Earnings Call: Q2 2016

Dec 2, 2015

Good morning. My name is Salima, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter Fiscal 2016 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 today's conference call over to Mr. Jay Koval. Please go ahead, sir. Thanks, Selena, and good morning, everyone. I want to thank you for joining us for Brown Forman's Q2 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 Q2 of fiscal 2016. The release can be found on our website under the section titled Investor Relations. In the press release, we have listed a number of the risk factors that you should consider in conjunction with our forward looking statements. Other significant risk factors are described in our Form 10 ks, Form 8 ks and Form 10 Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non GAAP financial measures. These measures and the reasons management believes they provide useful information to investors regarding the company's financial conditions and results of operation are contained in the press release. And with that, I'll turn the call over to Jane for her prepared remarks. Thanks, Jay, and thanks for joining us for our Q2 earnings call. I will be covering 2 topics today, which should leave us plenty of fiscal 2016, which we confirmed earlier today. So let me start by reviewing our recent results. During the first half of fiscal twenty sixteen, we grew underlying net sales by 6%. This underlying sales growth was broad based geographically with mid to half single digit rates of growth in both the developed and emerging markets. In the United States, underlying net sales grew 7% during the 1st 6 months of the fiscal year. These results were led by the Jack Daniel's family of brands, which grew underlying net sales by 7%. Jack Daniel's Tennessee Fire contributed almost 3 points of growth in the United States. Our leading portfolio of premium whiskey brands outpaced their competitive set, including aggregate underlying net sales growth of over 30% for the Woodford Reserve family of brands and Old Forester. Our El Jimador and Herradura tequila brands grew well into double digits as the brand building investments we have been making behind both of these leading tequilas are creating important momentum towards achieving our long term growth strategies. More on those in just a moment. Before moving on to our non U. S. Markets, I wanted to share some color on our blended value takeaway trends in the United States for Jack Daniel's Tennessee Whiskey. Both Nielsen and NAPCA's 3 month trends have slowed as we are now comping against last fall's substantial acceleration and takeaway on the heels of the campaign in fiscal 2015 to reach the 5,000,000 case milestone for Jack Daniel's Tennessee Whiskey. When looking at our takeaway trends on a 2 year basis, which removes short term comparison issues, Jack Daniel's Tennessee Whiskey has consistently grown value takeaway at a very healthy 9% to 10% rate each month this calendar year when compared to 2013. In developed markets outside of the United States, the rate of underlying net sales growth improved from the Q1 to the 2nd quarter, resulting in 6% growth during the first half of the fiscal year. Results were up double digits in Germany, France, Belgium and the Czech Republic. Additionally, we experienced solid growth in the United Kingdom, Canada, New Zealand and Spain. Part of the sequential improvement was also due to Australia, which enjoyed more favorable comparisons than in the Q1, resulting in first half underlying net sales that were roughly flat year over year. Underlying net sales in emerging markets grew 8% year to date. Strong double digit gains in Brazil, Turkey, emerging Africa and the CIS countries were offset by declines in China and in Southeast Asia. Mexico grew underlying net sales mid single digits, fueled by new mix. Poland also experienced growth, albeit driven in part by easing comps to last year. Russia's underlying results improved significantly from the Q1 large declines, resulting in now only a slight reduction in year to date underlying net sales. Non U. S. Markets now account for 60% of our total revenue, so I thought it would be worthwhile to share some additional color on takeaway trends for some of the markets outside of the United States where we have good visibility. 3 month consumer takeaway trends for Jack Daniel's Tennessee Whiskey are up mid single digits in Germany, France and in Australia. The brand is experiencing mid single digit growth in Mexico and is growing high teens in Russia. While Poland is down over the most recent 3 months, we are gaining share in whiskey, and Jack Daniel's is up high teens over the last 12 months. Jack Daniel's Tennessee Whiskey is also experiencing a short term slowdown in the United Kingdom takeaway, driven in part by timing of promotional activity, but 12 month value takeaway is up 10%. So these consumer trends are encouraging as we think about our full year outlook. Global Travel Retail, which accounted for approximately 4% of our strip net sales in fiscal 2015, continues to be challenging, driven by the decline in spend from high income travelers, particularly Russian and European. Travel Retail's underlying net sales are down 14% year to date, a slight improvement from the Q1, but well below our expectations for the business. We continue to believe that some of softness in the U. S. Travel retail channel is the result of the timing of orders. And in fact, we started to see some of those orders coming through during the month of November. Excluding the results of Travel Retail, total company underlying net sales growth would have been closer to 7% in the first half of the year. Moving now to discussion of our results on a brand basis. The Jack Daniel's family of brands grew underlying net sales by 7% year to date. Growth for the family in the 2nd quarter reflected a slight improvement from the 6% growth delivered during the Q1. In the Q2, Jack Daniel's Tennessee Whiskey grew global underlying net sales by 4%, while Tennessee Honey, Gentleman Jack and Jack Daniel's RKDs each grew global underlying net sales at a double digit rate. Jack Daniel's Tennessee Honey delivered over 30% growth outside the United States, while increased competitive activity in the United States negatively impact U. S. Results for Honey. Jack Daniel's Tennessee Fire contributed almost 1.5 points of growth to the company's underlying net sales growth during the 1st 6 months of this year, as we continue to invest behind the U. S. Rollout of this brand. Distribution remains well below the parent brand at roughly 2 thirds of Tennessee Whiskey's off premise remain encouraged by the early results from testing Tennessee Fire in a few markets outside the U. S, including the Czech Republic, the United Kingdom and Australia. And we believe that our geographic reach should create significant opportunities to develop the brand on a global basis. Our other American whiskey brands, including Woodford Reserve and Old Forester, enjoyed the best rates of growth as our authentic American whiskey brands are well positioned to meet the rapidly increasing demand for high quality premium priced bourbon. Finlandia vodka's underlying net sales declined 2% year to date, driven by declines in Russia, where fiscal 2016 got off to a sluggish start, though results did improve during the Q2. Poland, our largest volumetric market for the brand, registered slight growth. 