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 Brown-Forman First Quarter Fiscal 2016 Earnings 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. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now turn today's conference call over to Mr. Jay Koval, Director of Investor Relations. Please go ahead, sir.
Thanks, Salima, good morning, everyone. I want to thank you for joining us for Brown-Forman's first quarter 2016 earnings call. Joining me today are Paul Varga, our President and Chief Executive Officer; Jane Morreau, Executive Vice President and Chief Financial Officer; and Brian Fitzgerald, Chief Accounting Officer. This morning's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward-looking statements, the company undertakes no obligation to update any of these statements, whether due to new information, future events, or otherwise. This morning, we issued a press release containing our results for the first quarter of fiscal 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-K, Form 8-K, and Form 10-Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures and the reasons management believes they provide useful information to investors regarding the company's financial conditions and results of operations are contained in the press release. With that, I'll turn the call over to Jane for her prepared remarks.
Thanks, Jay, thanks for joining us for our first quarter earnings call. I plan on covering two topics today, which should leave plenty of time to address Q&A after Paul's brief comments. First, I'm going to review our first quarter results, second, I'm going to discuss our latest outlook for 2016. Let me start by reviewing our results for the first three months of fiscal 2016. Our underlying net sales grew roughly 7.5% in the first quarter. As expected, this rate of growth came in above the range that we are forecasting for our full year due to the seasonality we discussed on our last call. Our underlying net sales growth for the quarter were broad-based, with the United States being the largest contributor to our growth, with underlying net sales up 10%.
The company's portfolio of American whiskey brands drove these results with growth across the Jack Daniel's trademark, Woodford Reserve, and Old Forester. Additionally, the launch of Jack Daniel's Tennessee Fire also helped results, contributing almost four of the 10 points of growth we delivered in the U.S. Recall that Tennessee Fire was launched nationwide in the U.S. during our fourth quarter of 2015 with encouraging trade and consumer reactions. While the brand is still in its infancy in 42 states, it continues to track very favorably against the early days of Jack Daniel's Tennessee Honey in the original eight test markets. I'd like to point out one key difference between the two brands. Tennessee Fire is seeing increased acceptance and higher relative sales in the on-premise compared to Honey.
We remain optimistic about Tennessee Fire's growth potential and note the brand has expansion opportunities available to it as it is distributed in only 67% of Tennessee whiskey's off-premise accounts and 30% in the on-premise. While the competitive environment for flavored whiskey has intensified after the recent entrance of Canadian flavored whiskey, we still expect Fire to be a great addition to the Jack Daniel's family of brands, augmenting total value growth. As an aside, we are encouraged about the early days of performance for Fire in its test markets internationally, notably the U.K. and the Czech Republic. Let's take a look at some of our other brands' performances in the U.S. Our tequila brands, el Jimador and Herradura, grew underlying net sales double digits as we continue to build brand awareness through better on-premise activation and promotions.
Southern Comfort and Canadian Mist declined in the U.S. during the first quarter, while Korbel and Sonoma-Cutrer grew aggregate underlying net sales in the mid-single digits. Our business in emerging markets continued to grow well, with underlying net sales up 11% in the quarter. The majority of our emerging markets enjoyed solid double-digit gains led by Mexico, Turkey, Brazil, Ukraine, and Africa. Poland also returned to growth as we believe we have worked through the inventory issues caused by the effects of the January 2014 excise tax increase, but the competitive market and environment remains challenging there. Russia's underlying net sales dropped 36%. This was the result of a deteriorating economy and the devaluation of the ruble, both of which have negatively impacted consumer confidence and ultimately consumer demand.
A challenging comparison with last year's first quarter's underlying growth of 17% also contributed to the decline in the quarter for this market. Looking at our non-U.S. developed markets, we experienced a 5% increase in underlying net sales growth. This was led by strong double-digit gains in the U.K., France, and Germany. Germany was particularly strong as we have successfully resolved trade negotiations with several key accounts. While the U.K. and Germany both enjoyed favorable comparison to last year's Q1, Australia's comparison was more difficult, as the market declined double digits, reflecting a weak economy and a challenging excise tax environment for spirits. Travel retail's underlying net sales declined 18% due to two main factors. The first and largest factor was related to what we believe is the timing of orders from a couple of our customers.
