AGM 2016

Jul 28, 2016

Slides

Morning. I think we're a couple of minutes early, but it all got quiet, and I thought I might as well just start the meeting. Don't worry, the legal part will start at 9:30. Good morning, and welcome to Louisville. Welcome to our annual meeting. Apologies for the humidity and for the rain, but thank you so much for making the effort to come today. This is not all companies have annual stockholder meetings like this. This is pretty unique. It's unique in some ways as Brown Forman. And thank you for keeping it that way. We've got retirees in the room, some of whom I've seen. We've got advisors to shareholders in the room. Thank you for everything that you do between these meetings and thank you for coming today. And of course, people who've come in from all parts of the country and even the world. We're also live here online. And so thank you as well to those of you out in the financial community in Pennsylvania. I think you know who you are when I say that, in New York and in London. Thank you very much for dialing in this morning. In particular, I'd like to welcome some of our retired directors who are with us this morning. Martin Brown Sr. Is in the room. Thank you, Martin. Ina Bond is here as well. Thank you, Ina. Dace Brown Stubs, where should Dace Brown Stubs. Thanks, Dace. And Jim Welch has just retired as the Vice Chairman of the Corporation and was on our Board for 7 years, I think, maybe 8. And he's here as well. Thank you, Jim, for coming in. Martin Brown Jr. And Sandra Fraser enjoyed 10 years on our Board of Directors, and they're also in the room today. Martin, Sandra, Thank you so much for coming. Thank you. And actually in the last 12 months, I think it was my cousin Marshall who alerted me to this that, there was independent director of ours, John Speed, who passed away. And if you were my age growing up, he would have been one of these wise independent directors that we had, who contributed to so much of what's made this company great over the decades. And so I just wanted to mention that Mr. Speed is on certainly my mind today also. So with that, I think I'll move to the and we're almost at 9:30, the formal legal part of the meeting. I now call to order the formal business portion of the 2016 Annual Stockholders Meeting. We have 2 items of business on the agenda for today. The first is to elect the directors for the coming year. And second, we'll seek your approval of an amendment to our restated certificate of incorporation to increase the number of authorized shares of Class A common stock. Unless there's an objection, I'll waive the reading of the minutes from last year's meeting. If I could ask our Secretary and General Counsel, Matthew Hamill, to describe the notice given to the shareholders. Thank you, Garvin. Class A shareholders who appeared on our records as of June 20, 2016 are entitled to vote at today's meeting. On June 28, 2016, we mailed a notice of this meeting together with a proxy statement, a proxy card and a copy of the company's annual report, which included our Form 10 ks for fiscal 2016. To establish a quorum to conduct business at today's meeting, we must have in attendance in person or by proxy at least a majority of the outstanding Class A shares. I can report that at today's meeting approximately 91% of Class A shares are present in person or represented by proxy. We therefore have a quorum to conduct business. Thank you. The following people were sworn in earlier as electoral inspectors to supervise the voting: Jeff Kaffee, Mike Carr and Mohammed Lhaschej. At this meeting, the first item of business is the election of directors. The following 12 directors are up for election to serve for the coming year. If I could ask each of you to stand as I call out your names. Patrick Bouzgeschaubon, Executive Director of Customer Marketing and mands.com@markusandspenser Campbell P. Brown, President and Managing Director of Old Forester Brown Forman Corporation Stuart R. Brown, Managing Partner of Typha Partners, LLC Bruce L. Burns, Retired Vice Chairman of the Board at Procter and Gamble John D. Cook, Director Emeritus of McKinsey and Company Marshall B. Farrar, Vice President and Managing Director of Global Travel Retail, Brown Forman Corporation Laura L. Fraser, Owner and Chairman, Bitners LLC Augusta Brown Holland, Founding Partner, Haystack Partners LLC Michael J. Roni, retired CEO, Bunzl Plc and Deputy Chairman and Chairman Designate of Grafton Group PLC Michael A. Taubman, Retired Vice Chairman, Whirlpool Corporation Paul C. Varga, Chairman and CEO, Brown Forman Corporation and I'm George Garvin Brown IV, Chairman of the Board, and I'm also standing for reelection. I'd now like to entertain the nominations for your Board of Directors. Is there a second? I second the nomination. Are there any other nominations? If there are none, I declare the nominations closed. The second order of business here today is described as Proposal 2 in your proxy statement. We're asking you to approve a proposed amendment to our restated certificate of incorporation to increase the number of authorized shares of Class A common stock. Your approval of this proposal will allow the company to execute the previously announced 2 for 1 stock split of both our Class