Earnings Call: Q2 2018

Dec 6, 2017

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 Second Quarter Fiscal 2018 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 conference over to Jay Koval, Vice President and Director of Investor Relations. Please go ahead, sir. Thanks, Dorothy, and good morning, everyone. I want to thank you for joining us for Brown Forman's Q2 2018 earnings call. Joining me today are Paul Varga, our Chairman and Chief Officer Jane Moreau, Executive Vice President and Chief Financial Officer and Brian Fitzgerald, Chief Accounting Officer. This morning's conference call contains forward looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward looking statements and the company undertakes no obligation to update any of these statements whether due to new information, future events or otherwise. This morning, we issued a press release containing our results for the Q2 of fiscal 2018 in addition to posting presentation materials that Jayme 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, 8 ks and 10 Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non GAAP financial measures. These measures and the reasons management believes they provide useful information to investors regarding the company's financial conditions and results of operations are contained in the press release. And with that, I'll turn the call over to Jane for her prepared remarks. Thank you, Jay, and thanks for joining us for our Q2 earnings call. During my comments today, I will reference the slides we posted to our website this morning to help walk you through our 2 main areas of focus, which include, 1st, a review of our first half results and second, our revised outlook for fiscal 2018. After I complete my prepared remarks, I'll turn the call over to Paul for his comments, and then we'll open it up to Q and A. So let me start with the overall highlights, which are shown on Slide 3. First, our reported net sales grew 10% in the first half, driven by strong 7% underlying net sales growth, helped by trade inventories and foreign exchange. Reported operating income jumped 17%, driven largely by the strong underlying growth of 14%. 2nd, our underlying net sales accelerated to 8% in the 2nd quarter, marking the 5th consecutive quarter of improving growth trends as our teams are executing well against our efforts to reignite our top line back towards historic rates of growth. These results lifted our first half underlying net sales growth to 7%. 3rd, we delivered meaningful operating leverage primarily due to tight SG and A controls, but helped by intra year phasing of investments behind our brands. And finally, we increased our full year outlook for underlying net sales and operating income growth and now expect 6% to 7% and 8% to 9% growth, respectively. We also increased our fiscal 2018 EPS expectations for the 2nd straight quarter to a range of $1.90 to $1.98 representing growth of 11% to 16% to 16% compared to fiscal 2017. Let's now turn to Slide 4, our review of first half growth rates for several of our key metrics. Underlying net sales grew 8% in the 2nd quarter, resulting in 7% year to date growth. Although we were looking for continued acceleration in the first half, we were quite pleased to see our top line growth come in even higher than anticipated. After adjusting for some timing items, which helped result such as significantly higher volumes of used barrels sold in the first half of this year, we estimate that our normalized net sales growth is approximately 5% to 6%, a marked improvement from last year's normalized level of 4%. As highlighted on Slide 5, reported net sales increased 10% in the first half and helped by 2 points due to year over change in distributor inventories and a point of foreign exchange. Slide 67 break down our net sales growth by geography, which as you can see was very broad based with most major markets performing very well. So beginning with the United States, first half reported net sales grew 9% or 6% on an underlying basis. This growth was driven by the strength of our American Whiskey portfolio led by the Jack Daniel's family of brands, Woodford Reserve and Old Forester, not to mention continued double digit gains from our tequilas, our Jimador and Herradura. In our developed markets outside the United States, 2nd quarter results rebounded as expected, driving 5% reported and underlying net sales growth for the first half. Australia experienced double digit underlying net sales growth, while the developed markets in Europe grew high single digits. Japan was our outlier with volume declines due to comparisons against last year's price increase driven buy in. Our takeaway trends remain solid in most of our major developed international markets. Our emerging markets business performed very well with underlying net sales up 15% and reported up 24%. While Mexico and Poland delivered great underlying results, up roughly 10% in the aggregate, it was the remaining emerging markets outside of these two countries that was up most impressive, up 20%. The toric growth was fueled by improved economies and stabilized foreign exchange and was helped by easy comparison against depressed results a year ago. Slide 8 highlights the improvement in our emerging market trends over the last 12 months and the more difficult comparisons we expect later this fiscal year, particularly in our Q4. Given the progressively more challenging comparisons, we expect more moderate growth from the emerging markets in the back half of the year. Our travel retail channel continued its growth trajectory with underlying net sales up 11% and reported up 18%. The team is focused on growing key accounts and driving better distribution, Our overall results also benefited from higher passenger volumes, particularly in Russia and Turkey. Slide 9 breaks out our key brands underlying net sales growth. You can see that the growth is very well balanced across our portfolio. The Jack Daniel's family of brands grew underlying net sales 7% in the first half with our major brands delivering solid gains, including Jack Daniel's Tennessee Whiskey, Tennessee Honey, Tennessee Fire and Gentleman Jack. Jack Daniel's RTD business grew underlying net sales by 15%, helped by innovation. It's worth noting that the Jack Deener's RT business is well over 8,000,000 cases annually, equating to over 200,000,000 opportunities to market the brand through the consumption of the product, which we describe as a brand in the hand. In the United States, we launched the first ever new grain bill from the Jack Daniel's distillery with our charcoal mellowed 90 proof Jack Daniel's Tennessee rye. While rye is in its early days, the reaction from the trade has been quite positive, and we are focusing on positioning the brand for long term success through