Earnings Call: Q1 2020

Aug 28, 2019

Good morning. My name is Dorothy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brown Forman First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you. I would now like to turn the call over to Leanne Cunningham, Senior Vice President, Shareholder Relations Officer. Ma'am, you may begin. Thank you, Dorothy, and good morning, everyone. I would like to thank each of you for joining us for Brown Forman's Q1 of fiscal 2020 earnings call. Joining me today are Lawson Whiting, President and Chief Executive Officer and Jane 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 issued a press release containing our results for the Q1 of fiscal 2020 in addition to posting presentation materials that Lawson and Jane will walk you through momentarily. 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 discussing certain non GAAP financial measures. These measures are reconciliation to the most directly comparable GAAP financial measures and the reason 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 quick item before I turn the call over to Lawson and Jane. In the interest of time and fairness, we ask that you limit your questions to 1 per analyst. You are welcome to rejoin the queue and we will take your follow-up questions as time permits. With that, I'd like to turn the call over to Jane. Thank you, Leanne, and good morning, everyone. Today in our earnings release, we reaffirmed our full year growth outlook for underlying net sales, operating income and earnings per share as our Q1 performance was essentially in line with our expectations. What I'm going to do is walk you through our Q1 results to provide clarity to our performance given the considerable noise that exists. After I finish my prepared remarks, I'm going to turn the call over to Lawson for some additional color and comments. So before digging into our Q1 results, I thought it might be helpful to remind you how we break down our performance to better understand first, the significant drivers of our results and second, the trends that could affect our business. We have consistently isolated both the foreign exchange and distributor inventory shift to provide an to provide visibility either qualitative facility or tried to provide visibility either qualitatively or where possible quantitatively. This quarter was particularly noise with several factors influencing our underlying performance, most notably the noise introduced by the trade wars and the effects of the retaliatory tariffs particularly from Europe. While we've discussed this subject for 5 consecutive quarters, the impact in this year's Q1 is significant and is affecting us in a couple of ways. First, the buy in from prior year, which led to higher growth in the Q1 last year. And second, a reduction in margins, which is the result of either lower net pricing to certain markets where we sell to distributors or higher costs in markets where we import and distribute our products directly. Aside from tariffs, other factors can affect comparability. And in this quarter, consumer buying patterns across a number of markets are notable. With this as a backdrop, I will highlight these factors where appropriate to help cut through the noise. So now turning to our performance in the Q1. Our Q1 net sales were essentially flat in line with our expectations given the tariff and timing issues I just noted. Recall last year's Q1 underlying net sales grew 9%, favorably impacted by tariff related buy ins in anticipation of price increases, particularly in several of our largest markets in Europe. We estimate this factor and price adjustments related to tariffs reduced our underlying net sales growth by approximately 3 points for the quarter. Additionally, we approximate timing related buying patterns across a number of our international markets and our global travel retail channel negatively affected our underlying net sales growth by nearly 2 percentage points. Thus, after adjusting for these items, we believe underlying net sales grew in the mid single digits, which is in line with our long term track record of performance. And looking at our business from a geographic perspective, I'd like to start with our developed international markets, where our performance was most significantly impacted by tariff related costs and buy ins. Our underlying net sales declined 3% in the aggregate for the market there compared to 16% underlying net sales growth in the Q1 of last year. We estimate tariffs had about a 6 percentage point drag on the overall top line performance in these markets combined in the quarter. Adjusting from the tariff effect and an estimated 2 percentage point reduction related to timing of certain customer purchases, we believe our developed international business grew underlying net sales approximately 5% in line with our historical performance in these markets. The U. K. And Germany markets were most significantly affected by the tariff related buy ins and therefore both reflected underlying net sales decline. We believe our consumer takeaway trends in both of these markets remain healthy. I thought I would pause for just a moment to mention that U. K, our 2nd largest market, is navigating through multiple changes this year, including first, the uncertainty around Brexit and second, the recently announced change in our route to consumer. We have mitigation actions in place for Brexit and are executing against our plan to minimize disruptions and to maintain our business momentum during this transition to our own distribution. France and Spain, both among our largest European businesses and where we have in our route to consumer models delivered mid and high single digit underlying net sales growth respectively. France's growth was fueled by the launch of Jack Daniel's RTDs and sustained strong momentum behind Jack Daniel's Tennessee Honey. Spain continues to benefit from the focus that has resulted from our route to consumer change as growth was seen across nearly every brand in the portfolio. Moving on to our emerging markets. In the quarter, our emerging markets collectively grew underlying net sales 3% on top of last year's double digit growth. We estimate the tariff related buy ins in last year's Q1 for a number of emerging