Earnings Call: Q4 2016

Jun 8, 2016

Welcome to the 4th Quarter Fiscal 2016 Year End 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 Mr. Jay Kaval, Director of Investor Relations. Please go ahead, sir. Thanks, Paula, and good morning, everyone. I want to thank you for joining us for Brown Forman's 4th quarter 2016 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. 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 Q4 of fiscal 2016, and 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, 8 ks and 10 Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non GAAP financial measures. These measures and the reasons management believes they provide useful information to investors regarding the company's financial conditions and results of operations are contained in the press release. So with that, I'll turn the call over to Jane for her prepared remarks. Thanks, Jay, and thanks for joining us for our fiscal 2016 earnings call. I plan on covering 3 topics today, which should leave plenty of time for questions after our prepared remarks. First, I'll review our full year results, including a brief overview of the Q4. 2nd, I'll discuss our earnings outlook for fiscal 2017. And finally, I'll share some additional color on the changes we have made to our portfolio over the past year, including the Ben Reach acquisition. So let me start by reviewing our results. Despite a very challenging comparison against last year's 4th quarter 10% increase in underlying net sales, which you will recall benefited from the launch of Jack Daniel's Tennessee Fire in the United States. We delivered solid 4% growth in underlying net sales during this year's Q4. Underlying A and P spend increased 8%, while a 3% reduction in underlying SG and A boosted our underlying operating income growth to 15% for the quarter. For the full year, underlying net sales grew 5% and underlying income increased 8%, in line with the guidance we shared with you on our Q3 call and well ahead of our estimate for the industry's rate of growth. Our net sales growth in the year was driven by volume gains from our premium priced brands, driving 4 points of mix benefits and ten basis points of gross margin expansion. Looking at our business results by geography, the developed world delivered growth consistent with last year, helping offset a slowdown in emerging markets and declines in our travel retail channel. We grew underlying sales in each of the top 10 markets with the exception of Russia and believe that our balanced geographic approach to building our portfolio is one of the reasons why we consistently deliver top tier results. The United States grew underlying net sales by 6%, led by the Jack Daniel's family of brands, a remarkable achievement for a trademark that is celebrating 150 years in the market. The U. S. Launch of Jack Daniel's Tennessee Fire contributed almost one point of underlying net sales growth in fiscal 2016. Combined, Tennessee Honey and Tennessee Fire depleted over 1,000,000 cases in the United States in fiscal 2016, strengthening the brand equity of the Jack Daniel's family by appealing to new consumers and accelerating the brand's reach across ethnicity and gender. We believe we are uniquely positioned to benefit from consumer interest in premium American Whiskey. Our leadership position in this category is, of course, driven by the Jack Daniel family of brands, but is also aided by our bourbon brands, such as Woodford Reserve and Old Forester, both of which enjoyed rapid rates of growth in fiscal 2016. And we believe that our whiskey expertise, including our vertically integrated supply chain from barrels to homeplace experiences, position us well to grow our brands in the coming years. Woodford's family of brands reached 500,000 cases in fiscal 2016. While this impressive milestone might seem like an overnight sensation, it required a strategy built on patience and consistent investment behind the creation of a new brand in the mid-1990s that leveraged heritage and our whiskey making expertise. We are replicating this proven business model with Slane Irish Whiskey, which we believe can become the next Woodford like driver of our company's results as we see the next 20 years of growth. Developed markets outside the United States also delivered solid underlying net sales growth, up 6%. This rate of growth marks a 2 point acceleration from fiscal 2015, with particularly strong results in Western Europe, up high single digit as well as solid gains in Canada and New Zealand. Australia, Japan and Spain each returned to growth during the year, while results in Italy declined. The GiacTino's trademark is continuing to gain share from blended scotch among other categories and our market shares remain low compared to what we have achieved in the United States. So we are optimistic that the best is yet to come as the Jack Daniel benefits from its brand positioning around confidence and independence, strong heritage and authenticity, not to mention its prominence in pop culture. Moving now to our emerging markets business. Underlying net sales grew 4% in the year, a marked deceleration from what we have delivered over the last decade. Mexico and Poland, our largest 2 largest emerging markets grew underlying net sales by 6% and 1%, respectively. Turkey grew 17%, while Russia declined 17%. Brazil, South Africa and Ukraine each grew underlying net sales double digits, but this growth was offset by the slowdown in many of our other small emerging markets, including Southeast Asia, where regulatory changes in Indonesia led to significant disruption in the beginning of fiscal 2016. Our business has not been immune to weaker economic conditions and currency devaluations that have negatively impacted consumer demand. In our other markets, which represent 15% of total sales per the table in our earnings release this morning, Underlying net sales growth accelerated from 11% in fiscal 2015 to flat in 2016, effectively removing 1.5 points from top line growth. As we look ahead, we think the challenges in many emerging markets will persist in the short term, but that does not diminish our long term expectation for emerging markets, given how early we are in developing our brands outside of the United States. Travel Retail had a challenging start to fiscal 20 16 with underlying net sales declines of almost 20%. The rate of decline has moderated over the last three quarters. So while business fundamentals remain soft compared to the historic levels of growth, we believe the worst is behind us. Travel Retail's 12% underlying net sales decline in the year removed about 0.5 point from fiscal 20 16 net sales growth rate. Let's move now to a reconciliation of reported to underlying results. An appreciating U. S. Dollar negatively impacted our reported net sales in fiscal 2016 by 6 percentage points. While inventories were roughly flat year over year, reported sales were also hit by 1 percentage point due to the 2 month absence of Southern Comfort and Chilliwacko revenue following their disposition during the Q4. Our underlying operating costs increased nearly 3% in the year, but declined approximately 3% on a reported basis. Tight cost management helped us deliver SG and A growth of only 2%, and we remain focused on leveraging prior SG and A investments. It's worth noting that excluding Southern Comfort and Towaka, our A and P increased over 5% for the portfolio of brands we have today, in line with our underlying sales growth. Putting this all together, we delivered 8% growth in underlying operating