carefully building awareness in both the on and off premise. We realized a slight benefit from the launch of rye during the Q2 and expect the benefit to continue over the course of the year. Our premium and super premium bourbons, including Woodford Reserve and Old Forester, continue to grow net sales on an underlying basis well into the double digits as did our tequila brands, El Jimador and Herradura. New mixed RTD's underlying net sales were up high single digits. Finlandia also grew net sales up nicely, up 8%, driven in part by volume gains in key markets in Europe as well as Russia. Now before I move down to P and L, I wanted to update you on our used barrel business, which enjoyed strong year over year volume growth that more than offset the anticipated price declines, driving a positive variance to prior year's first half and contributing less than 0.5 point to the top line. We believe much of the first half strength in used barrel sales has been timing related as we expect modest declines for the full fiscal year. Slide 10 breaks down our gross margins for the first half. Reported gross margins were flat relative to the same period a year ago. Our first half gross margins were also helped by higher used barrel sales, but second half gross margin will likely enjoy less favorable comparison. Slide 11 summarizes our operating performance on both a reported and underlying basis. Our underlying A and P increased 5% year to date, two points behind our underlying growth in net sales, due in part to the timing of brand investments, as we still expect full year A and P to grow in line with our upperly revised rate of underlying net sales growth. We plan on continuing to invest in the Jack Daniel's family of brands, including additional investment in new media for Jack Gentleman Jack as well as the sponsorship with the NBA. We're also investing in other premium brands, including Woodford Reserve Double Oat, Cold Forester Statesman and Herradura, not to mention some of our newer additions to our portfolio, Slane Irish Whiskey and our single malt Scotch brands Glendronic and Ben Reoc. Reported and underlying SG and A during the first half declined 1% as we maintained our focus on improving efficiency and reallocating towards consumer facing investments. This decline is even more impressive given the cost associated with the recent launch of our new distribution company in Spain. The timing of certain costs also helped drive the first half declines in SG and A. In total, we delivered 14% growth in underlying operating income for the first half. Reported operating income jumped 17%, helped by the year over year change in trade inventories. Operating margins expanded 2 20 basis points to 36%. Reported earnings per share during the first half increased 24% to $1.08 EPS growth was propelled by the combination of strong top line gains, substantial operating leverage, a lower tax rate and a reduction in our share count compared to the same period last year. To wrap up our first half review, we delivered outstanding results, doing no small part to the hard work and great execution of our teams around the world. So now let me move on to a second and final topic for the call. A summary of our revised outlook for fiscal 2018 highlighted on Slide 12. Consistent with our communications to you back in June, our top line results in the first half of the fiscal year were always expected to be stronger than the second half. But given that our first half results were even greater than anticipated, coupled with the current momentum of our business, we have increased our outlook for underlying net sales growth to a range of 6 percent to 7% for fiscal 2018. As I mentioned earlier, we expect the rate of underlying net sales growth to moderate slightly in the back half, most notably in the 4th quarter due to more challenging comparisons in should remain essentially in line with the level of our first half margins, although lower than the same period last year as we expect modestly higher cost of goods. We have plans in place to further increase the investment behind our brand's momentum during the back half of the year, supported in part by the overall improvement in the economic environment. Underlying A and P is still on track to grow in line with our accelerated top line growth, implying an expected pickup in investment spend during the back half. Underlying SG and A will likely be up slightly for the full year given increasingly difficult year over year comparisons. Given these items, we expect to see the strong leverage we experienced year to date to reverse in the back half and for the rate of underlying operating income growth to slow relative to the blistering 14% increase delivered during the 1st 6 months. In total, we now anticipate underlying operating income growth of 8% to 9% in fiscal 2018, 2 points faster than our sales growth. This revised range is also consistent with our prior expectations to deliver a couple points of leverage due to the reallocation efforts and cost discipline. Now moving to our earnings per share. We expect EPS to be in a range of $1.90 to 1 $0.98 representing 11% to 16% growth compared to 16% growth compared to fiscal 2017. This upward revision is due to the combined impact of improved top line momentum and a slightly lower tax rate of under 28%. This full year EPS range incorporates that trade inventories come down slightly in the back half of our fiscal year. As a sensitivity, assuming our foreign currency cash flow exposure collectively moved 10% in either direction, EPS over the balance of the year would be impacted by roughly $0.03 per share. In summary, we are very pleased with our first half results and improved trajectory of our business. We believe our efforts to accelerate the top line are proving to be successful due to the combined effects from reprioritized A and P investments, effective reallocation of resources, more analytical revenue management tools, disciplined innovation and a continued focus on geographic expansion for our leading portfolio of premium spirits brands. So with that, let me turn the call over to Paul for his comments. Paul? Thanks, Jane, and good morning, everyone. Let me just add a few comments to Jane's. We're obviously very pleased with these excellent second quarter and first half results. And while we do not anticipate the second half being quite as strong, we still expect our full year results to represent a noteworthy improvement relative to last year, while also positioning the company for growth beyond this fiscal year. As most of you likely know, we typically strive to have a strong, balanced, comprehensive performance at Brown Forman. And as we were planning for this fiscal year back in the spring, this again was the case. However, we also felt at the time that we