7 Comfort family of brands saw underlying net sales decline 7%. While weakness in the United States was a driver of underperformance, the brand is seeing positive takeaway trends in markets such as Germany, the United Kingdom and South Africa. Sonoma Catrier, Korbel and Schombauer each grew underlying net sales by low single digits in the first half of the fiscal year. Now let me circle back to our tequila brands, which have been delivering accelerating rates of growth over the last year. During the first half of the fiscal year, all Hemadura's global underlying net sales grew 8%, Herradura grew 7% and new mix jumped 31%. New mix's takeaway trends are showing solid growth year to date, and underlying sales were also helped by low trade inventory levels at the beginning of the fiscal year. These aggregate results were well balanced by geography with 15% underlying net sales growth in the United States and 10% growth in markets outside of the United States. We believe that our tequila brands are early in their development in the United States as consumers are increasingly interested in 100 percent agave tequilas, particularly ones with the heritage and authenticity of our Casa Herradura family of brands. I'd like to take a moment and look at Herradura's recent momentum in the United States. It's an extremely important market for the brand and to share with you some of the drivers of these strong results. First, let's look at our outperformance, where during the last 12 months, ultra premium tequila has grown value by roughly 14%. Herradura has been gaining share with 16% over the same period. We believe this growth has been driven by a combination of factors, including the 1st large scale media campaign behind the brand since 2007, which helped drive faster velocity in established accounts as well as distribution gains. Thoughtful innovation such as the introduction of Herradura Ultra and Ultra Premium Price filtered anejo tequila is also helping us better address the high energy occasion. We believe the runway is long for this brand as brand awareness among our target consumers is only onefour of Patron. El Jimador has also been growing nicely in the United States, with consumer takeaway on a value basis accelerating from 14% over the last 12 months to 19% over the most recent 3 month period. This has doubled the premium tequila category's rate of growth as new packaging and more effective on premise activations are fueling off premise trends through increasing brand awareness. We are optimistic about both of these brands' growth potential over the coming years, given the brands are early in their development in markets outside of the United States. Let me now reconcile to reported growth for the 1st 6 months of our fiscal year. The strengthening in U. S. Dollar continues to negatively impact our reported results. These FX headwinds dragged down our reported sales by 8 points during the first half of the fiscal year. After a brief pause over the summer, the U. S. Dollar resumed its appreciation against other currencies, which will continue to dampen reported earnings growth over the near term. Our top line grew 6% on an underlying basis, fueled by almost equal contributions of volume growth and pricemix. Underlying gross profit grew in line with sales growth, up 6% as better pricemix was offset by higher costs in the first half. We expect the rate of cost increases, particularly related to wood, to ease in the back half and help drive modestly better gross margins for the full year. Underlying A and P spend increased 1%, while underlying SG and A grew 3%. So putting this all together, we delivered 9% underlying operating income growth in the first half of fiscal twenty fifteen. Foreign exchange headwinds hurt our reported operating income growth by 4 points, and lower inventory levels, primarily related to Tennessee Fire, pulled another 3 points from our reported operating income. On our other income and expense line, we enjoyed favorable comparisons against last year's related to the revaluation of net current assets denominated in foreign currency. For the first half of our fiscal year, we delivered reported earnings per share of 1.72 dollars Adverse foreign exchange was a 0 point 0 $7 drag on our EPS, a couple of cents worse than we had anticipated on our quarter call. Let me now move to my second and final topic for this morning, an update on our outlook for fiscal 2016. Year to date, our top line growth of 6% and operating income growth of 9% are consistent with the results we delivered in fiscal 2015. This growth reflects the strength of our premium portfolio, focused on American Whiskey and led by the Giacagnos family of brands. Our brands are enjoying broad based global demand, evidenced by the balanced geographic delivery of our results through the first half of the fiscal year. Additionally, disciplined innovation has allowed us to attract and target new consumers and your communications. So while we're in the middle of the all important O and D selling season, which drives a disproportionate amount of our annual sales, we are encouraged by the balanced geographic growth we have delivered so far in fiscal 2016 and are reconfirming the ranges we shared with you on our last call, as we still anticipate full year underlying net sales growth of 6% to 7%. We also expect to deliver 8% to 10% growth in underlying operating income. Somewhat better gross margin expansion in the back half of the fiscal year will likely be partially offset by higher growth in our operating expenses, but we continue to expect solid leverage to the operating income line in fiscal 2016. Moving now to FX. Assuming current spot rates, we now expect adverse foreign exchange to be approximately $0.05 worse for the full year than we had anticipated on our Q1 call. As a sensitivity, assuming our foreign currency cash flow exposures collectively move 10% in either direction, our EPS over the balance of the year would be impacted by approximately 0 point 0 $7 So in summary, the first half of fiscal twenty sixteen keeps us on track to deliver another year of strong growth. Notwithstanding the capital investments we have been making to ensure we are able to supply our growing base of consumers with our high quality products, our operating cash flow has been strong and growing. This cash flow and balance sheet flexibility has allowed us to return significant capital to shareholders in the form of buybacks and dividends. Over the last 5 years, we have returned $3,600,000,000 to our shareholders, with almost $900,000,000 alone during the 1st 6 months of this fiscal year, as we aim to consistently deliver top tier returns for our shareholders over the long term. So with that, I'm going to turn the call over to Paul for his comments. Thank you, Jane, and good morning, everyone. I'll be pretty brief here. FX headwinds aside, I'm pleased with our first half underlying results, particularly the performance of our premium American Whiskey portfolio, which, of course, is led by the Jack Daniels family, but was also bolstered by strong performances from both Woodford Reserve and Old Forester. Also appreciated in the first half was broad and balanced geographic performance. In my view, this is a major asset Forman and a very beneficial attribute of the company for investors. I will say that there is nothing easy about the current business environment, not that we ever expect it to be easy. At a time when the threat and reality