to take out in a thoughtful way into other countries.

And of course, the combination of the on-premise and the few markets we have introduced this fiscal year outside of the United States, it is having a nice and positive offsetting factor to that pipeline that we are working against in the United States.

And, Jane, did you want to (multiple speakers) pricing thing?

I can talk a little bit in the US.

I mean there is not a lot of pricing coming from there.

I would say if you were to just look at the US number straight up, of course the volume numbers would be down a bit because of brands like Canadian Mist.

But I think more importantly is to look at brands like Jack Daniel's.

And the volumes were up a couple percent and we had about 1 point of pricing.

Yes, and I think, Judy, too, the other thing on -- just to go back to the earlier statement I made about how you sometimes will have triers who won't convert.

I mean oftentimes one of the barriers for people converting to regular weekly or monthly usage is pricing.

And as -- I think you would know this, but like for example the drink price difference in the on-premise is much less than the bottle price in the off-premise for Fire and its main competitors.

And so, we think that might be one of the contributing factors, that the hurdle for an individual drink price in the on-premise isn't as great as the shelf price difference in the off-premise.

So, I think our people are appropriately always dabbling with the right price volume mix within a range in order to try to find the best way to create sales value.

Yes.

Well, just building on [smalls], I think we said earlier this year even in the US market as we look around the world in terms of pricing opportunities, as Paul alluded to just a moment ago, we are looking at always smart ways to do it.

But the environment right now is not and some markets are deflationary markets, so it is not necessarily conducive to it.

And as we look at the full year, as we discussed in the fourth quarter, we are expecting very little from pricing whether it is in the US or globally.

But some -- we will get some mix in there we expect as we have higher volumes coming from faster growing premium and premium plus brands.

Yes, the lone exceptions to that for us -- and those comments are absolutely relevant to the Jack Daniel's line.

But the Woodford Reserve and Old Forester brands, Old Forester has been able to get some price in recent years.

And Woodford, which had been doing modest pricing, is probably doing a little bit more this year than past years.

So we are hopeful that that could help in the United States, too.

Okay, but maybe just looking at the consolidated price mix in the quarter though, it came in up 1%, a little bit softer than the trends that we have seen in the last several quarters.

I would imagine the divestiture would have had a more positive price mix impact.

So is there any sort of timing issue?

Do you expect that 1% to improve as you get out to the balance of the year?

Gosh, I don't remember that.

I don't think so.

But I think first of all the [So Co] piece of it, we pulled all that out when we did this analysis.

So it is not helping or hurting it.

So the analysis that you are seeing is excluding that.

I think maybe if you are focusing on reported gross margins, that is where you see the hurt or the absence of Southern Comfort and Tuaca, which had nice high gross margins.

And so, the 180 basis points on reported decline year-over-year in margin, about 130 basis points of that decline was due to the exiting and the divestiture of those two brands.

But (multiple speakers) 1% is -- we are expecting somewhere in that range, Paul.

I mean I think as we look at the year it is unlike the past couple years.

Some of it is because we got lower innovation (multiple speakers).

We were getting such mixed benefit last year from particularly Fire as we introduced it.

And in past years also these barrel sales have been helpful.

So, in this particular quarter I think both of those things would have worked against us.

Got it, okay.

All right, thank you.

Bill Chappell, SunTrust.

Just first question -- and maybe I missed something, but I think the original gross margin guidance was kind of flattish, now it is down 200 basis points.

Just trying to understand exactly how you get back to your original EPS guidance?

I mean what the areas -- major areas of improvement are.

And maybe correlated, it seemed like -- I thought you had said in the past that advertising would be up this year or at least for the first -- this quarter, and it was down year-over-year on a dollar basis.

So maybe you could kind of help us understand the pacing of that.

Okay, well let me see if I can start.

So if you to look at our full-year, our guidance is unchanged.

And what we need -- what we are looking at and the confidence we have in achieving that for the full year versus where we are today is we do expect to continue to have leverage -- operating expense leverage via SG&A.

You will recall last year we had very low growth levels of SG&A.

We expect some more continued low growth this year too, 2% underlying last year.

And so we still expect that to happen.

You are right, on an underlying basis we had very small I guess not -- we didn't have a gross margin help, if you will, on an underlying basis.

And it is about what we expect for the year give or take a little bit.

So no help there, it is really coming from operating expenses, particularly SG&A.

But let's talk more about what is going to drive this is really your top-line growth.

