Earnings Call: Q1 2017

Aug 31, 2016

Good morning. My name is Kalia, 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 speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the conference over to Jay Cabal. Please go ahead. Thanks, Kalia, and good morning, everyone. I want to thank you for joining us for Brown Forman's Q1 2017 earnings call. Joining me today are Paul Varga, our President and Chief Executive 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, and you should not place undue reliance on any forward looking statements, and the company undertakes no obligation to update any of these statements, whether due to new information, future events or otherwise. This morning, we issued a press release containing our results for the Q1 of fiscal 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 ks, Form 8 ks and Form 10 Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non GAAP financial measures. These measures 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. Thanks, Jay, and thank you for joining us for our Q1 earnings call. I plan on discussing 2 topics on today's call. 1st, our first quarter results and second, our latest outlook for 2017. And then Paul and I will address any questions you may have. But before I jump into our Q1 results, I wanted to discuss a change we have made and how we present our reported and underlying net sales. In the past, we have presented our net sales, including excess taxes. Beginning with this, our Q1 and going forward, we will present our net sales excluding excess taxes, which is consistent with the presentation used by our competitors. We believe this is a small change in the presentation of net sales and reflects one of several metrics we, as a management team, look at our business. We will continue to present excise taxes in our income statement, so the amount of information we disclose is really unchanged. It's simply the geography in our P and L and the comparability of the net sales metrics that we will discuss and analyze going forward. So with that housekeeping item taken care of, let me now review our results for the 1st 3 months of fiscal 2017. Our underlying net sales using our new presentation of excluding as the Q1 of last year was our strongest quarter, up 9% on a comparable basis, meaning excluding the divestiture of Southern Comfort and Towaka, and up 11% over the 2 years. Remember that last year's Q1 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. And in the Q1 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 twenty sixteen. 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 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 digit as it entered its 6th year in the U. S. Marketplace, while Tennessee Fire experienced double digit declines. After accounting for last year's pipeline spill 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 Cooper's Craft, as consumers continue to gravitate toward brands with heritage and authenticity. El Hemadura and Herradura also continued to grow trajectory with both brands registering double digit growth in the quarter. In addition, Korbel Champagne and Sonoma Our developed markets outside of the United States also delivered a 5% increase in underlying net sales against last year's Q1 growth of 9%. This growth was broad based with every developed market in our top 20 markets growing in the quarter, including the United Kingdom, 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 2 largest emerging markets, Mexico and Poland, continued to expand in the Q1, delivering solid rates of growth, while several other emerging markets were down double digits for the quarter. This included declines in Turkey and Brazil, 2 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 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, so 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 Q1. Moving now to a reconciliation of reported to underlying growth. Reported net sales declined 5%. Reported results were pulled down by 2 points due to a strengthening U. S. Dollar as well as a 2 point reduction in distributor inventories, which relates largely to destocking in Russia following some inventory build there in the Q4 of 2016. The absence of Southern Comfort and Towaka following last year's sale of these brands resulted in an additional 3 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 combined effects of last year's divestiture and adverse foreign exchange. Underlying A and 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. And underlying SG and 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 2 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 sustainably growing underlying net sales by a mid single digit rate of growth for several years. As you know, the Q1 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 attack, not to mention foreign exchange swings. But net net, we delivered 11% underlying net sales growth on a 2 year stack, and we believe we remain on track to deliver 4% to 6% underlying net sales growth in fiscal 2017. Takeaway trends in our non U. S. Developed markets remained strong, including high single digit growth in Western Europe. In the United States, takeaway trends remain solid and the Jack Daniel's 150 birthday execution is well underway, which when combined with incremental media investments and the commemorative gifts should drive a moderate acceleration in the United States. And while we are carefully monitoring the challenging off premise trends for Jack Daniel's Tennessee Fire in the United States, we are encouraged to see Tennessee Honey growing again as we move past last year's new flavor of 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. But SG and A cost containment efforts should allow us to deliver solid leverage to the operating income line in the year, resulting in 7% to 9% in underlying operating income. After accounting for our recent 2 for 1 stock split, we still anticipate earnings per share of $1.71 to $1.81 including a $0.03 headwind from adverse foreign exchange. Full year tax rate is expected to be between 29% 30%. And as a reminder, a 10% move in the dollar in either direction would impact EPS over the balance of the year by approximately a nickel. 