markets, including Turkey and Poland, negatively affected growth by approximately 3 percentage points. Timing related to certain customer buying patterns further suppressed the growth of our emerging markets in the quarter. We expect our emerging markets underlying net sales to accelerate over the balance of the year and approximate the growth we've experienced over the last two fiscal years. Now with that being said, in Mexico, our largest emerging market, underlying net sales grew 3%, a bit slower than recent trends reflecting the difficult macroeconomic and political environment in that country. Though we often don't discuss Brick Markets as a unit, this quarter these markets collectively grew underlying net sales in the high single digits. To touch on each market briefly, Brazil continues to focus and execute a strategy as consumer demand expands for Jack Daniel's Tennessee Fire and Tennessee Whiskey. Russia's underlying net sales growth was fueled in part by strong consumer demand of Jack Daniel's Tennessee Whiskey as well as Finlandia. China and India's strong growth was led by what we believe are early days of introducing Jack Daniel's Tennessee Whiskey to consumers in these markets where we believe represent significant long term potential. Quarterly sales in our travel retail can be inconsistent and this quarter was no exception as underlying net sales declined as expected cycling against the very strong 22% underlying net sales growth in the same quarter last year, which was influenced significantly by the timing of certain customer purchases. Looking ahead, we expect Travel Retail's underlying net sales growth rates to improve as the large timing effects move out. As a result, we expect full year underlying net sales growth in the mid single digits for the year. Now turning to the U. S, our largest market representing a little less than half of our net sales grew underlying net sales 4% for the quarter, representing an acceleration over the 3% underlying net sales growth delivered in fiscal 2019. We believe this positive momentum is Herradura as well as improving trends for the Jack Daniel's Herradura as well as improving trends for the Jack Daniel's family of brands led by Jack Daniel's Tennessee Whiskey. We believe our trends for Jack Daniel's Tennessee Whiskey are just beginning to reflect the benefits of our incremental Broadreach Media and digital investments we have made in the Q1 and we intend to continue to make over the balance of the year, enabled in part by our significant reallocation within advertising and a year over year increase in activations and promotional activities. The improving trends in our U. S. Business are also evident by the fact that we have closed the gap versus TDS on a blended basis to less than a point over the past 6 months. Further, the latest 3 month Nielsen's reflect that we are growing in line with the industry, which remains very healthy growing mid single digits. Now looking at our business from a brand perspective. Jack Daniel's family of brands underlying net sales declined 1% globally as tariff related costs and buy ins for Jack Daniel's Tennessee Whiskey, largely in Europe, negatively affected our growth by 3 percentage points. These declines were partially offset by broad based growth of Jack Daniel's RTDs, international gains for Tennessee Honey, sustained advances for Gentleman Jack as well as the increasing volumes of Jack Deener's Tennessee Whiskey in the United States. Our premium bourbon portfolio grew underlying net sales 16% for the quarter led by over 20% consumer takeaway trends for Woodford Reserve in the U. S, a leader in the super premium bourbon category. Old Forester delivered strong double digit growth in underlying net sales driven by the launch of our new innovation Old Forester Rye, which has been very well received by the trade and our consumers as well as broad based double digit growth across the portfolio of expression. The brand's new Homeplace and Distillery, which opened last summer in Louisville, has also boosted the brand's growth with nearly 100,000 visitors since that time. Once again, our tequila portfolio showed strong sustained momentum growing underlying net sales at a double digit rate, building on the double digit growth in fiscal 2019. Herradura led the growth with underlying net sales up 22% driven by higher prices and volumes in both Mexico and the United States. El Jimador shared in the double digit underlying net sales growth driven by higher volumes and prices in the United States as takeaway trends remain strong. Moving down our P and L. Gross margins were in line with our expectations declining 3.30 basis points for the quarter, resulting in underlying gross profit drop of 5%. The margin decline was driven by 2 factors that we discussed during our year end earnings call. 1st, the tariff related costs, which accounted for roughly 2 thirds of the decline and second, higher input costs primarily related to agave as well as ongoing wood inflation. Underlying A and P was down for the quarter as our increased investment behind Jack Daniel's Tennessee Whiskey in the United States, primarily media related, was more than offset by the timing of investments on our tequilas and the rest of the Jack Daniel's family of brands. Underlying SG and A was down in the quarter driven by lower incentive compensation related expenses considered to be timing only. Turning now to the full year outlook. As I said earlier, Q1 was essentially in line with our expectations and thus we believe we remain on track to deliver another year of solid results. Starting with our top line growth expectations, we expect underlying net sales growth of 5% to 7% in fiscal 2020, unchanged from our earnings call in June. The key message is that we remain confident in the health of our business. While Q1 was noisy, it was expected. After considering these factors, we believe our top line trends remain solid, growing mid single digits and supporting our outlook. Our confidence is further supported by our brands, consumer takeaway trends, which have improved in many of our major markets. Further, we expect our underlying net sales in the U. S. To continue to accelerate, reflecting our more recent blended value take away performance and