Earnings Call: Q3 2020

Mar 4, 2020

Welcome to the Brown Forman Third Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Leanne Cunningham, Senior Vice President, Shareholder Relations Officer. Thank you. You may begin. Thank you, Dorothy, and good morning, everyone. I would like to thank each of you for joining us for today's Brown Forman's Q3 fiscal 2020 earnings call. Joining me today are Lawson Whiting, President and Chief Executive Officer and Jay Moreau, Executive Vice President and Chief Financial 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 released a press release containing our results for the Q3 of fiscal 2020 in addition to posting presentation materials that Jane will walk through more materially. Both the release and the presentation can be found on our website under the section titled Investors, Events and Presentations. In the press release, we have listed a number of risk factors that you should consider in conjunction with our forward looking statements. Other significant risk factors are described in our Form 10 ks and Form 10 Q reports filed with the Securities and Exchange Commission. During this call, we will be delivering certain non GAAP financial measures. These measures are reconciliation to the most directly comparable GAAP 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 investor presentation. One last note this morning, the state of Kentucky will be conducting a statewide tornado drill at 10:0:7 this morning. We are not certain if this will create any disruption to our call. If necessarily, we may need to mute the line for a moment, and we apologize in advance for any potential disruption. With that, I would like to turn the call over to Lawson. All right. Good. Thank you, Leanne, and good morning, everyone. Before I comment on our year to date performance, I do want to take just a short moment to recognize what a special time it is to be part of Ground Foreman as we enter our 100 and fiftieth year. Back in 18/70, our founding brand, Old Forester, was first introduced into the U. S. Today, we now have a portfolio of over 40 premium and super premium brands sold around the globe. Since our founding, the company has been agile and resilient in navigating through many challenges, including things like prohibition, world wars and economic recessions, just to name a few historical events. Today, we find ourselves amid trade wars resulting in tariffs that are weighing on our industry, geopolitical events that are disrupting many countries around the world and now a virus that is threatening the global economy. While the headwinds feel pretty strong right now, Brown Forman has continued to grow throughout our history and remains a strong healthy company supported by the commitment of our long term shareholders and importantly, our dedicated and talent employees around the world. So now, on to the performance of the company. Jane is going to take us through the company's financial results in a moment, but first I'd like to provide an update our progress toward our strategic ambitions. As you've heard me discuss on previous calls, we continue to evaluate our performance both on a geographic and through a portfolio lens. From a geographic perspective, 18 of our 20 largest markets are delivering underlying net sales growth this year, highlighting the strong benefits of our geographic diversification. As a side note, this does not include travel retail, which actually is in decline and we can talk a little bit about later. However, the growth rates of +3 percent underlying net sales year to date for the company are below historical norms and are also below our expectations, but we believe going forward these rates will return to more historical numbers and we will talk about that throughout the rest of this call. From a portfolio perspective, our premium and our super premium brands are well positioned to continue to deliver accelerating top line momentum with leading positions in some of the most attractive and fastest growing spirits categories, such as whiskey and tequila. In particular, the super premium brands in our portfolio are propelling the company's growth, both in the U. S. And increasingly our international markets becoming a more powerful growth driver for the company. So to get into a couple of the specific brand performance issues, look, the Jack Daniel's family of brands underlying net sales was up 3% year to date, essentially in line with the company's growth rate. We've encountered some near term challenges for Jack Daniel's Tennessee Whiskey, which is the core Black Label brand, in some of our international markets. Jane is going to talk more about this in her remarks when we get into the market by market analysis. But from a strategic perspective, we believe we still have the right strategy in place to deliver long term profitable growth and we are investing behind the opportunities. Projectino's RTD business is now over 9,000,000 cases globally and continues to deliver solid growth as the increasingly popular RTD format provides Jack Daniel's consumers with convenience in their drinking occasions. We continue also to focus on the versatility of our portfolio through innovation, which has resulted in the creation of Jack Daniel's Tennessee Honey and Fire over the last 9 years. These two brands now contribute 2,400,000 9 liter cases at very attractive margins and are connecting new consumers to the Jack Daniel's trademark. With the launch of Jack Daniel's Tennessee Apple, which is off to a strong start in the United States, we are continuing to drive innovation and diversifying the portfolio. And for our international consumers, we're gearing up for the launch of Jack Daniel's Tennessee Apple, and it should begin to appear on retail shelves in the next few months. In Gentleman Jack, which we don't talk about quite as often, one of our super premium family members is now nearly 700,000 cases and continues to deliver strong international growth. We've also made notable progress towards our strategic ambition of increasing