Good morning. My name is Khalia, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter fiscal 2017 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the conference over to Jay Koval. Please go ahead.
Thanks, Khalia. Good morning, everyone. I want to thank you for joining us for Brown-Forman's first quarter 2017 earnings call. Joining me today are Paul Varga, our President and Chief Executive Officer; Jane Morreau, Executive Vice President and Chief Financial Officer; and Brian Fitzgerald, Chief Accounting Officer. This morning's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict, and you should not place undue reliance on any forward-looking statements. The company undertakes no obligation to update any of these statements, whether due to new information, future events, or otherwise. This morning, we issued a press release containing our results for the first quarter of fiscal 2017.
The release can be found on our website under the section titled Investor Relations. In the press release, we have listed a number of the risk factors that you should consider in conjunction with our forward-looking statements. Other significant risk factors are described in our Form 10-K, Form 8-K, and Form 10-Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures and the reasons management believes they provide useful information to investors regarding the company's financial conditions and results of operations are contained in the press release. With that, I'll turn the call over to Jane for her prepared remarks.
Thanks, Jay. Thank you for joining us for our first quarter earnings call. I plan on discussing 2 topics on today's call. First, our first quarter results, second, our latest outlook for 2017. Paul and I will address any questions you may have. Before I jump into our first quarter results, I wanted to discuss a change we have made in how we present our reported and underlying net sales. In the past, we have presented our net sales including excise taxes. Beginning with this, our first quarter and going forward, we will present our net sales excluding excise taxes, which is consistent with the presentation used by our competitors. We believe this is a small change in the presentation of net sales, reflects 1 of several metrics we as a management team look at our business.
We will continue to present excise taxes in our income statement, the amount of information we disclose is really unchanged. It's simply the geography in our P&L and the comparability of the net sales metrics that we will discuss and analyze going forward. With that housekeeping item taken care of, let me now review our results for the first three months of fiscal 2017. Our underlying net sales using our new presentation of excluding excise taxes grew 2% in the first quarter. As expected, this rate of growth is less than what we expect to deliver for the full year, as the first quarter of last year was our strongest quarter, up 9% on a comparable basis, meaning excluding the divestiture of Southern Comfort and Tuaca, and up 11% over the two years.
Remember that last year's first quarter was fueled by the U.S. launch of Jack Daniel's Tennessee Fire, as well as a strong start to the year in both our developed markets outside the United States and our emerging markets. In the first quarter of this year, we stopped distributing some agency brands as we continue to focus on our portfolio. This negatively impacted top-line growth but had little impact on the bottom line. The trends in our first quarter were similar to those of the second half of fiscal 2016. While our developed markets delivered strong growth, global results were weighed down by disappointing performance in the emerging markets. In the United States, we delivered solid gains with underlying net sales growth of 5%, despite cycling against an 11% comp in the same prior year period.
Growth was led by the Jack Daniel's family of brands, including Tennessee Whiskey, Tennessee Honey, and Gentleman Jack. Jack Daniel's Tennessee Honey grew mid-single digits as it entered its sixth year in the U.S. marketplace. While Tennessee Fire experienced double-digit declines. After accounting for last year's pipeline fill and activation behind Tennessee Fire, we estimate that the brand is performing better than those results would indicate, including strong growth in the on-premise. Results in the United States were helped by our premium bourbon brands, including Woodford Reserve and Old Forester, as well as the summer launch of Coopers' Craft, as consumers continue to gravitate toward brands with heritage and authenticity. el Jimador and Herradura also continued their growth trajectory, with both brands registering double-digit growth in the quarter. In addition, Korbel Champagne and Sonoma-Cutrer grew aggregate underlying net sales by 10% in the United States.
Our developed markets outside of the United States also delivered a 5% increase in underlying net sales against last year's first quarter growth of 9%. This growth was broad-based with every developed market in our top 20 markets growing in the quarter, including the U.K., Australia, France, Germany, Canada, Japan, Spain, New Zealand, and Italy. Our teams are doing a great job at growing our value share in these major markets, and they continue to see a long runway ahead. Let me now move to our emerging markets, where we were disappointed with the results in the quarter. Our business in the emerging markets continued to slow, resulting in a 5% decline in underlying net sales compared to an 8% growth in the same prior year period.
Our two largest emerging markets, Mexico and Poland, continued to expand in the first quarter, delivering solid rates of growth, while several other emerging markets were down double digits for the quarter. This included declines in Turkey and Brazil, two significant contributors to our growth over the last few years. Other soft markets in the emerging world included Russia, China, Thailand, Ukraine, and emerging Africa, but we believe some of this softness was timing related. We believe that the majority of the slowdown in the emerging markets has been driven by factors outside of our control, including political instability, challenging economic backdrops, and significant foreign exchange volatility, and we are carefully monitoring the trends in our emerging markets. Travel retail underlying net sales increased 12% in the quarter, driven by easy comparisons against the prior year period, where net sales declined 15%.