sustained double digit growth for our premium bourbon brands and tequilas. We also expect Jack Daniel's Tennessee Whiskey to add to our improving trends throughout the years as we continue to invest in incremental advertising and promotional activities. In addition, we continue to expect the launch of Jack Daniel's Tennessee Apple in the United States, which is anticipated to begin shipping in September with plans to be on the shelves in October will provide incremental contribution to the year. We are encouraged by our trade partners' response enthusiasm towards this innovation thus far. We still expect gross margins to be down around 200 basis points for the year, split between cost of sales impact related to tariffs and higher input costs. Now I thought it might be helpful to remind you that we expect the cost of tariff to continue to be a drag on our margin and bottom line through Q2. In Q3, we will begin to cycle these costs from last year. And regarding our operating costs in fiscal 2020, we are planning solid reinvestments behind our brands with underlying advertising growth slightly lagging our rate of net sales growth. As a reminder, our planned advertising investment for the year includes a significant reallocation of certain investments from less efficient areas to broad reach media, digital and scalable consumer facing activations, which we expect to drive an effective increase well above our actual increase in spend. We expect SG and A to grow modestly as we remain diligent and focused on efficiency and productivity, driving some leverage to operating income. So in summary, we reaffirmed our full year outlook for underlying operating income growth of 3% to 5% and earnings per share of $1.75 to 1.85 dollars We continue to believe we have a long runway of potential growth ahead and that our business remains quite attractive with high margins and industry leading return on invested capital. In addition, we believe our long term highly engaged shareholders led by the Brown family allow us to endure volatile times such as what we are currently experiencing with tariffs and to continue to thoughtfully build our brands to endure for generations to come. We believe that regardless of the tariff related drag that significantly affected our results last year and that we expect to continue this year, the Brown Forman remains healthy with a demonstrated track record of resilience over the last 149 years and with high anticipation of celebrating our 150th year, which is just a few short months away. And with that, let me turn the call over now to Lawson for his comments. All right. Excuse me. Thank you, Jane, and good morning, everyone. As Jane said, and I'll just acknowledge it again, the significant amount of noise in our Q1 results in both sales that hit sales and the cost line make it a difficult quarter to understand. So hopefully her comments provided a lot of clarity in the slides that you have and provide some more clarity in why we remain confident in our outlook for the full fiscal year. So let me reiterate a couple of the key points that we've talked about this morning already. The tariffs are the biggest single thing affecting us both as a result of the buy ins from last year or comparing against the buy ins from last year and then also the costs that are flowing through this year. In addition, the timing of certain customer buying patterns largely in our travel retail channel, but also in a number of emerging markets are also compounding some of the volatility. But if you cut through all of that, as Jane has said a couple of times, we really do believe that we're still delivering that mid single digit sales growth and importantly maintaining our consumer momentum. Although another reason I believe that the overall business remains healthy healthier maybe than the headlines might read is simply that our takeaway trends have improved in most of our major markets. So if you take a look at the U. S. And the UK and Germany and Poland and some of the other real big markets around the world, our consumer takeaway, which is really the leading indicator, is moving in the right direction. So it gives us some confidence that those markets will continue to pull through. 3rd, we do believe that the top line results will start to look better over the balance of the fiscal year, partially because we're going to cycle past the tariff related buy ins that happened last year. But the launch of Jack Daniel's Apple will have a meaningful impact and then just the overall momentum that we want to continue to see in the U. S. Business from our planned investments and focused execution. We anticipate our bottom line results will continue to be negatively affected through Q2. So this is going to be tough for another quarter, but then we get into Q3 and we get to cycle more like for like comparisons that it ought to be a little bit clearer and easier to understand. But last key point, when you cut through all this noise, we do feel like our business is still on track. Therefore, we reaffirmed our outlook for underlying growth in the full year net sales and operating income this morning. So enough for the quarter. I want to talk a little bit about a little bit more of the strategies that we're pursuing that give us some good confidence for the long term. I want to spend a little time this morning talking about the U. S. Results and why we feel that they're moving in the right direction and providing confidence in the long term growth outlook for us. As you heard from Jane, the U. S. Underlying net sales trends in the Q1 reflected an improvement from our fiscal 2019 performance with stronger trends across much of the portfolio. As a reminder, the U. S. Market has by far and away the most developed portfolio of brands of any of our markets. And that diversification of the portfolio is a big benefit to us right now. Our growth is not reliant on a single trademark. For example, we saw very strong performance in Woodford Reserve and that's been going on for a number of years. The brand is about the top of the 1,000,000 case mark globally. And so that is becoming a very meaningful brand for us. Herradura continues to grow well into the double digits and is a very another strong performer. And then we continue