And we already talked about the emerging markets and why we feel confident that the emerging markets will improve from both a comp perspective and a timing perspective.

But also as we look out, we won't have the drag on our results from our first-quarter Fire and the US launch last year that drove us down this year, in other words, the pipeline.

And we continue to expand internationally so we are going to continue to get benefits there.

And then Jack Daniel's 150 activation is just underway.

And so, we've talked -- Paul talked a lot about this at our shareholders' meeting in July as well as he introduced this in June during our call.

And so, there is a lot of activation really going on now.

And then when I think about the United States, we are actually increasing our media spend as well.

And so you will start to see that coming through in the second and third quarter.

We've got a lot of incremental gift coming through too and our whole sales force and our trade partners are all focused on that.

So we will see some modest improvement, as I said, in Jack Daniel's as well.

So those things combined give us that confidence.

If you looking at advertising, it is probably worthwhile to step back and think about advertising a bit.

What we said was we expected advertising to grow in line with our full-year forecast at the top line.

I think at this point we would still say that.

What was happening in the quarter, there were some comparability issues, I mentioned one of them being that we had the launch of Fire last year in effect in the US.

We had a lot of promotional activities and so forth that we were doing.

We had the absence of that level.

We are still -- of course we are advertising behind it this year, but not at the levels we were doing last year.

There are some timing things going on too.

And then I think it is also worthwhile to just pull out Southern Comfort and take back and look at what kind of investments we have actually been doing behind our business over the last couple of years.

And so if you look at the F 2015 and F 2016 combined pulling out Southern Comfort on a two year stack basis is up 13%.

First quarter of last year, just to illustrate, the comp in advertising last year that had the Tennessee Fire in it, it was up 6%.

So we also have all that going on.

So, I hope I have given you some color.

I know I've said a whole lot in there.

So I will stop and see if Paul wants to add anything or you can ask us further clarifying questions.

No, I think that covers it well.

And again, I think -- again, it is three months and I find typically on this particular earnings release you end up having a lot of quarterly noise because it has only been three months.

And so, I think it is an emphasis that we have placed on some of this, this morning particularly, as it hit a few of our emerging-market businesses.

But as it relates to the expenses, I feel like we are continuing to -- we will continue to invest behind the brands as we go forward.

And most of that leverage as planned is at the SG&A line.

And, Paul, just to follow up on that, I mean just to be clear, what you are saying is there is really no surprise internally from this quarter.

And maybe the surprise is more the stock reaction, because it sounds like you knew the comps were going to be tough.

But it seems like the gross margin was a surprise, at least the outlook.

And so that is why I am trying to couple all these things together of it does seem like something has changed in the past three months.

Totally, I understand.

I think what happened, like for example -- I will give you the like for example the full-year impact of these lower barrel sales is really the brunt of it is hitting us in the first quarter.

I mean it will still be not as -- I mean it will still be negative to us as we go through the year.

But not to the level that it was in the first quarter.

I know that sounds odd, but -- and that was something that we were not experiencing through the course of FY16 for example.

And again, that is why I make an example of that one, it is just three months.

It does hit you pretty good.

And so, on a three-month basis it really will be impactful.

I know you are looking for signs and signals that the business is moving in some direction that either is the same or different.

And you always have surprises in a quarter.

I mean there is no doubt that I would have hoped for and helped -- hoped for emerging market business that was better than it ended up being simply because of just the unsettled nature of a lot of these markets.

I think those were reflected somewhat in our results.

Having said that, there are some one-time seasonal more short-term things that we think will abate as we go through the remainder of the year.

So, it is probably a tale of both.

As you say, I wouldn't say that -- we are surprised every quarter by something.

Okay, I will turn it over.

Thanks.

Tim Ramey, Total (sic) Research Group.

On the barrel sales, I assume that you just re-marked them to market in the 1Q and that is why the brunt of the impact for the full year is in the 1Q, am I thinking about that correctly?

Let me take you through barrel sales, how this all comes about.

Of course we are fully integrated, if you will, through the supply chain.

So we make everything from start to finish essentially.

We don't grow in corn, but we are making our barrels all the way to distilling and then out the door.

So remember that we are one of the largest barrel making operations in the world.

And so, just to give a little background -- I think it is worthwhile to think about the background of just barrel sales in general and then we will talk about how it flows through our P&L.

Just background, so we have been doing this -- we have been making our own barrels for a number of years.