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 Ben Reaco. In the quarter, we issued our 1st 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 $250,000,000 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, and we are focused on continuing that legacy for all of our stakeholders. So with that, unless Paul has any comments, we'll turn it over to the operator. You okay? Yes, let's just go straight to the operator and address any questions you all may have. Your first question will come from the line of Vivien Azer of Cowen. Hi, good morning. Good morning. Good morning, Vivien. So just in terms of your outlook, Jane, I think you were real clear about kind of the puts and takes, but 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. So a 2 part question. Number 1, can you quantify how much of the drag to EM was timing related? And 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 let me just talk about emerging markets in general. So 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. And I'd like to step back and remind everybody how much of our emerging markets makes up of our business. So it's around 20% of our total revenues. And so 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 2 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. And we expect them to continue to grow. So we do not expect them to be a drag on our results. Then we talked about our 2 of our larger contributors of growth over the past couple of years being Brazil and Turkey, being a drag on the quarter and 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. And so these really did have a significant drag on our results. We have other parts of emerging markets that are continuing to grow. And then we have some emerging markets that have, what I would call I think they are stabilizing. They're not necessarily getting better. And so 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 is was an issue. I would say it was about point of timing issues. And I would say the rest of it was that we also expect significantly easier comps as we go throughout the year, particularly if you look at the last half of the year and most notably the Q4 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. So I hope I've answered all your questions there. Yes, that's perfect. Yes, Vivien, I'll just add too. There are I mean, in any 3 month period, you always have, I'll call it, these fluctuations. I'll give you an example of one, which is like these discontinued agency brands that Jane mentioned. Once you cycle against not having them, in this instance, it would be that would I think those affected Mexico and Czech Republic. So 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 5 was good. It does feel though that at least in the syndicated data, the AC Nielsen data, that the category does seem to be softening a little bit. Are you guys seeing that as well? And if so, what do you think is driving that? Thanks. I mean, it's a good question, Paul. It probably takes this again. I think we might say it's hard to look at any 3 month trend to draw a lot of conclusions from it. We were talking earlier, we had seen increases in other industries, other alcohol industries, beer or wine, which we haven't necessarily seen or we haven't seen. So we don't see beer growing. So I think it's just I wouldn't over read the trend at this point in time. We're definitely looking at it and watching it, but that's 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 that. But I think as a general thing, I've seen some speculation that it's going to potentially be lower than it historically has. But I think we're still estimating in the mid single digits something in the U. S. That yes, value growth something in the 5% range, which I think isn't too far off what and again, the most important thing for us is that that has been driven in good part by the American Whiskey business. So I mean, I think we'd need a little bit more time to see either softness in trends or something to start to forecast 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. So just maybe a couple of follow ups on the U. S. If I kind of 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. So 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 mean, 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 Daniels, we experienced that there's all particularly the premium prices like Jack Daniels is that there are tryers who sometimes don't convert that to full monthly usage. So 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. So, of course, it doesn't have the pipeline build, the off premise channel does. And then I think very importantly, as we've said, is that versus introducing an additional flavored whiskey from Jack Daniel's or 2 or some of our competition has done. Our main focus was on geographic expansion. So trying to take out in a thoughtful way into other countries. And 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. And James, do you want to add pricing things? I can talk a little bit in the U. S. I mean, 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. But 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. Yes. And I think, Judy, too, the other thing on just to go back to the earlier statement I made about how you sometimes we'll have tryers who won't convert. I mean, 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. And so we think that might be one of the contributing factors that the hurdle for individual drink price in the on premise isn't as great as the shelf price difference in the off premise. So I think our people are appropriately always dabbling with the right price volume mix within our range in order to try to find the best way to create sales value. Yes. I will just build it on pause. I think we said earlier this year, even in the U. S. Market, as we look around the world in terms of pricing opportunities, or Paul alluded