Earnings Call: Q3 2019

Mar 6, 2019

Good morning. My name is Courtney, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brown Forman Third Quarter Fiscal 2019 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Jay Cobalt, Vice President of Investor Relations. Sir, you may begin. Thanks, Dorothy, and good morning, everyone. I want to thank you for joining us for John Kornman's Q3 2019 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 issued a press release containing our results for the Q3 of fiscal 2019. In addition to posting presentation materials that Lawson and Jane will walk 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 the risk factors that you should consider in conjunction with our forward looking statements. Other significant risk factors are described in our Form 10 ks, Form 8 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, a reconciliation to the most directly comparable GAAP financial 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. So with that, I'll pass the call over to Lawson. All right. Well, thanks, Jay, and good morning, everyone. Overall, I'm pleased with the Q3 and the year to date results that we released this morning. In particular, we're focused on maintaining our top line momentum around the world. Underlying net sales are largely where we expected them to be at the beginning of the fiscal year, growing about 6% after adjusting for the impact for tariffs. As a reminder, we chose to absorb the majority of the tariffs this fiscal year in order to maintain that solid business momentum. And James can talk a lot more about that in just a few minutes. As a result, though, we are on track for another year of strong sustained top line growth. Given recent trends and our expectations for a relatively strong Q4, we reaffirmed our fiscal 2019 outlook of 6% to 7% underlying net sales growth and 4% to 6% operating income growth. Importantly, these estimates have been unchanged since Q1. So as I said, Jane will run through the financials in more detail. But before she does, I'd like to take a few minutes this morning to talk about the ongoing evolution of both our geographic and our brand growth drivers and really how they've changed over the past decade or 2. For many years, Brown Forman's growth was powered by Jack Daniel's Tennessee Whiskey in the United States. But over the last decade, we've invested significantly in the international expansion of the company as all of you are very well aware. We've grown the portfolio within the Jack Daniel's family of brands. We've reshaped the rest of the portfolio to get out of weaker businesses and invested in faster growing premium spirits categories. And we've put significantly more resources to organically accelerate the growth behind 2 of the fastest growing spirits categories, bourbon and tequila. This increasingly balanced approach has been an integral driver of the company's ability to deliver consistently high rates of growth with limited volatility. Let me use the U. S. As an example where we've really been focused on portfolio diversification. We're seeing an increasing share of growth coming from other brands in our portfolio beyond just Jack Daniel's Tennessee Whiskey. For example, Gentleman Jack, Jack Daniel's Single Barrel, Jack Daniel's Tennessee and Jack Daniel's Tennessee Rye continue to grow nicely and provide margin benefits for the trademark. Jack Daniel's Tennessee Honey is now about 750,000 cases in the U. S. And Jack Daniel's Tennessee Fire is roughly 400,000 cases and both continue to grow. Additionally, we've been investing in what is now a leading portfolio of Bourbon and Steeler Brands. The Woodford Reserve and the Old Forester trademarks have been registering impressive gains in the bourbon category over the last several years, approaching 1,000,000 cases between the two brands. Woodford is on track to be the single largest contributor to growth in the U. S. Market this fiscal year. The brand is simply on fire and has a long runway ahead of it. Old Forester continues to present itself as a leader in American Whiskey. The brand has really gained a reputation for quality and innovation with a balance of its core 86 and 100 proof expressions, the popularity of the Whiskey Rose series and the annual release of the acclaimed Birthday Bourbon. The opening of the Old Forester home place on Louisville's Main Street and the recent release of the Old Forester Rye contributed to its position as a real leader in the renaissance of American whiskey. We're also seeing very nice growth in our tequila portfolio in the U. S. With Herradura over 200,000 cases now at a $40 price point. El Jimador was a 160,000 case brand when we purchased the company 12 years ago, and today it's over 600,000 cases in the United States. These brands are the most material drivers of our U. S. Growth, but we're also hard at work on developing the growth drivers for the next decade. The last summer, we created an emerging brands team in the U. S. To focus on some of our high end super premium brands, including Benreoc, Glen Dronic Single Malt Scotches and Slane Irish Whiskey. We also put Herradura and Old Forester into this group. And I'm pleased to say that we have accelerated the growth rate on every one of these brands over the past year. The team has really done a fantastic job making and growing these brands a bit faster and making them into brands where we will see a meaningful impact in the future. We believe we've positioned these burgeoning brands to really become the future growth drivers in the highly profitable yet competitive U. S. Spirits market. In terms of our increasing geographic breadth, 30 years ago, roughly 20% of Jack Daniel's Tennessee Whiskey