A and Class B common stock. I always like the numbers around share splits. Of course, Warren Buffett has his opinions if you read any of his annual reports. Since 1933, we've had 12 share splits, so this would be the 13th. Paul, I've done a bit of research. Since you came to the company in 1986 as a summer intern, we've had 6. And actually, we've had 2 since Paul and I have been working together in this capacity. So our share price without any of these splits today would be $137,460 I love Warren Buff as much as anyone, but I just and your Board recommends that, that that's just not really the way to manage our share price. I'm not sure it would fit on your iPhone, if that's how you track your shares. Anyway, enough of the aside. Matt, would you please describe the voting process? Thanks, Garvin. If you completed and returned your proxy card, you've already voted and you don't need to do anything further. If you do not send in a proxy card or you did, but would like to change your vote, please ask for a ballot from 1 of the people now walking through the aisles. In the election of directors, only Class A shares may vote and a nominee will be elected if he or she receives a majority of the votes cast. For Proposal 2, the approval of the proposed amendment to the company's restated certificate of incorporation to increase the number of authorized shares of Class A stock. Only Class A shares vote and approval requires an affirmative vote of the majority of the outstanding shares of Class A common stock. Would the inspectors please provide the results to the Secretary? Thank you. At today's meeting, each of the 12 director nominees has received at least 98% of the Class A votes cast. Therefore, each nominee is duly elected to be a director of the corporation. For Proposal 2, I'm pleased to report that 89% of the outstanding shares of Class A common stock were voted in favor of the proposed amendment to the company's restated certificate of incorporation to increase the number of authorized shares of Class A common stock. Therefore, Proposal 2 is approved. Thank you. And on behalf of your board, thank you for your continued support. This concludes the formal business portion of our meeting. Unless there's any other business to come before us, I declare the 2016 Annual Stockholders Meeting adjourned. Okay. Thank you. Before I bring Paul up to talk to us about the business over the past year and probably other years too, I know he'll use some metrics today, I imagine. I bumped into a new metric this year on a flight from London to Warsaw of all places in April. It's qualitative, so you're going to have to bear with me as I explain it. But I was off to visit the Polish team, wonderful business. They've actually doubled, the Jack Daniel's family of brands in the last 5 years to 350,000 cases. It's run by Ricardo Cupido, who's a Portuguese national, Polish wife. He's been living in Warsaw. Where's Thomas? For how long now? 5 years he's been in Warsaw, okay, and running our business there for 18 months, maybe 24. Thomas Hinrichs is here today. He runs everything from the United Kingdom into Australia. He'll be at the brand fair. So if you want to learn more about the Polish business, please do find him and lots of other businesses. So I was very excited, off to see Riccardo and his team hadn't been to Poland in a while, great business. The flight was a bun fight. It was packed, bunch of angry business people off to leave their homes for the week and go do business in Poland. But I was lucky. I got the aisle seat sorry, I got the exit row, and I got an aisle seat. I love a good aisle seat. Exit row is even better, no one can lean back on you, etcetera, etcetera. But I know that if you're sitting on the exit row, you need to put your bags up above, right? Which I did. And the good news is there's no one in the window seat either, no one in the middle. This is just golden. Right before we take off, angry Englishman about my age comes on in the flight, makes a whole flurry. He forgets to put his bags up above. He takes the window seat, bags under, he's got to get out, my seat belt's off, 2nd time now. Of course, he forgot something in his bags, 3rd time. Now I'm really not liking my neighbor very much. Anyway, we take off, the snack car comes down the aisle. I took a water, Paul, traveling on business, took a water. And he, of course, wants something. And he asked for a Jack Daniels on the rocks. Oh, it's not so bad. I look to the stewardess, and she says, Oh, I'm so sorry, sir. We're out of Jack Daniels. And it goes back and forth and back and forth. And she's offering him this other whiskey brand. She's got a Red Label and a Black Label of that brand. He's so bent out of shape. He said, look, if you don't have Jack Daniels, I'll take a glass of champagne. So what's this metric? Not only did he leave the category, he left the entire spirits industry when he couldn't get Jack Daniels. Brand loyalty, unaided awareness, recall, past 30 day usage almost. I bet he had a Jack when he got the hotel that night. On a flight from London to Warsaw in 2016, you're overhearing this conversation in the exit row. I mean, how did that happen? It took me right back to 2,003 when I was interviewing with Mark McCallum, Michael Keyes for