income for the full year. Reported operating income increased 49%, including the impact of the sale of Southern Comfort and Chawaka and 3% excluding. Earnings per share increased 63 percent to $5.22 Excluding the $1.76 impact as a result of the sale, our earnings per share would have been roughly $3.46 an increase of 8% from the prior year. So now turning to my second topic for today, our outlook for fiscal 2017. Notwithstanding the emerging market slowdown we experienced during fiscal 2016, we expect our portfolio SKU to premium American Whiskey will allow us to capitalize on favorable trends as consumers continue to shift from white to brown spirits, driven by a desire for heritage, authenticity and craftsmanship. In fiscal 2017, we will be activating a global campaign to celebrate Jack Daniel's 150th anniversary as America's Otis registered distillery. This activation consists of a focused campaign here in the United States called Jack Attack, including additional media spend and programming behind the trademark that we believe will accelerate our growth in the United States. It also entails large scale events in Lynchburg and pop up distillery experiences in several major metro markets. And we'll introduce special edition products, including an 86 proof Jack Daniel's 150th anniversary bottle. This intense consumer campaign extends far beyond the United States, including a global Jack Daniel's barrel hunt in over 50 countries and incremental media support. Our global teams and partners will focus on the premiumization of this trademark through additional support behind Gentleman Jack, as well as the continued growth and rollout of Tennessee Honey and Tennessee Fire outside the United States. In fiscal 2017, we expect underlying net sales growth of 4% to 6%, driven by sustained growth of our portfolio of brands in the developed world. We intend to launch Jack Daniel's Tennessee Fire in a few markets outside the United States, including the United Kingdom, France and Germany. We are innovating with high quality expressions, including rolling out Woodford Reserve rye and Jack Daniel's single barrel rye as well as introducing Cooper's Craft, our first new bourbon in 2 decades. Furthermore, underlying net sales should benefit from global consumer demand for our premium bourbon and tequila brands. We expect to benefit from both the easier comparison in travel retail this coming year as well as the absence of the 50 basis point drag that Southern Comfort had on last year's results. On the negative front, we anticipate moderate pricing for used barrels as the global slowdown in blended scotch is negatively impacting barrel demand. Fiscal 2017 should be another year of volume gains and improved mix, but with minimal pricing beyond a few select markets given the overall economic environment. This should result in flat gross margins compared to fiscal 2016. We are investing behind our brand's growth and development and are reallocating our human capital and dollars towards the brand market combinations that we believe have the greatest opportunities to create value. We are forecasting another year of low single digit growth in SG and A. And so while we are tightly controlling our core SG and A growth, we will invest where the opportunities exist, just as plans to switch to own distribution in Spain next summer, which will result in some modest costs later this fiscal year. In total, we anticipate underlying operating income growth of 7% to 9%. At today's spot rates, we expect the stronger dollar will negatively impact reported earnings per share by 0 point 0 $7 $7 The benefit from a lower share count will be offset somewhat by reductions in distributor inventories. The effective tax rate will be in percent to 30 percent range. In aggregate, we expect earnings per share of $3.42 to 3.62 dollars This represents 5% to 11% growth from our fiscal 2016 baseline EPS of 3.26 dollars which excludes 0 point and Towaka in fiscal 2016. You'll find additional details in a table in our earnings release that we released this morning. As a sensitivity on FX, a 10% move in the dollar in either direction would impact our full year EPS by approximately $0.15 Just a quick comment on seasonality. We expect our Q1 to be the most challenging comparison against 7% underlying growth in the Q1 of fiscal 20 16, which was also helped by the U. S. Launch of Tennessee Fire. Regarding our capital spending programs, CapEx came in at $108,000,000 for the year, well below our original estimate, driven largely by timing as our long term capital expansion plans remain unchanged. Timing of spend for Sling Castles and Old Forester Distillery and Homeplace, for example, will be weighted more to fiscal 2017 than we expected at this time last year. We are over halfway through our stepped up investments to increase total capacity and continue to deliver an industry leading 23% return on invested capital after adjusting for the gain on capital after adjusting for the gain on the sale of Southern Comfort in Chilliwacka, the highest ROIC in a decade for our company. Now let me move now to my final topic, an update on portfolio changes, including the acquisition of Ben Reach Distillery Company. We made some important changes to our portfolio of brands over the last 12 months, including the disposition of Southern Comfort and Chihuahua as well as our reentry into the single malt scotch of portfolio and the sale of our mid price runs, Fetzer and Bonterra. In addition to this M and A activity, we have introduced significant innovations into the marketplace, including the launch of Jack Daniel's Tennessee Honey and Fire, Woodford Reserve Double Oak and Rye and our entry into Irish Whiskey with Slane. So let me share a bit more color on our rationale for our most recent additions to our portfolio. The acquisitions of the Ben Reach Distillery Company and 3 great single malt Scotch brands Glendronic, Ben Reach and Glenglassol. The single malt scotch category is one of the fastest growing categories along with American Whiskey and Irish Whiskey. Outside of the 4 largest single malt brands, Glendronic, Ben Reac and Glenglossa represent the largest collective production capacity in the industry, giving us a great platform for which to build our over time. We believe that our whiskey making knowledge, barrel technology know how and long term perspective will continue to serve us well. Combined, these single malt scotch brands are relatively small today at under 100,000 cases in calendar 2015, but we believe they have significant global potential as the primary markets today are focused on the United States, duty free, U. K, France, Taiwan and Germany. There is also a small blended scotch business today. Given our purchase price of just over US400 $1,000,000 we paid out similar multiple on trailing EBITDA to Brahma trades today. We believe that we acquired high quality brands and assets, including the current home places, distilleries, warehouses and the bottling facility, not to mention valuable inventory. Equally important is the potential for these brands in a rapidly growing category. So we are hard at work at developing the long term business plan of how we can maximize the value of these brands. As is typical with any acquisition, we expect some transition and integration costs this year, somewhere in the $5,000,000 to $10,000,000 range. But even after including these costs, we expect the acquisition to be roughly neutral to earnings in fiscal 20 17, given only 11 months of ownership and then will be accretive in the