We are hopeful that the business has stabilized, and the distribution gains will help us to begin to grow again from the lower levels, though we aren't expecting a meaningful growth contribution from this channel for the year. Regarding barrel sales, I mentioned on our last call that we expected moderating prices for our used barrels as global demand has softened significantly over the last 12 months, reflecting weaker demand from blended Scotch industry buyers. This, combined with some lumpiness in order timing, drove a large reduction in barrel revenue in our first quarter. Moving now to a reconciliation of reported to underlying growth. Reported net sales declined 5%. Reported results were pulled down by two points due to a strengthening U.S. dollar, as well as a two-point reduction in distributor inventories, which relates largely to de-stocking in Russia following some inventory build there in the fourth quarter of 2016.
The absence of Southern Comfort and Tuaca following last year's sale of these brands resulted in an additional three-point hit to reported sales. Excluding these effects, underlying net sales grew 2%. Sales growth was split evenly between volume and price mix and resulted in a 2% increase in underlying gross profit as underlying gross margins were flattish. Reported gross margins were hit by a combined effect of last year's divestiture and adverse foreign exchange. Underlying A&P spend in the quarter declined 1% due in part to the comparison of last year's launch of Jack Daniel's Tennessee Fire in the United States. Underlying SG&A declined 2% as we remain focused on controlling costs and leveraging prior route to market investments. In the aggregate, underlying operating income grew 6%. On a reported basis, operating income declined 6% and earnings per share decreased 2% to a split adjusted $0.36.
This leads me to my second topic, our outlook for fiscal 2017. Our results in the first quarter were the Tale of Two Cities, with growth in the developed markets offset by disappointing performance in the emerging markets. Our developed markets business today represents over 80% of total revenues and has been sustainably growing underlying net sales by a mid-single-digit rate of growth for several years. As you know, the first quarter is our seasonally smallest of the year and can be disproportionately impacted by timing issues, such as barrel revenues, as they were this quarter, volatility in emerging markets such as Turkey's unforeseen coup attempt and terror attacks, not to mention foreign exchange swings. Net-net, we delivered 11% underlying net sales growth on a two-year stack, and we believe we remain on track to deliver 4%-6% underlying net sales growth in fiscal 2017.
Takeaway trends in our non-U.S. developed markets remain strong, including high single-digit growth in Western Europe. In the U.S., takeaway trends remain solid, the Jack Daniel's 150 birthday execution is well underway, which when combined with incremental media investments and a commemorative gift, should drive a moderate acceleration in the U.S. While we are carefully monitoring the challenging off-premise trends for Jack Daniel's Tennessee Fire in the U.S., we are encouraged to see Tennessee Honey growing again as we move past last year's new flavor whiskey launches. On the margin front, we expect cost increases to slightly increase more and offset the improvement to our price mix in the year. SG&A cost containment effort should allow us to deliver solid leverage to the operating income line in the year, resulting in 7%-9% in underlying operating income.
After accounting for our recent two-for-one stock split, we still anticipate earnings per share of $1.71-$1.81, including a $0.03 headwind from adverse foreign exchange. Full year tax rate is expected to be between 29%-30%. As a reminder, a 10% move in the dollar in either direction would impact EPS over the balance of the year by approximately a $0.05. In summary, we continue to deliver solid rates of underlying growth year after year. This growth is being led by the Jack Daniel's family of brands, as well as our other premium bourbon and tequila brands. We have, and will continue to take a measured approach to innovation that allows us to maximize our brand equity over the long term.
In addition to delivering solid underlying rates of growth today, we are continuing to invest in our long-term business prospects, such as the build-out of the Slane Irish Whiskey distillery, which is on track to launch in spring, as well as the integration of BenRiach. In the quarter, we issued our first non-U.S. tranches of debt at very favorable rates, thanks to our balance sheet strength and track record of growth. We also returned over a quarter of a billion dollars in cash to shareholders through the combination of a growing dividend and ongoing share repurchase program, which in fact, allows us to invest in ourselves. We believe that our success at balancing the short term and long term is a major reason we have been able to deliver leading TSRs over long periods of time, we are focused on continuing that legacy for all of our stakeholders.
With that, unless Paul has any comments, we'll turn it over to the operator. You okay?
Yeah.
Okay.
Let's just go straight to-
We go straight to-
Yep
the operator and address any questions you all may have.
As a reminder, ladies and gentlemen, if you would like to ask a question or if you have a comment, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question will come from the line of Vivien Azer of Cowen.
Hi, good morning.
Good morning.
Hi, Vivien.
Just in terms of your outlook, Jane, I think you were real clear about kind of the puts and takes. You did indicate that some of the EM softness was timing related, and clearly, you're going to need that to stabilize, I would think a little bit, in order to hit the full year guidance. A two-part question. Number 1, can you quantify how much of the drag to EM was timing related? Number 2, just help give us a little bit more confidence on any kind of stabilization that you're looking for from emerging markets, please.