should sharpen our focus in FY 2018 on accelerating the company's growth in underlying net sales above all else. The logic was that our margins in ROIC remained excellent and that we could create significant shareholder value by improving and sustaining our rates of underlying sales growth. And we felt that the best way to do that was with an improved blend of 3 items: investment, price volume balancing and innovation. Regarding investment, the idea primarily centered around making our investments work harder to produce sales growth. And that in turn entailed some resource reallocation, most notably from SG and A to A and P and the call for more impact consumer communications. Regarding price volume balancing, the idea was to make FY 2018 a year of volume led growth. This is not to signal any strategic distaste on our part for seeking pricing in the marketplace, which we will continue to thoughtfully do. It is more a recognition that consumers and retailers do not do have more choices today due to the influx of competitive offerings and that the advantages that a company like Brown Forman has relative to many competitors are our investment resources and route to consumer strength while also knowing that what we put in the bottle is of consistently excellent quality. So it was our feeling that this was a good year to leverage that and lean a little more heavily on the volume part of the equation, and so far so good. And regarding innovation, we felt that we were poised for a stronger FY 2018, and this was reflected in our plans for Jack Daniel's Tennessee Rye and Jack Daniel's RTDs, and to a lesser extent, our super premium Irish and Scotch brands. Of course, we would need some cooperation from the environment, and that has occurred in our view as we've seen an improved backdrop in emerging markets and a continuation of the nice momentum in the categories and price segments where we are predominantly focused. In combination, we believe that these are contributing factors to the nice accelerating acceleration we reported this morning and which has led us to increase our guidance for the full year. In closing, let me congratulate my colleagues across Brown Forman on these strong first half results. And now we're available for your questions. Your first question comes from the line of Nik Modi with RBC Capital Markets. Yes, thanks. Good morning, everyone. Paul, maybe you can just help us understand, it's these results are pretty dramatic when you think about the rest of the consumer staples landscape. Everyone's been talking about weakening category growth. So I'm just hoping you can provide some context on was this category driven? Was it market share driven? Can you just help us kind of understand why there's such big disconnect between your results and basically the rest of the CPG universe? Well, I mean I think I'm talking more about U. S. From a U. S. Perspective. Okay. I was going to say, one of the things we typically go to on to just give more color on the type of question you asked is how well balanced typically our results are across the globe. Oftentimes, I think the gist of your question indicates that because we're U. S. Based and there's and because this market is the most valuable in distilled spirits because people have great visibility to it, I mean, I think we're over indexed in terms of analytics by many audiences when they consider Brown Forman And in terms of the focus on the United States, but I mean it's evident in the results we had this morning that a nice part of what's happening with us is the bounce back in emerging markets and also travel retail, which is becoming increasingly important to us. So I think that's one element to our results generally that I would highlight. But I also think, I mean, yes, I mean, we don't take for granted that even in the U. S. Market that the business is actually growing and has been doing this for many years, consecutive years at this sort of 3%, 4%, 5% range depending upon what the quarter or year is. But and that has two elements to it, of course. It means there's great opportunity to be had. And then, of course, within that, keep in mind that our categories where we're focused, American whiskeys, bourbons, increasingly tequilas, Irish, these are categories today that are growing ahead of even the distilled spirits category in the United States. We think we're particularly well positioned. And then within those categories, the areas that tend to be doing better are at the premium plus level. So and that's where Brown Forman is concentrated. So I think it adds up to having a strong well performing category and within it the areas where we're concentrated being those items that are driving the category. And then just another quick one. From a distributor consolidation standpoint, does that change anything on how you operate, how you go to market, if you can just provide any context on how you see kind of the landscape evolving? I think it will change some things market by market in the way that the particular merger you're referring to that occurred just occurred. I'm sure there'll be local adaptations and ways that that particular instance will cause some local dynamic changes. It sometimes causes supplier evolutions, etcetera. But for us, I think we've seen so many of these iterations of change in the U. S. Wholesale environment, and they are noteworthy every time they occur. But I think the most important thing is we have a very significant investment through our own people in the U. S. Market that I think is a source of stability when you do have these changes because our people are out there trying to build our brands each and every day as a supplement to the good work that's going on at the wholesale level. So for me, the source of stability during these changes are having very long term partners in our arsenal in the United States and then the presence of our own RTC in the U. S. To propel the business. Great. Congrats on a great set of results. I'll pass it on. Yes. You're welcome. Thanks for the questions. Your next question comes from the line of Vivien Azar with Cowen. Thank you. Good morning. Good morning. Hi, Vivien. So I'd echo Nick congrats, really standout growth against a tough backdrop. As we think about that growth and the investments that you guys have made with over the last, I guess, 5 years in terms of incremental CapEx investments. Can you just remind us where you are in terms of the capacity expansion? Do you have some of those barrels coming out of aging at this point, some of the original capacity expansion that was underway? And what's your outlook for CapEx from here? Sure. So Vivien, we've been at this for I think we entered our 6th year of investment this year of stepped up capital. We've done a number of things just as a reminder of