the scale of our super premium portfolio. Woodford Reserve remains the leader in the super premium bourbon category and has been consistently growing strong double digits since its introduction 20 years ago or more 22 years ago. Supported by its excellent track record along with innovations such as Double Oat, Woodford Reserve has eclipsed 1,000,009 liter cases and is one of the largest growth contributors to the company. Looking ahead, we'll be focusing on the international development of this incredible brand with incremental resources being invested in a number of key markets around the world. As I mentioned a few minutes ago, Old Forester is celebrating its 150th anniversary this year. It continues to present itself as a leader in American whiskey. The brand is steeped in a reputation of quality and innovation with its core expressions and has increasing popularity with its Whiskey Row series. This brand has been registering impressive gains in the bourbon category and is increasingly meaningful growth driver for the company. Black Brown Foreman, coincidentally Herradura, was also founded in 18/70 and is also celebrating its 150th anniversary. Since we purchased the brands over 12 years ago, the super premium tequila category in the U. S. Has shown dramatic growth. To note, Herradura's underlying net sales are up 20% year to date and it's grown to over 600,000 cases with nearly half of its volume outside of Mexico. However, the unprecedented cost of externally sourced agave is putting pressure on gross margins. To help mitigate, we've been able to increase prices and accelerate the growth of Ultra, our higher priced innovation, which is now nearly 20% of the business. We expect cost pressure to continue, however, through fiscal '21 and continuing but continuing our strong sales trends. Forward looking, Herradura and Al Himidor are well positioned in the fast growing super premium and ulta premium segments. Our single malt scotch portfolio is also performing very well, led by Glendronic, which has been experienced considerable growth and has a very promising future. And our other emerging brands, things like Slane Irish Whiskey, Cooper's Bourbon and Ford's Gin, while newer in their development, continue to show potential for very meaningful growth. So generally speaking, we feel very confident across the different brands in our portfolio and the many levers of growth that we can pull upon. Geographically, I'm very pleased with the success of our U. S. Business this fiscal year to date. U. S. Is not only our largest market, but it is leading our growth in our 150th year. In the most valuable global spirits market in the world, Brown Forman takeaway trends are outpacing TDS, driven largely by our American whiskey and flavored whiskey portfolios as well as our tequila brands. The launch of Jack Daniel's Tennessee Apple has also, as I said, gone very smoothly and is accelerating growth to our overall plan. However, we recognize we need better performance on Jack Daniel's Tennessee Whiskey in the U. S. But it is worth noting that we can outpace TDS with essentially flat to low single performance on our biggest brand. We could not have said that even a few years ago, but our bourbon and tequila brands have gotten big enough that they actually have a meaningful impact on the overall trends in the U. S. Business. Developed International are having a relatively weak fiscal 'twenty as the U. K, Australia and Japan are weighing on performance. Where we have made investments in our routes to consumer, places such as France and Spain and Germany, our business is healthy and we've been able to broaden our portfolio of brands. In the U. K, which is the 2nd largest market in the world for Brown Forman, we're in the final stages of investing in a highly talented team and will soon assume full control over our route to consumer, which we believe will reaccelerate growth in this market into the fiscal year, and expectations are that this will be a strong market for us into the future. Our emerging markets are being led by BRIC this year. All 4 are providing strong underlying net sales growth, largely driven by Jack Daniel's Tennessee Whiskey. Also worth pointing out is Southeast Asia is producing strong underlying double digit growth. For the first time in a while, Asia really has been delivering solid growth this year. However, these markets are likely to suffer in the near term as a result of the impacts from coronavirus. I am, however, very encouraged that our brands are how our brands are resonating with consumers. And looking into the future, I do think that Asia is a part of the world where we are relatively small but fast growing, which I do think bodes well for the future opportunity we have there. To the coronavirus situation, just briefly, I do want to pause and take a moment to say the health and safety of our employees is paramount. Like other companies, we've taken steps to limit our employees' risk by limiting travel, canceling certain meetings, providing up to date information from the CDC and the World Health Organization, and ensuring our flexible work policies are being utilized. There are so many unknowns right now and it's difficult to quantify the financial impact. Jane will try to walk you through our thinking on this difficult topic. So in summary, we're expanding the breadth of our premium and super premium portfolio, both geographically and diversifying our revenue base in categories with the strongest momentum. We continue to have confidence in our long term global growth potential. Although currently, our overall growth rate is a bit below historical through through continuing to execute our long term growth strategy, focused on portfolio, geography, investments in our people, we'll continue to extend our leadership in premium American Whiskey around the world and continue our track record of consistently delivering profitable growth. While the near term challenges remain, will weather the storm as we have throughout our 150 years as we relentlessly