to just a moment ago, we're looking at always smart ways to do it. But the environment right now is not, in some markets, they're a deflationary market, so it's not necessarily conducive to it. And as we look at the full year, as we discussed in our Q4, we're expecting very little from pricing, whether it's in the U. S. Or globally. But some we'll get the mix in there that we expect as we have higher volumes coming from our faster growing premium and premium plus brands. The lone exceptions to that for us, those comments are absolutely relevant to the Jack Daniel's line. But the Woodford Reserve and Old Forester brands, Old Forester has 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 year. So we're hopeful that that could help in the United States too. Okay. Then 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 pricemix impact. So is there any sort of timing issue? Do you expect that 1% to improve as you get out to the balance of the year? Actually, I don't remember that. I don't think so. But I think, first of all, the SOCO piece of it, we pulled all that out when we did this analysis. So it's not helping or hurting. So 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 Chillawaka, which had nice high gross margins. And so the 180 basis points on reported decline year over year in margin, about 130 basis points of that decline was due to the exit team and the divestiture of those two brands. But 1% is we're expecting somewhere in that range, Paul. 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 benefit last year from particularly fire as we introduced it. And in past years also these barrel sales have been helpful. So in this particular quarter, I think both of those things would have worked against us. Got it. Okay. All right. Thank you. Welcome. Your next question will come from the line of Bill Chappell of SunTrust. Thanks. Good morning. Good morning. Just first question and maybe I missed something, but I think the original gross margin guidance was kind of flattish, now it's down 200 basis points. Just trying to understand exactly how you get back to your original EPS guidance. I mean, what the areas major areas of improvement are? And maybe correlated, it seemed like I thought you had said in the past that advertising would be up this year or at least for the 1st this quarter and it was down year over year on a dollar basis. So maybe you could kind of help us understand the pacing of that? Okay. Let me see if I can start. So if you look at our full year, our guidance is unchanged. And what we need what we're looking at as we and the confidence we have in achieving that for the full year versus where we are today. As we do expect to continue to have leverage, operating expense leverage via SG and A, you'll recall last year we had very low growth levels of SG and A. We expect some more continued low growth this year too, 2% underlying last year. And so we still expect that to have it happen. You're right, on an underlying basis, we had very small, I guess, not we didn't have a gross margin help, if you will, on an underlying basis. And it's operating expenses, particularly SG and A. But let's talk more about what's going to drive this. It's really your top line growth. And 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. But also, as we look out, we won't have the drag on our results from our Q1 fire in the U. S. Launch last year, the drug drove us down this year, in other words, the pipeline. And we continue to expand internationally. So we're going to continue to get benefits there. And then Jack Daniel's 150 activation is just underway. And so we've talked Paul talked a lot about this at in our shareholders meeting in July as well as he introduced this in June during our call. And so there's a lot of activation really going on now. And then when I think about the United States, we are actually increasing our media spend as well. So you'll start to see that coming through in the second and third quarter. We've got a lot of incremental gift that's coming through to and our whole sales force and our trade partners are all focused on that. So we'll see some modest improvement, as I said, in Jack Daniel's as well. So 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 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. And then 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. And so if you look at the F-fifteen and F-sixteen combined pulling out Southern Comfort, on a 2 year stack basis is up 13%. Q1 of last year, just to illustrate the comp in advertisement last year that had the Tennessee fire in it, it was up 6%. So we also have all that going on. So I hope I've given you some color. I know I said a whole lot in there, so I'll stop and see if Paul wants to add anything or you can ask us further clarifying questions. I think that covers it well. And again, I think again, it's 3 months and we I find typically on this particular earnings release, you end up having a lot of quarterly noise because it's only been 3 months. And so 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. But as it relates to the expenses, I feel like continuing to we'll continue to invest behind the brands as we go forward and most of that leverage as planned is at the SG and A line. And Paul just to follow-up on that, I mean just to be clear, I mean what you're saying is there's really no surprise internally from this quarter and maybe the surprise is more of the stock reaction because it sounds like you knew the comps were going to be tough, the new but it seems like the gross margin was a surprise at least the outlook. And so that's why I'm trying to couple all these things together of it does seem like something's changed in the past 3 months. Totally, I understand. I think what happens like for example, I'll give you the like for example, the full year impact of these lower barrel sales is really the brunt of it hitting us in the Q1. I mean, it will still be not as I mean, it will still be negative to us as we go through the year, but not to the level that it was in the Q1. I know that sounds odd, but that was something that we were not experiencing through the course of FY 2016, for example. So again, that's why I make an example of that one. Just 3 months. It does hit you pretty good. And so on a 3 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 either is the same or different. And you always have surprises in a quarter. I mean, there's no doubt that I would have hoped for and helped that hope 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 are 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 remainder of the year. So it's probably a tale of both. As you say, I wouldn't say that we're surprised every quarter by something. Okay. I'll turn it over. Thanks. Welcome. Your next question will come from the line of Tim Ramey of Total Research Group. Thanks so much. Good morning. Hi, Tim. 