volumes were from outside the U. S. So it was sort of an 80% U. S, 20% international. Today, it's flipped where over 60% of the volumes are international and only 40 percent inside the United States. And over the last decade, 80% of its incremental growth has come from markets outside of the U. S, more evenly between developed international and emerging markets. Our developed international markets are performing well, growing comfortably in the mid single digit range, in line with our historic rates of growth. Europe and Australia remain solid contributors as we have been steadily the We're also putting more focused resources on building our super premium portfolio in Europe. Although much smaller than the Emerging Brands team in the U. S, the idea is the same. We've asked additional resources to focus on super premium brands that will fuel the next generation of growth. For Europe, that is primarily about American whiskey leadership led by Gentleman Jack and Woodford Reserve. And while tariffs complicate our near term American whiskey strategy, we'll continue to invest in momentum against our medium to long term goals in the developed world. Emerging markets and travel retail have been delivering even higher rates of growth as we are in the early stages of building our brands in these major population centers of the world, including outstanding results over the last few years in both Mexico and Brazil. And at approximately 20% of total company revenues, we believe these markets are rich with opportunity for our brand portfolio and over time additional route to market investments. This is also an area where we under index relative to our new competitors, but we also really believe that we've got a long runway ahead. The key takeaway is that we've been expanding the geographic and portfolio drivers of our growth and diversifying our revenue base in categories that we believe have the best long term global growth potential. At our Investor Day this past December, we shared with you our strategic framework. If you recall, the framework covered 4 focus areas, including portfolio, geography, investment and people. We believe that through executing against this framework, we'll extend our leadership of premium American whiskey around the world and continue our track record of consistently delivering profitable growth. While tariffs remain a near term challenge on American Whiskey exports, we'll weather this storm as we have so many other challenges over the last 150 years as we look to create value for our shareholders. Now I'm going to turn the call over to Jane for a review of the financials. Okay. Thanks, Lawson, and good morning, everyone. I plan on covering 3 main areas today during my prepared remarks. First, I will review our year to date results for the Q3. 2nd, I want to discuss our full year fiscal 2019 outlook, which we performed this morning. And 3rd, I will cover our first capital allocation. After I complete my prepared remarks, we'll open the call up to Q and A. As Lawson said, we delivered solid results during the 1st 7 months of the year despite the substantial burden that tariffs had on our business. Our underlying net sales grew over 5% in the 1st 3 quarters of the fiscal year. Now the noise around buy ins and givebacks associated with tariff inventories at the retail level that we discussed on our Q1 and Q2 earnings call is behind us. However, we've seen to see the cost of tariffs hit not just the cost of sales and gross margin, but also our underlying net sales growth in the quarter year to date. In markets where we own inventory, and sell direct, tariff costs are through our P and L is higher cost of sales. This treatment represents the majority of our tariff costs. However, in certain markets where we sell through a distributor, the effect shows up in our net sales as we lower net prices to compensate for the incremental tariff costs that our partners are incurring. We estimate that these price adjustments reduce our year to date underlying net sales growth by approximately 1 percentage point. Thus, our underlying net sales growth of 6% after adjusting for tariff is largely in line with what we expected at the beginning of the year. A very solid performance against last year's 7% growth in the 1st 9 months, which were not affected by tariffs. While I'm on the topic of tariffs, we continue to work with our government affairs partners and industry associations such as to resolve the situation. The tariffs remain in place. They will have an estimated annualized cost to our company before taking into account any mitigation actions of roughly $125,000,000 As we have discussed previously, we have taken actions to mitigate roughly half of the tariff impact we expect in fiscal 2019. As a reminder, incremental tariff costs begin to impact our operating results beginning in October 2018. So we anticipate that we will have about 7 months of tariff drag on our results this fiscal year. Specific to our Q3, underlying net sales grew 4% and were negatively impacted by about 1 percentage point due to tariff related pricing actions. Excluding this effect, underlying net sales grew over 5% by the quarter. Foreign exchange continued to weigh heavily on the top and bottom line results through the 1st 9 months of the fiscal year as the U. S. Dollar has appreciated against most major currencies over the last year. FX impacted both our reported net sales and operating income growth by roughly 3 percentage points. When combined with a slight year to date increase in distributor inventory levels, we reported net sales of 3% and reported operating income increased 2%. Revenue growth was well balanced across our portfolio. Performance was led by the