Certainly. I'll take that. Let me just talk about emerging markets in general. While we were down for the quarter, as we noted, we were down 5%, and it was a little bit more than we expected, it should be noted that we had very tough comps versus last year. I'd like to step back and remind everybody how much our emerging markets makes up of our total business. It's around 20% of our total revenues. To really understand it, there's a lot of moving parts within it, and you got to peel back the onion, so to speak, to understand it. As I said in my script, our two largest markets are Poland and Mexico. They represent well in excess of 40% of our emerging markets, and they're growing quite nicely at 8% and 17% respectively.
We expect them to continue to grow, so we do not expect them to be a drag on our results. We talked about two of our larger contributors of growth over the past couple years being Brazil and Turkey, and being a drag on the quarter. They very much were a drag on the quarter, and that's not surprising given the political instability, the economic woes, the terrorism, the huge excise tax increases in both countries, but primarily in Brazil last year. These really did have a significant drag on our results. We have other parts of emerging markets that's continuing to grow. We have some emerging markets that have, what I would call, I think they are stabilizing. They're not necessarily getting better.
As we look on to the rest of the year, I think we don't expect, as you said, and you're right, it's one of our key drivers, not the most important, but one of our key drivers to get to our full year forecast is that we won't have as big of a drag as we did in the quarter. You mentioned the timing issue, and you're right, timing was an issue. I would say it was about a point of timing issues. I would say the rest of it was that we also expect a significantly easier comps as we go throughout the year, particularly if you look at the last half of the year, and most notably the fourth quarter of the year where emerging markets were down.
That's where you'll start to also see some of the things that we're talking about where I believe we've hit a bottom, if you will, so to speak, in some of these markets that have been down for a while. Russia would be an example of that, where I think we're close to getting to the bottom on that. I hope I've answered all your questions there.
Yep. That's perfect.
Yeah. Vivien, I'll just add, too, in any three-month period, you always have I'll call it these fluctuations. I'll give you an example of one, which is these discontinued agency brands that Jane mentioned. Once you cycle against not having them, and in this instance, I think those affected Mexico and Czech Republic. As an example, you won't have the detriment of that going forward. There's several examples like that.
That's helpful. Thank you very much. If we could just turn to the U.S., clearly for you guys, the plus five was good. It does feel, though, that at least in the syndicated data, the A.C. Nielsen data, that the category does seem to be softening a little bit. Are you guys seeing that as well? If so, what do you think is driving that? Thanks.
It's a good question. Paul will probably take this. Again, I think we might say it's hard to look at any three-month trend to draw a lot of conclusions from it. We were talking earlier, if we had seen increases in other industries, other alcohol industries, beer or wine, which we haven't necessarily seen, or we haven't seen, we don't see beer growing. I think I wouldn't overread the trend at this point in time. We're definitely looking at it and watching it, but that's where we're at.
Yeah, I think the hardest part is because it doesn't measure the whole market, you're always trying to estimate what's going on in the on-premise or in the geographies not covered by it. I think as a general thing, I've seen some speculation that it's going to potentially be lower than it historically has. I think we're still estimating in the mid-single digits something in the U.S. that.
Value.
Yeah, value growth, something in the 5% range, which I think isn't too far off what. Again, the most important thing for us is that has been driven in good part by the American whiskey business. I think I'd need a little bit more time to see any either softness in trends or something to start to forecast it forward in a way different than history.
That's great. Thank you very much.
You're welcome.
Your next question will come from the line of Judy Hong of Goldman Sachs.
Thank you. Good morning. Just maybe a couple of follow-ups on the U.S. If I look at your 5% underlying sales growth, can you give us some color just in terms of volume versus price mix within that figure? And then just on Tennessee Fire, obviously you're lapping the launches there and some of the, I guess, the syndicated data does show some weakness as you're lapping it. Maybe just a little bit more color, just what you're doing to maintain some of the momentum you've seen in maybe the other channels. And then it also looks like your pricing has come down on that brand, and sort of just curious to kind of what the rationale was there.
Well, I'll tackle at least a piece of this. I think going back to much of the interest in this category, literally over the last, as we've received interest and questions about it. I feel like we're pretty much sticking to our plan as it relates to knowing first that we're cycling last year's launch, which of course had pipeline in it, but also a lot of investment that of course generated quite a bit of trial. And with any of these pent-up demand launches we've had over the years with Jack Daniel's, we experienced that there's all, particularly with premium prices like Jack Daniel's is, that there are triers who sometimes don't convert that to full monthly usage. I suspect we're going against some of that. As I think you inferred, the on-premise is doing much, much better. It didn't ramp up as rapidly.
It, of course, doesn't have the pipeline build that the off-premise channel does. Then I think very importantly, as we've said, is that versus introducing an additional flavored whiskey from Jack Daniel's or two, or as some of our competition has done, our main focus was on geographic expansion. Trying to take out in a thoughtful way into other countries. Of course, the combination of the on-premise and the few markets we've introduced this fiscal year outside the United States, it's having a nice and positive offsetting factor to that pipeline that we're working against in the United States. Jane, do you want to talk to the pricing thing?