a Jack Daniel's marketing job. Guys, whisky category is not looking too good. Well, don't worry Garvin, we're not here to take share of the whiskey category. We're here to transcend the category. It's about building this brand. If the whiskey category grows, that's low hanging fruit. But with Jack Daniel's, we transcend the category. Okay. I guess they were right. How does Brown Forman do it? Here they talk about the art and science of brand building. On the art side, it's all the nice soft creative stuff, consumer insights, marketing, those Lynchburg postcards that I wrote about in the annual report that are on the subway line in London that my neighbor probably has been reading for 30 years, postcards from Lynchburg. People call it globalization, that's localization of the world of Lynchburg, Tennessee. And on the science side, it's production, it's finance, it's the sales guys getting rejected at accounts in those early days and going back and back and back. Art and science, brand building and Brown Forman. I remember leaving this meeting about 10 years ago, And I overheard a conversation between my mother, who's here today and Patrick Bouzquetschavan, one of our directors, just reelected. Mrs. Brown, how did you like the meeting? It's fine, thank you. But I'm just not so interested in business. I'm not really a business person, so I'm really not sure about the content, but it all looked lovely, lovely feel in the room. Mrs. Brown, what are your interests? Well, honestly, I love music. I love classical music. But we've just left a concert. Don't you know a great CEO is like a conductor of a symphony? And he knows when to call on the percussion and the strings and the wind instruments. We've just left a concert. She beamed, I beamed. Our conductors, Paul Varga. And we're all actually hitting the symphony. Shareholders who made the effort to be here today despite this weather, the traffic, I-sixty five. Paul's team transcending this category, building businesses around the world, are the wisdom of our Board of Directors, retired and active. All of us, we're all in the symphony. And it's Paul who's our conductor. So please join me in welcoming our conductor, Paul Varger. Thank you. Garvin's introductions are always so nice. And so it's a pleasure and a privilege to be here to represent the groups that he just referenced. And so before I even get started, let me thank all of you for the support you provide to what I'm about to say, as well as our board for the guidance and counsel and support they give. This executive leadership team that's at the front of the room here, I hope you'll have a chance to interact with at the brand fair. And they'd be mad at me and be correct too if we didn't honor the 4,200 people around the world who actually We have many, many faces in here, of course, from the Brown Forman family. The place is absolutely flooded with Brown family members as is our tradition, which is wonderful and unique, as Garvin mentioned. And I've actually got family here this year. Some years I've had it and others I've not. So we have an intern in the back, my nephew, who is interning here who counted votes, and I hope you did that right. And then my wife, Misty, is here and my dad's here for a repeat performance. I think he first came down to sort of check me out. And now I think he's down here looking after his investment a little bit more. So he's been coming down on that several the last few years. And after the first time, Doctor. Don came down, several people came up to me afterwards and said, my God, he looks exactly like you. Exactly like you. So if you get a chance afterwards and you see what I look like at the young age of 84, come up and visit my dad because we're a spinning image. So anyway, the theme here, as you can tell behind me, is Building Forever. And they're just two words. They do use the initials of the company, but I thought I'd try to, again, bring it to life. We've referenced it many, many times here at Brown Forman. And so this process of building forever, it is intended to be a statement that marries our highest ambition of building an enduring company with the process that actually will do that, which is a growth mindset. And so a way I like to think about it because it's a play on words, of course, is in order to build the end state of forever, we have to be building forever. And that building is this growth mindset about not only the company, but the brands I'll talk about and something I talked about in great part last year that I won't go into as much today, which is about the building of our people. And we think there's a very direct correlation between the company's progress, the brand's progress and our people's progress. So now I'll try to give you some insight of that. And I think one of the most important aspects of it is to first touch base on the year we just concluded because it's a fine example of this building forever. There are 5 highlights I would note here from the year. The first, of course, being the brand performance, and there's no new news from last year really here. Maybe one thing I'll cite, but Jack Daniels led it. The American Whiskey brands of Brown Forman, Woodford Reserve, Old Forester particularly continued to perform extremely well. But it was a Jack Daniels led business performance as in past years. But of note, the tequilas really had their breakout year in the 1st decade of Brown Forman's ownership of Casairo Dura. Alongside it was continued geographic balance. Probably the most noteworthy thing was something you would have observed in the headlines around the world over the last year or so, which was the slowdown in emerging markets. Brown Forman was not immune to that. While we still grew in the emerging markets, our growth rates moderated. So we were more dependent on the United States, which had another excellent year, as well as our developed international markets. Currency headwinds continued. It's been a theme for U. S.