The second factor was ongoing softness in European travel retail, which has been hard hit by Russian consumers who have cut back on travel and are spending less per trip in duty free. Our underlying net sales growth for the company, excluding some of what we believe to be timing issues in travel retail, would have been over 8% for the quarter. Moving now to the reconciliation of underlying to reported growth. Our reported net sales declined 2%, negatively impacted by nine points of foreign exchange. As an example of the foreign exchange headwinds we experienced in the first quarter, the euro was almost 20% lower in the first quarter of 2016 compared to the same quarter last year, and other currencies have devalued even more dramatically against the US dollar. Reported sales were further hit by a one-point reduction in inventories, resulting in an approximately 7.5% underlying net sales growth.
Our top-line growth was driven by strong volume gains and a two-point improvement in price mix. Our better price mix helped drive an 80 basis point improvement in growth margin and a 7% increase in underlying gross profit. Our underlying A&P spend increased 3% and SG&A grew 6%. When we put this all together, we delivered 9.5% underlying operating income growth. On a reported basis, operating income grew 3% and earnings per share grew 7% to $0.75, held back by approximately three points of adverse foreign exchange. This leads me to my second topic, our outlook for fiscal 2016, which we reaffirm today. Before I dig into that topic, I would like to add that while we are fortunate to have a business model that combines long-term growth with defensive characteristics, we realize that we are not immune to a further deterioration in the global economy.
Like all of you, we are anxiously watching the market gyrations over the last two weeks, particularly in the emerging markets. We believe we are fortunate to be in the early stages of capitalizing on our emerging market potential and are optimistic that over time it will become an increasingly important driver of our results. But for now, our emerging market footprint outside of Poland and Mexico is less than 10% of our total revenues. Our exposure is significantly less than the competition. Additionally, this approximate 10% is well diversified, spread over 100-plus countries around the world. Now for our fiscal 2016 outlook. First quarter results were largely in line with the trajectory we anticipated for the full year. As such, we believe we are on track to deliver the 6%-7% underlying net sales growth we shared with you on our last call.
We expect to continue the combination of modest gross margin expansion and better leverage through our operating costs will allow us to deliver the 8%-10% underlying operating income growth. We are also reaffirming our earnings per share range of $3.40-$3.60. While currencies remain volatile, the net FX impact is still expected to be a headwind in fiscal 2016 using rates as of late last week. As a sensitivity, a 10% move in the US dollar in either direction would impact EPS over the balance of the year by approximately $0.08. To share a little bit more color on the seasonality of foreign exchange, I thought it would be good to remind everyone that the large appreciation of the US dollar occurred in the fall of last year.
With that, we expect another quarter of significant headwinds on our reported revenues, though less so of an impact by the time we get down to operating income. Due to the absence of a $10 million loss in last year's Q2, resulting from the revaluation of current assets that were reflected in other income and expense. Looking at a full-year tax rate, we still expect it to be in the range of 30%-31%. In summary, our balanced geographic approach has helped us continue to deliver market-leading rates of growth fueled by robust global demand for American whiskey. Disciplined innovation is helping drive our results and premiumization trends continue. All of which we believe position Brown-Forman for another record year of top and bottom-line growth.
While we are investing significantly to meet future anticipated demand, our business model allows us to return capital to shareholders through growing dividends and our ongoing share buyback program. With that, I want to turn the call over to Paul for some quick comments.
Thank you, Jane, and good morning to everyone. I think I'd start by just saying I was pleased with the quarter as it continued our strong underlying results from FY 2015. The underlying Q1 results were right in line with our full-year guidance for both underlying net sales and operating income. In my view, we're off to a good start to the year. One noteworthy milestone that occurred during the quarter was Jack Daniel's Tennessee Whiskey surpassing 5 million cases in the U.S. for the first time in its 149-year history. To be clear here, I'm referring to the parent brand, Jack Daniel's Black Label, as most know it. I've been reflecting some on this recent accomplishment, I thought I'd share a few perspectives with you about it.