following years. Let me remind you that our last acquisition of SaaS was when we acquired Casa Herradura in 2007. After several years of methodical investment, these brands have enjoyed solid growth over the last few years as we believe they have reached an inflection point in consumer awareness. Herradura's underlying net sales jumped 13% globally in fiscal 2016, while Hemadura's U. S. Underlying net sales increased 19%. And new mix, our Mexican RTD business experienced a 23% jump. So all in all, a stellar year for our tequila brands, but one that was years in making. We expect that these single malt scotch brands will also receive time require time and patience them to help fuel our growth over the long term. So in summary, fiscal 2016 was another great year for Brown Forman. We delivered solid top and bottom line growth, notwithstanding foreign exchange pressure from an appreciating U. S. Dollar. We invested significantly in the long term opportunities that we believe will fuel our growth over the coming decades, including our entry into Irish Whiskey with Slane and the launch of Cooper's Craft. We made several enhancements to our portfolio of brands, including the disposal of Southern Comfort and Towaka and the acquisition of Ben Reoc. And we invested over $100,000,000 in capital investments behind our organic growth prospects. We did all of this while returning a record $1,400,000,000 of capital to our shareholders in fiscal 2016. Steady dividend growth is a hallmark of Brown Forman and we increased ours by 8% this past year. We repurchased over 11,000,000 shares, bringing our diluted share count to half of where it was in the mid-1980s. And we recently proposed a 2 for 1 stock split, our 7th split in 35 years. Our ability to simultaneously grow our business, invest in the future and return capital are reasons why we believe we can continue to generate top tier returns for our shareholders. Our TSRs have outperformed the competitive set, the Consumer Staples Index and the S and P 500 over the past 3, 5, 10 year periods by healthy margin. We believe that we will remain an industry leader through thoughtful allocation of resources and category focus on our core competency, whiskey. We operate in a business with aged products and multi generational brands, and we benefit from a long term focus and engaged shareholder base through family control. And with our strong cash flow generation and inherent capital efficiency, we will continue to pursue a well balanced capital deployment strategy aimed at perpetuating Brown Forman's strength and independence. So with that, let me turn the call over to Paul for his comments. Thank you, Jane, and good morning, everyone. My take on FY 2016 and our guidance for FY 2017 is that they are both illustrative of Brown Forman's strong and continuing organic growth story once you consider the effect of last year's dispositions and account for the impact of FX and inventory, which we customarily do. Something a little less customary is the disproportionate amount of work we've been doing of late to position Brown Forman for enduring growth in the distant years ahead. And for sake of defining distant years ahead, I mean 2020 at the earliest and more like 2025 and beyond. While we always strive to take a long view of our business somewhat by necessity given the aging horizons for most of our products, this last 18 months in my view has been even more exemplary of Brown Forman's long term orientation. The current time reminds me in some ways of similarly strategic times in our recent history when we made changes to benefit our long term future. Examples would be the early 1990s when we began a more aggressive geographic expansion, which included our initial work in emerging markets and our first experiences with international distribution ventures. The mid-2000s when we followed our disposal of Lennox and Hartman to enable us to better focus on our premium American whiskey trademarks at a time when consumer interest in the category had begun to surge. In the last 5 years, this shift of focus alongside further investments in our organization and global route to market contributed to successes such as Jack Daniel's Black Label's ascent to one of the industry's most valuable brands, the creation of both Jack Daniel's Tennessee Honey and Jack Daniel's Tennessee Fire, 2 of the company's most successful line extensions ever. The accelerated development for super premium brands Woodford Reserve and Gentleman Jack, as both brands achieved the difficult super premium volumetric milestone of 500,000 cases, and the resurgence of Brown Forman's founding brand, Old Forester. So now in mid-twenty 16, we have our recent portfolio changes and capital deployment actions as examples of significant actions and investments from which we believe shareholders are likely to benefit in the years ahead. The investments we've made in Scotch and Iris Whiskey over the last year are intended to give us brand and production platforms for what I like to call Woodford Reserve like brand development over the next generation in exciting premium whiskey categories adjacent to the American whiskey category that we know so well. Our patient brand building success on Woodford is certainly a source of confidence as we begin our work behind brands like Lindronic and Flame. And our initial investments behind Cooper's Craft Bourbon will enable us to tell the story of our Coopers, the people who make our whiskey barrels and in doing so convey the importance of wood and barrels in crafting the highest quality bourbons. The brand will leverage our distinctive know how in its very old and truly unique trade of barrel making. We will undoubtedly seek to apply some of this Cooperage expertise to our new endeavors in both Ireland and Scotland. For these new trademarks and products to find commercial success, they need the focus of an organization that has the skill, the scale and the time to develop them. Brown Forman's global route to market platform is a strong asset in this regard and with the sale of Southern Comfort and Towaka in FY 2016, we have enabled our sales teams to shift their focus to existing brands with greater growth prospects as well as the newer brands that I've just mentioned. Since we are not reducing overhead costs dollar for dollar to cover the lost profitability of the brands we recently disposed, I consider this an incremental organizational investment against big ideas like Jack Daniel's 150th distillery anniversary this year and Cooper's Craft in Ben Reach in the years ahead. We made a similar type of hidden investment behind our American whiskeys after the sale of our wine brands in 2011 and it served them very well in the years that ensued. Beyond these portfolio and organizational investments, quality capital deployment, long a hallmark at Brown Forman, will continue to be important to the next 10 years and beyond. We are fortunate to have a very capital efficient business model as evidenced by the 23% return on invested capital that Jane mentioned in her comments as well as excellent financial flexibility. Beyond the acquisitions I've mentioned, we are continuing to make significant investments in production expansion and Hope Place Marketing at Jack Daniels, Woodford Reserve, Old Forester and Slane. And in the years ahead, we will incur depreciation costs associated with this additional capacity. These investments are intended to enable us to grow going forward in a manner similar to our last 10 years. Considering the margins, returns, track