focus on creating value for our shareholders. With that, I'll turn the call over to Jane and review more detail in our financial performance that we released this morning. Thank you, Lawson, and good morning, everyone. Over the next several minutes or so, I plan on walking you through 2 items. First, our 3rd quarter and year to date results, which as Lawson just said a moment ago, are a bit lower than we had expected at this point in the year, driven largely by some farmers in some of our international markets. I'll discuss that in more detail as I go throughout my suggestion this morning. And then secondly, I'm going to review our full year outlook, which we revised to reflect 2 things: 1, the tempered expectations in some of our international markets and 2, the increasingly uncertain global economic outlook, which includes an estimate of the effect the coronavirus may have on our business globally, including our global travel retail business in Asia. So let's begin with our actual performance. 1st, our underlying net sales grew 3% in the quarter, lower than we had anticipated but consistent with the company's first half results. 2nd, while the impact of retaliatory tariffs, particularly from Europe, will continue to weigh on our margins and profits for the full year, the year over year effect began to ease a bit in our quarter 3. In fact, our underlying gross profit grew for the quarter for the first time since the cost of tariffs began affecting us, up 3%, consistent with our top line. The cycling of tariffs also helped to boost our underlying operating income growth in the quarter, up 5%. Consistent with our 3rd quarter performance, our year to date underlying net sales grew 3% on top of 5% growth in the same period last year, but again lower than we had anticipated we would be at this point in our fiscal year. So breaking down our underlying net sales performance by geography, just a bit more color on what Lawson just provided. Again, the U. S, our largest market representing nearly half ourselves, continued to lead our growth, growing 6% underlying net sales year to date, the market's strongest rate of growth registered in 4 years. This growth was fueled by the launch of Jack Daniel's Tennessee Apple and sustained double digit underlying net sales growth from our premium bourbon brands, notably Woodford Reserve and Old Forester and our tequila brands and aggregates. This strong growth, again, as Lawson said, in the world's most valuable spirits market was also supported by improving takeaway trends, which accelerated over the past quarter and are now growing ahead of our the healthy total distilled spirits mid single digit growth for the first time in over 18 months. In our emerging markets, we also experienced another quarter of double digit gains. The acceleration was less than expected at this point in the year due in part to rapid market disruptions in Africa and macroeconomic and geopolitical challenges, which have begun to weigh more heavily on certain markets in the CIS and Latin America. 1 of our largest emerging markets or actually our largest emerging market, Mexico, where we grew underlying net sales double digits last year at this time is now growing in the low single digits through the Q3, reflecting a weakening economy. We work to exclude Mexico and the rest of Latin America, CIS and Africa. Our emerging markets grew underlying net sales double digits. So despite seeing some pockets of slowdown, strong double digit underlying net sales growth was delivered across a number of emerging markets, including Turkey, Russia, China and parts of Southeast Asia, led by strong volume growth of Jack Daniel's Tennessee Whiskey. Poland also returned to mid single digit underlying growth year to date following a very strong quarter for Jack Daniel's Tennessee Whiskey. Now I thought I'd pause for a moment and discuss our performance in Asia. Over the past nearly two years, we've been quite pleased with the momentum and increasing contribution we've been experiencing from this part of the world. Specifically, our business in China has been growing underlying net sales at a double digit rate since fiscal 2018, led in large part by our growing e premise business where we have been focusing our investment in this market. Our performance through January had essentially not been affected by the coronavirus. So understandably, we do expect a marked slowdown in our Q4 in this market and other parts of Asia and have already experienced this in February. Despite this near term headwind, we remain optimistic about the long term growth potential for our portfolio throughout Asia. Similar to the first half of the year, our developed international markets delivered 2% growth in underlying net sales year to date. This growth was led by Germany, Czechia, France, Spain and Korea, reflecting strong growth of Jack Daniel's RTD, Jack Daniel's Tennessee Honey and our super premium American whiskey portfolio Woodford Reserve and Gentleman Jack. In the U. K, our largest market outside the U. S, underlying net sales declined in the 1st 9 months. You may recall that we are navigating through multiple challenges in this market this year, including: 1st, the upcoming route of consumer change in May 2, changes in our promotional strategy and 3, softness in the cash and carry channel. So all combined, we are experiencing what we believe is some short term disruption. We expect the negative trends in this market to ease as we move into next fiscal year. In addition to some softness and planned results in the U. K, the devastating fires in Australia have also contributed to our developed international markets growing less than expected. Our global travel retail business, which had declined in the 1st and second quarter of this fiscal year, grew underlying net sales single grew net sales high single digits in the 3rd quarter due in part to easy comparisons to the same quarter a year ago. Despite improvement in the trend, global travel retail remains a drag on our top line with underlying net sales