First, I'll simply note that attaining the 5 million case level in our industry is a rare event in its own right. This is a very high level of consumer acceptance achieved by very few brands. Add to this the fact that Jack Daniel's is priced at the super premium price level, well above the price of most brands that have achieved a 5 million case level, the recent milestone is even more rare and impressive in my view. Consider further that the 5 million cases are derived from just one single country for a brand that does more than 12 million cases in more than 160 countries around the world, it elevates the accomplishment even further. As I think about all of this and the brand's recent performance further, it's not that difficult to imagine that a different outcome was quite possible.
While the trends for American whiskey have been a positive factor in recent years, I can think of at least five factors that had the potential to negatively impact Jack Daniel's volumes in the U.S. over these last many years. Yet, this very strong and unique brand forged ahead despite these forces. The first factor I'll cite is the difficulty that big brands have experienced both inside and outside our industry. As evidence, consider that the largest 10 brands by volume in calendar year 2010 in the United States have not only lost share, but cumulatively lost over 1 million cases in the last four years, with six of the top 10 having lower volumes today versus 2010. Jack Daniel's was one of the brands that grew nicely against this very difficult backdrop for more larger, established brands. A second force was pricing.
Despite the consistent price increases by the Jack Daniel's brand in the United States to support its super premium position and to reinforce its specialness, volumes have still moved forward. This is not always the case for brands who attempt to advance price. A third factor has been the intensifying competition in the American whiskey segments as new entrants in craft, premium plus, and flavored whiskey have exploded in recent years. While some of this expands interest in the category, at the same time, it is a direct source of competition, particularly for the most proven and established players such as Jack Daniel's. Additionally, the brand held up extremely well to its own innovation where there was the possibility of cannibalization.
It's not uncommon to observe brand innovations that will significantly cannibalize the parent. The development of expressions like Gentleman Jack and Jack Daniel's Tennessee Honey have not held back Jack Daniel's volumetric progress to date. Finally, it's often believed that older, longstanding brands are mature brands whose best days are behind them. I find it impressive that Jack Daniel's is in its 149th year in the United States and sits today at its all-time volumetric high point. I cite these factors to illustrate that Jack Daniel's is not your normal brand. I believe it to be a special brand and often the exception to the rule. As part of our responsibility to be excellent brand stewards, we believe it is important to consistently and persuasively tell the brand story.
Some of you on this call had the opportunity to hear parts of that story in June with your visit to the brand's homeplace in Lynchburg, Tennessee. The brand story is a story of authenticity, a story of quality, a story of the brand's heritage and history, a story of Americana, and a story of a small-town brand making a splash on a worldwide stage. All conveyed with a down-to-earth personality, genuine hospitality, and with an intent to make friends the world over. We are thrilled that many of the attributes that Jack Daniel's possesses so naturally appear to be in fashion with consumers these days, and we believe this bodes well for the brand, both in the United States and across the world. Thanks for indulging my recognition of this milestone. Congratulations to everyone at Brown-Forman on the accomplishment, most notably our Jack Daniel's and U.S. teams.
With all of the attention that our globalization and our Jack Daniel's line extensions have received in recent years I felt it important to briefly highlight some of the impressive progress we are making with our most important brand and our most important market. That concludes our remarks this morning, and we're now happy to take your questions.
As a reminder, if you would like to ask a question at this time, simply press star, then the number one on your telephone keypad. Again, that's star one. The first question comes from the line of Vivien Azer with Cowen.
Hi. Good morning.
Good morning.
Morning, Vivien.
My first question has to do with the top line. Clearly, the timing issue in travel retail was a factor in terms of the 7%+ underlying sales growth. Keeping in mind that you're cycling your easiest comparison of the year, what gives you comfort that you can hit that full year objective, given kind of where you've started the year? If you could comment on the role of expanded distribution for Fire as part of that would be helpful.