what we've done over the period of time, some of our major investments was to add another Cooperage. It was to add another distillery at Jack Daniel's, of course, numerous warehouses that have been expanded and put up at both Jack Daniel's and Woodford Reserve. And this is all in light of what we see is the continued long term viability of this business and sustainability of the growth that we see. So we're very optimistic and robust about that as we look ahead. This year, we had a forecast or forecasting somewhere, I would say, in the $120,000,000 to $130,000,000 of CapEx. I would expect next year to still be another stepped up here. And we would expect things to then come down a bit from there to get more in line with our historical rate of spending as it relates to revenue, not obviously going back to the dollar amount levels that we had prior to our stepped up level. So think of it more in the 2.5% to 3% of revenue. We've got a number of investments we are finalizing this year that we're really excited about, one of them being our new distillery over in Ireland, Sling Irish Whiskey brand. We just opened that distillery at the end of August. It's still opened it to guests. We're still officially working on everything around it. And we've got the Old Forester distillery in Homeplace that we're looking to open in the spring early summer next year. So a lot of excitement, a lot of momentum that we see ahead for us. But I think you can see that we'll be closing out and coming down on our CapEx as we look ahead maybe to about 2020. Vivien, additionally, because you mentioned things in the barrel, the most significant development, I think, in the fiscal year and started a little bit last year as well is after years of waiting, the company has now had available rye product. And we did not go out into the open market and buy rye. We made our own at both the particularly noteworthy, of course, this year's Tennessee rye introduction. So we had waited several years for that product to become available. It was not necessarily tied to the capital expansions necessarily, but it certainly took some forethought on our part in putting down the inventory. And what's unique about, of course, rye is it's a different recipe. And so you do have to wait. And we just think that right now, it's a particularly unique and special year, not only because Jack Daniel's rye has been introduced, but also because Woodford rye, just been out a couple of years, is continuing to perform very strongly and both brands get excellent recognition for the quality of the products and the bottle. And so it's given us a and in forthcoming years, we will have additional rye inventories to continue to build our presence in that category. So it's another area where we are now well positioned for growth in the U. S. Market where that category is outpacing the industry. Just building on what Paul said, because it reminded me of you did ask about Beryl Whiskey And you will notice that Barrow Whiskey has the investment behind it has continued to increase rather significantly over the past few years. You've got to pull out different things and realize that a big piece of that was just acquiring the Scotch brand. But again, it's important to remember, we've got to be laying down today for what we see in 5, 4, 5, 6 years from now. And again, that reflects the robustness and the optimism that we see in the long term growth trajectory. So you won't you'll continue to see us increase barrel whiskey because that's going to part of what our optimism is all about. I will add too, Vivien, that the annual fluctuations you see in our price volume balancing act not only reflects what's going on in the marketplace, but it also can reflect what we see going on and how well we forecasted whiskey demand several years earlier. So I mean it's all a complex consideration each year, but it does influence how you think about it. Your next question comes from the line of Laurent Grandet with Credit Suisse. Hey, good morning, Paul and Jane, and congrats for this great quarter. I'd like to focus on the U. S. Numbers and more specifically rye and depletion. You had a great quarter in the U. S, but would like to understand how big Jack Jenner's rye selling was? And also in term of depletion, I mean, you seems to have a 3% benefit in the quarter. And I believe some of this is due to rye. But in addition, you had another 5% benefit in the Q1. So do you think you are now at the right level of inventory at wholesaler level? Or are you higher than usual? And how we should think about this in the second half of the year? Yes. May I talk about rye? Just as a reminder, we just started shipping our rye in September. So the impact on the U. S. Results was very small in the quarter and for the company. So I would not say that that's what's driving the increase in our top line growth rate from 5% to 6%. What we see there is really pretty broad based growth across the portfolio. The upper end, our premium, super premium bourbons are doing extremely well. Think of Woodford Reserve and its various expressions from Oak and Marai, they're growing quite nicely. You see that in takeaway trends. Most recent trends were up 20%, 30%, 40%, depending on which expression you're talking about. Our Old Forester brands where we're focusing not only on the Old Forester main brand, but we're seeing an acceleration in the top line growth on some of our new expressions, which is all contributing to the mix benefit that we're getting from these products, both from the higher end Woodford Reserve and Old Forester. And importantly, the tequilas are doing quite nicely in the U. S. Are up well over double digits and the overall category is growing nicely. So I think if you look at the U. S. Business, it's really more organically from those parts of our portfolio. Giacinios is still growing, maybe not at the rates that it has in the past, but it's still contributing nicely. So in the quarter, what you saw as the growth rate and what you're seeing now is more from the very broad based upper end expressions that were growing really strongly. Yes. And as a reminder, we reconcile between in the charts at the back of the earnings release, the differences between shipments and depletions. And so, of course, when you're filling pipeline, the shipments on rye would be ahead of our depletions in the United States. And the depletions, of course, at this stage, because it's still so new, would be ahead of the consumer takeaway. But the one thing that's unique about this is that there is not unlimited supply of rye for FY 2018. And so there is a limit to even what we can provide even in shipment out to the marketplace today and that's watched obviously very closely. But yes, you would fully expect for the shipments to be ahead of the depletions at this stage and the depletions to be ahead of the consumer takeaway. But our early read on the consumer takeaway bit, even though as Jane correctly stated, it's not driving the growth rates of Brown Forman or the U. S, it is having a positive contribution, of course, and is being, from what can tell anecdotally more than anything, well received in the market. Now Lauren, I thought I would follow-up just with one more question you were asking as it related to our inventory levels because it did benefit our reported results. You saw our reported results up stripping our underlying results at the top line. And that is U. S.