to get good performance in El Jimador and Old Forester, which is actually the fastest growing brand in our U. S. Business these days. So all these together are meaningful and moving the top line growth of this market. In order to accelerate but in order to accelerate our portfolio development in the U. S. Market, we did we established something called the Emerging Brands Group about a year ago. We've talked about this a couple of times I know on these calls. But as a reminder, it's a group of about 40 plus dedicated individuals that really focus just on building some of our smaller, very premium brands, brands like Old Forester, Cooper's Craft. Now we've inserted Chambord in there. They focus on our 3 single malt scotches, but particularly emphasizing Glendronic in the U. S, Slane Irish Whiskey and now our most recent addition Ford's Gin. Consistent with the message that we had just a few weeks ago at our Annual Shareholder Meeting, these brands continue to thrive. And one of the points that I think we're all very proud of is that they're growing each one of those at least the major ones are all growing faster today than they were 12 months ago when we first put this group together. I couldn't be more proud of the team and accomplishments and believe that they've really done a good job in setting us up for the next generation of growth for the company. But it also points to another factor that we think we can use and export to the rest of the world and that's really the benefit of focus. Focus is what really builds brands in our industry and I think we're showing that focus can have a meaningful impact on our growth rates. These lessons we've learned here in the U. S. Business at least in the early days, we're not declaring victory yet, but certainly the early days are moving in the right direction. But this focused effort really can be used around the world. So our portfolio outside of the US as you all know is much smaller and largely focused on Jack Daniel's Tennessee Whiskey. We know that we need to have a both and here. We need the Jack Daniel's family to continue to grow around the world and it is, but we also know the importance of building a super premium portfolio of brands. So we want to now replicate the success we've had in portfolio development in the U. S. And make that work in our largest particularly developed international markets. So we've invested incremental resources in Europe, places like Poland, Germany, France and the U. K. And as a result, we've started to see a meaningful acceleration in the growth of some of these brands, particularly Gentleman Jack and Woodford Reserve. So although these brands today are relatively small outside of the U. S. I mean order of magnitude Gentleman Jack's about 250,000 cases Woodford's about 100 and 50. But we believe we've only just begun this long term growth journey. It was simply over the history over the last couple of decades was not happening fast enough. Portfolio development was not happening fast enough when we were using third parties as our RTC partners. Now we've taken control in most of the largest markets in the world giving us at least the ability or a better chance to win in the world of portfolio development. So despite the current drag from tariffs in a very noisy quarter, we do believe we've got the right long term growth ambitions and that we can continue to deliver. Before I conclude, I do want to say a few words on FordsGen. Since I did not get the opportunity to talk about it last call, we missed we actually announced the acquisition of Ford's Gin a couple of days after the call. But while this brand is small today, it's a little over 30,000 cases. We believe it has the potential to be a powerhouse in the upcoming years. It's just a beautiful liquid paired with an intriguing package and rich brand stories. And the combination of all that is a formula that works well for Brown Forman and something we think we can build upon. Furthermore, Ford's gen we have put it into that emerging brands group that I was describing earlier. But Simon Ford, the Founder and his team will help us up our game I think in the on premise. They've done a beautiful job in some of the most prestigious bars and restaurants around the world, in seeding the brand in a way that very few entrepreneurs actually can achieve. And with a very large percentage of the business in the on premise right now, we think we can take the Brown Forman system, the Brown Forman Forman Emerging Brands team and use the size and scale of our system to really find new and exceptional ways to grow. So I'm really looking forward to many success stories on Ford's gym as we talk about that in the coming years. So look my last point, just want to thank our employees who've been putting in the extra time and effort through these volatile times. Continue to deliver the growth we're seeing is only possible because of our super talented teams around the world. And I just want to thank you again. So that wraps up our prepared remarks. Dorothy, can you please open up the line for Your first question comes from the line of Amit Sharma with BMO Capital. Hi, good morning, everyone. This is Drew Levine on for Amit. Thanks for taking the questions. I just wanted to touch on the top line. Just trying to think about the cadence through the rest of the year. Obviously, you have some easier comps in the next quarter, but you also mentioned some timing related issues with customer ordering patterns. So maybe you could kind of give us some help on when those should reverse and kind of how we should think about the cadence through the rest of the year? Thank you. Sure. I'll take that. As you said, one of the things that we know is going Q2, which should help our top line quite a bit, is that we'll be cycling against last year's give back a tariff. So that top that will what you saw in this Q1 will be the opposite the time we get to our Q2. And we're further we're past the any impact to the sales line from price reductions with tariffs in the handful of markets where we reduced our price to compensate for tariffs. So that will all be behind us in the Q2. Further, we'll get a benefit from the introduction of Jack Daniel's Tennessee Apple. It's expected to ship in the middle of September