Yeah, I can start off with the first thing. Our forecasts, our actual numbers, Vivien, came in a bit higher than our range, so it did come in around 7.5%. As you did note, if you pull away global travel retail, our results would have been over 8%. We had some other tough comps, too. Russia, parts of what we saw in Russia, we don't expect to repeat itself, some of which they had very tough comps versus last year. Australia, some of which are tough comps versus last year, some of which are just difficult trading environments, things that are going on there. If I wrap all those things up, if I were to adjust for all those things, our actual growth rate would have been closer to 10%.
I think what I'm saying to you is those three things I mentioned, I think there's bits of it that are timing. The only one I adjusted for you was the global travel retail piece. We knew we would start out of the gate stronger. I'm expecting those items I just mentioned to lessen as the year goes on and the timing of those orders as such and global travel retail to reverse themselves. Does that help?
Very helpful. If you could comment on the distribution opportunity with Jack Daniel's Tennessee Fire, given the metrics that you offered in the prepared remarks?
Yeah. Just to give you a flavor, I noted a number of 67% of off-premise distribution for Fire as it related to Jack Daniel's Tennessee Whiskey. As a point of reference, Honey is 81%. We know we've got that opportunity to get there as well. In terms of its on-premise, while we've gotten faster in the on-premise, the ratio there of Jack Daniel's Tennessee Honey to whiskey and Fire to whiskey, it's got opportunities, too. I mentioned 30% of Fire on the on-premise, and Honey is, I think, 39%. We know we've got distribution opportunities there, all in the U.S. that I'm talking about right now, too.
Vivien, I'll add, too, I think, while we don't try to internally here precisely nail down the quarters as we go along, and we try to give enough of a flavor to them. The one thing in retrospect that I think we've learned is that the acceptance at the trade for Jack Daniel's Tennessee Fire in our last fiscal year's Q4, because we pretty rapidly built distribution, and of course, we can't gauge with precision how much retail inventory there is. We can do a really good job, we think, on the distributor inventory pipeline, but on the retail inventory pipeline, as now I look back on it, I think we probably built it faster than we did on Honey in its early days for Jack Daniel's Tennessee Fire.
Back when we were, I guess, forecasting our fiscal year 2016 in the Q1, we would've thought that maybe some of that pipeline was going to be more evenly spaced through the first six months, whereas a lot of it, I think, as we look back on it now, happened pretty quickly for Jack Daniel's Tennessee Fire, and we suspect that was because of the pent-up demand that was occurring because of the staged rollout. That could be a factor, too, in the Q1 results. It's kind of the hybrid of both your questions there.
That's very helpful. Thank you, Paul and Jane. Just one last one for me. As we think about operating leverage for the full year, it seems like that should accelerate, given your full-year guidance. Can you talk please, Jane or Paul, about the drivers of that?
Yeah, sure. I'll take that on. In the quarter, we actually had some cost pressures. You will notice that our underlying gross profit growth and our underlying net sales growth were both online, both grew 7%. We are still expecting some modest leverage there. We had cost pressures from wood. I think I talked about this in the fourth quarter. Just given the supply-demand constraints there and the cost of wood. We expect that to abate over the balance of the year as our costs to come down, our costs of goods to come down more in the inflationary 2%-3% type of range. We'll expect to start seeing a bit of leverage through the gross profit. In terms of operating expenses, we expect to continue to see leverage there.
Yeah, we had.
I think that.
Yeah
for the quarter, there was a handful of things that were one time in nature or things that occurred only in the first quarter that will not repeat themselves over the balance of the year. When we adjust for those things, it was more in the 4%, 4.5% range.
Yeah, we would certainly expect the SG&A to moderate from where it came in the first quarter because we had, as Jane said, seasonal. We, for example, had our global meeting that came in the first quarter and had not had that last year, for example. We do expect that to moderate.
Mm-hmm. Very helpful. Thank you both.
You're welcome.
Our next question comes from the line of Robert Ottenstein with Evercore. Robert?
Hello. This is Eric Serotta in for Robert Ottenstein. How are you?
Great, thanks.
Good.