of global terrorism is increasing, emerging market economies have softened somewhat and industry competition has intensified, particularly on the innovation front in the United States, I feel our underlying business continues to perform very well and notably very consistently. I'll make this point related to this consistency by noting that Brown Forman's FY 2015 full year results from last year saw a 6% growth in underlying net sales and a 9% growth in underlying operating income. With today's mid year results, we have posted a 6% growth in underlying net sales and a 9% growth in underlying operating income. Further, in confirming our full year EPS guidance this morning, we are anticipating that underlying sales and operating growth will roughly continue at these same attractive rates. And if they do, we estimate that Brown Forman's underlying results will continue to compare quite favorably to our spirits competition. So while we still have the last half to navigate and this includes our important holiday season, I'm pleased with where we are at this year's midpoint. I'll also note that our earliest read on November's business, which of course was not part of this morning's first half results, is quite positive and serves to further strengthen our confidence in our underlying growth outlook. Before closing, I'd like to note one other item that I believe reflects Brown Forman's ongoing progress as well as our belief in the continued growth prospects for the company, and that was our announcement to increase the annual dividend by another 8% in calendar year 2016. This marks the 32nd consecutive year that the company has increased its annual dividend, and this, I believe, stands as another testament to the consistency to which I'm referring. Thank you. That concludes our prepared remarks this morning, and we're now happy to take any of your questions. The first question comes from the line of Dara Mohsenan of Morgan Stanley. Hi, good morning guys. Good morning. First, just wanted to get an update on kind of the positive offset to keep full year EPS guidance the same despite the incremental FX hit. Is there something specific on the positive side giving you confidence there? Is it more related to having a range around earnings and maybe where you land in that range is a bit different? And then second, Paul, was just hoping for some more detail on the competitive pressures you cited in the U. S. Around innovation. How big a concern is that going forward as flavor whiskeys proliferate? Obviously, you guys have been very successful with the flavor products so far, but do you worry competitive risk ramps up going forward as some of your competitors catch up to you? And it looks like a number of the Canadian whiskey brands are kind of revitalizing themselves as they move into the flavor products. So how big a risk is that and how do you manage through that? Thanks. Okay. Thank you. Jamie, do you want to take the first one to Scott? Yes. I'll take the first one. So your question was really around what our full year outlook and really the biggest change that's happened from what we gave you back in June and what we reconfirmed in August and what we're seeing today is FX. And so excluding FX, I think we're as we confirm today, we're on track for the top line 6% to 7% growth and the bottom line 9% to 10% 8% to 10% growth. So the only change has been FX and FX, which is allow us to still fall within the range that we gave you. Yes. And to Dara's question Yes. And to Dara's question related to competition, let me just this is something we started to emphasize a bit more in at the conclusion of our Q1 when we were discussing results. So let me just maybe build on that a little more. I think this reference to competition, I mean, look, companies always have competition out there. So it's not like that's new. I think the thing that I would emphasize and I might break it down, particularly as I think your question related to the United States, which is one of the most competitive markets just because of the structure of the system and the ability to innovate within it, which is both of course a blessing and a curse depending upon which engine you're on. So when I think about what's been happening in the last sort of 6 months or so in the United States, going back a few years, many of the really global competitors had more what I'd say more balanced geographic earnings profiles than some of them have enjoyed here more recently. I mean, if you think back 4 or 5 years ago, a lot of people were dependent on the emerging markets for growth, whereas their developed international markets may not have been growing as robustly. And in the U. S, they could expect maybe industry competitive levels of growth, but the emerging markets were really helping drive them. And obviously, what we've seen from a number of our competition is that that's just more difficult these days. So I think a lot of them are turning to a very attractive U. S. Market where innovation is possible. It's a very premium market, so the ability to influence your margins and the growth of your company is probably a little more rapid in the United States just because of the structure and profile of the market. And so these are good competitors and they want to grow. And so as we sort of forecasted back in the Q1, we expected levels of increased competition just generally to go up. So I think that is an influence on one level. So you got highly motivated competitors who want to grow at rates kind of like Brown Forman's, right? I think the other thing is that just the existence of this flavored whiskey phenomenon that's going on. And so what we've seen is a lot of different strategies people are deploying for trying to be successful in that particular segment. And for us, for example, I'll just heighten the Jack Daniel's Tennessee Honey competition. And I think this will kind of help on Dara's question. Just in the last year, what we've seen, whereas the category was really developed along the lines of primarily cinnamon and honey with just a little bit of cherry flavored whiskey out there, What you see just 12 months later is the development of both an apple flavored segment, which increases sort of sort of the premium position within the Honey segment. Now there are new competitors in there that are at lower prices. So I think we've started to see the within particularly Cinnamon Apple and Honey stratification between popular and premium price leadership. And so when we refer to intensifying competition, it's really along those lines. The things we'll continue to do, we talked about this in the Q1, I think it continues to be our posture, is that our great advantage in playing in flavored whiskey, I feel, today is to be focused on fewer flavors but broader geography and less on lots of flavors and narrow geography. And so, of course, a lot of the data that you observe and are interested in, which we are as well, because it's become an important piece of the distilled spirits market in the United States, is this U. S. Flavored whiskey segment. But I really continue to believe and it's been our experience on Tennessee Honey that a lot of gold is there to be mined outside the United States. So it doesn't mean we don't have to compete in the United States and we'll sharpen our sales and marketing efforts there. But I still continue to believe that while there's great runway ahead for the 2 flavors that we've got on the Jack