I can talk a little bit in the U.S. There's not a lot of pricing coming from there. I would say if you were to just look at the U.S. numbers straight up, of course, the volume numbers would be down a bit because of brands like Canadian Mist. I think more importantly is to look at brands like Jack Daniel's, and the volumes were up a couple percent, and we had about a point of pricing.
I think, Judy, too, the other thing on, just to go back to the earlier statement I made about how you sometimes will have triers who won't convert. Oftentimes, one of the barriers for people converting to regular weekly or monthly usage is pricing. As I think you'd know this, but like for example, the drink price difference in the on-premise is much less than the bottle price in the off-premise for Fire and its main competitors. We think that might be one of the contributing factors that the hurdle for an individual drink price in the on-premise isn't as great as the shelf price difference in the off-premise. I think our people are appropriately always dabbling with the right price volume mix within a range in order to try to find the best way to create sales value.
Well, just building on Paul's, I think we said earlier this year, even in the U.S. market, as we look around the world in terms of pricing opportunities Paul alluded to just a moment ago, we're looking at all the smart ways to do it, the environment right now is not, in some markets, they're a deflationary market, it's not necessarily conducive to it. As we look at the full year, as we discussed in our fourth quarter, we're expecting very little from pricing, whether it's in the U.S. or globally. Some will get the mix in there, as we expect, as we have higher volumes coming from our faster-growing premium-
Yeah
premium plus brands.
The lone exceptions to that for us, and those comments are absolutely relevant to the Jack Daniel's, but the Woodford Reserve, an Old Forester brand. Old Forester's been able to get some price in recent years, and Woodford, which had been doing modest pricing, is probably doing a little bit more this year than past years. We're hopeful that that could help in the U.S., too.
Okay. Maybe just looking at the consolidated price mix in the quarter, though, it came in up 1%, a little bit softer than the trends that we've seen in the last several quarters. I would imagine the divestiture would have had a more positive price mix impact. Is there any sort of timing issue? Do you expect that 1% to improve as you get out to the balance of the year? Gosh, I don't remember that. I don't think so. I think first of all, the SoCo piece of it, we pulled all that out when we did this analysis, so it's not helpin' or hurtin'. The analysis you're seeing is excluding that.
I think maybe if you're focusing on reported gross margins, that's where you see the hurt or the absence of Southern Comfort and Tuaca, which had nice high gross margins. The 180 basis points on reported decline year-over-year in margin, about 130 basis points of that decline was due to the exiting and the divestiture of those two brands.
Don't you-
The 1% is, we're expecting somewhere in that range, Paul.
Yeah.
I mean, I think as we look at the year, it's unlike the past couple of years. Some of it's because we've got lower innovation.
We were getting such mix benefit last year from particularly Fire as we introduced it. In past years also, these barrel sales have been helpful. In this particular quarter, I think both of those things would've worked against us.
Got it, okay. All right, thank you.
You're welcome.
Your next question will come from the line of Bill Chappell of SunTrust.
Thanks. Good morning.
Morning.
Morning, Bill.
First question, maybe I missed something, but I think the original gross margin guidance was kind of flattish, now it's down 200 basis points. Trying to understand exactly how you get back to your original EPS guidance. Maybe what the major areas of improvement are? Maybe correlated, it seemed like, I thought you had said in the past that advertising would be up this year, or at least for this quarter, it was down year-over-year on a dollar basis. Maybe you could help us understand the pacing of that.
Let me see if I can start. If you look at our full year, our guidance is unchanged. What we're looking at and the confidence we have in achieving that for the full year versus where we are today, is we do expect to continue to have leverage, operating expense leverage via SG&A. You'll recall last year we had very low growth levels of SG&A. We expect continued low growth this year too. It was 2% underlying last year. We still expect that to happen. You're right, on an underlying basis, we had very small, we didn't have a gross margin help, if you will, on an underlying basis. It's about what we expect for the year, give or take a little bit. No help there. It's really coming from operating expenses, particularly SG&A.
Let's talk more about what's going to drive this. It's really your top-line growth. We already talked about the emerging markets and why we feel confident that the emerging markets will improve from both a comp perspective and a timing perspective. Also, as we look out, we won't have the drag on our results from our first quarter, Fire in the U.S. launch last year that drove growth down this year. In other words, the pipeline. We continue to expand internationally, so we're going to continue to get benefits there. Then Jack Daniel's 150 activation is just underway. Paul talked a lot about this in our shareholders meeting in July, as well as he introduced this in June during our call. There's a lot of activation really going on now.
When I think about the United States, we are actually increasing our media spend as well. You'll start to see that coming through in the second and third quarter. We've got a lot of incremental gift coming through, too. Our whole sales force and our trade partners are all focused on that. We'll see some modest improvement, as I said, in Jack Daniel's as well. Those things combined give us that confidence. If you look at advertising, it's probably worthwhile to step back and think about advertising a bit. What we said was, we expected advertising to grow in line with our full year forecast. Top line. I think at this point, we would still say that. What was happening in the quarter, there were some comparability issues.