A couple questions in terms of your comment about increased competitive activity manifesting itself. Could you give some color as to where you're seeing it in terms of countries and categories and who you're seeing it from? Is it the sort of upstart craft players, or is it some of the large established players in spirits getting a little bit tougher in terms of either price point or execution?
I think both. When we talk about intensifying competition, it could apply to any number of the reference points in our prepared remarks. I'll cite a couple. There's no doubt that if you look at areas like flavored whiskey, premium plus American whiskey, and then I'll just maybe comment on it at the corporate level as lots of corporations are competing against each other out in the marketplace. There's just a large number of new entrants in flavored whiskey in that one example. If you just think about it, in a very short amount of time, it's my estimate that in the U.S. alone, the flavored whiskey segment could be 7 million-8 million cases, which makes it, not only did that happen fast, it makes it very large.
That is very exciting, and a lot of people who are seeking growth want to be a part of it, so you start to see a lot of entries. That's what makes it, in some ways, challenging to forecast your business, to think about. Because of the pace of its growth, it makes the management of those brands that are from Brown-Forman in there a much more dynamic exercise. That's something we've been adjusting to a bit. I think at the super premium level of American whiskey, it's really the craft items. There's just the regionalization of the category where there's lots of offerings in each state, many distilleries being built, and all of that has a competitive, collectively, really a competitive presence in the American whiskey category.
Some of it's exciting because it adds new users, but for the established players, it's something you have to pay attention to. When we refer to intensifying competition, we're referring to that as well. That can be very much for retail space, too, space on shelves, space on back bars, et cetera. The third area really is, the world doesn't just sit around idly and look at how Brown-Forman's performing, and then reviewing themselves and not desire to grow at faster rates. We feel competitive pressures from companies that are simply striving to do better out in the marketplace. Often in more recent years, these have been some of the larger competitors. Whether it's through their innovation or through the intensity of their efforts, sometimes it's spending, sometimes it can be discounts.
We're just seeing more of an all-out effort from some of our competition on that range. When we cite intensifying competition, it really spans all three of them.
Okay. As a follow-up to that, you had about 2% price mix on a sort of weighted average globally in the quarter. How does that break down between the U.S. and non-U.S.? I imagine there's some currency-driven pricing in some other countries. What should we expect in terms of price mix contribution for the U.S. this year?
Yes. Just pull back on pricing a bit. Think of what we guided at the year-end, was we were going to lean a little bit more on volume this year and a little less on price, though we would still get a benefit from mix, just because of our portfolio and the more we premiumize and the faster growth rates we're experiencing on some of our higher-end whiskey, such as Woodford Reserve, so that in and of itself gives you a benefit. Recall that we took a couple of years of pretty aggressive pricing in the U.S., both in 2013 and 2014. We did some more moderate pricing last year, and we expect to continue to do more moderate pricing this year. In the low single digits, the 1%-2% range is what we got it to. I don't have the actual number for the quarter.
The price mix, it was pretty split, as I recall, pretty close to being split between price and mix, in terms of contribution.
You should always expect the mix factor to be more prominent in the United States just because of the status of the portfolio and the fact that the premium items are doing so much better than our lower-priced items in that particular market. Our portfolio just isn't as expansive as in the United States when you go to the international markets.
Great. Thanks for your help. I'll pass it on.
You're welcome.
Next question comes from the line of Nik Modi with RBC Capital Markets.
Hi, good morning. This is Russ Miller in for Nik. It seems Jack Daniel's Tennessee Whiskey depletion slowed somewhat sequentially during the quarter. Could you provide some context around the slowdown for this brand specifically? I have a follow-up, if you don't mind.
Yes, are you looking at Schedule B? Is that what you're looking at?
Yes.
Okay.
3% depletion growth.
Yeah. Again, there was lots of things going on, lots of moving parts in the quarter. I think I've mentioned some of them in my prepared remarks, and I mentioned some when Vivien asked the question. We definitely had moving parts where we were down in Russia, and we had customers in travel retail that didn't order. We also had tough comps in Australia. They had a price increase last year in the first quarter. Or as of August 1st, there was a large buy-in there. There's some of that dynamic going on. If you look on the flip side, there's other moving parts too, in terms of looking at our developed markets. I think I would just pull back and not get hung up on Tennessee Whiskey in just one quarter.