Daniel's franchise and those opportunities exist both in the United States and overseas, we have really continued to have some advantage because of the strength of the Jack Daniel's trademark and our route to consumer around the world in developing beyond just one country. So that's the current way we're sort of thinking through this. I don't expect us to do this introduction of multiple flavors at one time or sometimes what people are referring to is sort of the flavor of the month thing. I just really think these we want to build these as Jack Daniel's brand extension. Okay. That's very helpful. Thanks. Thank you. And the next question comes from the line of Bill Marshall with Barclays. Hi, good morning. Thank you very much. I'm just kind of building not to belabor the point, but just building off of that. On the flavor commentary, we do have examples in other categories, vodka, maybe even craft beer, where the consumer does kind of jump from one flavor to the next looking for the next thing consistently. And I'm interested in your commentary around focusing on fewer flavors. What is the risk that the consumer just moves away from the flavors that you've emphasized? And is there anything different about the whiskey category that's unlike vodka or beer, these other categories, which have been a little bit more fickle as we look forward in the the sustainability of this growth? And then secondly, digging into that even further, how do you view the flavor phenomenon impacting the core Jack Daniel style? And are you do you feel you're cannibalizing the core brand and will consumers come back into that brand if they do move away for some of the flavor expressions? Good question. Yes, I mean, I think the data would show that people are showing an interest in flavor variety. I think the key to not being susceptible to dramatic declines in your volume, it goes to, 1, the strength of the trademark 2, the quality of the product offering itself and continuing to offer a product that really holds up in the glass, I think, is really critical to this because not all of them will. And then just the way that you sell and market the brands. You just don't want it to be I actually feel like sometimes and it's often a reaction to short term conditions, studying something maybe perhaps that happened last month or in the last 12 weeks or 6 months, the reality is to really treat these things as brand expressions and I mean, for us, the size of Jack Daniel's Tennessee Honey today, I mean, it is a pretty significant brand on a global scale. I a global scale. I think we've mentioned this from time to time. I mean, there's fewer than 20 brands that we know of that are at its price point and above 1,000,000 cases globally. So we don't treat it as a sort of like what I call a flavor extension from which we've now got to go replicate it over and over again. I think that can be a self fulfilling prophecy. On the balancing act of cannibalization category where they might not have been a participant in the past. And we are seeing, I think, really nice evidence of particularly now with the passage of time, because we've got more data on Honey, it's newer still on Tennessee Fire. But it actually exposes people to the Jack Daniel's brand in such a positive way and it's a way for them to sort of build their palate toward the appreciation of what I'll call straight whiskey. And so, I feel like, yes, you can accept modest levels of early cannibalization to the extent it exists. I mean, we've been very comfortable thus far with both of the expressions at the level of cannibalization. You expect a little bit and frankly, we feel like on Tennessee Fire, just because of the shot nature of that occasion that it has the potential to do a little bit more cannibalization than Jack Daniel's Tennessee Honey did, although both are at what I consider to be modest acceptable levels and more than offset by the potential gateway and marketing value they create. So as people the way I like to think about it is people switch flavors, as you say, one of the things that we expect is that they switch flavors from, say, Jack Daniel's Tennessee Fire to Jack Daniel's Black Label. So and I just don't anticipate us getting caught up in a very exhaustive flavor by flavor exercise. And so from time to time, compared to other people who are building distribution or getting trial with any number of flavors, we're just going to have to deal with it. And so the way we would be successful is to focus on the flavors we have and try to get them to be as successful in the marketplace as they can. And I continue to think a huge piece of that for us is a global marketplace versus just a U. S. Marketplace. Perfect. And if I could just ask one quick follow-up. It looks like your price mix accelerated pretty nicely in the second quarter. I assume that's predominantly, if not wholly on the mix side. I'm curious what the puts and takes were there, if it was an acceleration in some of your premium products selling through or a slowdown in maybe some of the more value products and how we should think about this for the back half of the year on the price mix side? Thank you. Sure. I'll take that. So just to talk about the split on the price mix, it was more mix, as you said, than price. I think it's onethree, twothree, if you will, or in that range. And it was driven as we look through it, it was driven by definitely higher growth from our premium portfolio of brands. So our reserves, our Jack Daniel family of brands definitely contributed. To a lesser extent, we did have some of our lower margin products not do as well, Finlandia and Canadian Mist, those. But to a large extent, it was due to the premiumization of our products. As we look forward in terms of the rest of the year, as we were consistent and said throughout the year, we're not really expecting much from pricing the whole year, very modest pricing. And so anything that we get will be more mix related. I think at the beginning of the year, we said it was going to be in a couple of percentage points is the message that we had. So I would assume that it would say in the 2% to 3% range for price mix in totality. Perfect. Thank you very much. Appreciate it. You're welcome. Our next question comes from Bill Schmidt with Deutsche Bank. Hi, good morning. Hi, Bill. Just a modeling question to start and then a real question. So, do you have a share repurchase target for the year because it was much higher than we thought, or at least modeled for the quarter? And then also CapEx is a little lower than we thought given all the initiatives you guys are doing. And then lastly, your comfort level on the leverage ratio kind of where you think you could sort of take it and still be within your comfort zone? And then any sort of commentary on divestitures or acquisitions because there's obviously been some stuff in the press about some of the brands you may or may not be party wise with? Okay. Well, you asked a lot of questions. I'm not sure if I have a lot. But I can do the what was your specific question? Do you mind saying on the share repo again? Yes. Do you have a share repo target for the year? Because it came in much higher the quarter than we thought. Yes. We don't target a share repo. Hopefully, I'll remind you that we have a $1,250,000,000 authorized share repurchase that was effective last March 24, I believe. And we've repurchased about $1,000,000,000 against So we got $250,000,000 $250,000,000 or so less on that initial approval, if you will. But the way we approach share repurchases, there are opportunistically. So we're looking at it as an investment. And so as you saw by a significant amount in our Q2 where we felt like the market wasn't understanding and realizing of the underlying growth that we see in our business and how we see it going forward and that it was being masked somewhat by foreign exchange. So we don't have a target for that for the year, if you will. So it's more of an opportunistic. Several factors go into play when we do it, both the price of the stock, what we our own needs of our business are, so funding our own business, a host of things that go into that. So but we do have about $250,000,000 left on it. In terms of the CapEx, you did see it. It's lagging where we thought it was going to be for the year. We expected it to be about $200,000,000 for the year. I think some of it's going to get shifted over to next year. So right now, we're expecting somewhere in the $150,000,000 $160,000,000 range for the year. So it's timing only, so it will be pushed into next year. So when we get done with all of our capital expenditures, the major ones behind expanding our distillery, adding the cooperage, doing mills, adding bottling, we have been well in excess of $300,000,000 on those expenditures. Okay. And then you asked a question about coverage ratio? We're very comfortable at the levels that we're at right now. I mean, as you all would know from following us, we have a pretty conservative posture about that historically. Some of it's just what opportunities come along. It's not that we're not willing. I will say that in addition to what Jane said there that the attractive borrowing rates paired with the long term prospects we feel for the company combined to motivate us a little bit on the share repurchase activity right now, the ability to if you just think about it for a very, very long term investment to buy back shares today and to have a view of the company in the way that we do as managers and then just be able to support it with very low price debt today by historical terms is a wonderful combination of factors. And I'll just to boot, I mean, you're always looking at what your alternative investments might be. And as we scour the world and think about the things we can invest in, investing in our own business is right near the top. So and that occurs both through the CapEx that Jane mentioned, but also through the share repurchase program. And then you had also mentioned about rumors in the marketplace. And as we is our typical posture, we just have been really well served by not commenting on rumors that are out there related to things that we might either be somebody's prospecting that we might be selling or buying. And we just really appreciate the fact that over the years, the no comment on that has served us well. So we'll continue to hold by that today. Yes, I totally respect that. And then just on more on the business side of things, I mean, how do you balance market share versus profitability? Because if I look at the U. S. Data and admittedly the data set is pretty limited for us because we really only have the Nielsen data to go on. But it looks like the incumbent brands are losing quite a bit of market share at least year over year on the whiskey and bourbon side. And you have pretty substantial share growth from Bulleit and then that all other category, which probably some of your brands are in there as well. But it seems like that's accelerating a little bit. And I know the margin mix obviously is improving quite a bit with Woodford and some of the other variants. So how do you guys kind of manage that and how important is that market share data? And then again, I know it's a short period time, so maybe it's just not a broad enough data set. It's important to study, I think, over time to make I think mostly to make sure that the opportunities you see for your company, you're not letting others have. Although I will say it's been my experience in this business to be more growth oriented and not size or share oriented. We typically don't set scale based or size based ambitions relative to competitors for our company. And I think that because I think that can lead to oftentimes the wrong set of behaviors. And I mean, it's not that it's not useful. We're as competitive as the next person, so we like to look at share data. But I think the criticality of growth and enduring growth is what we've continued to focus on. And so I mean, I really don't feel like we lose sleep. Like for example, I mean, it's been it will be a fact with the size of the Jack Daniel's black label business in the United States. It will have a very difficult time growing at the growth rate that Woodford Reserve is. I mean, it's just an earlier stage of development. So what we tend to do when we look at shared data is we look at it with and without Jack Daniels. We look at it in ways that can inform us and illuminate where there might be growth opportunities for us. And I actually I mean but we are competitive. I will tell you that we want like for example at the price point above Jack Daniel's in the U. S. American Whiskey market, we want to be a leader. We want to have our fair share of it. It doesn't mean we would do anything at any cost to be the number one volumetric player at the ultra premium level. But I will tell you that we really feel like that's an So the same thing is true of flavored whiskey. It'd be rare for you to hear us say something like we need to be number 1 in flavored whiskey in the United States. I'm just not compelled by that and I don't think our company is we don't like to see other people get consumption that we don't have. But when you have, as our company does today in our largest market, something like a 6% or 5% market share And when you have across the globe less than 1% of the market share, you're going to be really frustrated for a long time if you measure yourself on that basis. So we think we can be an enormously successful company building value for shareholders without having to dominate any particular category or segment. And the next question comes from Judy Hong with Goldman Sachs. Good morning. Jane, so on your full year underlying sales guidance, I know you're continuing to stick to the 6% to 7%. You did 6% year to date. I guess, last year, you also did 6%. And if I kind of look at the 4th quarter comp being pretty tough and U. S. Comps are probably going to be tougher in the next quarter or so. So I'm just wondering, I know it's 100 basis points to get to the high end of it, but are there anything in the back half that you expect some acceleration, whether it's markets or brands that gives you some confidence that actually we could see some acceleration in the back half? Yes. Great questions. And again, we're looking at our full year forecast, and we do see, as Paul already alluded to, getting off to a good start in November. So we are seeing an acceleration from that perspective. And so we're expecting we had pretty soft Q3 last year. And so we are expecting soft comps against that or easier comps against that quarter and expect that to be a good quarter for us. You do point out that we did have a nice quarter in the Q4 last year with the rollout the national rollout of Tennessee Fire in the U. S. But we also have some markets in overseas that we've been testing, not that we're rolling them