positive underlying net sales growth across the acting of family of brands. Carref related pricing actions reduced the family of brands underlying net sales growth by 1 percentage point from Opelfeit. Our Permian bourbons, including Old Forester and Woodford Reserve, grew underlying net sales 24% and our tequilas including Herradura, our humidor and new niche RTDs grew underlying net sales in aggregate of 13%. Now moving down to P and L for our gross margins. Year to date gross margins declined 190 basis points year over year. The impact of absorbing the majority of the tariff costs accounted for roughly 2 thirds of this decline, while higher input costs for both wood and agave drove the remainder of the decrease. Gross margin compression was partially offset by the continued tight management of SG and A spend. Underlying SG and A declined 2% due in part to lower personnel costs, including compensation related expenses. I want to take a moment to point out that we expect fiscal 2019 will mark the 5th straight year of SG and A leverage we've delivered via our efficiency and productivity initiatives. It's important to note that while we leverage prior investments such as EnRoute to Consumers, We also increased our SG and A in markets such as France and Spain as well as established the emerging brands group in the U. S. Now on the same period, we tightened our focus behind building our brand and consistently reallocated from SG and A to increased investments behind the consumer, growing our underlying A and P roughly in line with our sales. Our underlying A and P investment grew 3% year to date as reinvestment in our American Whiskey brands, including the 1st year of our Woodford Reserve Kentucky Derby Sponsorship, Jack Daniel's Tennessee Whiskey and the new Old Forester Homeplace and Distillery. Now pulling it all together, we grew underlying operating income 4%. Higher operating income coupled with a significant reduction in our effective tax rate resulting from last year's Tax Act, more than offset higher interest expense and a pension settlement charge and helped higher the 12% EPS growth of $1.40 per share through the 1st 9 months of this year. Now let me move on to my second topic and I'll share a little bit more color on our reaffirmed outlook for 2019. Given our year to date results, our improving recent takeaway trends and easing comparisons in our 4th quarter, we remain on track to deliver another year of strong underlying net sales growth in the range of 6% to 7%. Our trends outside the U. S. Remain healthy. And in the U. S, we are seeing encouraging trends in the recent takeaway data that points to further acceleration in our business from the year to date underlying net sales growth of 4%. As we discussed on our Q2 call, our brand activation and promotional periods were back half weighted. Combined with the strong execution by our sales team and distributor partners, we have seen a meaningful acceleration in our U. S. Business over the 1st 9 months from 2% underlying net sales growth in Q1, 3% in Q2 and 5% in the most recent quarter. We expect that this momentum will continue as we move into fiscal 2020. Looking at our U. S. Business over a longer period, our recent mid single digit rates of value growth are in line with our average growth rate over the past 5 years. We're very pleased with our consistency and sustained solid growth in this important market, which is also in line with GBS growth over that same period. As a reminder, top line comparisons for the company softened from 7% underlying net sales growth delivered during the 1st 7 months of fiscal 2018 to 4.5% in the 4th quarter. And comparisons are even more dramatic on the bottom line. Our year to date underlying operating income grew 11% during the 1st 9 months of fiscal 2018 and then declined 4% in the 4th quarter. Also recall, our reported SG and A in the Q4 of last year included a $70,000,000 contribution to create a charitable foundation. We anticipate gross profit will remain under the pressure in Q4, primarily due to tariff and cost of sales inflation on wood and agave. As a result, we anticipate our full year gross margins will decline more than 200 basis points as of 2019. Given expectations for modest SG and A declines for the full fiscal year and solid investment in A and T, we continue to expect our underlying operating income will grow in the 4% to 6% range and earnings per share to increase 11% to 18% to $1.65 to $1.75 This outlook assumes the tariff's remaining effect throughout the remainder of fiscal 2019. Now let me move on to my 3rd and final topic today, a quick discussion on our capital allocation. As you know, consistent share of our revenue growth and efficiency of our business model allows us to generate strong and growing free cash flow. And over many years, we have followed a systematic approach to allocating this cash. First, on our list is appropriate reinvestment back into the business to meet future anticipated demand. 