down 3% year to date. While we experienced some improvement in the quarter and had anticipated further improvement in the Q4 resulting from the phasing of certain customer purchases, we now estimate that as a result of the coronavirus, our travel retail business for the full year will be down similar to year to date performance. Our used barrel business declined significantly in the 3rd quarter. The decline in the businesses reflects both a reduction in demand due in part to the U. S. Tariff impact on single malt scotch whiskey and secondly, softening prices driven by the increased supply of used barrels in the market. This business and our other non branded business, which includes contract bottling and bulk whiskey and bulk wine sales, have negatively affected our underlying net sales year to date by about 1 percentage point. Now looking at our business through a portfolio lens. Consistent with the drivers of our growth through the first half of the year, our premium whisking brands, Jack Daniel's RTD, Jack Daniel's Flavors and Tequila remain the key contributors. As Lawson mentioned, Woodford Reserve continued its consistent double digit underlying net sales gains fueled by strong consumer momentum in the United States and is now over 1,000,000 case super premium brands globally. With only 20% of its volume outside of the United States growing at an even faster rate, we believe the brand has a significant run rate for geographic expansion. Tequila delivered underlying net sales growth of 10% year to date, pulled down modestly by our pricing actions on the Pepe Le Puez Mixto brand in the U. S. Our consumer takeaway trends in the U. S. Remain very strong. For Herradura specifically, in addition to the strong takeaway trends in the U. S. And increasing volumes in Mexico, higher prices and a favorable product mix in both the U. S. And Mexico helped to deliver the 20% growth in underlying net sales year to date. 15 years of RTDs grew underlying net sales mid single digits on a year to date basis, driven by volumetric gains in Germany and the U. S. And the introduction and launch in France. JD Flavors continued its broad based geographic growth, most notably in the U. S, France, Poland, Czechia and Brazil. As it relates to the successful loss of Jack Daniel's tendency, Apple in the U. S, the brand remains on track to deliver about 1 percentage point of growth for the company this year. Jack Daniel's Tennessee Whiskey underlying net sales were essentially flat as year to date growth in emerging markets were offset by declines for the brand in the U. K. And our travel retail channel. Moving down the P and L to gross margins. Year to date gross margins declined 220 basis points year over year, reflecting resulting in flat underlying gross profit growth through the 1st 9 months. The reduction to gross margin was driven by the same two factors we've highlighted for the last 3 earnings calls. First, our input costs reflecting inflation and secondly, tariff related costs. As I mentioned earlier, while the impact of tariff related costs will continue to impact the full year margin, as we began to cycle prior year periods that were affected by tariffs, the year over year effect began to ease in the quarter with 100 basis points compression for the 1st 9 months compared to 200 basis points through the first half. We continue to invest behind our brands with underlying A and P spending of 3% year to date, in line with our top line growth. As we've discussed in previous calls, the effective increase in our spend is much higher given the significant reallocation we took this fiscal year to increase our efficiencies from high touch spend to broad reach media and digital investments, along with our increase in activations and promotion activities. On the SG and A front, we remain committed to a disciplined approach to our investment, looking for opportunities to continue to gain efficiencies, including productivity initiatives that ultimately result in operating leverage. It is important to note, however, that while we continue to leverage prior investments, we've also increased our SG and A in markets where we see opportunity to heighten our focus behind building our brands and accelerating our growth. For example, a key element of this can be seen in our Q3 of this fiscal year as we began to invest in the U. K, opening a new office and creating and forming the team and capabilities that we believe will support building our broader portfolio of brands in our new routes to market structures that will begin on May 1. In the aggregate, both our reported and underlying operating income declined modestly year to date, driven in part by an approximate 3 percentage point drag related to tariff related costs. An effective tax rate of just over 17%, which includes a couple of discrete items year to date, drove 4% growth in diluted earnings share to $1.45 Now turning to my final topic this morning, an update on our fiscal 2020 full year outlook. There are really 2 sets of factors weighing on our outlook, which I will describe in turn, that has led us to revising our full year underlying net sales growth from 5% to 7% to low single digits. 