out further, but we've got further tests to do in some of those markets. So there will be some offset there, too. So it won't be a one for one kind of thing if you're thinking about it's going out, and we've got to cover it all. So, but our full year forecast anticipates all this, Judy. And we think the 6% to 7% range is acceptable and reachable given the environment we're in currently. Thank you. Just following up on the November trend. So I know you guys had a pretty weak trend in Poland in the Q3 last year. So is the acceleration driven by Poland? Or are you seeing broad based acceleration in November? Pretty broad based right now. Yes, it's early now, but it looks broad based. Poland is a top 10 market for us, but it's rare that it would drive the entirety of brown formul. So oftentimes, the numbers I mean, you can get that from sometimes the United States because of the size of it within Brown Forman. And periodically, you'll get the U. K. Or the France's and Germany's, particularly when they combine. But right now, again, it's early. We still got a lot to see, but we're encouraged by what we've seen broad based out of the November. I would just like to add one more thing to it, and I alluded to it during my talk my script, travel retail. And it's still tough flooding there, if you will, but we do know that the U. S. Travel retail business had some timing issues and we kept waiting for them to come and then we started to see them come through in November. And so we would are expecting the rate of decline in travel retail not to be what it is for the full year. Thus, we are expecting acceleration there from what we've had year to date. So that will add to some of the growth. That's why we've been pointing out and pulling out travel retail both in the Q1 and the Q2 to show, what it actually has done to our growth rates. And it's been fairly significant in both the year to date as well as our 1st and second quarter. The other thing I'll mention is I think the travel retail piece, I mean, we still have some determinations make inside the company as it relates to geographic expansion on Jack Daniel's Tennessee Fire. So we'll be getting to those here in the next probably few weeks or so. But the other thing is as the calendar year turns, once we enter into 2016, it marks actually the year where the Jack Daniel's distillery will begin to celebrate its 150th anniversary. So, you can imagine that a company like Brown Forman has a great milestone. And I don't know how much impact that would have on this fiscal year, but it's something that we expect to be something that's a really nice mobilizing event for the calendar year 2016 period. And you can imagine us having a lot of fun with that, but also consumers getting to have a lot of fun with it as well. So we'll be talking probably a little more specifically about that with passage of time, maybe a little bit more at the end of Q3, but that's another point I'd note. Got it. Okay. And then, Paul, I know, yes, obviously, you said you don't want to comment on any of the market speculation about M and A. But if I just kind of look at your portfolio and it sounds like you're definitely stepping up your focus on the premium tequila with the Herradura brand and that makes perfect sense. But as you think about your broader portfolio and thinking about some of the declining brands and sort of the lower margin businesses, what are kind of the puts and takes from a strategic standpoint of keeping those brands so that you have scale versus perhaps maybe pruning some of the portfolio so you can focus your portfolio to really be more of a whiskey premium tequila brine portfolio, even if there is some potential dilution in earnings? Yes. I mean, I think our portfolio management generally across time, I mean, I think you could just observe it. I think it's stood the test of time. I mean, we've increasingly become more premium and more whiskey would be the observations if you go all the way back to the consumer durable stays and then wine. But I think it would be evident that when we even chose to exit wines, we chose to stay in Sonoma Cattrayer. So we find that our I mean, it's just we have found the benefit of focusing on fewer trademarks that are excellent businesses that have great growth profiles. And the story around Forman today is that a lot of companies will have brands that are smaller in terms of their contribution in the modern day than they might have been 5 or 10 years ago when we always talk about it at the company's Old Forester, that here it's enjoying remarkable success, both on and off premise and but is a little brand still in the scale of Brown Forman and probably endured about a 50 year decline. And so I guess you could call that patience. We waited for it to get small enough that it could be termed craft and retro and all other things that it's enjoying this renaissance that it is today. So here's an example of staying with brands. And I really do feel when you take Brown Forman's portfolio overall and compare it to many of our competitors out there, I mean, we just have one of, if not the most focused portfolios in the spirits industry. And I do think we benefit from that. So but as again, going back, I think it was in your preface, we just don't comment on things that either are incoming or potentially outgoing. It's just not this doesn't serve us well. And so we let the rumors be the rumors, and we keep focused on our business. I know some of you all I mean, people have speculated. I will say I'm really encouraged by there's some recent marketing on the Southern Comfort brand that is literally, I mean, occurring in the last week or so where some viral advertising, I'll call it, associated with Danny McBride has gone out there in Spotify as noting it as one of the top 10 sort of viral efforts in the United States. It's actually gone global as well. So there's I think that's evidence that the brand continues to get support and we continue to try to put our best foot forward in a really competitive environment for Got it. Okay. Thank you very much. You're welcome. The next question comes from the line of Eric Saroda with Evercore. Good morning. Not to belabor the competition point too much, but wanted to approach it from a different angle. Paul, last quarter you made the distinction between increased competition for shelf space at retail and back bar space on premise as opposed to competition, price competition either at retail on premise, saying you had clearly seen a pickup in the former, but the latter was kind of in line with historical trends. Wondering whether you could update us on that, particularly price competition in the off premise. We've seen some hot price points from particular markets. And then related to that, in response to Dara's question, you mentioned some popularly priced flavored whiskeys. Just wondering whether you're seeing more or less or the same discounting of sort of the premium core brands from your competitors. So two related questions. Yes. I think I mean, I think it's fair for us to comment on that. Certainly, there's I mean, there's 2 forms that we're seeing, just to go back and be clear, there are 2 forms of the competitive effort. One is level of entries into the marketplace. There was something that internal report we were looking at here just this week where this is a pretty interesting statistic that in the United States, in the U. S. Alone, whiskey market, above the $20 