And what we do, as you know, is each bourbon and Jack Daniel's whiskey require a new barrel to put the whiskey in to age.

When we get finished with those barrels we sell them and the market generally for the sale of these barrels has been the Scotch industry.

So, if you look at it over a long period of time, let's just say 50 years, it is a very cyclical business.

So, we can see when the production and sales of Scotch go up and down, so it impacts the sale of barrels, it impacts supply and demand, it impacts pricing.

And so, as you know, there has been some softening in demand of blended Scotch.

So, we started seeing some pricing pressures and we noted that and we said that in our fourth-quarter conference call.

What that did is in the first quarter we had a couple things happen.

We saw those pricing pressures, so each barrel that we were selling on the outside market, once it got dumped, this used barrel, we were making less on it than we were a year ago.

We also had some lumpiness, as I was alluding, to orders, which would have been one of our surprises in the quarter, if you will.

But it is going to abate over the course of the year because it is not gone.

That is a little background, but how it flows through our P&L is simply we got less revenues from those sales of barrels this year than we got last year.

It comes through our revenue line and it hits you all the way through your P&L.

It is just basically revenue -- it is very higher-margin business.

So there is no brand expense, if you will.

There are some people that sell it, but it largely drops to the bottom line, whatever you have in your revenues all the way to operating income.

Yes, and remember too that while we -- while the demand has been influenced, remember just each year that has been going by as bourbon has been doing well.

Not only have we been emptying more barrels to meet the bourbon supply or demand out there, there have been other bourbon barrels out there.

So that influences the supply of those against the Scotch demand.

So some of that is hitting us in this first quarter.

And as Jane said, it is a nice margin business.

And we do expect throughout the year the pricing pressures and we -- because of what Paul just said and what I was saying too, so yes.

Just not to belabor it but in wine, trough to peak, used barrels pretty much doubled.

I assume that something similar happened on your end and so this is softness relative to recent but not softness relative to say three years ago, would that be a fair statement?

I think our -- I would say softness relative to -- let's see three years ago trying to remember what our price -- the price of the barrel -- the price of the barrels have gone up because actually they were in short supply --

Yes.

-- a couple years ago.

So I am trying to think relative to three years ago -- (multiple speakers).

I think a lot of it --.

I think it would be a little bit higher today than (multiple speakers).

It would be.

I think a lot of that growth over the three years, Tim, was driven by selling more barrels in addition to the prices at which they were sold.

And so now you have got a -- [we're sold out].

And just backing up, Tim, I don't want to belabor this either, but there is obviously other things that you can do with barrels and so that influences your mix.

So, if you don't have a supply -- someone to sell it to, so a person in need of it, a Scotch buyer or Irish whiskey producer, you can sell it as planters and other things like that.

They generally are less profitable too, which would also hurt your mix.

Yes, just the same as in wine.

And on the tequila side, I mean those numbers were really good.

Should we think about those -- you mentioned Mexico was quite strong as well.

Should we think about that as primarily a Mexico impact or is there something else we should be focusing on relative to el Jimador and Herradura?

They are both growing nicely in the US and Mexico, I know that.

So you should see both those trends.

I think in the quarter in Mexico there were a little bit of price increases so they probably were a little bit stronger, but they both (multiple speakers).

In Mexico, yes.

In Mexico, not in the US.

But I think both brands are doing quite well.

They are both growing I think in the double-digit range, thereabouts, in both countries.

Particularly el Jimador in the United States continued to go from month to month rolling very, very well.

Sorry I should correct myself on el Jimador in Mexico because that is the one where we have been repositioning the price and I am looking at the profitability from a pricing perspective.

Yes.

So we do have less volumes there.

But they are still both doing well.

Terrific, thanks for your help.

Bill Schmitz, Deutsche Bank.

Can you guys just clarify a couple things for me?

First of all, what exactly -- maybe I missed it, but what was the impact from the barrel softness in the quarter and how big is that business and maybe where it shows up?

You have that schedule on the last page of the press release.

Like where do we see the trends in the barrel business?

The trends are in your revenue, it had about 1 point of an impact on the quarter.

A 1 point drag, yes.

A 1 point drag that was made up of both the pricing, which we expected.

So it was -- about half of that was 1 point in the other half is timing.

Okay.

Is it reflected in that schedule on like page 10 of the release or not?

It is on -- it is not separately -- okay, I am sorry, you are on page 10 of the release.

Yes.