I mentioned one of them being that we had the launch of Tennessee Fire last year in effect in the U.S. We had a lot of promotional activities and so forth that we were doing. We had the absence of that level. Of course, we're advertising behind it this year, but not at the levels we were doing last year. There's some timing things going on, too. I think it's also worthwhile to just pull out Southern Comfort and take back and look at what kind of investments we've actually been doing behind our business over the last couple of years. If you look at the F15 and F16 combined, pulling out Southern Comfort, on a two-year stack basis is up 13%. First quarter of last year, just to illustrate the comp in advertisement last year that had the Tennessee Fire in it was up 6%.
We also have all that going on. I hope I've given you some color. I know I said a whole lot then there, so I'll stop and see if Paul wants to add anything, or are you going to ask us further clarifying questions?
No, I think that covers it well. Again, I think it's three months, and I find typically, on this particular earnings release, you end up having a lot of quarterly noise because it's only been three months. I think it's an emphasis that we've placed on some of this morning, particularly as it hit a few of our emerging market businesses. As it relates to the expenses, I feel like we'll continue to invest behind the brands as we go forward. Most of that leverage, as planned, is at the SG&A line.
Paul, just to follow up on that, just to be clear, what you're saying is there's really no surprise internally from this quarter, and maybe the surprise is more the stock reaction because it sounds like you knew the comps were going to be tough. It seems like the gross margin was a surprise, at least the outlook, that's why I'm trying to couple all these things together. It does seem like something's changed in the past three months.
Totally. I understand. I think what happens, for example, the full year impact of these lower barrel sales is really the brunt of it's hitting us in the first quarter. It'll still be negative to us as we go through the year, but not to the level that it was in the first quarter. I know that sounds odd, and that was something that we were not experiencing through the course of FY 2016, for example. Again, that's why I make an example of that one. It's just three months. It does hit you pretty good. On a three-month basis, it really will be impactful. I know you are looking for signs and signals that the business is moving in some direction that's either the same or different. You always have surprises in a quarter.
There's no doubt that I would have hoped for emerging market business that was better than it ended up being, simply because of just the unsettled nature of a lot of these markets. I think those reflected somewhat in our results. Having said that, there are some one-time seasonal, more short-term things that we think will abate as we go through the remainder of the year. It's probably a tale of both, as you say. We're surprised every quarter by something.
I'll turn it over. Thanks.
You're welcome.
Your next question will come from the line of Tim Raney of Total Research Group.
Thanks so much. Good morning.
Yeah.
On the barrel sales, I assume that you just remarked them to market in the 1Q, and that's why the brunt of the impact for the full year is in the 1Q. Am I thinking about that correctly?
Yeah. Let me take you through barrel sales, how this all comes about. Of course, we're fully integrated, if you will, through the supply chain. We make everything from start to finish, essentially, because we don't grow our own corn, but we're making our barrels all the way to distilling it and then out the door. Remember that we're one of the largest barrel-making operations in the world. Just to give a little background, I think it's worthwhile to think about the background of just barrel sales in general, and then we'll talk about how it flows through our P&L. Just background. We've been doing this, we've been making our own barrels for a number of years. What we do, as you know, is each bourbon and Jack Daniel's whiskey require a new barrel to put the whiskey in to age.
When we get finished with those barrels, we sell them. The market generally for the sale of these barrels has been the Scotch industry. If you look at it over long periods of time, let's just say 50 years, it's a very cyclical business. We can see when the production and sales of Scotch go up and down, so it impacts the sale of barrels. It impacts the supply and demand, and impacts pricing. As you know, there's been some softening in the demand of blended Scotch. We started seeing some pricing pressures, and we noted that, and we said that in our fourth quarter conference call. What that did is in the first quarter, we had a couple things happen.
We saw those pricing pressures, each barrel that we were selling on the outside market, once it was got dumped, this used barrel, we were making less on it than we were a year ago. We also had some lumpiness, as I was alluding to orders, which would've been one of our surprises in the quarter, if you will, but it's going to abate over the course of the year because it's not gone. That's a little background, how it flows through our P&L is as simply we got less revenues from those sales of barrels this year than we got last year. It comes through our revenue line, and it hits you all the way through your P&L. It's just basically revenue. It's very high margin business. There's no brand expense, if you will.
There's some people that sell it largely drops to the bottom line, whatever you have in your revenues, all the way to operating income.
Yeah. Remember too, that while the demand end has been influenced, remember, just each year that's been going by, as bourbon has been doing well, not only have we been emptying more barrels to meet the bourbon supply or demand out there have been other bourbon barrels out there. That influences the supply of those against the Scotch demand. Some of that is hitting us in this first quarter. As Jane said, it's a nice margin business.
We do expect, throughout the year, the pricing pressures because of what Paul Varga said and what I was saying too.