and therefore hit the shelves. Plan is in sometime in October. So we'll get a benefit from that as well in the quarter. So I expect the Q2 to have a nice top line growth. I think our back half of the year will continue to benefit from the acceleration in the U. S. Business as well as the Tennessee Apple introduction. So all in all, again, we walked through why we believe the top line of 5% to 7% is still achievable, because we're essentially still on line with what we in line with what we were expecting in the quarter. And so nothing has changed that outlook for us. Your next question comes from the line of Judy Hong with Goldman Sachs. Thank you. Good morning. Just following up on the last question. Jane, you talked about the benefit from Apple launch in the second quarter. Just wondering if you have any kind of quantification that you could give us on what you think the impact could be? And then I think more broadly, if you think about the U. S. Market, clearly we've seen some improvement. I think your promotional activities went up in the quarter. So I guess I'm just wondering how you see sort of your strategy to accelerate the U. S. Growth both from kind of the promotional activity whether we should see that continuing as we go into the holidays or we should start to see more of an innovation driven growth in the U. S. Market going forward? Let me try that. Again, as we get the impact I'm not going to get down to the 10ths of points here. I think we communicated at year end that we expected Apple to contribute incrementally to our business this year about 0.5 point of growth. Because we're getting it out in the shelves in the month of October, you'll start to see some of that come through. It won't be material, but it will help our Q2. As it relates to your questions in terms of why we believe the U. S. Business will continue to accelerate, This is really similar to what we discussed in our year end call. You'll recall that our takeaway trends there, which have been improving even at the end of April, were not reflected in our financial results. We grew last year in the U. S. 3%. So we said takeaway is a leading indicator. Lawson just mentioned and reminded us of that again. Our takeaway trends are well in the mid single digits now 5%, 5.5% already. Our financial results don't reflect that. So as the year goes on, that will be coming through our financials. So that acceleration will continue to see the overall financial. Further, the we do plan as you noted, we do plan to continue the incremental spend behind Jack Daniel's Tennessee Whiskey. We believe that the incremental monies that we're putting behind Apple, which actually are beginning in our Q2, will also benefit the whole Jack Daniel's family of brand and the parent company, a parent brand. That combined with incremental promotional activities will continue to celebrate that brand. And we do plan that all throughout the year. Yes. I mean a couple of things I'd add on top of it too in terms of confidence for the U. S. Business as a whole. Some of it is the brands themselves, the Woodfords, the Herradura, the Old Foresters that we keep talking about have simply gotten bigger. And so and they're maintaining the growth rates that they've had for the last couple of years or in some cases even getting better. And so you get a more meaningful impact from those brands and you combine that with really not much in the way of a drag from our tail. I mean we have a couple of brands obviously that are not growing, but it's not a very meaningful impact from those brands. And so I think that helps the overall Brown Forman portfolio. I mean I think there is something to be said for the U. S. Market the U. S. Distribution system itself which has been through a bit of turmoil over the last few years seems to be settling down now and everybody's getting their job done. So that I think is a bit of a benefit too. And then we continue to have what I can saw a strong discipline around revenue growth management trying to manage the business in what we think is the smartest way possible. I think that message has gotten through and people are executing on that. So things just feel a little bit better. Great. Thank you. Your next question from the line of Peter Grom with JPMorgan. Hey, good morning everyone. Good morning. So I just wanted to get a bit how are you? I just wanted to get a bit more color on the UK distributor change. I know the company has done a good job of developing in house distribution over the years, but the UK is a large and important international market that is kind of dealing with a number of its own challenges. So first, it would be helpful to get more background as to why the agreement wasn't renewed. And then second, realizing the company is taking mitigation efforts, But will there be a point in the future where you have greater clarity on whether or not these issues could have a financial impact on FY 2020 or beyond? Thanks. Okay. Yes, let me I'll start with it a little bit and Jane can finish on some of the impacts on fiscal 2020. But let me back up a little bit just for those that haven't been close to this over the years. We entered with Bacardi entered it into what we call it a cost sharing arrangement back in 2002. So this is a 2019 or 17 year partnership that we've been in there. And we've basically what it was, we're sharing the sales team between the 2 of us and then also sharing some back office support. So we have always held responsibility for our own brands on the marketing of our own brands and let the shared force do their job. And it's been a long successful relationship. It's but both companies agreed that it was just time. It was time to take control of our own business and develop our own portfolio. So as being the 2nd largest market in the world for Brown Forman, one of the comments I made in my prepared remarks was about how we now have a better chance at developing the rest of the portfolio, which is what we want to do. We really when we started the agreement 17 years ago, there were only 13 brands in the between both companies, 13 brands in the portfolio and it was largely complementary as they were focused on rum and we were focused on really on Jack Daniel's. We now have something like 110 brands in