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? Let me take you through Vericel, how this all comes about. Of course, we're fully integrated, if you will, through the supply chain. So 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 distillate and then out the door. So remember that we're one of the largest barrel making operations in the world. And so 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 and L. Just a background, because we've been doing this we've been making our own barrels for a number of years. And what we do, as you know, is each bourbon and Jack Daniel's whiskey require a new barrel to put the whiskey into age. And when we get finished with those barrels, we sell them. And the market generally for the sale of these barrels has been the scotch industry. So if you look at it over long periods of time, let's just say 50 years, it's a impacts the sale of barrels. It impacts the supply and demand, it impacts the sale of barrels. It impacts the supply and demand and impacts pricing. And so as you know, there's been some softening in demand of blended scotch. So we started seeing some pricing pressures, and we noted that, and we said that in our Q4 conference call. What that bid is in the Q1, we had a couple of things happen. We saw those pricing pressures. So each barrel that we were selling on the outside market, once that we've got dumped, this used barrel, we're making less on it than we were a year ago. We also had some lumpiness, as I was alluding to, to orders, which would have 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, but how it flows through our P and L is simply we got less revenues from those sales of barrels this than we got last year. It comes through our revenue line and hits you all the way through your P and L. It's just basically revenue. It's very high margin business. So there's no brand expense, if you will. There's some people that sell it, but it's largely drops the bottom line whatever you have in your revenues all the way to operating income. Yes. And remember too that while we while the demand end has been 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, there have been other bourbon barrels out there. So that influences the supply of those against the scotch demand. So some of that is hitting us in this Q1. And as Jane said, it's a nice margin business. And we do expect throughout the year the pricing pressures and we because of what Paul said and what I was saying too, so yes. Just not to belabor it, but in wine trough to peak, used barrels pretty much doubled. I assume that something similar happened on your end, and so this is softness relative to recent but not softness relative to, say, 3 years ago. Would that be a fair statement? I think our I would say softness relative to, let's say, 3 years ago. I'm trying to remember what our price the price of the barrels have gone up because actually they were in short supply a couple of years ago. So I think relative to 3 years ago, I think it would be a little bit higher today. It would be. I think a lot of that growth over the 3 years, Tim, was driven by selling more barrels in addition to the prices at which they were sold. And so now you've got to pull that. And just like you know, Ken, 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. So if you can't if you don't have a supply someone to sell it to, so a person in need of it, a Scotch buyer or 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. Yes. Just the same as in wine. And on the tequila side, I mean, 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. So that you should see both Mexico, there were a little bit of price increases, so they probably were a little bit stronger, but they both In Mexico, yes. Mexico, not in the U. S. But I think both brands are doing quite well. They're both grown, I think, in the double digit range, thereabouts 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. So we do have less volumes there. So, yes, but they're still both doing well. Terrific. Thanks for your help. Thank you. Your next question will come from the line of Bill Schmidt of Deutsche Bank. Hi, good morning. Hey, good morning. Hey, could you guys just clarify a couple of things for me? First of all, what exactly, 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 in the last page of the press release. Like 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, yes. A point drag, that was made up both the pricing, which we expected. So it was about half of that was point and the other half is timing. Okay. These are reflected in that schedule on like Page 10 of the release or not? It's not separately. Okay. I'm sorry, you're on Page 10 of the release. Yes. I'm sorry to get down on the minutiae. Yes, sorry. Actually, I guess it would just be in your bottom line numbers because this is all the first things are volumes and we don't track it there. So it would just be in your very bottom line 2%, I guess. So it's not per se in there. Okay. That's helpful. In terms of our total business, it's not a major a meaningful business itself. Okay. No, that's helpful. And then can you just kind of give us like a more detailed gross margin bridge and how