-based on a reported basis that we expect to give back some in the back half of the year. It's not really a very tiny bit of that. As Ralph said, yes, shipments are outpacing our depletions. But in terms of the amount of top line benefit that we got from our net inventory levels being up a bit was not due to the RAS. So I just wanted to clarify that and just again just remind you as we said in our script today that we do expect some get back by the end of the year, we'll be back more in balance. And from what we had said at the beginning of the year, maybe a point of growth, if you will, when we get to the end of the year due to inventory levels. Thank you very much and congrats again on a great quarter. Sure. Thank you. Your next question comes from the line of Judy Hong with Goldman Sachs. Thank you. Good morning. Good morning. Good morning, Judy. So just a quick follow-up in the U. S. Market. Just in terms of your view of the underlying category growth that you're seeing in the marketplace, it sounds like you're saying 5% to 6% growth that you're seeing for your business is kind of in line with the broader consumer takeaway trend. So from a category perspective, what do you think that is? And then from a channel perspective, just because obviously the Nielsen data seems to really understate that growth rate for both the category as well as your business, which channels are actually accelerating from a U. S. Perspective? Yes. I'll try to address that. I think that I mean, it's hard, of course, to pinpoint a single point because we don't have a comprehensive metric for the entire U. S. Marketplace. But, yes, I would agree with you that I think data we're seeing in at least using Nielsen would understate what's happening. If you look over at the NABCA markets, which are not comprehensive for the whole market, of course, but I think they're more indicative of what's happening. And the way we're seeing that is that, that business, in my view, continues to grow in the 4% to 5% range. And then consistent with the Nielsen data as well, Brown Forman continues to perform above the rate of growth for the industry. I think some of the consistent themes that have been there that the largest manufacturers in both data sources are slightly losing share to the rest of the market, which has been a consistent theme as smaller, more entrepreneurial players in both data sources consistently have shown higher growth rates than the market overall. And I can just say that Brown Forman is one of the few larger players in both data sources that is performing ahead of the market overall. But I think it is a particularly difficult time to read any one individual data source simply because they're not comprehensive. And it then forces you to think about what are the dynamics occurring within the marketplace that could be causing certain data sources to be reporting higher or lower. So we are in the same boat as you as you try to figure out all the puts and takes involved there. But we consider to see us ahead of the market and similar to a prior question, driven in part not only by our own brands and their good performance, but also where we're positioned at the premium ends of the categories that are growing above the market. And just as a reminder, those tend to be American whiskeys and bourbons, Irish category is doing well, cognac is doing very well and tequila is doing very well. Got it. Okay. And then Jane, just in terms of the tax policy changes, obviously, it's not final yet, but I think we have a better sense today than we did of what potentially could get passed in the next weeks or months. So how should we think about sort of the potential benefit to brownformin and to the extent that your tax rate comes down? Have you given some thought to how that could be used in terms of flowing to the bottom line investments, etcetera? Yes. So Judy, there are like you said, there's so many elements of this that are still outstanding, and we're looking for it and welcome hopeful that this does get passed at some point. For us, I think it will finally level up the playing field with many of our competitors that have much lower tax rate. In terms of how if this comes about and if we have a lower tax rate, it could produce higher cash as you're suggesting. I don't think it changes our approach to capital allocation that we've been so thoughtful doing for a number of years. And so again, we'll look at all the things levers that we have available to us, make sure we're investing fully behind the business, which we think we are at this point, given our not only the expected increase in our spending for this year relative to CellScope, but just our CapEx levels of expanding. But we'll step back and look at it at all. As this comes more clear, we'll be able to communicate to everyone here more transparently in terms of what this impact may mean to us and how we will potentially use this cash as we go forward. Your next question comes from the line of Robert Ottenstein with Evercore ISI. A few small items. I think you had said that the bet used barrel sales helped the top line by 50 basis points. Can you specify, what impact it had on the U. S. Business, which I think is running up 6% so far? Robert, this is Jane. So the used barrel business actually had, I think, I said a little bit less than point impact on our top line results. It's not included in our U. S. Business. We separately talk about it as its own line items. So when we go through our various geographic areas or provide you tables, it's not in our U. S. Numbers. Okay, terrific. That's great. And then, a little bit more longer term, Paul, just wanted to get your thoughts on 2 areas that you're in relatively small in one case and more important in the other and that's scotch and tequila. Tequila is clearly one of the faster growing categories right now. Just your quick thoughts in terms of your strategy there, is do you have the right brands, do you need more brands, Where you see it going? And then some comments on scotch and how you see the scotch market evolving in the U. S. And whether you're happy with your presence or looking to add to it? Thank you. Sure. Thanks for the