1st, temporal expectations from some international markets reflecting short term disruptions and macroeconomic and geopolitical headwinds. Specifically, the U. K, our largest international market, is experiencing short term changes and disruptions, including the transition to our own route to market in just a few months. The economy of our largest emerging market, Mexico, continues to weakening. The strengthening U. S. Dollar has made our brands more expensive to our customers and consumers in certain other emerging markets such as Latin America and CIS, further exasperating the uncertainty and unpredictability of demand. And finally, unplanned destocking in travel retail. Now turning to the second factor weighing on our outlook, the uncertainty and unpredictability, the effect the coronavirus may have on our business including the current most affected areas, travel retail and Asia, most notably China. Included in our outlook is an estimate of some additional deterioration that is likely as this continues to evolve globally. We continue to expect gross margins will be down around 200 basis points for the year, against split between tariff related costs and higher input costs. Regarding our operating costs for the full year, despite the volatile and uncertain market, we continue to build our brands, investing behind roughly in line with our net sales growth. We're expecting SG and A to now be flat for the year, continuing to provide leverage to operating income. We've reduced our underlying operating income outlook from a range of 2% to 4% to flat to modestly down, driven by lower top line expectations that I just discussed. We narrowed our earnings per share outlook from 1.75 $5 to 1 $0.75 to 1 $0.80 still benefiting from a lower effective tax rate. So lastly, while our expectations for growth this year are now below our initial range, We continue to believe there is a long runway of opportunities ahead for our brand. Our teams are experienced, as Lawson said, weathering these uncertain times and are focused on accelerating our business back towards our consistent historic rates of growth. However, we are cognizant of the current market dynamics that may limit our near term improvement. In the meantime, we believe our business remains very with nice margins resulting from the efficiency and historic consistency in our revenue growth, industry leading return on invested capital and ample free cash flow. Over many years, we have followed a systematic approach to our capital allocation that has served us well. 1st, reinvesting back into the business to meet future demand 2nd, growing our cash dividends. And in the absence of meaningful M and A opportunities, we return excess cash to shareholders through special dividends and share purchases. Currently, we continue to invest behind the business in expanding our production capabilities, increasing whiskey inventories to meet future growth expectations, investing in technology to not only improve our efficiencies throughout all of our functions of the company, but also to drive growth based analytic insights, such as our revenue management platform. We continue to return cash to shareholders as we always have, thoughtfully, disciplined and consistently, including increasing our cash dividend for this calendar year by 5 percent. While we have been navigating near term challenges, including tariffs and the increasingly uncertain and volatile world, we continue to manage our business as we always have for the long term. Strong support from our shareholders, as Lawson also said, including the Brown family, enables this long horizon, which is essential to the company's deepened aged spirits. We believe our portfolio of premium super premium whiskey and tequila brands position us well to continue creating value for all of our shareholders. And with that, this concludes our prepared remarks. Darcy, please open the call Your first question comes from the line of Peter Grom with JPMorgan. Hey, good morning, everyone. Good morning, Peter. Good morning. So maybe this is a bit early, but would imagine you're starting your planning for next year. And it would be helpful to try and understand how you are thinking about the impacts of the virus and weaker international growth beyond just next quarter. I guess what I'm really trying to get at is if top line growth remains below historical levels, input costs are still a headwind and your tax rate moves back into the 20% to 21% range. What are the levers you can pull in order to deliver earnings growth in fiscal 2021? Thanks. Yes. Look, I mean, I think, obviously, we're not giving out guidance yet for next fiscal year. But I think as you look at our business in general, we feel pretty confident on the U. S. Business these days as it is sort of above TDS and I would expect that to continue. As I said in my prepared remarks, even with JAK, it's sort of subdued rates, are able to grow above that TDS number. So and believe me, there are a lot of plans and there's a lot of action and a lot of activity going around to try to improve the growth rates on Tennessee Whiskey. And if that happens, we're even, I would call it, more confident in the U. S. Market. So that feels pretty good. The developed international side of things is subdued, but it largely, as Jane said, it's largely the U. K. There are other markets that are not kicking on all cylinders these days. But I think we can get that we'll get that category of markets, the developed international back into what its traditional range would be mid to even a little bit better than mid single digit growth. But I'll take mid single digits out of that part of the world. And the merging is the volatile one. It's always been the volatile one. It's been growing at a rate above our company average now for a number of years. It has slowed this as we said, largely because of Mexico. Asia is the wildcard in this. And I don't know how to tell you that we're trying to think about what is growth rate for that part of the world is going to be, because right now it's solid, but we're going to be a little more subdued. And I think at the end of the day, we're going to be we use the word around here agility a lot. You're going to have to be agile next year because while things do have a tough outlook, the comps are going to be a little bit easier next year and I could see some bounce backs and some other things that turn it into a pretty good year. So not directly answering your question because we have not provided that guidance yet, but I think we generally feel pretty good on the top line that things will return to what I call a more normalized growth rate. Peter, Just to build on what Lawson said a little bit more on the developed international heat was hitting on the U. K. And as I said in my remarks this morning, what's happened in the U. K, we believe, has released some short term disruption. So if you get