I'm sorry to get down in the minutia.

Yes, sorry.

Actually I guess it would just be in your bottom-line numbers because this is all -- the first things are volumes and we don't (multiple speakers).

[In our branded].

Yes, and we don't track it there.

So it would just be in your very bottom-line 2% I guess, so it is not per se in there.

Okay, that is helpful.

In terms of our total business it is not a major -- a meaningful business itself.

Okay.

No, that is helpful.

And then can you just kind of give is like a more detailed gross margin bridge and how you think that sort of plays out over the year?

I know you talked about it qualitatively, but do you see gross margin up this year and maybe some of the moving pieces that could drive it one way or the other?

Okay, so I think in the fourth quarter I was talking about our gross margin.

At that time, I think it's really relatively unchanged from that.

So I said it was -- at the time we expected it to be flattish.

Bill referred a little bit earlier to 2/10 down -- a 20 basis point difference, so I am talking give or take 20 basis points or so.

So nothing has really changed in that perspective.

Okay.

At the time I talked about it being largely on volume and a mix versus any pricing.

Okay.

No, that is helpful.

And then just, it sounds like the SG&A costs are going to be up a little bit this year.

Is that -- should we expect that ratio to expand and -- as a percentage of sales?

And then what is driving the higher SG&A costs?

Actually, are you looking at the same thing I am looking at?

I think SG&A costs are actually down on the (multiple speakers).

I thought you were talking about the outlook.

Did you say that the SG&A costs would be up offset by some pricing, or did I miss-hear you during the (multiple speakers).

Oh, okay, yes, I am sorry.

I was talking about underlying SG&A growth.

If you were to look at where we are to date underlying SG&A is down 2%.

I would say that was largely influenced by timing or one-time -- the absence of one-time items we expect going forward.

And so we do expect some modest increase in SG&A.

Recall last year our SG&A grew about 2%.

Recall our sales grew what I said earlier, 5%.

So if you looked at a metric we actually improved on an underlying basis our SG&A as a percentage of revenue.

I would expect a similar type of thing this year, low-single-digit growth in SG&A at this point and then of course higher growth at the revenue line.

So, improving trend on an underlying basis.

Yes, hopefully it will be similar leverage to last year.

Yes, yes.

Okay, no, super helpful.

Also and then just lastly, do you think for the full year that depletions and underlying will kind of being aligned or is there some more inventory to come out in emerging markets?

Actually in some markets, in emerging markets I hope inventories will come back versus -- because I think anytime you have some of the circumstances we have got you will find some inventory tightness in some of these markets.

But I think is it general -- you were talking about depletions, I was trying to convert it over to sales which is --.

It is [fair], I mean we did have some timing issues and there are some markets that --.

Russia particularly.

Yes and some -- yes, that is right.

We had shipments last year ahead of depletion.

So we expect depletions to get ahead of shipments this year there.

We had some timing as you -- seasonality or timing issues in the first quarter this year we're (technical difficulty).

On distributor changes and things like that, yes.

(Multiple speakers) and depletion so that will work itself out.

And we have been accommodating -- we have been -- now two offsetting things on Tennessee Fire, remember is in the new markets we will be -- internationally we will be probably building some inventories out there as we go along, pipeline particularly at retail.

And then offsetting it in the United States has been some of those reductions.

Okay, no, that is super helpful.

Thanks very much for your time.

Bryan Spillane, Bank of America.

Just a couple questions, first just some clarifying points.

Jane, I think you talked earlier about the prior year comparison on underlying sales excluding the divestitures was 9% in the first quarter, is that right?

Yes, I think I exclude foreign-exchange from that as well.

Yes, excluding -- so underlying -- ex foreign exchange and ex acquisitions and divestitures.

Have you given what that comp is for the full year, just trying -- because I know, at least in terms of where we were modeling it, we were looking at just what was reported last year and the organic sales comp I think was 7. So I just want to make sure if you've got it if you can provide --.

(Multiple speakers) excluding -- excluding So Co was 5. So we talked about $20 million of operating -- or $0.20 now $0.10 split adjusted was the bottom-line impact of that.

I'm trying to think what else I get -- what else I have on (multiple speakers).

What I am trying to get to is (multiple speakers).

(Multiple speakers) seasonal two-year stack.

Yes, right, we have got a 4% to 6% underlying sales growth expectation and I just don't know what it is comping against.

What does 4% to 6% comp against if we are going to be apples-to-apples pulling out the divestitures?