questions. I mean, our tequila strategy, I think, remains unchanged. We feel we have the assets and trademarks from our acquisition of Casera Dura more than a decade ago. And this year's performance, it really is building on last year's. I mean, it's comprehensive. It's a nice performance from Herradura, el Jimador and Numix. And both in the United States and Mexico. And one of the things that's I mean and there's always hidden nice performances in this that even we don't report out to you all in a table or chart. The one that's been building over the last couple of years down in Mexico is Herradura Ultra, which is a and reason I bring that up is that versus adding trademarks, innovating within the existing trademarks, we think is a critical piece of the growing growth of the category and the success. And in that instance, it's been rapidly growing. It's really only available in Mexico and is in some ways, remember the tequila category down in that market is much more established and well known than it is anywhere else in the world. So, the relevance of innovation is even more impactful. So that's a project that we're looking at and continuing to be excited about in that one country, but also in passing quarters years consider its applicability for introduction into other markets. But that's one such example of how innovation can be important to the tequila category. But again, we're really, I mean, excited with this last sort of 2 years or so of momentum that's been building on it. We're investing more behind it. We had consistently been investing well ahead of the last 2 years. And so we just think things line up particularly well for our Premium Plus tequila business. And of course, even the ready to drink business we've got down in Mexico continues to perform well, again grounded in innovation, but is an under sometimes an underappreciated aspect of our tequila business. On the scotch front, I mean, I continue to think it's still very, very early days for our single malts. I mean, we are such a tiny percentage volumetrically or even on a sales basis of the single malt category and the scotch category overall. But we think we are learning some things about in the 1st year plus of owning these brands. The first part of it was the integration was heavily focused on just their company into ours and on the manufacturing side. The 2nd year, we're actually making more transitions on the route to market side, and there's natural hiccups that go with that that always take longer. So yes, I would say our first half of the year, the single malts aren't performing up to where we might have planned for them, but we think they're more timing related and we continue to have very high hopes for them. As we get them positioned with our sales forces and the right partners in the marketplace and as we get them priced the way we'd like, The thing we're most encouraged about with those brands in the first really 2 years here is the reception to the product and the bottle. I mean, the accolades that are coming out on all three of the brands have been excellent. And so it's now in our hands to go do some of the things we're doing with some of our other brands, which is to build their awareness and distribution. And they do require because they're at higher price points and sold in more unique ways than, say, taking Jack Daniel's Tennessee Whiskey in the marketplace. So we do have to refine our selling approaches and that takes a little bit of time as well. Great. And how do you see just the scotch market in the U. S. In general developing? And maybe, if you kind of go back in time when bourbon has been strong, has scotch followed along? And just trying to get a sense of how you see the 2 of them relating with each other going forward and how you want to play in that? Well, I think they actually have a lot of similarities, Robert. I mean, the single malt category in the United States has been growing very nicely for a really long time, even back I mean, I'll just use the days when we were introducing Woodford Reserve and had started developing Gentleman Jack and Jack Daniel's Single Barrel. Around that same time, Brown Forman actually started to represent and then ultimately took an ownership position in Glenmorangie. So our memory of the growth of single malts in the United States goes way back and that has continued pretty much interrupted for a generation. So some of what we've seen and because there's so much attention on the bourbon aspect, particularly the super premium bourbons today, people it's kind of overshadowing how strong and significant the American single malt market is. And of course, because the huge amount of volume that historically existed at the standard price of scotch overwhelms even the growth sometimes of the single malt, it doesn't come into focus so much. Whereas if you look at other categories like tequila and Irish and increasingly American whiskey where a lot of the development is the premium end, when that premium growth is coming in, it's not being offset by sluggishness in the standard part of the category. So I think the single malt aspect has been a single malt category in the United States has been attractive for a very long time. It's one of the reasons we were so interested in the acquisition and continuing to try to find a way to participate in it. Thank you very much. You're welcome. Your next question comes from the line of Tim Ramey with Pivotal Research. Thanks so much. And boy, it's fun to think back 10 years ago, you're doing the I think it was just over 10 years ago, the Herradura acquisition and that had some sacrifices at the time, but what a payoff that's been for you. So congrats on the long term strategy there. Thank you. Jane, just to ask the tax rate question a slightly different way. Can you tell us what your cash tax rate might be expected to be this year? I don't have that in front of me right now, Tim, but I'll be happy to follow-up with you after the call. And again, we said our overall effective tax rate for the year was going to be a little bit under 28%. If we just if you'll go back and look at last year's, each of our Qs and our 10 Qs or in case you'll see our cash tax rate at the bottom of that. So I would utilize that information and get yourself into it, but we can walk you through that aspect to help you take it offline. Is that okay? Yes, sounds good. I can turn it back on that. Okay. Your next question comes from the line of Bill Chappell with SunTrust. Hi, this is actually Grant on for Bill. We just had a question on the travel retail segment that continues to kind of outperform and you said it's becoming more important part of your portfolio. Maybe what stage are we in, in the growth of that segment and how sustainable is that going forward? Well, it's benefiting from, I