that short term disruption behind us next year, just having that mark and back to stability will get us back more to our historic growth in that part of the world. So that will help. As Lawson said, it is the emerging markets, but we've got a lot of pockets of growth, and we're very excited about a number of those. But as you know, emerging markets always have been volatile in everybody's business, but there are tremendous opportunities long term. I see this all as really the short term right now. Okay. That's helpful. And just a quick follow-up. I just on your global travel retail guidance, I think you mentioned earlier that you expect full year to be in line with year to date, which kind of implies minus 3% for Q4. And it just strikes me as meaningfully better than what we've seen from your peers. So any color on how you arrived at that would be pretty helpful. Thanks. I'm sorry. Say it's better than what our peers, is that what you're saying? Yes. I mean I think our business is smaller percentage wise than them. They have more concentration in Asia than we do. And so our concentration of our travel retail business is more in Europe. So they probably are being affected a bit more than we are from the Asia part of the world. With that being said, we had as we've talked about the travel retail business before, it's quite lumpy and volatile anyhow from quarter to quarter and when people purchase. And so we had the strong growth at the beginning of last year first half and now we're cycling against some softer growth in the second half of travel retail. We still do expect some improvement, but that will be offset by this coronavirus on our business and the growth of just people less traveling internationally. So we but that's what I would answer your question in terms of why there's a difference in our smaller and it's where they're concentrating. Okay. Thank you. I'll pass it on. Your next question comes from the line of Laura Lieberman with Barclays. Great. Thanks. Good morning. Good morning. I was hoping we could talk a little bit more about the U. K. I mean, of course, you gave us some high level commentary. But I guess, one, just more color on what's going on with cash and carry. I feel like last quarter, it sounded like it was limited to a few customers and more of maybe a retail than a consumer dynamic. So just curious how that sort of evolved? And then secondly, kind of changes in the promotional strategy, impacts on the route to market transition. These I would think were planned and embedded in guidance and are things you've done in other markets previously. So, I know you could share on kind of like what's gone wrong or differently, specifically, again, because this is something you've done very successfully in other markets before with arguably less disruption? Yes. So let me start. I think Boston will chime in here, Sue. The cash and carry is limited to a couple of customers one customer really. And so that business, and we talked about last time, so that really hasn't changed from our Q3 where we were referring to what was going on there. We just I was more precise saying cash and carry this time. The increased promotional strategy, you're right, it was planned. And it's something that we're doing as we get ready to own our own distribution come May. And that's why when we look ahead to this market and the optimism we have going forward versus what we have had this year, we will be in control of a lot of our decisions of working grocers and determining their pricing strategies. And right now, that doesn't always happen. And so that's important for us as we go forward. Just a reminder of why we made this decision to go on our own around the consumer in the U. K. This relationship probably served us quite well. It started in 2,000 and 2, served both companies quite well, but we had very limited portfolio at that time, I don't know, 10, 12, 15 brands. And now combined, we have over 100 brands. So you can only imagine the lack of attention, focus, prioritization, understanding the consumer and focus on our own portfolio. And so we haven't transitioned yet. That, again, is May 1, but we believe the focus, the prioritization, the understanding the consumers, the more direct contact with our customers, if you will, will allow us to not only accelerate our business there, but get our rest of our portfolio growing quite nicely. Yes. This one's kind of a different animal this time. This is a cost sharing arrangement as opposed to what we used to use typically with more agency type And so you're not going to see a big margin change, you're not going to see I mean, this has been one of the most successful markets in the world for Groundhorne for literally a long time. But I think both companies would admit it's just time. As Jane said, our portfolio has got bigger, the conflicts got bigger, and we've moved on. So on the pricing of the promotional question you asked a little bit earlier, I mean, the if we're totally honest, the amount of promotion in the U. K. Market got too big, and so we're trying to reduce that a little bit and get some pricing up. And we're working on that slowly. It's not a I mean, you have to do it slowly with the European retail world. But we're I don't know if we're paying the price necessarily. We're just seeing short term disruption with some of our customers as we do a little bit less promoting. We do think in the long run, it's the smart thing to do and we'll both we're taking our medicine now for what we think can be a great outlook going forward. Okay, great. Thanks so much. Yes, that's really helpful. Your next question comes from the line of Vivien Azar with Cowen. Thank you. Good morning. Just to follow-up on the top line, please. Jane, you guys were specific about the coronavirus impact on travel retail and what you're seeing in February, specifically in Asia Pacific. But as we think about the revision to the full year guidance, are you already or also baking in some weakness in newer markets where the coronavirus is starting to