Just not to belabor it, in wine, trough to peak, used barrels pretty much doubled. I assume that something similar happened on your end, this is softness relative to recent, but not softness relative to, say, three years ago. Would that be a fair statement?
I would say softness relative to, let's see, three years ago. I'm trying to remember the price of the barrels. The price of the barrels have gone up because actually they were in short supply-
Yeah
A couple of years ago, I'm trying to think, relative to three years ago.
Go back. I think a lot of it-
I think it would be a little bit higher today than-
It would be. I think a lot of that growth over the three years, Tim, was driven by us selling more barrels in addition to the prices at which they were sold.
Yeah.
Now you've got to that.
Just so you know, Tim, I don't want to belabor this either, but there's obviously other things that you can do with barrels, and so that influences your mix. If you don't have someone to sell it to, a person in need of it, a Scotch buyer or an Irish whiskey producer, you can sell it as planters and other things like that. They generally are less profitable too, which would also hurt your mix.
Yep. Just the same as in wine.
Yeah.
On the tequila side, those numbers were really good. Should we think about those, you mentioned Mexico was quite strong as well, should we think about that as primarily a Mexico impact, or is there something else we should be focusing on, relative to el Jimador and Herradura?
They're both growing nicely in the U.S. and Mexico. I know that. You should see both those trends. I think in the quarter in the Mexico, there were a little bit of price increases, so they probably were a little bit stronger.
In Mexico, yeah.
in Mexico, not in the U.S. I think both brands are doing quite well. They're both growing, I think, in the double-digit range, thereabout, in both countries.
Particularly El Jimador in the United States continued to go from month-to-month, rolling very well.
Sorry, I should correct myself on El Jimador in Mexico, because that's the one where we've been repositioning the price, and I'm looking at the profitability from a pricing perspective.
Yeah.
We do have less volumes there. Yeah. They're still both doing well.
Terrific. Thanks for your help.
Thank you.
Your next question will come from the line of Bill Schmitz of Deutsche Bank.
Hi, good morning.
Hey, good morning.
Hey, could you guys just clarify a couple of things for me? First of all, maybe I missed it, but what was the impact from the barrel softness in the quarter, and how big is that business, and maybe where it shows up? You have that schedule on the last page of the press release. Where do we see the trends in the barrel business?
The trends are in your revenue. It had about a point of an impact on the quarter.
A point drag, yeah.
Point drag. That was made up of both the pricing, which we expected, so half of that was pricing, and the other half is timing.
Okay. Is it reflected in that schedule on page 10 of the release or not?
It's not separately. Okay. I'm sorry. You're on page 10 of the release.
Yeah. I'm sorry. To get down to the minutia.
Yeah. Sorry. Actually, I guess it would just be in your bottom line numbers because the first things are volumes, and we don't-
Are branded. Yeah.
Yeah. We don't track it there. It would just be in your very bottom line, 2%, I guess. It's not per se in there.
Okay. No, that's helpful.
In terms of our total business, it's not a major, a meaningful business itself.
Okay. No, that's helpful. Then can you just give us a more detailed gross margin bridge and how you think that plays out over the year? I know you talked about it qualitatively, but do you see gross margin up this year and maybe some of the moving pieces that could drive it one way or the other?
Okay. I think in the fourth quarter, I was talking about our gross margin. At that time, I think it's really relatively unchanged from that. I said it was, at that time, we expected to be flattish. Bill referred a little bit earlier to 20 basis point difference. I'm talking give or take of 20 basis points or so. Nothing's really changed in that perspective.
Okay.
At that time, I talked about it being largely a volume and a mix versus any pricing.
Okay. No, that's helpful. It sounds like the SG&A costs are going to be up a little bit this year. Should we expect that ratio to expand as a % of sales, what's driving the higher SG&A costs?
Actually, are you looking at the same thing I'm looking at? I think SG&A costs are actually down on the fourth quarter.
Well, I thought you were talking about the outlook. Didn't you say that the SG&A costs would be up, offset by some pricing, or did I mishear you?
Oh, okay. Yeah, I'm sorry. I was talking about underlying SG&A growth. If you were to look at where we are today, underlying SG&A is down 2%. I would say that was largely influenced by timing or the absence of one-time items we expect going forward. We do expect some modest increase in SG&A. Recall last year, our SG&A grew about 2%. Recall our sales grew, what I said earlier, 5%. If you looked at a metric, we actually improved on an underlying basis, our SG&A as a percentage of revenue. I would expect a similar type of thing this year, low single-digit growth in SG&A at this point. Of course, higher growth at the revenue line, so improving trends on an underlying basis.
Yeah. Hopefully it'll be similar leverage to last year.
Yes.
Okay. No, super helpful also. Just lastly, do you think for the full year that depletions and underlying will kind of be aligned, or is there still more inventory to come out in emerging markets?
Depletions.
Actually, in some markets, in emerging markets, I hope inventories will come back.
Yeah.
I think any time you have some of the circumstances we've got, you'll find some inventory tightness in some of these markets. I think, you were talking about depletions. I was trying to convert it over to sales.