price point. So $20 price point and above over the last 4 years more than 500 new entrants. So there's that that would be now where are you going to put all those? I mean, it's shelf space, back bar. And of course, I mean, those are in many instances highly regional. So you're not going to those aren't going to be full blown national brands immediately unless they're large trademark line extensions, which have the capacity to do that. But in addition to that, I mean, I don't know, I almost feel like every year for the last 10, around October, November, December, we start to observe increased price competition. And I mean, it differs from brand to brand or company to company, it feels like every year. But I don't know that this year is any more competitive than 2014 was or 2013. I always feel like both anecdotally and when you study the data after the fact, some brands chose to go deep on their 175 or to put IRCs or coupons out there. I mean, just it all depends on the motivation of those particular competitors. So we have seen some spread difference in the U. S. Market between, say, Jack Daniel's and Jim Beam. We've seen that would be an example for this year. But in prior years, we've seen other brands go deep on discounting. And all of it is just the reminder of the balancing act. I actually think one of the things is it will be interesting to see over the this is not a comment about 2015, but as I look at 20 16, 2017 2018, some of this will be dependent upon the stocks available if these rates of growth for the category continue and these entrants continue to go in and we never have a quite a good enough feel for how much supply is actually out there. And so if demand outstrips supply out there, I think you'll start to see pricing go up, not down, with sort of rational competitors. So we don't have any indication of that now, but I mean these growth rates have been running pretty solid for a while now in the industry. And I think that can be an influence to the pricing and the pricing competitiveness out there. Great. And just as a follow-up, Jane, wondering whether you could give us any more color or an update in terms of the COGS second half of the some moderation in wood that would happen in the second quarter. It now looks like that's more pushed to the second half. Just wondering whether I'm remembering that correctly or if you could give us an update there as to what happened? Yes, sure. So I still think we still would expect COGS somewhere in the 3% range for the year. But in terms of what I've said, I don't know if I referred to a second quarter or not, but let's just focus on the wood as we go forward. We are expecting of the big drivers of the increase of the COGS growing a little bit faster than it has historically for us. And the reason why it's going to moderate is because last year at this time, the cost of components that go into making a barrel, took a pretty components that go into making a barrel, took a pretty significant increase and it's continued to increase, but the rate of increase over the balance of years is expected to moderate. Yes. So going a little bit back to that earlier question, are any price mix benefit that we would have been seeing through the years being offset somewhat by those some of those higher wood costs, as we start to cycle them, we'll get more benefit from our price mix in that second half because we're cycling a higher base. So that is a positive for the company in that second half. Great. Thanks a lot. I'll pass it on. You're welcome. Our next question comes from Nik Modi of RBC Capital. Yes, thanks for the question. Hey, Paul, I was wondering if you can help confirm something we recently picked up in the trade regarding Bacardi putting its distribution out to RFP, breaking the alliance with Remy and Brown Forman. And then if that is true, what would be the implications if the distribution alliance actually broke up? Would that benefit you or would that hurt you? RFPs out RFPs out there that Vicardi has initiated. But as far as we know, we're continuing to partner with them in the same way that we have historically in the United States. And just to remember, there's part of that partnership we do all together and then the respective companies go and do their individual brand building work and then within each company, people are building their own individual brands. So I mean, I think no matter what happens, and I always feel this way about the U. S. Environment, whether it's wholesale consolidation, supplier people changing distributor alignments, etcetera, I really have a high level of confidence in Brown Forman's ability to navigate the U. S. System. I really do. We do that. We really don't have a one single way of doing it in the United States. There's And so I just like the flexibility along with the stability that comes from Brown Forman's historical approach to the U. S. Distribution system. And so we really do have always some there's still a lot of markets where we go to the marketplace with BICARDI, not only in the United States, but outside the United States as well. So where that's appropriate, we'll continue to do it. Great. Thanks so much. You're welcome. Our next question is from Tim Ramey with Saboto Research Group. Hi, good morning. Thanks. Hey, Jim. I wanted to recapitulate something you said a few minutes ago, but I think it bears kind of thinking a little bit more about. Consumer behavior in alcoholic beverages has always shown a tendency to more complex flavors and more crafted flavors, if you will. Go to beer drinkers, become craft beer drinkers and so on. And so I mean, I think it really is the right way to think about it to think that the best thing about Tennessee Fire is Jack Daniel's Black Label. The best thing about Jack Daniel's Black Label is Woodford Reserve or Gentleman Jack. Am I thinking about that right over kind of 10 year outlook? I mean, yes, I think that's one aspect of it, Tim. I think there's a phenomenon that's really interesting in the, call it, spirits category relative, we often get compared to beer or wine. So one observation along the lines of what you're thinking that just first to ground you. Remember that the core offering of distilled spirits more often than not gets consumed in its final format in a varied or flavored or mixed way. So it's even more natural in my view for flavored spirits to exist. In some forms, that's providing convenience. In other forms, it's providing a little more prepared form of what they enjoy anyway. So and that's not true. I mean, the beer is not an ingredient in a broader based beverage, for example. So I think that's one thing to think about, which I think bodes well for the longer run, the two factors that I think will make flavored whiskey have a longer life versus shorter are that it's inherently the way those core whiskey category gets consumed anyway. And 2 is that they are aged products that have a moderating and regulating mechanism to the boom bust phenomenon that can happen. I think those are 2 contributing factors that they don't guarantee that some brands won't go away or there won't be some bubble or something like that. But for our business, it's why we believe that they can be very strong enduring brands. Then the other piece is what you're talking about, which is the I mean, I'm just going to give you an anecdotal one, because I saw it over the last one of these last I mean, I'll give you an example of my wife who