emerge, particularly developed Europe like Italy and France? Thanks. Yes. Thank you, Vivi. I'm glad you asked the question. I thought let me just pause for a minute because we want to be super clear here with what we have in our forecast. So again, if you looked at what we did, we took our overall forecast down, as you saw. We reduced our underlying forecast with 2 factors. First, it was the tempering of the growth and contribution from some of our international markets, again, reflected some short term disruptions as well as these macroeconomic and geopolitical challenges. So when we look at our base business, what we growing in the 3.5% to 4.5% range. It is, therefore, growing in the 3.5% to 4.5% range. It is therefore a couple of points less than what our expectations were just 3 months ago. But the second factor that we built into our forecast, and this is what you are asking specifically about Vivien, that led to our reduction in our top line outlook. And again, not surprising, this unpredictability and uncertainty surrounding the coronavirus and what it may have on our business globally. So we've estimated at this point there's about a point drag, including those markets that are currently affected. So to your point directly, the Asian markets, including China and other parts of Asia, travel retail, and we have Italy in there. So collectively, that's about 8% of our business. And as I said earlier, yes, we've already seen areas many of these areas already affected in our February results. But that being said, we also have, in that 1% some additional downsize impact. And we don't know, none of us know if that's going to be enough, too much as we're learning daily as this situation unfolds. So we're really only looking at our Q4. We haven't tried to estimating downstream secondary effects on anything beyond the demand we see and then an expectation for perhaps it's spreading some other markets. We don't know about the economy and the consumer confidence and sentiment and how they may linger into our Q1 summer months. So we'll obviously come back in June with more guidance on that for next year. So anyways, I know I went into a little bit more detail, but I thought it was important to just go to phrase this for you or put it in perspective in terms of where we are and why we did reduce our guidance into the 2 buckets. Your next question comes from the line of Kevin Grundy with Jefferies. Hey, good morning, everyone. Good morning, Kevin. 2 very quick ones for me. Just clarification on the guidance and just to kind of see where you are for fiscal 4Q. So the guidance is now low single digits for the year. My thinking is you're probably toward the higher end of low single digits and that is closer to 3% as opposed to 1% with the 3% for the year implying something sort of similar for 4Q, particularly given the strength of the U. S. But if you could just confirm that, that would be helpful just to kind of see where you are with that? And then for Lawson, just an update on the U. S. Pricing environment. As we look at the Nielsen data, the price mix remains negative and has been that way, although albeit moderating somewhat. Can you just give us a little bit of an update there in terms of what you're seeing in the competitive environment and then your expectations going forward from a pricing perspective to help drive some gross margin improvement? So thank you for both of those. Kevin, just as I just mentioned a moment ago, our base business guidance would be probably in the 3.5% to 4.5% range, and we've got about a point drag from the coronavirus. So whether it's going to be worse or not than that, we don't know. So that's how we got to our low single digit growth. And then I can take a shot at the pricing thing. So look, I mean, as we've talked about now on numerous calls, the pricing environment has been challenging in the U. S. For a number of years now really, really for the last, I'll say, last decade, it's been low single digit. Some of that, I mean, as most companies do, we take a hard look at what our competitors are doing and where we are relative to that and try to pick our spots. And we've done that in the last year. We had gotten above and the competitors were going down and that hurt our volumes a bit. So at the beginning of this fiscal year, we got a little more aggressive, and our volumes have reacted. Our volume growth this year is as good as it's been, I don't know how many years, it's a number of years. So I think if we that's a good thing and that means consumers are still taking the product away and we feel pretty good about that. But it's cost us on the value line and we want to get that back in balance again. So the idea for next year is certainly to have it more in balance, and that's something that we're working on very hard. And actually, I think you'll start to see some of the results of that even in the Q4, which will improve our mix. When you were commenting about the mix, was that a Jack Daniel's question or the full portfolio? That was a Black Label question that I'm seeing. I mean, overall, the higher growth of the more premium products is driving more favorable price mix overall, but I was specifically just looking at Black Label where the trend there from a price mix perspective remains negative? Yes. That will start to improve here in Q4. Your next question comes from the line of Sean King with UBS. Good question. I have a question just drilling in a little bit on the travel retail. Is it safe to assume that that business is a, I guess, a lower gross margin, but a higher operating margin than, I guess, the base business? And I guess, if at all, is that something to keep in mind? Yes. I'm sorry if I make sure that I understand your question. Did we earn less a higher or a lower margin? Yes. I'm just wondering if the margins from a from what I've heard in the past is that it's a higher gross margin business for travel retail, but it's actually a lower operating margin or sorry, a lower gross margin, but a higher operating margin. Is that a fair