record of growth and the potential we see ahead, I believe these capital expenditures are excellent investments by the company. And finally, through our more ambitious share repurchase program of late, shareholders are essentially given the options of liquidity those who choose to sell their shares or a slightly increased percentage ownership of Brown Forman for those who choose to hold their shares. For non selling shareholders, your decision means the repurchase program therefore represents a long term investment the company makes on your behalf in the future of Brown Forman. And that is something that we believe in, and I hope that today's results and next year's outlook as well as our discussion of the investments we are making to enable our continued success give you a similar belief in the company's prospects for continued value creation. That concludes our remarks. Thank you for listening, and we're now happy to take any questions Your first question comes from Dara Mohsenian of Morgan Stanley. Good morning, Dara. Hey, good morning. Good morning. So just wanted to get a bit more detail on the interplay between volume and price. It looked like total company volume declined on a year over year basis in the back half of the year, ex price and mix, which is the first time I can remember that in recent history. It sounds like you're expecting volume growth next year, but can you give us a little more specifics on the balance between volume and price mix? And on the price mix side, it sounds like you're looking at more mix than pricing. Is that fair? Yes. So let me talk about this year. I think what you're seeing in the half of this year are a couple of things that happened. 1, we're cycling against the fire launch in the United States. So that will happen, if you recall, last year's Q4, so we didn't repeat that big buy in that sold all the way through to the retailers last year's Q4. And so I think that's one of the things that's driving. The second thing is we continue to have declines in Finlandia. It's a low price brand, so a low margin brand. So it really hits your top line, not so much your bottom line. It continues to be hurt in markets like Russia and the CIS. So some of the markets where the economic conditions are just continued to be very, very poor. And so you can we saw some acceleration in the back half of the year on that brand and then again the other piece being the absence of the launch in the U. S. On the fire. So you did see a slowdown because of those two factors, if you will. They netted again, the gains that we had on the rest of the portfolio that continue to grow nicely. Our premium bourbon brands continue to grow nicely. Our taquitos did and Jack Daniel's did as well. In terms of as we look to next year, we're expecting really very little, if any pricing, just in a few select markets. So it will be more mix. But what's coming along next year is, Paul alluded to this a little bit, we've been making investments for a number of years, last several years behind our production facilities, the span capacity, so we can meet demand that we think will be there in the not so distant future. So we're going to have some a bit higher cost than our price will come through. So that higher cost will offset the mix benefits that we saw this year. So most of it will be coming from pricing excuse me, volumes next year, most of our growth. Yes. And the benefit on mix, it's just it would be evident in this past year's results, but you'd expect it to continue where you get more mix benefit than pricing. And if you just think about Jack Daniel's and Woodford Reserve growing and brands like Finlandia and Canadian Mist and the absence of Southern Comfort declining, just the mix of profitability improves for Brown Forman overall. There's one other thing I just thought of to. Our table is somewhat misleading in the volume. So I think this is where you're looking at is the table. We've got SoCo volume. So SoCo is in the table, and we did not adjust for the 2 months of last year's volume. We adjusted for the 2 months of the revenue, but it's not out there for the volumes. That's probably the biggest piece than Bayer and then Landia. So we need to figure those numbers out. Okay. That's helpful. Yes. And then on the flavored whiskey side, Paul, I guess, can you discuss as you look out over the next few years, you've obviously had a lot of success with Fire and Honey. Are you planning to launch additional flavors in that category? And as you look out over the next few years, given we're seeing such strong growth there and a lot of competition ramping up, How is your portfolio kind of positioned to compete versus that expanding category? Well, the 2 that you that we discussed in our results today, we continue to have very high hopes for. And I mean, I think I've mentioned a few times that we have no plans at this time particularly on the Jack Daniel's brand to be bringing out any additional flavors. And what we think is the best approach for our company is and we've been encouraged so far, but what we've seen from the success of Jack Daniel's Tennessee Honey globally, but also the early and limited tests we've done on Jack Daniel's Tennessee Fire outside the United States that for us we think global expansion versus additional flavors is the more effective tool for us in expanding our flavored whiskey business. So that's I think we're going to stick to that. And actually I think some of that is incorporated in this year's plan projecting those Tennessee fires. It enters either more full distribution in the markets where it was tested or some additional countries as well. Okay, thanks. And then last in emerging markets, I mean, what we've seen in your business recently is a pretty rapid slowdown. And also your business didn't really slow as much early on as some of the competition. So I'm just kind of curious why you think your business has seen a more rapid slowdown recently in emerging markets, given if we go back over the last few years, it looks like macros have really been consistently slowing in emerging markets over time. And can you talk a little bit about the pace of improvement next year and when that plays out in terms of emerging markets organic sales growth? I mean, we'll maybe hit on a couple of those. I think part of it was the early part of the slowdown. So much of it was associated for some of our competition in China, where we just our presence is relative on a percentage basis smaller than many of our competitors. So maybe that particularly the cognac players, they were impacted by that going back a few years. I think more recently for us, we've seen that in places a lot of Jack Daniel's is so geographically diversified and spread. And for many, many years, it has been developing its business. And for example, in the emerging markets, we never singularly focused on brick. We looked to all kinds of smaller markets that were also emerging and we just felt that those were I think more appropriate developmental efforts on behalf of the brand even going back 10 years ago. So like for example, Eastern Europe has slowed down in some markets, some of the smaller markets, those related to oil, just their economies and their currencies have been so difficult. And so it's just this round of emerging market difficulty because there's always it seems to me that there's some markets going up and down and that's why we like the geographic diversification we have. This particular year with emphasis on Russia and then some of the smaller markets, other markets