2nd, exploring our cash dividends and third, in the absence of meaningful M and A opportunities, we look to return excess cash as special dividends and share buybacks. Over our past 12 months, we've returned an aggregate of $1,000,000,000 to our shareholders. At the same time, we've continued to invest behind our business, expanded our production capabilities, leveraged technology for cost savings and revenue growth initiatives, increased bookings and inventory to meet future growth expectations, fully funded our employee teaching program and established a Cherryville foundation for the communities where our employees live and work. This disciplined approach to capital allocation, combined with our track record of delivering sustained top line growth in the 6% range, as the key drivers of our value creation equation for our shareholders. The consistency of our revenue delivery over the last 10 years can be attributed to Brown Forming brand building model and the company's early success at developing our trademark in new markets around the world. While we have been successfully navigating our near term results to the challenging world of tariffs, we manage our business for the long term. Strong support from our shareholders, including the Brown family, enabled these time horizons, which is essential for a company to derive the majority of its revenue from aged spirits. We believe our portfolio of premium American Whiskey brands is second to none and position us well to continue creating value for our shareholders. With that, I'll wrap the prepared remarks. Dorothy, we'll go ahead and open up the call The first question comes from the line of Robert Eisenstein with Evercore. Good morning. It's Eric Serotta on line for Robert. My question was on travel retail. Looks like there was a fairly dramatic slowdown in the 3rd quarter with bringing your year to date up 6% or so. Just wondering if you could give some color behind what drove that? And if you could remind us how your global travel retail business splits up by major regions and what the trends have been there? Thank you. Sure. You're exactly right. We did see some slowdown in our Q3. Now as we've been communicating all year about our capital retail business starting out quite strong in our Q1, over 20% of our volume and has been steadily coming down. And that just simply represents some noise in the business. What I would say noise is buying patterns with a handful of customers, some actions actually we've taken related to the customer that are disrupting the results. And excess noise might continue to get more into Q4. But pulling back out of all the noise that's happening this year, the business remains fundamentally healthy. Travel trends continue. The business is strong there for us. We've got very solid growing business with our Woodford Reserve and Herradura business. Nice innovation going in with Jack Daniel's bottom lawn and rye in our single malt. So fundamentally, what I think you're seeing in this year's numbers is nothing but some timing of buying patterns and so forth that I think will continue for the balance of the year, but not to be over read. I think our business in travel retail remains solid probably in the mid single digit type growth area. Great. And just as a reminder, how does that how does your business split out geographically within travel retail? Yes. It's about onethree in Americas, onethree in Europe and onethree in Asia. Great. Thanks. I'll pass it on. Your next question comes from the line of Tim Graney with Digital Research. Good morning. I was struck by the numbers that you gave on the impact of the tariffs and then the mitigation effects. And I wasn't quite sure how to interpret it since I think you said tariffs only impacted 7 months of the year. I assume that major number was on annualized basis rather than just 7 months. And would you argue that you have mitigated roughly 50% on a go forward basis? Yes. So Tim, the number that I noted in my prepared remarks, dollars 125,000,000 was an annualized cost of tariff alone just themselves. So that was before any mitigation. And for this year, the number is somewhere within $70,000,000 to $75,000,000 of which we've mitigated half of that this fiscal year. We're in the process of our planning for next fiscal year assuming tariffs remain. And so another $45,000,000 to $15,000,000 before any mitigation, we're working on mitigation as it relates to that now. Yes. Does that clarify your number? It does. Thanks, Jim. Your James, just one quick clarification, the impact the 1% impact in net sales in the quarter related to the lower pricing to the distributors. I presume that's going to stay in place until the tariff impact is left. Is that the right way to think about that impact? Well, we expect about a 1% impact for our year as it relates to that. Now if tariffs stay in place forever, the totality is going to stay in place next year. We've taken the vast majority of the impact to our sales line this year already. So meaning that when you start cycling against actually, you're not going to see as large of an impact on the sales line. Okay. Got it. I guess my broader question is in terms of your advertising spending. Number 1, as it relates to your guidance, when you say it will grow in line with your sales growth this year, I just want to confirm that's in line with your underlying net sales growth, not your reported net sales growth which has changed a bit over the course of the year. So I just wanted to confirm that that's the case. And then I guess more broadly, it seems like many of your competitors are actually raising your advertising spending as a percent of sales, particularly in the U. S. Market. And I guess I just wanted to get a sense of your stem level versus your competitors. When you kind of look at your market share performance in the U. S, I think the total sales growth instead of a category also improved. So just thinking about your spending level with kind of the market share losses particularly around the Jack Frank, continuing to see some softness there. Thank you. Judy, let me take a stab at it. I mean, I think if you step back over, I think, we look at the 5 year, our A and P numbers and our underlying net sales are now the same. And that's a pattern we expect to continue for the more stable future. I mean, that's something we're pretty comfortable with. And Jane has referred to it, some of that is being funded