So last year's quarters were 9, as you said, right, and then as they came down it was 5 --.

Roughly 4 for the balance.

4 over the balance.

And so you need 5s to 6s on a two-year stack to equal out to the double-digit that you would have accomplished with a 9 and a 2. I think that is where you were going, right?

Yes, yes, yes, yes, no, that is helpful.

(Technical difficulty) so I think -- yes, we need mid-single-digits off -- on a two-year basis.

And I think that -- the reason that Jane was illustrating that is just to show you how good the first quarter was last year and how the two-year -- or the 2% this year can be explained against that.

Yes.

And that is what I was getting at.

It was even a more difficult comparison I think than we all thought because we didn't have the comp excluding the divestitures.

Right, got it.

Which so you're looking for more specifics on mostly the Fire launch to be honest with you --

Yes.

-- which was in that Q1.

Okay.

All right, that is helpful.

And then just second question.

Just on Finlandia, the decline is getting less steep, I guess.

And in Poland you grew this quarter.

So could you just give us -- are we at a point where the drag there from Finlandia maybe is going to be less of a drag than it had been the last year or two?

We hope so, yes.

Yes I mean you looked at -- I mean you're looking at the correct numbers, so mathematically, yes, it has been.

And I think the other thing too off a slightly smaller base and profitability, it is less impactful when you get down to the bottom line.

So our teams are working hard, particularly out there in its core geographies in Eastern Europe.

So we were pleased to actually see the quarter unfolding.

I guess what I am after is just is there anything that has changed either in the -- sort of the approach that Brown-Forman is taking to it or anything that has changed in the market that has stabilized it?

Or have we just -- is it just sort of evolving on its own?

Yes, I mean, I think some of it was what I was alluding to earlier is some of these -- whether it is brand markets are getting to a point where they have got a new low and so you are going to start cycling against that.

Not seeing that in Poland, Poland actually has recovered some.

But Russia would have been one place -- it's still declining there.

But again, I think it is getting to a place where it is not where it was, a year ago it was as much of a drag.

In terms of our own sales force and what they are doing differently, they are always trying new things.

I know we are looking at a new package later this year (multiple speakers).

Which we won't get the benefit until 2018.

I wish we could get that faster, but it is just the nature of packaging changes.

Yes.

And so, there is work always being done on it to help improve it.

But I would have to look at it by country to see, but one of the influences I always feel in the vodka business particularly and a lot of these markets is the pricing activity of competitors.

And your question makes me want to go look at a few of the key countries to see if that has stabilized because sometimes that can have a very nice impact on Finlandia's performance.

Okay, great.

Thanks, guys.

Rob Ottenstein, Evercore.

A couple of questions.

Number one, Cooper's Craft, haven't heard much about that on the call today.

Can you just remind us when that launched?

If there was any impact in the quarter?

And how you see that reception in the marketplace and with your distributors?

I don't think virtually any impact on the quarter.

I think it launched July 1 in a very select number of states, just eight -- yes I think seven or eight.

And our read so far has been, which is mostly just trade and then any reviews about the product, has been very, very encouraging.

So, I mean so far so good on it.

Terrific.

And then on Jack Daniel's, you mentioned that you had a about 1% pricing.

I just wanted to clarify is that 1% pricing for No.

7 or 1% price mix for the Jack Daniel's family in the US?

That was in the US and that was only for No.

7. Again, as I said earlier, I think that was -- as we look at the full year I don't expect that.

I expect minimal pricing for the full year in the US from the brand.

So that (multiple speakers).

Okay, so you have got maybe an easier comp in Q1 and then less pricing for No.

7 the rest of the year?

Easier comp in Q1?

On pricing.

Yes, I don't think -- no (multiple speakers).

So you expect roughly 1% pricing for the rest of the year for No.

7?

No, I'm sorry.

I said we had 1% in the quarter.

Right.

And I don't expect as much for the balance of the year.

So the full year will be minimum pricing.

Got it, okay, okay.

And then just final question.

Going back to Finlandia, is this -- and I know these are delicate questions, but is this a strategically important brand for you?

Or is it something kind of it is nice to have but not need to have?

Well, I think it has been an important brand for us particularly in key markets.

You heard Jane emphasize that Poland is one of our top two emerging markets and Finlandia was actually really, really helpful, particularly in its early years, to helping launch Jack Daniel's in a lot of these markets.