tagged to particularly tied to oil, seem to hit us more than they had in past years. And it doesn't really take away over a longer period of time our viewpoint that these will be important markets for Brown Forman. It's just that you have to be patient while those economies wrestle with what's happening locally. So just building on what Paul said. So you're asking about also ask about what we thought about in F 2017 as it relates to these. We really don't expect much improvement in the short term. So we're not expecting big bumps, big increases from the emerging markets. We still, as Paul said, believe in the long term of these brands or of these countries. The one thing I would say, just to add on to what Paul said, he talked about the oil. Now obviously, that had a big impact on currency. And so we found that currency hit us in many different ways in emerging markets. So whether it was that the consumer could price the valuation of the currency had gone down so much making our products so much higher. So maybe the purchasing power in this situation caused that to happen are some of our trade partners, margins were screed. So it was pretty widespread. And I would say a lot of the currency stuff hit like starting last summer, when the big devaluations in the Brazil real and some of those other countries and this kept going everywhere. And so I think it's just Yes. I think the thing too, if you're looking for something unique to our company, because we play relative to our competition at are concentrated in terms of our sales and profitability at higher price points, an impact like what we're seeing in the emerging markets might hit us. For example, we don't own a lot of local brands in these emerging markets. So they might have a hedge or something against the devaluations and purchase power that you see. So that could be a point that helps explain it as well. Okay. That's very helpful. Thanks. Thanks for the question. Your next question comes from Judy Hong of Goldman Sachs. Thank you. Good morning. Good morning. Thank you, Judy. So I wanted to get a little bit more color on how you're thinking about the U. S. Outlook for fiscal 2017 in terms of the underlying sales growth. So obviously, you're lapping the fire launch, which will be pretty challenging in certainly the 1st part of the year. I think you've talked about some of the competitive dynamics in the marketplace. It sounds like you have a lot of the consumer campaigns planned for this year. So I'm just curious as you think how sustainable how sustainable is that kind of growth lapping fire and all and are all a lot of these consumer campaigns that you have planned really aimed at driving, growth kind of more in the near term or more really building the equity in the longer term and enduring growth on the JAK? I'll touch on that just the second question you've got there. I mean, I feel like what we're planning for the U. S. Is sustainable. I mean, I really do. And I would segregate the my answer to your questions. There's some investments we'll be making, like for example this year in Woodford and Old Forester Packaging for example which I think could benefit those brands. There's usually some initial interest in it, but I think, those things tend to benefit brands in the years ahead. Clearly, the most significant thing that will have a timely impact that I think is probably the most significant thing we're doing this year is the promotion and marketing and selling around the Jack Daniel's 150th anniversary. So I think that is pointed toward a lot of it is already underway, but also we'll have really here in the second half of the year, we think a pretty significant consumer impact. So that is one of our bigger ideas for ways to sustain the growth, both in the U. S. And at Brown Forman. And just building on what Paul said and just to emphasize that Woodford Reserve, Old Forester and our tequilas are doing very, very well and they continue to grow nicely and we expect them to continue to grow nicely next year. We alluded to some of the double digit growth on all those categories. So we feel we're at a inflection point and good consumer awareness is having. And so we're continuing to see nice gains and nice contributions out of those. So those will continue as our expectations on those. And one of the offsets just to repeat something I said just a few minutes ago, one of the offsets to cycling the initial interest in trial on Jack Daniel's Tennessee Fire in the United States is the fact that we'll be introducing it to new countries. And so that is clearly a partial offset. It's not diminishing the fact that the U. S. Market for this category is really competitive. And in this particular year, in year 2 of Jack Daniel's Tennessee Fire reminds me in some ways of prior years where there was such interest in the prior year, on the launch something where there was some pent up demand, which I felt last year, in the spring, particularly after we've done that stage rollout. And there was a huge surge in interest in trial associated with this product. And as you can imagine, I mean, I just feel like it's just composition as a product. It's not going to be for every whiskey drinker, because it's in fact a flavored whiskey. And so I really do. It doesn't surprise us that there are tough quarters following a launch like that in a particular country, but I do feel we have the benefit of expanding it geographically to partially offset that. Okay. And if I can just follow-up on that, Paul. So when you compare the Honey geographic expansion to sort of the Fire expansion, how should we kind of think about the impact? And maybe also you can just remind us how big Honey is in some of the markets that Fire is getting launched this year, the U. K, the France? Well, I think on a global the volumes are about half half, I think, for Jack Daniel's Tennessee Honey. It's a little bit more outside the U. K. A little bit more outside the United States, if it gives you any indication. And we're in no hurry, I mean, to go get as I think Jack Daniel's Tennessee Honey, it took us the better part of 4 years plus to get to, I think we're I mean, rough this number, we're something like, in 80 countries where we're doing most of the business for Tennessee Honey today. And I don't anticipate us getting that fast next fiscal year or even the next 2 fiscal years on Jack Daniel's Tennessee Fire. We're playing at a market a time to see where there seems to be appeal. As we go along, we know that the one of the differences between Jack Daniel's Honey and Fire are that the way that they're used. And so going into it, we knew that Tennessee Fire would skew more towards shot or straight consumption, whereas Honey, while it has some of that, is also used in mix format equally. So I think we're just going to learn as we go and try to promote this. We've been encouraged, I'll tell you, from what we've seen, not only in the United States, I just feel like we had a great first year there against a pretty tough competitive States that Jack Daniel's Tennessee Fire is doing very well and sufficiently enough that we would either expand it within those countries or introduce it into new countries. Okay. And then my last question is, obviously, you've made significant changes in terms of the portfolio over the last few years. If I look at your brand performance, certainly Zealandia and Canadian Mist sort of screen is continuing to be a drag in terms of your growth. So not asking what your intention is with these brands are, but I mean, are you investing behind