you think that sort of plays out over the year? I know you talked about it qualitatively, but I mean, 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. So, I think in the Q4, I was talking about our gross margin at that time. I think it's really relatively unchanged from that. So I said it was at that time, we expect it to be flattish. Bill referred a little bit earlier to 2 10ths down 2 20 basis point difference. So I'm talking give or take of 20 basis points or so. So nothing's really changed in that perspective. So at that time I talked about it being largely a volume and a mix versus any pricing. Okay. No, that's helpful. And then just it sounds like the SG and A costs are going to be up a little bit this year. Is that so should we expect that ratio to expand and as a percentage of sales? And then what's driving the higher SG and A costs? Actually, are you looking at the same thing I'm looking at? I think SG and A costs are actually down on the Well, I thought you're talking about the outlook. Did you say that the SG and A costs would be up offset by some pricing? Or did I mishear you, Jerilyn? Yes, I'm sorry. I was talking about underlying SG and A growth. If you were to look at where we are today, underlying SG and A is down 2%. I would say that was largely influenced by timing or one time the absence of one time items we expect going forward. And so we do expect some modest increase in SG and A. Recall, last year, SG and A grew about 2%. Recall, our sales grew, what I said earlier, 5%. So if you looked at the metric, we actually improved on an underlying basis our SG and A as a percentage of revenue. I would expect a similar type of thing this year, low single digit growth in SG and A at this point, And then, of course, higher growth at the revenue line. So improving trends on an underlying basis. Hopefully, it will be similar leverage to last year. Yes. Okay. No, it's super helpful also. And then 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? Actually in some markets, in emerging markets, I hope inventories will come back versus because I think anytime you have some of the circumstances we've got, you'll find some inventory tightness in some of these markets. But I mean, I think is it general? You were talking about depletions. I was trying to convert it over to sales, which is but It's fair. I mean, we did have some timing issues and there's some markets that Russia particularly. Yes. And some yes, that's right. We had shipments depletion. So we expect completions to get ahead of shipments this year there. We had some timing as you seasonality or timing issues in the Q1 of this year were shipped. On distributor changes and things like that. Yes. We have some of that shift and depletion. So that will work itself out. And we have been accommodating we have been now the 2 offsetting things on Tennessee Fire, remember, is in the new markets, we will be internationally, we'll be probably building some inventories out there as we go along, pipeline, particularly retail. And then offsetting it in the United States has been some of those reductions. Okay. That's super helpful. Thanks very much for your time. Welcome. Your next question will come from the line of Brian Spillane of Bank of America. Hey, good morning everyone. Good morning, Brian. Just a couple of questions. First, just some clarifying points. Jane, I think we talked earlier about the prior year comparison on underlying sales excluding the divestitures was 9% in the Q1. Is that right? Yes. I think I exclude foreign exchange from that as well. Yes, excluding so underlying ex foreign exchange and ex acquisitions and divestitures. Have you given what that comp is for the full year? Just trying to because 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 7%. So just want to make sure if you've got it, if you could provide? Excluding SoCo with 5. So we talked about $20,000,000 of operating or $0.20 now $0.10 split adjusted was the bottom line impact of that. I'm trying to think what else I have on the rep. What I'm trying to get to is we've got a right. We've got a 4% to 6% underlying sales growth expectation and 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? The last year's quarters were 9 as you said, right? And then as they came down, what was 5? Roughly 4 over the balance. 4 over the balance. And so you need 5 to 6s on a 2 year stack to equal out to the double digit that you would have accomplished with a 9 and a 2. I think that's what you were going, right? Yes, yes, yes. No, that's helpful. Yes. So I think, yes, we need mid single digits off on a 2 year basis. And I think that the reason that Jane was illustrating that is just to show you how good the Q1 was last year and how the 2 year or the 2% this year can be explained against that. Yes. And that's what I was getting at it. It was even a more difficult comparison, I think, than we all thought because we weren't we didn't have the comp excluding the divestitures. Right. Got it. Which you're looking for more specifics on the mostly the fire launch, to be honest with you, which was in that Q1. Okay. All right. That's helpful. And then, just second question, just on Finlandia. It's the decline is getting less steep, I guess. And in Poland, you grew this quarter. So 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 in the last year or 2? We hope so. Yes. I mean, you're looking at the correct numbers. So mathematically, yes, it has been. And 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. So our teams are working hard, particularly out there in its core geographies in Eastern Europe. And so 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 is taking to it or anything that's changed in the market that's stabilized it? Or is it have we just is it just sort of evolving on its own? Yes. I mean, I think some of it was what I was alluding to earlier as 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 has recovered some, but Russia would be in one place. It's still declining there. But 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 