I think what I would suggest doing is looking at our largest market, Paul spent some time on talking about the milestone we achieved in the U.S. in the quarter of 5 million cases. When I think about what we were doing in takeaway trends a year ago, that brand was actually, I think it was flat to a little bit down. If you look as the year progressed, and it has continued to hold up, the growth rates has improved. I think it was even stronger in APPA information I saw yesterday, but it's been more in the 4.5% type of growth range. I think that knowing that as a backdrop and then looking at the family number, I think you may be referring to too, realizing that it's hugely impacted by RTDs in Australia.
That's a tough market there right now, from both an economy perspective as well as just the RTD category. If you were to just strip Australia out of those numbers, you would see a nice number for the Jack Daniel's family of brands. Depletion growth, it would've been up 7% for the quarter.
As we look at the Jack Daniel's Black Label numbers for the next 9 months, we would expect, based on the factors Jane talked about, some of the seasonal stuff that occurred in travel retail, and Russia's a more difficult one to try to anticipate. We would expect that volumetrically and hopefully from a sales standpoint, to be better for the balance of the 9 months than the 1st quarter.
Okay, thank you. That's very helpful. As a follow-up, could you provide perspective on your on-premise business overall and the delta in on-premise versus off-premise growth for the quarter and looking forward?
Well, that's a country-by-country answer. Of course, sometimes we don't have the details to provide you. Our business in the U.S., the largest and most important country, we've actually been encouraged by our on-premise progress over the last six to 12 months, where it appears our brands are performing a bit better than they were in prior 12 months. Some of that, as a factor Jane mentioned, that relates to some help from the introduction of Tennessee Fire into the on-premise. That's a nice thing. It really is the skew to the American whiskeys.
Right
that is doing it, and the results on brands like Woodford Reserve, Old Forester, Jack Daniel's continuing to do well. I think, we would be, in the largest market, encouraged by some of the more recent trends in the on-premise. Honestly, something we look to for both on-premise and off-premise in this country are fuel prices. We would knock on wood that the lower fuel prices and that the expectations they would continue could continue to help support some of the recent performance in that channel.
I thought I might just build on what Paul said, too. Something he talked about at the end of our earnings release and something he talked to us about from time to time is really we started seeing a change in consumer behavior, starting right after, during the recession, and people started not going out as much, and people started changing where they had their drinking occasions. I think, we're seeing some of more blur between on-premise and off-premise. Not that on-premise is not important, but where they drink has remained changed, I believe, from when the recession hit.
Fundamentally, yeah.
Fundamentally. Yeah.
We do believe that. If you just look at the behavior of millennials, where they might've spent three or four hours at a bar for an evening, they may only be spending an hour and a half, and the first portion of it is in their apartment on the couch with their friends. The brand selections that occur in those different environments are really important, and I think that actually is a contributing factor to why the flavored whiskeys are actually doing fairly well, because they're convenient to pour and consume and don't require a lot of mixers, et cetera. I think there's some changing dynamics that may be with us for a while.
Okay, that's very interesting. Thank you. A last question, if you don't mind, is there seems to be a lot of buzz around the industry regarding Mezcal. Is that a category you'd be interested in entering through an acquisition or with el Jimador or Herradura? If you could just provide any context around that'd be helpful. Thank you.
I can take a little bit of that.
Sure.
Let Paul jump in. I would say just in general, when we look at acquisitions, we're not necessarily looking at categories. We're looking at businesses, and we're looking for brands, and we're looking for good businesses and good brands. What I mean by good businesses is that have attractive economics. Are the margins well? Are the returns well? Are they capital intensive? Hopefully not. Are they growing? Are they sustainable? Can they be globalized? We look less at the category, if you will, versus a brand and looking for a good business. I would start off with that.
Yeah.
Given our portfolio we have now, we've spent the last decade, really tweaking it.
Yeah.