these brands at this point? Is it just more of a macro dynamics that sort of are pressuring these brands? And are there other strategic considerations as you think about brand like Philandia, where given its size in the Russian market that you kind of need a sizable brand like this if you're going to be in that market? Yes. I mean, you kind of answered your question. There are I agree with you. I think there are always strategic considerations. Look, we don't have the largest portfolio by any means. And so, as a general bias, we are brand builders versus brand sellers. And I really do feel like that almost any brand in our portfolio, we're going to try to do the best job we can with it. And oftentimes, they do play strategic roles. And Finlandia has been very important to particularly Jack Daniel's development in Eastern Europe over the last decade. And Finlandia has been on its own merits a very successful brand in that part of the world. It's just a very difficult time for the vodka segments in those Eastern European countries right now. And we've seen this before with categories where they go through some rough times, but it doesn't mean we don't put our best foot forward. And actually, we're right now, we've continued to work on Finlandia. We've got I don't know if it will hit this year, but it may be into the next fiscal year because it takes a while to make these changes. But we're sort of enthusiastic about some packaging changes there. And we have the latitude of being patient here because really in the grand scheme of things, the brands you mentioned are not that significant a drag on Brown Forman. I mean, they're relatively small when you get down to the bottom line as it relates to their degree of their impact on our performance. I mean, yes, they might pull you up a quarter or 2 on the sales line or even on the operating income line a little bit from time to time. But I mean, the story at our company because of the just development that I mentioned over the last decade or more around Jack Daniel's and our American whiskeys is really where we're placing our emphasis today. But having said that, it doesn't mean we're not going to develop brands in the tequila space, which we're very excited about what's been going on within the last 18 months or so, but also do the best job that we can to shore up brands that are having difficult performance like Finlandia and Canadian Mist. Got it. Okay. Thank you. You're welcome. Your next question comes from Bryan Spillane of Bank of America. Hey, good morning everyone. Hey. Good morning, Bryan. Just a couple of quick ones. First, I think when you went through the components to the revenue build for 2017, you referenced barrel pricing not being as good as it was last year and also some reduction in distributor inventory. Can you just give us a sense for how much of a drag you expect that to be in 2017? Yes. I'll take the distributor inventory 1, specifically. And we've estimated somewhere on a nickel or it could be a drag on our reported top line growth. So that's the answer to that. What I would say with the other pieces of the sales growth, I would focus on the things that were dragged this year. So there won't be dragged next year. For instance, the Southern Comfort Towaka drag on our top line, which was about 0.5. Global Travel Retail, which we think divorces behind us, that was about 1 point. So both of those things, we don't expect to repeat again. And so in terms of the barrel sales, it's not material to our top line sales number. Okay. So the message there is that those things are generally washing themselves out. Is that the way we should look at it? We could get there. Yes. Yes, we could get there. Yes. Okay. And then there was also the mention about, I think, in the out year changing over to self distribution in Spain. Did I catch that? Yes. Uh-huh, we did. That's in 20 18. So we'll have some costs that we'll start to incur in the latter part of next year, but the actual transition to it will not happen until next summer. In terms of order of magnitude I'm sorry. Okay. I'm sorry. I was going to say just in terms of order of magnitude, I remember when you did this transition in France, it caused a lot of noise kind of around the Q4, if I'm remembering correctly, of the year before and then in the year that you actually made the transition. So just order of magnitude, do you think it would have that similar types of effect on sort of the flow of things? No. It's definitely not in that 17, for sure. And the size of the market is not as large as France either. So we don't expect even when we do transition it will have that kind of magnitude. We will have a transition and we'll have some small impact, but not as significant as what we had in the frame. And we'll make that more visible as we get closer to it. But it's intended to have similar long run impact as it relates to bringing focus to our priority brands in that market. It's an excellent whiskey market that seems from at least a few of our vantage point to be turning the corner as it relates to their economy and their disposable income relative to what they've been experiencing in the prior few years. So we think it could be well timed to go and make this move, which is familiar terrain for us. And in each instance, they've been differently scaled investments in operations. As we get closer, we'll give you all visibility to it. Okay. And then just one last quick one. Does the EPS guidance range for 2017 that include or include any share repurchases? Or would that be if you did any be above and beyond? It only would include what's been done thus far. Okay, great. All right. Thank you. Your next question comes from Bill Schmitz of Deutsche Bank. Hi, good morning. Good morning. Hey, can you just talk about the gross margin outlook for next year? Because it seems like commodities are still relatively favorable, the currency environment is a little bit more tame and it looks like there's going to be a ton of positive mix. Is that a fair assessment? I'm sorry, can you repeat that question? I was just asking about the gross margin outlook for next year because it seems like there's a lot of favorability going into 2017. Yes. So we aren't expecting and we're expecting our gross margins to be flat next year. And the reason why that is we're not expecting much in the way of pricing and our costs are going to go up modestly, but more than offset the pricing and that's offset some mix. So we're not expecting margin expansion. So some of our cost increases, I mentioned this earlier, are starting to come through as we've made these investments behind, our stepped up capital spending to expand our capacity. Got it. And the moderation in currency is not going to help? You're talking about on a reported basis then? Yes, yes, exactly. Right now, what we have forecasted in there are no. Okay. All right. Thank you. And then if I look at some of the flavor brands in the U. S, and this is obviously just in the scan channels, it seems like some of the sales trends are declining pretty rapidly. I mean, is that kind of what you're seeing as well and maybe what's driving that? And is there a plan to kind of get that moving in the right direction again? Well, I think there's just been such a dynamic category. When you look at any short term period, whether it's a month or a quarter, there could be all kinds of explanations for why they might be showing big gains or big losses. I think we have the number of entries that are going in there. I know as we sort of explained for