that structure. I mean both companies have grown tremendously over the 17 years and it's everything from scotch to Irish whiskey to tequila. So there was a lot of overlap that became a starts to become a problem in terms of how you're going to get priorities, how you're going to set priorities for your team. So we made the decision and the time was just right and we'll see how trends going. Every time that we have made a distribution change in our past, I think we've had a nice uplift from it. So we have confidence that we've done this enough times that we won't see a tremendous amount of disruption and life goes on. So yes, it's going to take us a few months to get through all this stuff, but we've put a lot of plans in place and to make sure that it's not a lot of disruption this year and we hope to be in a better place starting at the beginning of next fiscal. Yes. So just to add on to Lawson's and answer your question as it relates to any financial impact to this year. Yes, I would like to step back and say this is really unlike a lot of other changes to own distribution companies such as Spain and France where we actually did take a financial hit in those years where we moved to them and that was because of the inventory reductions that resulted from the 3rd party relationship to us. Well, on this case, we felt that impact 17 years ago, when we moved from our 3rd party partner at that time to this cost sharing arrangement. And the inventory is owned by us today. So there will not be a big financial impact as a result of that. Now we will start to see some start up expenses, although think of them more as one time in nature, incurred later this fiscal year for putting in systems and hiring and training people. This has all been factored in our outlook. What's interesting about this particular distribution arrangement is, again, 17 years ago when we moved to this cost sharing, we would have not only had the hit from the inventory reduction, we would have also gotten the benefit at the time from the increased margin from the margin going away that we used to pay our distributor. So this cost sharing arrangement, we share in SG and A. That's already in our P and L today. So you're not going to see incremental costs really going forward once you get past the start up expenses that aren't material in nature and they're in our full year outlook. So hopefully that answers your question. Material in nature and they're in our full year outlook. So hopefully that answered your question. That's very helpful. Thank you. Yes. Your next question comes from the line of Vivien Azer with Cowen and Company. Hi, good morning. Good morning, Vivien. Good morning. So it sounds like things are very much getting back on track in the U. S, but there's certainly from a macro perspective a lot of noise in developed Europe just in terms of kind of the economic health of the region and then some country specific uncertainty namely with Brexit. So Lawson, given your long tenure at the organization, can you just remind us like how this business performs in particular in Developed Europe against more challenged macro backdrop? Thanks. Well, look, I mean, the some of our largest markets in the world are obviously in Developed Europe. But this has been a place where we've been able to grow mid single digit now for I don't know many years. And as we look at the true underlying, I mentioned that the consumer takeaway numbers in there. I mean, it's why we think we've got confidence that we'll continue to be able to grow at those kind of rates. Now one of the I don't know if you were implying this or not. I mean, the is the world of macro political issues and all that kind of stuff starting to hurt our brand as being sort of Americana and something we at least ask ourselves. But this is not the first time that we've been through. I mean it's a little bit different this time, but certainly there have been some anti American sentiments that have leaked through various markets around the world. But for whatever reason the Jack Daniel's brand seems to be a bit insulated from that. We just haven't seen any negative backlash against some political issue impair the brand. And in fact, if you rely on the takeaway figures, it's not happening now either. So we're continuing to fight through. It is a difficult environment. It's a difficult pricing environment over there too. But I think our strategy of maintaining consumer momentum, which you've heard us now say multiple times is still the right thing to do for the long term good of the company. It's to maintain that momentum. And so I'm happy as long as we continue to get that top line Does that answer your question? Yes. That was perfect. Thanks. Your next question comes from the line of Tim Ramey with Pivotal Research. Thanks so much. Retail, but that segment sometimes is a canary in the coal mine for overall economic activity and potential slowdown of markets. It sounds like you didn't really see any slowdown that would be attributable to the base business, but I just wanted to ask that. And number 2, if Jane could comment on the tax rate outlook for the year. Sure. I'll talk about the tax rate first. We had guided to a tax rate of around 21% for the full year. We now think it's going to be somewhere between 20 $20.5 so slightly better than what we had provided at year end. As it relates to Global Travel Retail, in terms of anything that we're seeing there. Again, we've got it. So we think we're going to continue to grow mid single digits. Are there things happening in various airports and channels that happens all the time ebbs and slows? I don't know if that's the same. Yes. I mean our growth last year in the Q1 in that channel was enormous, 22%. So I mean it's and I think it gets a little more exaggerated over time as we've gotten bigger in that channel and we do more business with Woodwood Reserve. The single malt scotches can be I mean you can see some volatility in the way that they order those. So it's just it's part of the game playing in there is you're going to live with the choppy order patterns. But I still I don't think there's really a change in the outlook. What we've not seen is a decline in travelers and all those kinds of macro things. That stuff all seems to