literally does not drink whiskey and never has. And with the introduction of Tennessee Honey and Jack Jones Tennessee Fire, I mean, literally, I mean, she said, well, that really tastes good, for example, on the rocks. And literally over the Thanksgiving holiday, she was stealing my Gentleman Jack on the rocks. I mean, so here is an example of somebody who's developed a pallet over a period of time, so that somebody who never would have been interested in the category. And it, I think, is an example of what you're referring to. Now whether or not she'll trade up to Woodford Reserve or Double Oak, I don't know. But in any event, I think there's real foundation to the premise that you suggested there. Yes. At the end of the day, the ultra premium is kind of where everybody is going. They might get stuck along the way, but they might end up going there. Tim, the other thing, it's a really affordable luxury. I mean, you can get on a liter of, say, Woodford Reserve, you're getting right there, there's 20 standard drinks in a liter of Woodford Reserve. And the money compared to where you might put your entertainment dollar, particularly if you're entertaining people at home, it's a real value. Just a quick question on barrel making. I mean, you do all that in house, I believe. And so other than just the raw material costs, as you expand barrel making activity, should we think about that sort of diluting COGS from higher depreciation and so on? Or should we think about that as a benefit to COGS from greater efficiencies? How would we think about that? Yes. I mean, we're definitely building our new all of our new facilities with a couple of things in mind. 1, to make them as efficient as the fact that it's possible and 2, make them scalable. So we're not necessarily building it to be double what we need today. We're building it and scaling it as we go. So I think the answer is sort of in the middle. There will definitely be some incremental depreciation as time goes on from some of the investments we're making, but we're also being very thoughtful in terms of how much we're investing now to minimize overproducing over constructing and over making something that we don't need at this point. Yes. Couple of things, I think, in addition to what Jane is saying there is, just remember from a traditional economies of scale thing, I mean, barrel met, you don't run these down a line in the way that you get that ramped up with extra volume. These are made by human beings. So that's one of the tricks of the barrel making operation. The I mean, we do get some benefit, I think, on a little bit of probably on freight because we're down closer. The new Cooperage is a little closer to Jack, which is the primary customer. I mean, a lot of it would depend too on how you account for, which the used barrel sales a little bit and do you count that as efficiency or do you count that as a sale? And of course, we've been benefiting from the used barrel sales these last couple of years because the market's been so buoyant. So a lot of it depends on how you account for that aspect of it. I will say the other piece that relates to that is it really was in part a, I'll call it, a risk mitigation move by the company to ensure we had 2 Cooperages spaced in different locations, etcetera. So, I mean, as we've learned that long ago with warehouses and other aspects of the businesses, but it really was bought some insurance for us as well because our business is so attractive, we would not want to be have any limitations as it relates to getting wood. Yes, I would just say anecdotally in wine, used barrel prices are up 100%, because there's so much demand from craft distillers and craft beer makers who want to put the beer in oak. You bet. That's one of the reasons about the cost just of our own wood that we were procuring went up because some of the wood was going to the beer and the craft beer. Lot of competition for people, yes, who want to use Cooper's. Yes. Thank you. And the final question comes from the line of Bill Chappell with SunTrust. Thanks for squeezing me in. Welcome. Just a couple of things just on the cost front, I just want to clarify. You had said wood prices would get better in the back half. I mean, is that a start of a longer term trend as we move into kind of 2017? Or is that just very small changes on year over year? Phil, that's actually what I was referring to as a year over year comparison. So the rate of change that we have experienced in the first half of the year versus abating over the rest of the year. It's not that the costs themselves are coming down at this point because the They're just comping the higher cadence. They're just in second half. They started to go up in the second half of last year, so they won't you won't have as negative impact as you did in the first half. Okay. And then I kind of missed the commentary. You had said also SG and A would kind of accelerate faster in the back half. Is there something behind that in terms of like marketing, advertising or is that just kind of the normal flow? I was referring to operating expenses. So if you look at our first operating expenses in the first half of the year, they were up modestly and a lot of it's due to easy comps, if you will, versus last year. We had pretty high spending in the first half of last year. So we're flipping it in the second half, so you'll have tougher comps, if you will. So that's all. Okay. And then last one, just all the competition all the talk about price competition, does this impact your kind of views of the goal of trying to raise price a couple of percentage points every year as we look to kind of the June price increase? Well, I don't know we've ever had that programmatic approach to it. I mean, I think we do like to try to advance prices, but we kind of do it I haven't recall. Now we did some June July pricing just 3 years ago, yes, I think, the other way we thought that was the right timing to do it. And not all markets did it then, but a large number of did. Sometimes they're associated with input cost, other times they're associated more with price positioning, just the desire to continue to price the brands at the premium level around the world. So, I mean, we'll probably be taking it here in the next, I don't know, 90 days, start to look at what our expectations would be for FY 2017 as it relates to pricing, but we haven't we don't have any early thoughts on that. We will continue to get I mean, as you sell, I'll just use the example, as you sell more Woodford Reserve and sort of less Canadian Mist, you'll continue to get mix though. That will continue to roll. But in terms of what you're saying, the current price competition in the U. S. Doesn't alter your plans at this point? I mean, you've got to look at it. I mean, the reality is that a lot of that competition I'm talking about is above the Jack Daniel's price point. So as it relates to Jack Daniel's, I mean, we're as motivated to make sure we're not seen as too lower priced related to a lot of these new entrants because pricing, in addition to being an economic tool, is also a marketing tool in this business. So I just feel like we'll be weighing that as well as we do what the price spread is between us and say Jim Beam. I mean we'll be looking at both factors. Got it. Thanks so much. You're welcome. Thank you, Paul and Jane, and Thank you. This will conclude today's conference call. You may now disconnect your lines.