our business, we're currently on the Jack Daniel Tennessee fire up against some I think some significant introductory promotion and trial from last year. So for us that would be the case. I can't speak to every single competitor, but I suspect that remember this category is still relatively new. So there's been a lot of new introductions just in the last two years. I mean, I remember thinking about it, I guess, as we turn the calendar year this year, how much it had changed just even since we began with the launch of Tennessee Honey and then how we had sort of methodically been testing Jack Daniel's Tennessee Fire and how rapidly the category kind of changed just from the test markets on Jack Daniel's Tennessee Fire to the national launch. And so it's the nature of these categories that rapidly develop. We think we're smart to be in it in the way that we're in it. It's been very nice business success for to date, but also plays just as we were referencing on the roles brands can play in a pro form a plays a very strategic role in some ways defensively, but also very offensively as it relates to giving people an opportunity to try whiskey in a way that they might not have before. The straight whiskey can be an acquired taste. And we find that this category, particularly for our brands, has been bringing in new consumers and it generates an interest in our other whiskeys, most notably Jack Daniel's Black Label. And so it plays it can play a strategic role as well as being a bona fide business in its own right. Got you. That's helpful. So do you think it will start inflecting positive in the sell through data as we see the data come out? Are you talking about the category or for our brands? The category and your brands? I think the category is continuing to grow just because there's been I mean, there's really concentrated right now around 3 predominant flavors. But I think the category will continue to grow, but then within the category you'll see trademarks in certain flavors be more volatile bourbon or gin or vodka category just because the category is so dynamic right now. As it relates to Jack Daniel's Tennessee Fire, I think once we cycle through some of these comparisons, the impact won't be as large. But I still expect you all I really do feel like that 1st year with particularly a brand that's participating in a category where the flavor is cinnamon, I really do expect that there in the first sort of half of its national launch there were absolutely just think of it this way, there were I know there were a bunch of Jack Daniel's drinkers who were straight whiskey drinkers and were not participants per se in the cinnamon whiskey business who tried it and just decided it wasn't for them, right? I mean, they prefer straight whiskey. I think there were also a fair amount of Fireball, which was obviously the large volume lower priced brand that tried it and then maybe didn't see fit that they could afford it on every single occasion when they were consuming cinnamon flavored whiskey. And so I think those things, they end up being what I call trial influences in those early days of a brand's existence in the marketplace that just don't get repeated. So, until you work through some of that and then also begin the marketing and selling process to introduce the brands to new consumers, which the most encouraging thing we're seeing in our numbers, which don't really get reported a lot in the syndicated data is the are the results in the on premise, which kind of started okay, I felt. I thought it was going along pretty well. But with the expanded distribution and the momentum that sort of happened out in the marketplace, the Jack Daniel's Tennessee Firebrand is doing very, very well right now in the on premise, which might surprise you because the off premise is not doing as well against that introductory launch. So in any event, it's the thing that gives us encouragement and tells us we need to continue to sell it and market it and promote it in a way that can make it the choice for more consumer occasions. I mean, it just comes down to that and knowing it full well that it's going to be a competitive environment in which you are attempting to do that. Great. Thanks. That's very helpful. Thank you. Welcome. Your next question comes from Mark Swartzberg of Stifel Nicolaus. Yes. Thank you. Good morning, everyone. A couple of operating income questions. The first is when I look at fiscal 2016 Jane, you've had this nice reversal. You've gone from another expense item in fiscal 2015 to another income item. And I think it's about a 3 point benefit to your total operating income growth. So it's pretty significant. And I don't quite understand what's going on there. So is my math right? And if it is, can you give us some understanding of what is going on there? Just to clarify, you're talking in the Q4, correct? No. Well, it's clear that it's more of an impact in the latter part of this fiscal year than in the earlier part of the fiscal year. But I'm really looking at the full year and just saying, you guys are incentivized on operating income performance, you got to your 8%, but 3 of those points came from this reversal from another expense in fiscal 'fifteen to another income in fiscal 'sixteen? Yes. So the largest component of it is FX related. So we had some fairly sizable losses last year that we had talked about throughout the year that wouldn't repeat itself this year, coupled with as the year went on, particularly in the Q4 of this year. When we got to April, we had a nice gain. And these are on cash and other current assets and liabilities that aren't denominated in U. S. Currency. So that's FX related, a big piece of that is Probably about half of it actually is due to that, some more than half of it's actually due to that, about 2 thirds of it is due to that. Then we also had an asset that we wrote off last year's Q4 that it was a low value vodka brand. So it was a write off that we had in last year that didn't repeat itself and that's about the other piece of it. Those are the two pieces. Got it. And that FX component, how much discretion do you and your team have with that? And to what extent is it just what the market deals you? It's what the market deals us generally. I mean, we do hedging, but that's our hedging is largely against another line item in our P and L, it's more against ourselves or rep. Got it. Got it. Okay. And then as I think about fiscal 2017, the 7% to 9%, you talked about SG and A. I'm still not quite there because you're talking about a volume driven revenue performance. You're also going to get this distributor drawdown effect. You're also saying gross margin is going to be flat. So it all really comes back to SG and A and perhaps if you have some optimism about this other income line as well. So can you just help me better understand how you think you get 7% to 9% given what's going on from the revenue down to the GM percentage line? Yes. Just to step back for a moment on 7% to 9%. Fair enough. Yes, good the 7% to 9%. Fair enough. Yes, good point. That's probably your biggest piece. But let's talk about SG and A as I alluded to. We had a couple of percentage point increase in underlying SG and A this year. We expect about the same next year. So we're going to really leverage our prior investments that we've made in RAP to consumers. Paul alluded to this in his comments well, the reallocation of resources as I did to from the folks that were spending time on Southern Comfort and Chilliwack that were reallocating the time and energy to