More than tweaking it, I should say, because we sold off our consumer durables business. We sold off our low-value wine business. We brought in some brands in the portfolio, too, namely the tequila brands. We have, what I call now, a pure play spirits portfolio skewed to the premium end. That would be something else that we would obviously look for. It's obviously, we're skewed through American whiskey, which happens to be the place to be right today.
Yeah, I think you'll find us being fairly focused relative to our competition on particular trademarks and Probably my most direct response to the interest that's out there in Mezcal is that our response would be to focus ever more on Herradura. I think that we have so much work still to do to build awareness, distribution, velocity. Telling the story of Herradura remains very important to us. We think it can be a very significant piece of business for us in due course. It's actually showing nice traction of late. We think that interest in Mezcal might create interest as well in the Tequila category because of the flavor profiles. To your point, I think it would be shortsighted on our part not to pay attention to emerging categories and see how they might impose competitive tension or distraction for our brands in the marketplace.
These have come up from time to time, whether they're Mezcal or the Cachaça or the Japanese whiskeys are showing, in this country, some interest. I think it is worth always having a little bit in your peripheral vision, these categories, so you can see what you can learn from them. From what I can see so far from Mezcal, it makes me want to work even harder on Herradura.
Excellent. Thank you very much.
You're welcome.
Our next question comes from the line of Bill Schmitz with Deutsche Bank.
Hi, good morning.
Morning, Bill.
Morning.
Hey, do you see any short or long-term benefit from what's going on with Diageo in the U.S. on the investigation?
You want me? I'll start off with that.
Sure.
You probably have read as much as we have read on that. We only know what we've read. Only thing I can really talk about is ourselves and how we address our own business. Something that we've always done, probably for two decades now, is measure ourselves on a depletion basis, not a shipment basis. With that being said, we also not only do all of our management reporting here on that basis, but we also hold all of our sales force and employees accountable on a depletion basis. They're incentivized, if you will, on that same basis.
When you're in the business that we're in, which is the whiskey business, the whiskey-making business, something we've been in the whole time we've been around, it's very important to, there's really some art and science to it, but we've had many learnings over the many years, if you will, to be careful of how much you lay down, when you lay down, what you lay down. It's not like the white spirits, if you will. We pay a lot of attention to what the inventory levels are up at distributor level. We try, where we have information on consumer takeaway, which would be the best information, obviously, if we had that, to see what's going on in the retail level, to see when things were to get out of whack.
That's something that we constantly are looking at and are constantly aware of.
Yeah. I'll just add that the idea that I mean, I've referenced this a little bit with the point I made earlier about corporate competition. I think the effect of that, amongst many other factors, perhaps for Diageo, who you cited, is they're probably a more motivated competitor as a result of really a couple of things. One, the desire to continue to be a better company and grow. If they're doing that, of course, for a company like Brown-Forman and everybody else in the industry, creates competition.
I think the test would be whether or not it's any more significant than what we've experienced historically, because we always find that there are some competitors who are out in the marketplace, whether they manage their business by shipments or are really trying to preoccupy the retailers by getting them to spend more of their dollars on Diageo brands or somebody else's brand. That's always been a competitive force, and people who manage their business at retail differently than we might, I can't say that it's any different today than I've seen them over my career in many countries around the world, people who will do things that cause what I call competitive distraction. I think the net of a more important factor are companies who are striving to grow at rates that are higher than they currently are experiencing.
When you attempt to do that, whether it's through investments or innovation or some of these others, you just get sometimes a more formidable competitor in the marketplace. I don't know that that's any more difficult than we encounter all the time. My advice to our own people is to keep our heads down, do the right things that are right, both short, mid, and long-term for our company and our brands, and adjust where you see there's something new, particularly on the innovation front. I think that's a more compelling competitive force sometimes than the heavy discounting or stealing the retailer's dollars through loading or something like that. In any event, for us, we pay attention to it, but we're not going to be preoccupied with it.
Okay. That's really helpful. This is a question on the guidance. I think you said only 10% of your sales are emerging markets, ex Poland and Mexico. Why did you feel there's been a necessity of sort of caveating the guidance based on global economic environments? It seems like by and large, most of the developed markets, which are the bulk of your business, are still, I mean, they're not great, but they're not any more volatile than they have been in the last, I guess, two or three quarters. Is that fair?