as we continue to hold SG and A much tighter so that we can reallocate some of the what would have been the SG and A costs into more consumer facing programs. So now year to date underlying is up 3%. We said we'd be roughly in line with sales for the full year, which would mean the Q4 is going to be healthy. But we as far as relative to the competitive set and things like that, I mean, that's obviously been a factor for a long, long time. A lot of that's driven by the efficiency and I think the efficiency of the Jack Daniel's brand itself. So when you've got one that is such a big percentage of a company and it's such a big brand in and of itself, you get efficiencies from that. And so we still feel pretty comfortable that that's a sustainable business model where we sales, that we get enough leverage. Now tariffs aside in that conversation, that we could get some leverage out of SG and A and continue to grow operating income at a rate higher than sales. But obviously, in the middle of this stub period, we're in here with tariffs, that's not going to happen. Judy, if I might just build on a little bit to what Lawson was referring to his question on the competitive set. We clearly think of A and P and SG and A together, think about some of the things we've done as it relates to wrap to consumers that clearly show up in SG and A. We think that's building on our portfolio overseas. Think about the emerging brand group that we invest for them this year. That's really feet on the street there, building our brands on premise by on premise location. And so we look many times at the 2 combined, if you will, The new Old Forester home facing distillery, as an example, would show up in our SG and A, not in our A and P spend. And so there's probably differences there too when you compare ourselves to competitors. And so we want to look at it holistically when we think about how we invest behind our business. Your next question comes from the line of Vivien Azer with Cowen. Hi, this is Gerald Pascarelli on for Vivien. Thanks very much for taking the question. My question is on hi. My question is on inventory and pricing outlook, kind of given where we are in the bourbon cycle, it's been craft bourbon coming online, it's been laid down and aged for 4 plus years now, which should be hitting the market. Can you speak to your view of current industry inventory levels and whether there's a risk of oversupply that's a pressure on the U. S. Pricing going forward? Thanks. Yes. I'll take it, at least I'll start it. First of all, as far as industry supply numbers, I actually I think we would look at the big Kentucky bourbon producers as pretty significant increases in supply. I'm actually much less worried about the other 49 states or 48 states in those craft suppliers because in aggregate, it's really not all that significant. Although, I must say, recent the most recent volume numbers that you would see in Nielsen for the bourbon market sort of in that 8% to 9% range. So that's just obviously in the U. S. That's U. S. Globally, it's more like different. So we feel pretty I mean, that kind of numbers are awfully strong and shouldn't be outstripping supply. So the situation seems to be in pretty good shape, I think. We're looking at it, obviously, too. I do think another part of it is we along with some of the other larger competitors have a very obviously large global distribution network that many of the craft players obviously don't have, but many other smaller bourbon producers here even in Kentucky don't have. So we do have that advantage too that we can continue to grow. And when we've talked about leadership in American Whiskey, we're going to continue to grow and expand our bourbon and our Tennessee Whiskey franchise outside of the U. S. That's very helpful. Thanks very much. Your next question comes from the line of Amit Sharma with BMO Capital. Good morning, everyone. Good morning. Jane, a couple of questions for you. One, it was a very helpful conversation on G and A and G and M, how you see it together, right? And that makes sense. But if you really just look at the SG and A part of it, we did see some flex in the quarter this year. Can you talk about like where is that flex coming from? And as you look to next year, is there opportunity to continue to do more? And then touching on the gross margin line, obviously, the equivalent base point traction this year, but it's always sugar prices are still high. It's a little bit early for 2020, but as you look through, do you expect that pressure to continue next year as well? Okay, sure. Let me see if I can take this. You're right, there was a bit more flex in the quarter as it related to SG and A. Let me just take a minute to talk about that. Of course, our reported results were impacted by favorable foreign exchange, but even stripped that away, our SG and A expenses were down a couple of percentage points in the quarter. There was a piece of it that was one time in nature and won't be repeating itself again that related to a change in our benefits for segment of our employees population base. But the other piece of it is really important is something that we customarily do at this time of the year. Once we understand our performance through the O and D period is we adjust our performance based compensation and that occurred in the quarter. That happens every quarter. Every Q3 thereabouts will go up or down with that. So those were the 2 things as it relates to the quarter. As it relates to the ongoing ability to look at SG and A, we began to share this slide this morning that shows the number of years that we've been leveraging SG and A. I think there's what we have been doing is part of the and A here