some of the value to new brands that we brought into our portfolio as well as other opportunities for better value creation. So you're getting leverage from the SG and A. And do you have a view about what will happen with this other income line? Or do you just kind of see what happens with that line? I mean, the other income line, we don't forecast FX per se in that line. So whatever was in there that was related to FX this won't repeat itself. Yes. Other than what? Other than whatever happens at the spot rate at the end of the year. As you asked, you said, are you at the mercy? And we are at the mercy of whatever We do think just based on where currency rates are today versus last year, we know that the currency is net net and our EPS forecast a bit of a drag on the overall. I mean, so we do forecast that, but we sort of just do our plans at a consistent rate and then we report to you all as the year goes on as fluctuations occur. And what's you can probably tell, I mean, what's driving my questions is the rate of operating income growth for a lot of companies is coming down because of the nature of the marketplace. But you have this incentive comp structure that changed a few years ago and 8 is the magic number. And you got there in fiscal 2016 and fiscal 2017 has got incremental challenges on the top line. So I'm just trying to understand how you're thinking about the cost flexibility you have as a result. And then just when you think about this distributor intention, how are you thinking about your own promotion rate visavis either your more expensive brands or some of your lower tier brands? I would think there's an incremental incentive to promote a little more given that you do want to improve volumetric performance. So am I thinking about that right or can you help us better? And that's a U. S. Question. I'm just trying to better understand how you're thinking about that. I don't have a higher level of discounting or promotional activity for next fiscal year. Yes. I think it's I think we Or when they do it and how they do it. Yes. So I think it would be consistent from year to year. I actually think the thing that will drive more promotion this year that will assist and it might help you with your answer is this Jack Daniel's 150th anniversary. I mean it is significant news for our trade system and we just happen to have a very and we're fortunate to have such a loyal and affiliated Jack Daniel's consumer base around the world and we can already tell from their early reaction to some of the initial PR that they're very enthusiastic about the things we are planning and we'll be undertaking which include new to the marketplace special offerings and packages in the latter half of the year too from which we should benefit. So but I also think you'll just see more Jack Daniel's Black Label on displays and because of the event itself. We sometimes call this a gift from the calendar that we've lasted this long. And we think that there's just the energy and emotion around it. We had a bunch of the U. S. Distributors in here about 3 weeks ago. And I can tell you the reaction to what's forthcoming and the expectations that we're placing on our U. S. System, they didn't bulk at them at all. Great, great. Very helpful. Thank you. You're welcome. You're welcome. You're welcome. You're welcome. You're welcome. We have time for one more question. Thank you. Welcome. We have time for one more question. Your final question comes from Tim Ramey of Pivotal Group. Thanks so much for squeezing me in. Yes, my question was really about sort of triangulating how impactful the 150th anniversary might be. I can see this being quite a gift from the calendar. But I don't know how and you probably are not ready to tell us how big your promotional plans are, but will the average consumer be aware that this is going on or is this sort of an insider cult and approach? No, it will be. I mean, look, our advertising and promotional budgets aren't of the scale of some industries. But there will be quite a bit that will be targeted through our social media means, so that it allows you to be efficient. But there will also be mass media. The public relations piece of this, which is more significant than in past years, will also expose it to larger populations of people. The special packaging, of course, will be more devoted to the retail environment where that's offered. But there's a couple of offerings. There's one that's a little bit above the price of Jack Daniel's Black Label on it every day and then there's one that's going to be more limited that's I think $100 a bottle. And so, yes, I mean these are unusual events for us because you don't come along on that much. And so when you treat them like a milestone and I actually expect when I sit and look at it, can you get another point of growth out of the Jack Daniel's Black Label franchise over a year because of an event such as this, I sure think so, I'd like to hope so. So, we'll keep you updated as we go and some of it will become more visible as the marketing and selling makes its way out into the environment. But I mean we wouldn't put forward a forecast that we didn't have some level of confidence in. We always do a range because we can't predict what the world's going to do out there. But as I said in my comments, I really do feel like what we're considering, even though the puts and takes are a little bit different, what we are forecasting in our outlook is really a continuation of the good year that we think we reported this morning. All right. Is the $100 offering you mentioned a special product or special package? Both. Both. Yes, it'd be hard to get. I know you're going to want 1, aren't you? I will. Put me down. Yes, put you down. I don't even know if I can get one. No, it actually those will be much more limited as the market for them is. But nonetheless, we think it's something that honors the 150th anniversary of the distillery. And I actually think, I'll tell you, it's really important. It's not only just an important thing for Brown Forman's earnings as we're discussing here today, but it's also really important as an opportunity for Jack Daniels against a competitive backdrop where there's everything from craft whiskeys and bourbons out there some of these waves of and trends where big is bad and small is cool and all of that. I just feel like this is a really important opportunity for Jack Daniel's to tell its authentic story in really, really compelling ways, which will go way beyond calendar year 20 16. I think that it is an inflection point for the brand to remind everybody that, it's one of the most special brands of any kind in this industry and I think across a lot of categories of consumer goods. And as you all have observed across a lot of companies and a lot of categories, it's hard out there right now for established brands. And we've largely been continued to be successful against that backdrop. But this gives us a really unique opportunity to what I'd like to say is just to tell our story. And it's a story that should fit beautifully just a great opportunity for us to get out and tell that. Thanks, Paul. Thank you, just a great opportunity for us to get out and tell that. Thanks, Paul. You're welcome. Thank you, Paul and Jane, and thanks all of you for joining us today for Brown Forman's 4th quarter earnings call. Please feel free to reach out to us if you have any additional questions, and we hope you all have a great week. Take care. Thank you. This concludes your conference. You may now disconnect.