It's fair. We did have some timing issues.
There's some markets.
Russia particularly.
Yeah, that's right. We had shipments last year ahead of depletions. We expect depletions to get ahead of shipments this year there. We had some timing issue, seasonality or timing issues in the first quarter of this year with shipments.
Distributor changes and things like that.
Some divestitures and depletions, that will work itself out.
We have been accommodating. Now, two offsetting things on Tennessee Fire, remember, is in the new markets, internationally, we'll be probably building some inventories out there as we go along, pipeline, particularly retail. Then offsetting it in the U.S. has been some of those reductions.
Okay. No, that's super helpful. Thanks very much for your time.
You're welcome.
Your next question will come from the line of Bryan Spillane of Bank of America.
Hey, good morning, everyone.
Hey, Bryan.
Just a couple of questions. First, just some clarifying points. Jane, I think you talked earlier about the prior year comparison on underlying sales, excluding the divestitures, was 9% in the first quarter. Is that right?
Yes. I think I exclude foreign exchange from that as well.
Yeah, excluding, underlying ex foreign exchange and ex acquisitions and divestitures.
Yes.
Have you given what that comp is for the full year? I know, at least in terms of where we were modeling it, we were looking at just what was reported last year, and the organic sales comp, I think, was seven. Just want to make sure if you've got it, if you could provide.
Last year was excluding SoCo was five. We talked about $20 million of operating, or $0.20, now $0.10 split adjustment, was the bottom line impact of that. I'm trying to think what else I have on here.
I'm trying to get to.
What I'm trying to get to is we've got a 4% to 6% underlying sales growth expectation. I just don't know what it's comping against. What is 4% to 6% comp against if we're going to be apples to apples pulling out the divestitures?
last year's quarters were nine, as you said, right?
As they came down, what was it, five?
Roughly four over the balance.
Four over the balance. You need five to sixes on a two-year stack to equal out to the double digit that you would have accomplished with a nine and a two. I think that's where you were going, right, Brian?
That's helpful.
I think, we need mid-single digits on a two-year basis. I think that the reason that Jane was illustrating that is just to show you how good the first quarter was last year and how the 2% this year can be explained against that.
That's what I was getting at. It was even a more difficult comparison, I think, than we all thought because we didn't have the comp excluding the divestitures.
Got it. You're looking for more specifics on mostly the Fire launch, to be honest with you.
Yeah.
Which was in that Q1.
Okay. All right. That's helpful. Just second question, just on Finlandia. The decline is getting less steep, I guess. In Poland, you grew this quarter. Could you just give us, are we at a point where the drag there from Finlandia maybe is going to be less of a drag than it had been the last year or two?
We hope so, yeah. You're looking at the correct numbers, mathematically, yes, it has been. I think the other thing, too, it offers a slightly smaller base in profitability. It's less impactful when you get down to the bottom line. Our teams are working hard, particularly out there in its core geographies in Eastern Europe, we were pleased to actually see the quarter on Poland.
I guess what I'm after is just, is there anything that's changed either in the sort of the approach that Brown-Forman's taking to it or anything that's changed in the market that's stabilized it? Or is it just sort of evolving on its own?
Yeah, I think some of it was what I was alluding to earlier is some of these, whether it's brand markets are getting to a point where they got a new low, and so you're going to start cycling against that. Not saying that in Poland. Poland actually have recovered some, but Russia would have been one place that's still declining there. Again, I think it's getting to a place where it's not where it was a year ago, was as much of a drag. In terms of our own sales force and what they're doing differently, they're always trying new things. Then we're looking at a new package later this year-
Which we won't get the-
or probably next year
benefits till 2018. Wish we could get that faster, but it's just the nature of packaging changes.
Yeah. There's work always being done on it to help improve it.
I'd have to look at it back country to see. One of the influences I always feel in the vodka business, particularly in a lot of these markets, is the pricing activity of competitors. Your question makes me want to go look at a few of the key countries to see if that's stabilized, because sometimes that can have a very nice impact on Finlandia's performance.
Okay, great. Thanks, guys.
Thank you.
Your next question will come from the line of Rob Ottenstein of Evercore.
Great. Thank you very much. Couple of questions. Number 1, Coopers' Craft, haven't heard much about that on the call today. Can you just remind us when that launched, if there was any impact in the quarter, and how you see that reception in the marketplace and with your distributors?
I don't think it had virtually any impact on the quarter. I think it launched July 1.
Eight markets.
select number of states. Just 8, yeah. I think 7 or 8. Our read so far has been, which is mostly just trade and then any reviews about the product, has been very encouraging. So far so good on it.
Terrific. On Jack Daniel's, you mentioned that you had about 1% pricing. I just wanted to clarify, is that 1% pricing for No. 7 or 1% price mix for the Jack Daniel's family in the U.S.?
That was in the U.S., and that was only for No. 7. Again, as I said earlier, as we look at the full year, I expect minimal pricing for the full year in the U.S. from the brand.