now. I must look at the productivity initiatives, ask ourselves, are we spending are these dollars being spent in the right places? We're leveraging technology. We'll continue to do that. So I think there's still more opportunities to see leverage through SG and A as we look ahead. That's in growth, Tanya? Sorry, Tanya. Yes, you're exactly right. The Jave prices from what we can tell from the information that we have available to us is that agave prices will remain under pressure probably through the next 18 months to 18 2 years as we look out there. And so they will continue to have pressure on our margins next year. What we've seen in those markets like Mexico is the pricing environment fairly robust. Most competitors have taken pricing. We have not seen that so much in the U. S. At the premium and ultra premium levels, we have seen it below that level. But there is going to be continued increase just because JAVI is doing so well. It's on fire in the U. S. It's doing well in Mexico too. So supply demand is what we've planted several years ago. So I mean, It's going to have upward pricing pressures that we would expect over the next couple of years that will impact our margins. Got it. Thank you so much. Your next question comes from the line of Kevin Grundy with Jefferies. Thanks. Good morning, everyone. I had a question on the organic sales guidance and your decision to maintain it for the year. So the 6% to 7% that you're still expecting for fiscal 2019 implies a pretty sharp acceleration in 4Q. And Jan, I know you talked about some of the easing year over year comparisons and I think some encouragement with what you're seeing from a retail takeaway perspective. But I was hoping you could drill down a little bit on that, number 1. Number 2, I guess, where you kind of expect to land within the range, the high end would certainly seem to be an extremely strong result in the current environment. And then just more broadly, is there anything that you see that makes you either more encouraged or a bit discouraged in terms of that type of number looking out to next year or something in that 6% to 7% kind of range? So thank you for all that. Yes. I think you answered a lot of the question yourself. That was a great recap. As we said, we are growing over 5% through our results year to date. And this is against last year's plus over 7% growth. So when we talked about how we were adjusting for tariffs, our growth grew more in the 6% range. Now I think maybe it's helpful to look at 2 year stack. If you look at our 2 year stack, we're adjusting for tariffs and so forth. We've been clearly on a 2 year stock basis in the 12% range. So implying that we as we look ahead, we're expecting a strong quarter as we said, high single digits. We feel good about that. When we see the momentum in the business that is happening in the U. S, you pointed that out. We saw recent takeaway trends that support that. Our emerging market business remains very strong. We expect that to continue in our Q4. We know we had some timing related items that are going to help us in this year's Q4 as well. And so when I look at what we're expecting you're exactly right, we are expecting a high single digit growth in Q4. It's still squarely in our range of 6% to 7%. But I'd say we'd be at the high end of 7%, probably not, That was squarely within the range, including with or without care. Louis, I'll add another point on there, too. In the pricing environment in the United States, it's actually improved a bit, I'll say, over this fiscal year. I mean, 12 months ago, you were seeing price declines, just talk GDS for a second, of 100 basis points, 150 basis points down, and that is essentially flat now. So there's been a nice improvement in the pricing environment. As we said last call too, the promotional activities for Gounformin is going to be weighted through the back half of the year. So that's helping accelerate our business right now. We also talked about in Q2 the material increase in media spend, which is just rolling out or has been rolling out over the last month or so. So that's starting to help things too that the timing of the year of our spend this year was a little unusual and off, but it's heavy right now. So you're seeing some of that, and I hope that should be stimulating some volume. And we're also seeing some innovation. So we've got a legacy product out there on Jack Daniel's and Tennessee Taste. There's others, not huge, but incrementally positive for our sales growth. And another comment I think that's just interesting about the industry these days, When you talk about TDS sales growth, and it's sort of in that 6% range itself right now, The mix to get to 6% has evolved a little bit over the last year. Half is volume and half is mix, which is one of the the mix piece of it is what I think is interesting because it's gotten to be so material. I mean, that's the premiumization of the U. S. Spirits market. But to have volume growth of 3%, little to no pricing on any individual brand, a 3% mix is a really strong indicator, I think, in the health of the business. And when you break down TES into the sort of standard, mid, premium and ultra premium buckets, the really, really strong work that you're seeing in that ultra and super premium buckets well in the teens or low teens, it's quite impressive. And that's where a lot of our portfolio is playing these days. So I just think it's interesting to see the premiumization of the U. S. Market continues and if anything else, if anything is accelerating. Okay. That's helpful. Thank you. Good luck. Your next question comes from the line of Bill Chappell with SunTrust. Hi. This is actually Grant on for Bill. Thanks for