-based companies the last few years as the strong dollar. When we translate profits back, we actually have what we call currency headwinds. And so they don't convert at the rate they did 2 3 years ago. So it's a prominent topic in all of business today, some people benefiting from it, some people being hurt by it. But it clearly was a theme in the FY 'sixteen performance. Despite it, Brown Forman continued to have great business efficiency, I call it. Within our industry, we have the leading operating margin and return on invested capital, 2 of our foremost metrics. And then finally, we made significant long term investments. We reshaped our portfolio and through share repurchases and the continued success of our dividend program provided cash back to shareholders. For those of you who've been coming here for years, other than things like currency headwinds, it's been a pretty consistent story. So one thing I would note across all of it, though, that really will emphasize this point of building forever, what we're striving to do and what I hope you will take away that what building forever represents, is the desire to perform in the present while continuing to invest for the future. So performing in the present while continuing to invest in the future. And so this is the 1 year total shareholder return and I'm going to show you 4 of these. The first one is just captures the last 12 months ending April 30 at the end of our fiscal year. And so you'll see we were not the best performing within our industry as a couple of companies really rebounded versus some prior years. Even consumer staples in the 1 year was ahead of us. This is a benchmark set of companies and benchmarks. We never go out with some mandate that we have to be first. We just let these results fall where they may. We love the fact when we are the first, but we can only control our own performance. And so we guide ourselves based on the strategies and investments we make to try to deliver consistent results. So in this year, we were about, looks like, about mid pack here, and you see a variation, as you always do, on a 1 year basis. Now important, we performed very nicely with the 8% TSR, but we're doing things to position the company very well for continued success. Again, this idea of building forever. One thing we did was dispose of the very difficult decision to sell a Southern Comfort and Towaka, particularly Southern Comfort, a brand that had been with us since the late 1970s. We've been very successful at Brown Forman, a lot of us attached to it because we've done such good work on it over the years. But we made the decision to sell that and, at the same time, make investments via acquisition and innovation. And I've got a sampling here, and it goes well beyond this, but these are some of the more noteworthy ones. Jack Daniel's Tennessee Fire had a successful introduction this year. You see picture there a wonderful picture at the ribbon cutting of the Slane Irish distillery that we're building and will soon enter the Irish whiskey business. Ben Reach Distillery, which encompasses 3 single malt brands we closed on, which reenters Brown Forman in the single malt scotch business. And then Cooper's Craft, a brand that alongside Woodford Reserve and Old Forester, which by the way we continued to invest significantly behind, Cooper's Craft joins our stable of Kentucky bourbons. And you might ask, what is Cooper's? And I'm going to show you a video because they can say it a lot better than I can. We here at the Brown Forman Cooperage are proud to announce Brown Forman's first new bourbon in over 20 years. A toasted wood whiskey made with our distiller Bourbon. And our own barrel. We're proud to be a part. Of 1 of the oldest. And leading whiskey makers in the world. And the only major distiller to own its own cushion. Raising our barrels since 1945 here in Louisville. Louisville. Louisville, Kentucky, USA. Our barrels. Our barrels. Our barrels. Our bourbon. Cooper's Craft. Kentucky Straight. Bourbon Whiskey. With barrels creative. With the heritage. Skilled. Hard learned, hand taught knowledge from. 2 years. 4 years. 5 years. 10 years. 15 years. Almost 25 years. 