think just the return of travel generally. And then if you think about that channel compared to our universe at large, it is it really is an environment for premium brand building, which is an area where we tend to be focused. So it really helps a company like Brown Forman when you have a channel that is premium skewed return like it is. And then within that, historically, the categories that were so strongly developed in global travel retail, It was always led by whiskey, but also alongside were categories like cognac and other very high end categories. So we're still, I believe, at the very early days of the American Whiskey and Bourbon and Tequila and Irish presence in that channel. So my view is, yes, it's accelerating for our company, but from a still relatively early stage of development in the channel. Okay, great. And then actually our second question just on the guidance raised for the back half of the year. Just kind of why didn't you pass through kind of the full quarter beat? Is that just conservative on your part at this point in the year? Are you looking to maybe invest more in the brand building going forward? And maybe is that going to drive more growth into 2019? Yes. I mean, the whole idea was just as Jane, I think articulated it in her the primary reason was some tougher comps in the second half, but also the desire to invest more. So the mix of spending first half versus second is going to change in a way that has the effect that you referenced. And so we'll we, of course, will be making those investments for the benefit of the second half, but also hopefully to position the company for continued growth beyond this fiscal year. Great. Thanks so much. You're welcome. Your next question comes from the line of Brent Cooper with Consumer Edge Research. Good morning. I was just wondering if you guys could break down geographically where the two points of better top line growth are coming from? And then as you increase ad spend, I'm wondering if it's safe to make the assumption that some of the higher ad spend is going into emerging markets given sort of the better backdrop that you've been talking about? Okay. I heard the first part of your question. So, if you saw that we went through all the various growth rates, but essentially, the acceleration in our growth rate and this is why we're referring to the second half being a little bit more difficult came from emerging markets largely. A little bit from barrels, but primarily that acceleration came from emerging markets. Some of that was timing, some of it was just improving momentum in the business. That's why we gave you some insight into the visibility of our normalized trends. And then the second half the second part of the question was would that then dictate or suggest a higher investment rate in the second half related to emerging markets? Yes. So it may or may not in terms of emerging markets. And I think where we're looking at putting the incremental investments in the back half of the year, we started talking about some of that. Some of it's just feeding the new brands that we have out there, Slain's and the Scotch brands. Some of it is to continue to fuel the momentum that we've seen on our tequilas, as well as our premium bourbons. We've seen nice growth and we've accelerated our investment behind both Woodford Reserve and Gentleman Jack and we've seen results accelerated correspondingly. And then of course we'll put it behind Jack Daniel's and Jack Daniel's emerging markets would benefit from that piece of it. Yes, there's no and in terms of our approach just more strategically, we always while we're always looking to as we said in our remarks make the investments we make work harder for us at any given time, I mean, we still prefer a balanced approach geographically because we continue to think there's growth opportunity globally for the company. And you will see pockets from time to time of investment spike, one such as this year on the SG and A front, for example, is the investment in the Spanish routes out to consumer, which of course in the second half will have higher investment levels in SG and A versus last year because we didn't have it last year. And so there's examples like that that will be in every quarter almost or every half year. And so but as a general theme, we would certainly feel like now is a better time to invest in the emerging markets versus 2 years ago. Same thing with say travel retail in some of these areas. But also we typically are putting in incremental investments that will show up in a quarter behind whatever is new on the innovation front. That's the other thing to keep in mind. So if you're investing behind Jack Daniel's rat, that will incrementally hit a particular quarter or segment of the year. So and I think that continues to be the right mix for us. And we're always looking at that to see if there's not some timing based thing to try to propel growth during a particular 1 to 3 year segment for the company. Great. Thanks. And if I could follow-up with one more. I was wondering if you guys have a reasonable read on industry inventories for U. S. Whiskey and sort of the implications of that what that means from a competitive standpoint, obviously, 3, 4 years out? Well, it's a hard I mean, obviously, a difficult we have some visibility, obviously, being the leader of it, we have significant influence on it ourselves because of the inventories we place. But there's ways to estimate it. And I mean, I think that because of I mean, how does it impact our business would be the natural question that comes from having visibility of those inventories. And I would say that probably the most significant one in this year doesn't mean it will be this way every year, But because there are an increased number of competitors and people in the industry are leaning more on to the volume part of the volume price equation. You see Brown Forman in some ways adopting the same philosophy. I think it has at least for this fiscal year and I think it's actually served us very, very well this year. It's one of the contributing factors as I stated. So, I mean, you're constantly looking at 1st and foremost your own historical forecast because remember we had to make these forecasts a few years ago as well and are regularly then trying to extrapolate those out into the future. And it will the most significant impact it will have is on how you manage your volume and pricing. There's not much we can do if for some reason we thought that the consumer was going to walk away from the category. I do. I've said this many times before that I think the boom bust aspect of this category will be moderated in part by the fact that aging is required. It at least will lengthen the ride up and I think it will have the impact of lengthening any kind