taking the question. Just wondering on the EU market, even though you guys didn't pass through the pricing, we're wondering if you guys have seen any changes in your ordering pattern there, whether that be maybe a pickup as some smaller craft players are not entering the market or a slowdown as kind of the market shifts away from brown spirits at all? Our growth has I think Lawson may have mentioned that was definitely in our earnings release this year. Our business in Europe has been pretty steady. It's been in the mid single digit, 5% range for some a number of periods. So we really haven't seen a good change there because of the tariffs, whether it's impacting taxpayers or ourselves. It's been fairly consistent and pretty healthy, steady business that we're seeing in that part of the world. And I'd be I'm not sure if I could put the point right. You had said people moving away from brown spirits. I mean, that's true in the U. K. Clearly, the gin is doing what it is doing. But that's not true for many other markets in Europe where obviously, both in consumer. American whiskeys continue to take share from a lot of the white space. It's a different country, obviously, but I wouldn't want that. I wouldn't want you to walk away thinking that white spirits are growing faster than brown spirits and at least American whiskey in many of those countries. Your next question comes from the line of Brian Celan with Bank of America. Hey, good morning, everyone. Good morning, Brian. Good morning, Brian. Jane, just wanted to follow-up on some earlier question related to gross margins. Just want to clear a couple of things up, if you could. Just the $125,000,000 I guess gross sort of hit gross profits, that all fits in cost of goods sold, right? And also the mitigation, the $70,000,000 to 75 $1,000,000 mitigation, that's all captured above the gross profit line? Yes. So let me take you back again. The $125,000,000 is an annualized number. We only have about $70,000,000 $75,000,000 of that happening this year. Roughly, that's a little more than twothree is hitting the cost of sales line this year and onethree hitting our sales line this year. So but it's all hitting above gross profit. All above gross profit. Okay. All above gross profit. And that's what I just mentioned, onethree, twothree roughly. Okay. And then as we sort of if nothing changes and you're really just like 1 more quarter of that next year, right? It's where you're just trying to kind of think about how gross margins could evolve. It just would seem like Q4 and Q1, nothing changes, you'd still have it. And then it should begin to sort of moderate after that. Is that the way to think about it? It will moderate. We still have a little bit more coming through because thinkovers, right, healthy 7 months. We protected ourselves largely this year because of some of the mitigation we did. As we talked about earlier, we shipped in or rebuilt inventories in advance this year. So we have to check this to roughly September, October time period. So until you anniversary that, we'll still have some impact in Q2. Okay. All right. And then beyond tariffs, the other pieces, agave, wood, those are the things that have sort of been pressuring on cost of goods sold, haven't really changed much, meaning they're not if we're thinking about it 'nineteen to 'twenty, it's not as if they've inflated more, right? You're sort of absorbing those that rate of inflation now. Yes. The F 'nineteen numbers that we discussed to you, when I had talked back in June in terms of the margin impact because of those, that has not changed. We're in the early planning stages of our F 'twenty process. So we'll be able to share more color with you in June as it relates to costs. Clearly, the cost of Gave continues to increase though. I won't say that much. Your next question comes from the line of Brett Cooper with Consumer Edge Research. A question on innovation. It's been a small driver of your growth recently, certainly less than peers. I was wondering if you could offer your view on how innovation will come into the business going forward, I guess, relative to the past. And if the focus on seeding smaller brands for the future impacts innovation effort, I guess sub question of that is certainly seeing more efforts on ready to drink cocktails in the U. S. So wondering what your view is on the opportunity of this offering given your brand? Thanks. Let me take I mean, your comment is our innovation is not as robust as our competitors, but I'm surprised to hear that because I don't normally think about it quite that way. But I guess it's certainly true that we haven't rolled out a large Jack Daniel's one in a number of years. That's largely because the current line extensions that we have, primarily Honey and including prior to continue to grow. So we feel pretty good that those have very large brands now and driving some very nice profitable growth. A lot of line extensions in the bourbon brands that we have primarily, but it would also include some tequila too are very strong and meaningful actually. So Woodford has got a bunch, Old Forester has a bunch and even Herradura with its ultra line extension has been very, very successful. So we feel pretty good about that. I mean, I guess your comment about should the Slane and Glendronix and those small brands cause you to pause. I think that was that what you were trying to imply that we had I think it's fair to say we had a lot of those brands got off to a slower start immediately after we bought them. And so we did put a lot of focus and attention to say, look, we want to get these things going. And so we may have hit the pause button on some of our smaller brands so that we didn't