Okay. You've got maybe an easier comp in Q1, and then less pricing for No. 7 the rest of the year?
Easier comp in Q1. Oh, in Q1.
On pricing.
Pricing. Yeah. I don't think No. I'm not sure if I follow you.
You expect roughly 1% pricing for the rest of the year for No. 7?
No, I'm sorry. I said we had 1% in the quarter.
Right.
I don't expect as much for the balance of the year, the full year will be minimum pricing.
Got it. Okay. Then just final question, going back to Finlandia. I know these are delicate questions, but is this a strategically important brand for you? Is it something kind of, it's nice to have but not need to have?
Well, I think it's been an important brand for us, particularly in key markets. You heard Jane emphasize that Poland's one of our top two emerging markets, and Finlandia was actually really helpful, particularly in its early years, to helping launch Jack Daniel's in a lot of these markets. It definitely has some strategic benefit and roles even beyond its own trademark contribution. As you all know, the vodka category is an enormously competitive one, and particularly at the prices where, even though they're what we would consider to be premium for the vodka category, there's a lot of competition in them. Like I mentioned earlier on, I think it's an encouraging sign that we've had a good quarter in Poland, but it's been a tough couple of years.
In the markets where Finlandia has been strongest, between excise taxes and competitive activity. Remember, a lot of these markets are what we consider dark markets. Our ability to advertise our way out of it is difficult. It's had some challenging times. I wouldn't go so far as to say that it's not strategic to us in maybe the way you were implying.
Maybe a little bit less than in the past.
Oh, yeah, mathematically. Sure. Just because of the innovation success we've had, particularly within the Jack Daniel's family, and the growth of the American whiskeys. If you're just mathematically, Finlandia hasn't kept up with those, so as a percentage of Brown-Forman, it's down.
No, I understand that, but just in terms of your ability to thrive in the Russian and the Polish markets, which are the two key markets, do you need to have Finlandia to give you critical mass in Poland and Russia?
It was certainly before Jack Daniel's had any scale in those markets, Finlandia would've proportionally been more important. I still think it's important.
Great. Thank you very much.
Welcome.
Your last question will come from the line of Brett Cooper of Consumer Edge Research.
Good morning, guys. Can you talk about your relative performance in emerging markets? I guess more on a trailing six or 12-month basis versus a couple of years ago. On a separate topic, when you're thinking about the go forward, what do you expect from blended Scotch competition given the devaluation of the pound? Thanks.
Jane, which one do you want to tackle, either one of those?
The relative performance relative to competition. I think, ourselves, I would point to some of the things that we already talked about in the quarter in terms of the numbers being down, and some of it being timing. I think that you have to peel back the onion again, similar to what I was doing with our own numbers, and look at the footprint of each of your geographic competitors to do any kind of comparison. Most of them have a lot larger percentage of their business in emerging markets than we do. Actually were hurt earlier, a couple years ago by the emerging markets action, whether it was in China, than we were, just because we didn't have a big footprint there.
I think relative performance to that, again, is you have to look at each country, and I think our competitors have noted doing well. Places like Mexico, we're doing very well there. I think our performance is holding in those places where it should be, and if not better.
Yeah. I think the big delineation between us and the competition is that in some of the instances, not all of them, but in some of them, we aren't in the, what I'll call, the lower priced local business, whereas several of our competitors, their business is influenced quite a bit by that. We tend to be at the more premium end, even where we're in a category that's indigenous to the country, like tequila to Mexico or an example of the very sizable vodka market in Poland. We tend to be at a little bit higher price point. You'll see some observations on performance between, say, us and some of our competitors that skew because of the portfolio. I'd have to look. I agree with Jane, it's a mixed picture, and you'd have to look at it market by market.
We group it into emerging markets a little bit for just convenience of aggregating what is, particularly for us, the Jack Daniel's global business. Jane, the other question?
The second part of this question, I think perhaps you were alluding to, was the impact of Brexit. Is that what you were really referring to?
Expectation of what the blended scotches might do.
Do as a result of that, since they actually got a nice favorable effect or pricing impact to them. I think that's what he's referring to.
Yeah. I think it remains to be seen. At least personally, I haven't heard of any reports or seen any data that tells me that they're using it to lower prices. Just so you'll know, even though you can be impacted by lower prices of competitive whiskeys, for some time, that was not the basis on which Jack Daniel's particularly competed with the standard blended Scotch brands. Oftentimes, in most of these markets, almost virtually all of them, we're a meaningful trade up to those brands. It remains to be seen what they do with them. I like Jack Daniel's price position where it is today, for the very long term.
Thank you, Paul, and thank you, Jane. Thanks to all of you for joining us today for our first quarter earnings call. Before you jump off, though, we wanted to make sure you knew we do plan on holding an investor day in New York on the afternoon of December 14th. Be sure to mark your calendars, and in the meantime, if you have any other questions, please feel free to reach out to any of us. We hope you all have a great Labor Day weekend, and that you enjoy some of our fine products. Take care.
Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.