of bust that people might forecast. So I consider that to be a mitigating effect to the fashionability of the category right now. And just to build on what Paul said, obviously, the boom bust type thing, when we look at our opportunity in emerging markets with American Whiskey and things like that, just the knowledge of what's out there, the socioeconomic place that the consumers are there, the demographics, all those things. Even if you're thinking boom bust U. S, there's tremendous opportunities outside the U. S. As it relates to whiskey and thus supply we need to be laying down today. Yes. I would remind everybody the company had excellent results and growth for many, many, many years when the category was not growing. And so it goes back to some of the basic elements, whether there's excess supply in the industry or not, critical items like investing behind your brands, having your innovation pipeline thoughtfully planned are I think continue to be critical elements no matter what the supply situation is. Thank you. Welcome. Thanks. And your final question comes from the line of Mark Schwartzberg with Stifel Financial. Great. Thanks for fielding the question. Hey, Paul. Hey, Jane. Also a U. S. Question focusing on the Jack Daniel's family. Paul. If we presume you do have an appetite for getting better price realization, whether it's fiscal 2019 or sometime not long after the current fiscal year. Do you have confidence that there's an environment supportive of that from both from a competitive and consumer standpoint. No one has a crystal ball for what Christmas next year will be like, for example. But just wondering how you're thinking about the opportunity as you at least have the early preparations for next fiscal year because the dynamic between you and the Beam family, for example, is obviously rather price competitive right now and your tactics are working very well. I'm just wondering how much opportunity you see for a change in tactics given the competitive environment. Yes. I mean, I think the thing is being responsive and also thinking beyond just a 12 week period when we make these determinations. The things that I look for, the basic old list that I would look for are what is the category strength generally. So just trying to see if you have general momentum in your category. And that category, of course, when you're a brand like Jack Daniel's is both the distilled spirits industry and the bourbonAmerican Whiskey category. You will be looking at what we've referenced here on the call, which is the supply demand dynamics. And then as a result, you're looking at your competitors. I think an underappreciated piece of how we sometimes look at this that actually, in my view, is starting to show a little bit of encouragement versus prior years is the strength of the on premise environment. I've always considered the strong and growing on premise environment to be one of the helpful considerations when companies or brands go to raise price in our industry. And in the U. S, I mean, it would suggest to me just looking at some of the anecdotal elements and seeing actually some of the differences between some of the data sources, it might suggest that the on premise is beginning to improve a little bit. So that can be a factor as well. And I think the other thing comes down to how we are spending money and what our consumer communications are actually communicating. And that can be a consumer communication can be a packaging change. A consumer communication can be an improved representation of the brand in advertising. It can be a number of things. And so there can be conscious efforts generated by the brand owner to help their cause as well. I mean really for us, it really is just a preference to run the business the way we're doing it right now in terms of pricevolume mix. I mean, we just know we know mathematically that from a financial standpoint, the more it skews toward at least in the short term, the more it skews toward pricing, the more efficient it produces profit. However, I've always used this example of what I call consumption based brand equity in a business that is inherently social. I feel it's always important to make sure that consumers get to enjoy the products in our bottle. And oftentimes, they do that with other people, whether that's in their home or in a bar or restaurant. And there's nothing like losing the momentum. We've seen it before. We saw it a little bit on Southern Comfort. When you lose the momentum that it comes from people just consuming your product. And so volumetric market share is has to be looked at with great priority, not exclusively, but it has to be looked at a great priority. And this is one of those times where we feel like it really is important, particularly given what we've got in the bottle. I just feel like reinforcing the quality of our products right now through consumption is and trial is really important for the company. And I think it's one of the nice contributing factors to our performance right now. And in these results too, I just sort of really enjoyed the positive performances that we don't talk as much about these days because there's fewer questions, but of our Jack Daniel's Tennessee Fire and Jack Daniel's Tennessee Honey brands, where we could have and it was a conscious choice to treat those more like brands from the Jack Daniel's trademark and family and not come out with the flavor every quarter, every year. And because our people have been focused on developing them, both through geographic expansion, but also reinforcing their product attributes and why they exist in consumer communications, I think it's having an impact of developing them more along the lines of brands than flavors. So those are some of the things that I think can help. And James mentioned it a couple of times. I think this we are very fortunate to be able to lean on volume at a time when you might not be getting as much benefit from price. But to have the higher end segments of our categories growing at exceptional rates, that gives us the equivalent of some pricing through portfolio mix. So right now, it's all working well for us, but it is subject to change, I agree. And over the last 10 years, I can probably identify a bit of a roller coaster ride for the company as we emphasize volume over price at one point and price over volume at another. And then we try so we try to measure it over the span of maybe 10 years. Very, very helpful. Thank you, Paul. You're welcome. And thank you, Jane and Paul. And thanks to all of you for joining us today for Brown Forman's 2nd quarter call. And we hope you all enjoy your holiday season. Please feel free to reach out to us if you have any additional questions. Thanks, everyone. Thank you. That concludes today's conference call. You may now