get too much clutter in the innovation pipeline. But now those brands are growing really nicely. And so you'll gradually see Brown Forman turn off the innovation on dial again and continue to make that an important part going forward. Is there a third? RTDs. RTG's in the U. S. Well, Jack Daniel's Country Cocktails play squarely in the middle of that. It has been a dramatic turnaround in that business over the last few years and how successful it has been. And so that is our large play right now. In that business, we continue to look at other potential things to do in that RTD world in the United States. Obviously, it's a huge business for us in many countries around the world, both on new mix and on Jack Daniel's and Cola and the different variants there. I think as you know, it's tougher to put a spirit based, put real spirits into a U. S. RTD and make much money at it and nobody's really nobody's making material money at that side of things. And so you got to do it a different way. But we continue to look at that. I would say we will we believe in the RTE business on a global basis. I mean, it's something that we've developed into, as I said, a very large piece of business for us, and we want to make sure that we can play it in the United States. Your next question comes from the line of Robert Ottenstein with Evercore. It's Eric again. When the tariffs first started going in September, October last year, you were pretty vocal about taking a deliberate and balanced approach of absorbing some of the tariffs in some of your largest markets. I'm wondering now that we're good 6 months into it, as you start to plan for next year, how are you thinking about that balance in some of your key markets in the EU? And have you taken any mitigation actions in any of those markets to date? Well, you want to take it? Go ahead. I mean, we obviously yes, we have been a bit surgical, I think, would be the word, in the way that we've approached the pricing and the pricing decisions that we've had to make. And if we're really talking mostly about Europe, it's obviously been a tough pricing environment for a long, long time over there. We continue to push it in some third party markets. We've pushed it in some relatively smaller markets. We've been less aggressive in some of the very large grocery dominated markets over there for reasons that are pretty obvious, I think. I mean, they're very difficult places to take pricing right now. And we've made a conscious decision to what we've been calling it investing in momentum. And it's something once you lose momentum, it's very hard to get And so when it came to really getting country by country trying to decide what the right decision might be, in a lot of cases in those big ones, we decided the right decision was to wait. Let's not wait forever, but it is wait for now until these things hopefully get resolved. So I think we'll continue to do some of the surgical approach that Lawson was mentioning. We're continuing to balance, be very balanced and where we are taking it. We're looking for as many opportunities as we can. Still hoping that the situation will resolve itself. As Steve mentioned, it is we are in a unique position with the export of American whiskey, and we're competing against other players that don't have the same issues. So we want to continue to make it affordable to our consumers as well, balancing the margins that we can and how long we think this might last. We're in the early stages of our planning process for next year. So we'll talk in more detail in June to you about pricing as it relates to that for next year. Your next question comes from the line of Sean King with UBS. Hi, thanks for the question. Yes, my tariff aside and knowing that tequila and international are becoming increasingly part of the long term growth algorithm. Is there any sort of long term margin implications that we should be thinking about? Has sort of the mix shifted away from the core? Look, I mean, historically, our margins internationally were pretty close to what they are in the United States. Some of the more recent FX moves over the last year have made the U. S. Sort of on a per case basis or whatever a bit more profitable, but it's not they're not hugely different in some markets. But the most part, our international business has pretty high margins too. So, you shouldn't expect that, that will change the overall company mix all that much. And think about some of the brands we're also selling at the higher end. I think what Lawson was referring to, if you were thinking of we were only a one trick selling jack gain, then we're not anymore. We've got with the reserve in this much higher price than Jack. We're looking to expand that around the world. And so its margins will be more. I would just project at the Airdura, which is also higher than the JAK, which is growing quite nicely in the U. S. And really in Mexico and starting to gain footing around the world. And we've heard the Scotch brand, which are very, very nice margins and we've got our hopes for those. So if you think about the mix of our portfolio too, that's going to help off business quite a bit too. So everything stayed the same as it was 20 years ago and I lost some conversation that might have it, but it's not. And I look ahead given the mix of our business and how we're progressing that. There are no further questions at this time. I will now turn the call back over to you, Mr. Dick O'Brien. Thank you, Dorothy, and thank you, Lawson and Zane, and to all of you for joining us today for our Q3 earnings call. And please feel free to reach out to us if you have any additional questions. Take care. Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.