26 We feel this is a very big idea for not just today, but for 20 years from now. And if you get a chance, we'll have, I'm sure outside, copies of our annual report. Most of you would have received them in the mail. But on the back of it is something that as we think about Cooper's and we think about the investments we're making today, there's a quote. It says, plant trees so that others might enjoy their shade. That was an Owsley Brown quote. He loved it as a from a Greek it was a Greek proverb, and he would cite it often. Bill Street, who I didn't see here today, used to tell us to plant acorns to become oaks. And what that reminded me of, that video and some of the activities of the last year are exactly captured in this idea of planting trees so that we might enjoy their shade. And that's what I'm going to talk about here with these next segments of time where we have begun to recognize the benefit of earlier investments. So one of the things that gives us confidence about what we've done here in the last 12 months is to start to look at, let's say, 5, 10, and 20 year segments because this isn't new at Brown Forman. We've been doing this for a very long time. So here's our 5 year, and you see here that if you spread the results out over 5 years, Brown Forman having a significant advantage over many of the benchmarks and at the very top of our industry set. So it didn't just happen by absolute coincidence. One of the most important things we did 5 years ago was to devote our energies toward the spirits business in an even more concerted way, and one of the things we did to enable that was to sell our popular price wines, another difficult decision for us because they'd served us well to that point. But when we shifted out of there, we really focused our efforts on Jack Daniel's Tennessee Honey, and those are in these 5 year results. And I can tell you that the result of that is that this brand today in 5 short years is easily Brown Forman's 2nd most important brand behind only Jack Daniel's Black Label. So and if you spread it out to 10 years so let's go back a full decade. Brown Forman, again, fortunately for us at the very top, very strong results on an absolute and relative basis. And what might have propelled this? It so happens that 10 years ago was the time when we again, a business that had served the company well until this time, we decided to exit the consumer consumer durables business, which was Lennox and Hartman, in 2 transactions. And at the time, we even focused more on distilled spirits, particularly the premium end with the acquisition of Casera Dura. You see pictures here. This was fun as I saw it as it was prepared. These were the bottles and what they looked like back 10 years ago when we bought it. And if you ever wanted to know one of the little capabilities that Brown Forman brings in the brand building process, I think tested over time, we've been very good at evolving and improving the brand identity through packaging. I also feel our manufacturing units are excellent at ever improving the liquid that's in these bottles. So this was something I thought was very helpful, that shift from consumer durables and Hartman luggage focus to this, giving the organization even more clarity about what would be the most important priorities and could drive our results. And then probably the thing that should give us the most confidence about what we've done in the last year and what might happen going forward is to look at the 20 year. So now we're going back an entire generation, and this is just not management taking credit for stuff that happened a long time ago. This really is the story of Brown Forman's continuing success. And it's this renewal of performing in the current time while investing to make sure that might continue. And if you'll remember, there were the probably one of the most significant strategic actions at the company of the modern era was Owsley's and Bill's push to globalize. And you see it captured here in the map, but also how we were going to go take Brown Forman's brands and values around the world. And if you think about why we have performed in the way that we have against this competitive set and these benchmarks, the big factor has been the appeal of Jack Daniels globally, just the appeal of Jack Daniels worldwide. And so it's captured through that sliver called globalization, which by the way is going to continue. But also we did something else back then, which was we planted a tree called Woodford Reserve. And at that time, several of us were around, but at that time, we wouldn't have imagined that Woodford Reserve might become what it's become today, but we sure hoped it might. We sure hoped it could. And what you see here is, from 1997 through to today, the ascent of Woodford Reserve, and I'm going to give you just something because the scale here has 100,000 cases going up to 500. For those who are not that close to the business, there's typically, for a brand, 2 very meaningful milestones at its early stage. Getting through that 100,000 case mark. And I don't mean just pushing it out there, I mean truly selling. And then when a brand is so rare at the premium, and in this case, super premium level, for brands to go through in a healthy way, a half a 1000000 cases, and Woodford Reserve eclits that during FY 'sixteen. So the way I'd say it is the team before us planted the tree here, and that's the shade we're enjoying. We really are. And so as we go do that for the next group, with the Ben Reach acquisition, with Coopers, etcetera, We hope that somebody will be up here 20 years from now saying, Thank you for planting that tree. So it's this idea of