assumption for the travel retail portion of the business? Definitely a higher operating margin because of the there's not the brand spend in there. So it's really more the products themselves and the packaging that you see and some of the people, the experience that are there, so more of that. Yes, I have to look at the business. The gross margin of the business is, I mean, we saw a lot of single malt scotch, for instance, into that channel, and that's going to be higher margin business. But and Woodford Preserve has actually had a really nice run-in the global travel retail business too. But now we also most often focus on the airport side of things. But you also got to keep in mind, the global travel retail sector is a lot broader than just airport business. There's a lot of border store business in Europe and in China. Military goes in there. So military, I mean, so you've got a real big mix, which I think as Jane said earlier, Globusrat region, while it's hurting our growth rates right now because it's not big enough to really consider moving our corporate, say, gross margin or operating margin around it. I wouldn't try to over think that piece of it in terms of is that going to be a help or a hindrance to our overall company gross margins. Great. That's helpful color. Thank you. Your next question comes from the line of Bryan Spillane with Bank of America. Hey, good morning, everyone. Good morning. Good morning. Two quick ones for me. First, I think you touched, Jane, in the prepared remarks, you touched a little bit on agave inflation and that sounds like it's going to stay inflationary for next year. Can you give us just an update on where we stand now on barrel costs and wood? Has anything loosened up in that market? And then I have a follow-up. Yes, sure. I'll talk about we did talk about tequila or the agave cost a bit. And just as a reminder on that, we've been consistently saying that we expect agave costs to continue to increase through calendar year most of calendar 2021. So in other words, we won't start seeing any easing to the back half of calendar 2021, early calendar 'twenty two. So just as a reminder, I mean, we've got that information based upon what is publicly available from the CRT. So we can see when planting started to accelerate, and we kind of know what the demand is. And so we can see, by the way, tons of plantings more recently. So we know 6 or 7 years from now, we'll have there'll probably be lots of pressure on pricing at that point in time. But in the near term, again, it's going to be late calendar 2021 early calendar 2022 before we see cost pressure base. Now with that being said, Brian, it's important to note that what we're seeing in the market, what we have seen like a 5 fold increase from 2015 in the price of the agave, it really and it rapidly increased during 2016 through mid last year. We have seen some slowing. It's still growing, but not at the and still at unprecedented dollar I guess, peso cost, if you will, but it's just not growing as rapidly. So that perhaps is a bit of a good news there, if you will. As it relates to the cost of wood, we have seen some moderation in that. But again, you're not going to start to see that come through our P and L because of our aged products for 4 years from now. And coupled with that, we have capital investments that we've made. So all of that's got to factor in. None of that will come through our P and L for 4 years because of our aged products. But still the rate of growth of our the cost of our whiskey products that really at Jack Daniel's will moderate considerably next year relative to where we've been the last couple of years. So it will it makes life. So more thinking about we're at higher cost levels at this point, but the rate of inflation should start to moderate versus what it's been in the last year or 2? Yes. Combined the 2 combined, yes, if you put the agave and barrels together. And then Lawson, if you could just give some color now that Apple has been in the market for a while. And I guess what I'm interested in is how it's how you think the Jack Daniel's Tennessee Black Label is impacted by having all of these sort of line extensions? Do you think that it's diluting the kind of the core? Are there things you may need to do to strengthen or reinforce the positioning of Black Label in order to make sure that it stands out from all of these other brand extensions? Yes. So, I mean, that's a good the cannibalization question is 1. First of all, we look at it about 16 different ways trying to figure out how what is actually happening out there. Because to be honest, we were a little more concerned about the cannibalization of Honey and Fire necessarily than we were on Black Label. But when we've done the work and it's the same thing that we've said sort of on prior when this has come up in prior conversations around Fire and Honey, there's been almost no cannibalization. To be honest, I think it probably surprises a little bit, but it just hasn't been there. There's it really has been successful in bringing in new consumers in different occasions, and it just feels it not feels like it, it is showing through the analysis that we do that it's tiny. I mean it's almost truly on what we've done so far year to date on the impact on black label, it's imperceptible. I mean, literally a few 1,000 cases kind of thing, but it's not the reason that the Tennessee Whiskey brand in the U. S. Has slowed down like it has. Another piece of that is on a volumetric basis, Black Label is up nearly 3% at the same time that we've released Apple. So think that also gives us some confidence that just the cannibalization is not there. Okay, great. Thank you. There are no further questions at this time. Are there any closing remarks? We'd just like to say thank you to Lawson and Jane and those that have joined us today for Brown Forman's Q3 fiscal 2020 earnings call. If you have any additional questions, please feel free to contact us. And thank you. Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.