be pretty solid. Terrific. Thanks for your help. Your next question comes from the line of Laura Lieberman with Barclays. Thanks. Good morning. Good morning, Lauren. Hey, I just want to ask a little bit about tequila. So first was, I guess, to follow on on some of the comments that you've made last quarter around pricing, receptivity of the market and the competitive environment. So just kind of how that developed, what you've seen in more recent months and the outlook as we move forward? And then also just it feels at least from my seat in Times Square like there's been a major acceleration in your efforts to market both Herradura and el Jimador in the U. S. Or maybe it's just in New York. So maybe you could just talk about if that's the case and sort of a bit of why now? Why not 2 or 3 years ago? Why not 2 or 3 years looking forward? Why is this the right moment to really step up efforts on those 2 brands domestically? Thanks. You want me to take the pricing part of it? Yes. Yes. So the tequila category remains amazingly healthy, particularly in the United States. I think if you looked at last year's IWSR, the overall category grew 16%, so quite nice. But as it relates to the pricing environment, both in Mexico and in the U. S, that's one category where you're seeing pricing. You're seeing fairly significant pricing in Mexico, and we've taken fairly significant increases as well on our brand. The overall category down there is actually volume has actually slowed value to some categories of the Mexican market actually down a bit from a volume perspective, but the overall value improved year over year. So if you move to the U. S, as I said a moment ago, we're actually starting to see pricing across all price points in tequilas. We took some pricing last year on Herradura and el Jimador. We took some significant pricing on our low value in tequila this year, Pepe Lopez, and we continue to expect to take some more surgical increases across a number of markets on Herradura and El Jimador this year. We're continuing to monitor what's going on in the environment. People are taking it as we talked about like you said at year end more related to that incredible increase in the cost of the agave which is cyclical pattern that we discussed and expect that to come back in the next couple of years. But people are trying to offset these increases as we are by passing on pricing. I mean, I think to add on the why now a little bit. I mean, obviously, we bought these brands 12 years ago and it took us a while to sort of get our feet underneath us with tequila and it was a sort of a slow start. We have changed the model for tequila quite a bit on El Jimador in terms of premiumizing in Mexico and continuing to really grow in the United States. And it's gone from get these little 150,000 cases to 600 over that period of time. So really good growth there. But Herradura at the higher price point is the brand where we're going to put the most sort of consumer facing activities out there. And really the category the ultra premium tequila category in the U. S. Which was always led by some of the big brands like Patron, but is a very healthy place to be. The consumer demand is very healthy. I think the consumers love the mix ability, the authenticity, the it's just a hot category. And so I think it's really taking off and it's some of the things that we would have put down in the rationale for interest back in 2,007. And the recession hit. Yes, the recession hit. The recession hit. Yes, the recession hit. It's in there after. How about the bars? A lot of those consumer dynamics are coming true today. And so, yes, it's just a hot place to be and somewhere we want to continue to invest. And beyond the U. S. And Mexico, it's so early in its infancy as it relates to the rest of the world that we're very excited about the opportunities to introduce consumers to tequilas around the rest of the world. That's also in line with Watson and what he was talking about in our investments and focus and people to premiumize our portfolio beyond Jack Daniels in those markets outside of the U. S. Why we think there's such tremendous opportunity. Those brands are part of it. Okay, great. Thank you so much. You're welcome. Your next question comes from the line of Bryan Spillane with Bank of America. Hey, good morning, everyone. Hey, Bryan. Got a couple of Jane, just a couple of cleanup questions and then just one broader question for Lawson. So just first on the model. I might have missed this earlier, but I think on the last call you talked about gross margins for the year being down 200 basis points. So is that still a good figure to work with? Yes. About that is perfect. Yes. Okay. And then I think last year the tariffs were about 100 basis point drag price mix for the annualized for the full year. So if this is really the last quarter, I guess, where we'll have that sort of drag year over year comparisons, we should see a little bit of a pickup in price mix as we're modeling out the balance of the year because we will have kind of lapped all that noise? The latter part of your question is correct. I want to say that the impact last year was maybe a bit more, 160 basis points is kind of what I had in mind. Okay. So but yes, as we once we get past Q2, we'll have lapped the cost of the tariffs. Okay. Thanks. And then, Lawson, with the I guess the emergence of hard seltzers here in the U. S. And it's sort of a slash, right? I think is it a beer? Is it a spirit? I think consumers have a lot of kind of varying viewpoints of kind of what it is. Can you kind of just maybe talk about how you're observing it and whether there's some opportunities that might present themselves for of your brands, not necessarily a hard seltzer, but is it maybe the format, right, having things in more convenient portable ready to go formats, maybe consumers more sort of open to that now than maybe they had been before at least in the U. S? Yes. No, I mean, I think you're right. I wanted to we did this at year end. We talked about the categories to be in whiskey, tequila and gin and how we feel good about that. And then the IWSR I know puts a lot into the format of the next 10 years is going to be RTDs. And we've got about a 16,000,000 case RTD business around