and then we're looking at new package. Which we won't get benefit till 2018. Wish we could get that faster, but it's just the nature of packaging changes. So there's work always being done on it to help improve it. But I'd have to look at it backcountry to see, but one of the influences I always feel in the vodka business particularly in a lot of these markets is the pricing activity of competitors. And 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, Cooper's 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 virtually any impact on the quarter. I think it launched July 1 in a very select number of states, just 8, yes, I think 7 or 8. And our REIT so far has been, which is mostly just trade and then any reviews about the product has been very, very encouraging. So, I mean so far so good on it. Terrific. And then on Jack Daniels, you mentioned that you had about 1% pricing. I just wanted to clarify, is that 1% pricing for number 7 or 1% pricemix for the Jack Daniel's family in the U. S? That was in the U. S. And that was only for a number 7. Again, as I said earlier, I think that would as we look at the full year, I don't expect that. I think expect minimal pricing for the full year in the U. S. From the brand. Okay. So you've got maybe an easier comp in Q1 and then less pricing for number 7 the rest of the year? Easier comp in Q1? On pricing? Pricing. Yes. I don't think no. I'm not sure if I follow-up. So you expect roughly 1% pricing for the rest of the year for number 7? No, I'm sorry. I said we had 1% in the quarter. Right. And I don't expect as much for the balance of the year. So the full year will be minimum pricing. Got it. Okay. That's okay. And then just final question, going back to Finlandia, is this and I know these are delicate questions, but is this a strategically important brand for you or 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 is one of our top two emerging markets and Finlandia was actually really, really helpful, particularly in its early years to helping launch Jack Daniel's in a lot of these markets. So it definitely has some strategic benefit and rolls even beyond its own trademark contribution. So I mean, 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. So, and 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. And they have I mean, this in the markets where Finlandia has been strongest, it's just there's been between excise taxes and competitive activity. Remember, a lot of these markets are what we consider dark markets, our ability to sort of advertise our way out of it is difficult. So it's had some challenging times, but I wouldn't go so far as to say that it's not strategic to us and maybe the way you were implying. But maybe a little bit less than in the past? Yes, mathematically. Sure. I mean, yes, mathematically. It's just because of the innovation success we've had with particularly within the Jack Daniel's family and the growth of the American whiskeys. And if you're just mathematically thin landing hasn't kept up with those. So as a percentage of Brown Forman, it's down. Well, no, I understand that. But just in terms of your ability to thrive in the Russian and the Polish markets, which are the 2 key markets, do you need to have Finlandia to give you critical mass in Poland and Russia? I mean, it was certainly before Jack Daniels had any scale in those markets, Finlandia would have been proportionately been more important. But I still think it's important. Great. Thank you very much. You're welcome. And 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 6 or 12 month basis versus a couple of years ago? And then on a separate topic, when you're thinking about the go forward, what do you expect from blended scotch competition given the devaluation in the pound? Thanks. Jane, which one do you want to tackle either one of those? The relative performance relative to the competition. Again, I think ourselves, I would point to some of the things 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. And actually were hurt earlier, a couple years ago by the emerging markets actions, whether it was in China than we were just because we didn't have a big footprint there. And so I think relative performance to that again is you have to look at each country and I think we're our competitors have noted doing well. Places like Mexico, we're doing very well there. So I think our performance is holding in those places where it should be and if not better. Yes. 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 price local business, whereas several of our competitors influence their businesses 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 in the example of the very sizable vodka in Poland, we tend to be at a little bit higher price point. So you'll see some observations on performance between, say, us and some of our competitors that skew because of the portfolio. But I'd have to look I mean, I agree with Jane. It's a mixed picture. 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 Jack Daniel's global business. And then 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? The expectation of what blended scotches might do. As a result of that, since they actually got a nice favorable FX or pricing impact to them. I think that's what he's referring to. Yes. I mean, I think it remains to be seen. I haven't seen at least personally, I haven't heard of any reports or seen any day 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. I mean oftentimes in most of these markets, almost virtually all of them, we're a meaningful trade up to those brands. So it remains to be seen what they do with them, but I like Jack Daniel's price position where it is today for the very long term. Thanks. Thank you, Paul, and thank you, Gene. And thanks all of you for joining us today for our Q1 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 14. So 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. And we hope you all have a great Labor Day weekend 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.