So it definitely had some strategic benefit and roles even beyond its own trademark contribution.

So, I mean as you all know, the vodka category is an enormously competitive one.

And particularly at the prices where, even though they're what we would consider to be premium for the vodka category, there is a lot of competition in them.

So, and like I mentioned earlier, I think it is an encouraging sign that we had a good quarter in Poland, but it has been a tough couple of years.

And they have -- in the markets where Finlandia has been strongest it has just -- there's been between excise taxes and competitive activity -- remember a lot of these markets are what we consider dark markets, our ability to sort of advertise our way out of it is difficult.

So it has had some challenging times.

But I wouldn't go so far as to say that it is not strategic to us in maybe the way you were implying.

But maybe a little bit less than in the past?

Oh, yes, mathematically, sure.

I mean, yes, mathematically.

Just because of the innovation success we have had particularly within the Jack Daniel's family and then the growth of the American whiskeys.

And if you are -- just mathematically Finlandia hasn't kept up with those, so as a percentage of Brown-Forman it is down.

Well, no, I understand that.

But just in terms of your ability to thrive in the Russian and the Polish markets, which are the two key markets, do you need to have Finlandia to give you critical mass in Poland and Russia?

I mean, it was certainly before Jack Daniel's had any scale in those markets Finlandia would have been -- proportionately been more important.

But I still think it is important.

Great, thank you very much.

Brett Cooper, Consumer Edge Research.

Can you talk about your relative performance in emerging markets?

I guess more on a trailing 6- or 12-month basis versus a couple of years ago?

And then on a separate topic, when you are thinking about the go forward, what do you expect from blended Scotch competition given the devaluation of the pound?

Thanks.

Jane, you want to -- which one -- do you want to tackle either one of those?

The relative performance relative to the competition?

Again, I think ourselves, I would point to some of the things that we already talked about in the quarter in terms of the numbers being down and some of it being timing.

I think that you have to peel back the onion again, similar to what I was doing with our own numbers, and look at the footprint of each of your geographic competitors to do any kind of comparison.

Most of them have a lot larger percentage of their business in emerging markets than we do.

And actually were hurt earlier, a couple years ago by the emerging markets action, whether it was in China, than we were just because we didn't have a big footprint there.

And so, I think relative performance to that again is you have to look at each country.

And I think our competitors have noted doing well, places like Mexico we are doing very well there.

So I think our performance is holding in those places where it should be and if not better (multiple speakers).

Yes, I think the big delineation between us and the competition is that in some of the instances, not all of them, but in some of them, we aren't in the what I will call the lower-priced local business whereas several of our competitors are influenced -- their business is influenced quite a bit by that.

We tend to be at the more premium end.

Even where we are in a category that is indigenous to the country like tequila to Mexico or in the example of the very sizable vodka market in Poland.

We tend to be at a little bit higher price point.

So you will see some observations on performance between say us and some of our competitors that skew because of the portfolio.

But I would have to look -- I mean I agree with Jane, it is a mixed picture, you would have to look at it market by market.

We group it into emerging markets a little bit for just convenience of aggregating what is, particularly for us, Jack Daniel's global business.

And then, Jane, the other question.

The second part of this question I think perhaps you were alluding to was the impact of Brexit.

Is that what you were really referring to?

Or expectation of what the blended Scotches might do.

Do as a result of that since they actually got a nice favorable FX or pricing impact to them, I think that is what he is referring to (multiple speakers).

Yeah, I mean I think it remains to be seen.

I haven't seen -- at least personally, I haven't heard of any reports or seen any data that tells me they are using it to lower prices.

Just so you will know, even though you can be impacted by lower prices of competitive whiskeys, for some time that was not the basis on which Jack Daniel's particularly competed with the standard blended Scotch brands.

I mean oftentimes, in most of these markets, almost virtually all of them, we are a meaningful trade up to those brands.

So, it remains to be seen what they do with them.

But I like Jack Daniel's price position where it is today for the very long-term.

Thank you, Paul, and thank you, Jane.

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

Before you jump off though we wanted to make sure you knew we do plan on holding an Investor Day in New York on the afternoon of December 14.

So be sure to mark your calendars.

And in the meantime if you have any other questions please feel free to reach out to any of us.

And we hope you all have a great Labor Day weekend and that you enjoy some of our fine products.

Take care.

Responsibly (laughter).

Thank you, ladies and gentlemen.

That does conclude today's conference call.

You may now disconnect.