the world, 7 new mix and 9,000,000 cases of Jack Daniel's. So but as the vast majority of that is outside of the United States. So how are we playing it inside the United States? I mean, as I'm sure everyone knows, it's from a tax perspective very punitive against spirits relative to beer or malt. So certainly that is a disadvantage that the spirits players have relative to these malt brands. But I do think we were in fact there was a commercial on television last night for Truly where the guy took it was a bottle of whiskey and it was a generic bottle just that whiskey across the top of it and he actually poured it out and went over to his cooler and grabbed his Truly out of cool. I don't know if anyone has seen that yet. So obviously Truly is coming at us a little bit. I'm not but I would argue that the whiskey category is a little bit more insulated from this sort of spike in hard seltzer demand. It's closer in on beer and then likely closer in I think on some of the lighter drinks given it skews female and it skews younger. So you're going to get a lot of you're going to start taking from vodka. So I don't worry too much about our whiskey portfolio and the impact that it might have on there. But we spent a lot of time thinking about how can we play in that there and we're running some tests in California right now with Jack Daniels under a spirit based model. But it's given the tax thing that I mentioned they're expensive. So we feel pretty good about it. It is an interesting phenomenon to watch and see how many people are going after these seltzer drinks. But I'm not going to predict the category direction, but we've seen this before in the RTD world. A lot of brands go up fast and go down. So we're trying to do it on our own way mostly with the Jack Daniel's brand. Thanks for that Lawson. Have a great Labor Day everyone. You too. Thank you, Brian. Your next question comes from the line of Chris Pitcher with Redburn. Thanks very much. A couple of follow-up questions really. On the U. K. Business, just to get a little bit more understanding on where you're sourcing the resources for your own business. If we look at the development of that joint venture, you've become a much more significant player than your partner was sort of back when you first set it up. Are you able to just basically carve out your respective costs and those salespeople will be enough to support the business? Hence, you're saying there isn't going to be a significant increase in costs? Or can or does your existing partner still require the headcount they currently have in Bacardi Martini? And then just secondly following on from the tequila, one of the other distillers recently have been saying that the agave costs aren't falling off as perhaps as quick as they thought. Can you comment on when you expect your higher agave costs to start to run off? Are you seeing some of that being pushed out a bit further? Thanks. I mean, I can do the UK one or we both can. I mean there's a contract in place that goes through a process of how we're going to split the teams up for the most part. And so that so yes, we're working through that right now. But on the cost side of things, I think January said, we expect it to essentially be neutral to where we are today. We already have marketing folks there, our own marketing folks. We have so this is really the sales force. And so yes, we'll We're going to split the teams. Yes. Yes. So we already have those. Yes. And then in terms of the agave, really we haven't got haven't really changed what we believe will happen. Again, we can go back in terms of when we will start seeing that cycle of pricing of the cost of agave to go down. As we talk at year end, we've had some visibility into the number of plantings by year, by calendar year. And that points to really probably late 2021 calendar 2021 before you start to see that. But there's a lot of dynamics going on. I'll just say that now in terms of the market with people our competitors ourselves actively taking heavy pricing particularly in Mexico where the margins aren't as attractive as the U. S. So they can take that agave and move it toward the United States and support the great growth that's happening in the category in the U. S. So there's a lot of dynamics that could impact that, but that's really nothing that's changed this right now, but it could perhaps come a little bit earlier, meaning start to see start to come down a little bit earlier should some of the volume in the Mexico market where it's low margin, it's being suppressed really not being needed as quite as high as what is expected in the U. S. So there could be some little things like that, move it up a little sooner. But we've said that toward the end of calendar 2021. Thanks. And just one final clarification because you've reiterated your earnings per share range. You've got a lower tax rate. Is that help compensate for some of the adverse currency movements that will be running through particularly in say the U. K. Market? Is that the way to think why earnings hasn't changed despite the tax? Yes. I don't know if you're looking at yes, so foreign exchange for us, I think we have a couple of cents maybe in our full year forecast, which is fairly consistent, I think, with what we started off in the year. But what you're probably asking is, hey, I've seen a lot of movement in the currency just themselves. But we have a hedging program in place and have for a number of years. It's a 36 month hedging program. So what you're seeing is some of the underlying results really being offset by our hedges. That's what you're seeing right now. So that's why it's not expected to be a big deal this year, because we would have hedged these currencies before now. So the hedging offsetting the fluctuations you're seeing in the market. Hopefully that makes sense because these were laid down some time ago at better rates. And there are no further questions at this time. I will turn the call back over to Leanne. Thank you, Lawson and Jane, and thanks to all of you for joining us today for Brown Forman's Q1 fiscal 2020 earnings call. If there are any additional questions, please feel free to reach out and connect with us. Thank you. Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.