renewal where you perform in the current and invest for the future. Now how do you keep confidence against the backdrop outside this room? I mean, how do we go forward thinking what we did over the last 20 years will work against this context of the next 20, particularly when all of this is around us. I mean, it's around all of us, and all businesses all people have to deal with it, but businesses too have to navigate this. Now one of the ways that we keep our confidence is to look at these, be aware of them, but we also look at these headlines. You have to remember to give equal balance to the scary world we're in, but also what's happening with our category. And for us, all of that progress during most of the period, say for Woodford Reserve, the bourbon category, particularly in its home, in the domestic country where Woodford's strongest, the U. S, was not growing. So it happened against the grain for the first part And in these last few years, it's actually been a tailwind for us. So we consider this to be a source of optimism even against all the negativity we might see in the world. And you might ask, why American Whiskey? Why is it bucking the trend of many other categories, etcetera? And there's just reference points on here, but I will tell you 1st and foremost that that stressful set of headlines I showed, it's in part one of the reasons that I feel personally that bourbon is thriving. Because somewhere between the stress created by all of those headlines and terrorism and uncertain global economies and difficult markets and just the hectic pace of life, the world decided it needed a real drink. It really did. And so why is American Whiskey considered a real drink? And it's because of these things. It's made by real people, real craftsmen in real places. More often than not, the Providence happens to be small towns or not the big city. It's enjoyed by people who are just think of the reference point. The reference point 10 years ago were candy coated vodkas, watered down light beers and sugar bomb Chardonnays. And this has flavor. It has taste. It acquired taste is cool. Can you imagine that? An acquired taste where everything was so easy, this has flavor and taste. And so I feel like this is the time for American whiskey because where the consumer has moved, American whiskey more naturally is. So nothing, nothing has either built or represents today more American Whiskey than Jack Daniel's Tennessee Whiskey. And another thing that people appreciate in addition to provenance and quality today. Even though we can never be the new kid on the block again, it's really cool today to be 150 years old. It's really cool to have survived your own prohibition. It's really cool to have lived through a few world wars. And Jack Daniels is celebrating this year with a tremendous amount of public relations. And even though I've showed the Woodford story and all these other ones that we hope will someday turn into brands like Jack Daniel's, There's no chart that I can put that even comes close to this enduring growth story. You have to really go back with me here now. This is 60 years. So this is a 60 year line of Jack Daniel's development globally. And you see a 60 year cumulative annual growth rate of roughly 7% for both the main black label brand as well as the family. And so we don't take it for granted, but I would contend that enduring brand growth comes from enduring brand values that people feel are compelling. Enduring brand growth, really, to prove it over that long a time, comes from enduring brand values. Now I could tell you all about Jack Daniel's brand values, but I thought I'd show you just a clip because, again, they can say it better than I can. This is Lynchburg, Tennessee. This is how many people were born here. This is how many are 5th generation. This is how many are named Hiawatha Kitty McGee. These people have served their country. This is how many will still be in town when the football team plays at Huntland. She's from Taiwan. He's German. This guy keeps the town dry. These guys would prefer it a little wet. This many have ejected from an SR 71 Blackbird and lived to tell about it. He can lift a 500 pound barrel of whiskey. These are the direct descendants of Mr. Jack Daniel himself. This is how many people are proud of what we do here. This is how many will go around bragging about it. This is our town for 150 years, the home of Jack Daniels. If you can't get here, just look for one of our postcards. We send them all over. They look like this. Thank you. So let me finish with a little toast to Postcards, to 150 years, to Jack Daniels and to Building Forever. Thank you all very much for being with us today. Thank you all. We of course have the brand fair and reception as is traditional here, but if there were any questions, we'd be happy to entertain them here. But otherwise, we'll direct everybody. I'm sure if it's really rain, I haven't seen outside, obviously, but if it's rain, there'll be umbrellas, of course, for us in order to shore it, and you can mostly stay undercover through the buildings themselves. There'll be a short amount of time you'd be out underneath the rain if it is raining. But otherwise, we welcome you all to the brand fair. Thank you very much for being with us.