Yeah, I think you make a good point. I think it's more the uncertainty around what might occur going forward as a result of just the skittishness that we've seen over the last, literally, week to 10 days. More impactful for our business are countries that undertake aggressive excise taxation as some policy of the country to raise revenues or whatever, that can directly impact us. No, you're absolutely correct that there's always macroeconomic forces that are working both for and against you. No, we're reacting a little bit more, I think, to just the recency of some of these market sell-offs. At this stage, and we'll see what happens, I'm not obsessed with what's going on out there. A lot of it is because our geographic diversification at the company has really been a big help for us.
The country we've been talking about here just a little bit today, Australia, which has been kind of difficult economy. It's been a difficult distilled spirits environment, and been not the leading performer for Brown-Forman more recently. I'll cite that a while back, while countries were having difficulty, whether it was in Europe or maybe the United States was not performing the way it is today, Australia was leading Brown-Forman in some ways because of the growth of our RTDs and our mainland whiskeys down there. I always try to reflect on how this geographic diversification and not putting all of our eggs in one basket can help us. It's at times like these that I'm particularly appreciative of it.
Okay, great. I appreciate it. Thank you so much.
You're welcome.
Our next question comes from the line of Ian Shackleton with Nomura.
Yeah. Good morning, Paul and Jane. Can I go back to what you were saying on FX? Well, I guess with what's happened in markets in the last couple of weeks, the FX headwinds have become a little bit more severe, and you basically kept your EPS guidance range intact. Is it a comment that the FX really hasn't moved that materially, or is it the fact that despite the fact there's more negative FX, you've got all the positives running the other way, which allows you to keep that guidance?
Ian, actually, if you were to look at the rates earlier this week, which actually went in our favor, what we ran our analysis as of was that week. The rates really hadn't changed much from when we gave the guidance at year-end, we really haven't seen much movement at all as it related to or forecasting for the year, which is a few $0.01 of headwinds for us, FX.
With it being very focused on the first half of the year.
It's very focused on the first half of the year.
Yeah.
Understood. Thank you for that. Just to follow up, with what's happening in, I guess, particularly in emerging markets but elsewhere, with currencies weakening and probably expectations of valuation coming down, do you think this starts to open the door to be a bit more aggressive on M&A in the spirits space?
Oh, yeah. I think there are certainly unique opportunities that the currency can create. I would totally agree with you there. The trick still becomes whether or not what you might be pursuing is on really on two fronts of our four A's, whether they're available and in fact attractive. As far as I'm concerned, that hasn't changed that much. The things that we would find most attractive are pretty strongly unavailable, we're not going to be preoccupied with it. It's one of the reasons we've become so focused on innovation with sort of the example of entering Irish and trying to do with that initiative, something perhaps similar to our experience on Woodford Reserve over the last 20 years. The industry continues to be in an attractive place.
It can change, and it has for some of our competitors, whether or not that creates some impetus for M&A or some opportunities for us remains to be seen.
Very useful. Just finally, is there any update? I know that the Ireland thing was quite a long-term project, is there any update on how that's progressing?
Yeah. At the end of September, we're doing a groundbreaking over there. From our original sort of 12-month plans, we're on track, which is sort of exciting around here. We're getting some product in initial packaging and brand identity work done so that we can do something concurrent while we're building out the distillery and then starting the distilling of the product and the aging of it. It'll be a concurrent process, very much the way it was at the company for Woodford Reserve back 20 years ago.
I think we're targeting the spring of 2017.
2017. Maybe a year from the end of our fiscal year, we might be entering the market.
Yeah.
Very good. Thanks for that. Thank you a lot.
You're welcome.
Our next question comes from the line of Judy Hong. Judy? Judy, your line is open.
She may be on mute. Judy?
Your next question comes from the line of Bryan Spillane.
Hey, good morning.
Hey, Bryan.
Hey, Bryan.
I guess the question, just one question. I guess it's a little bit of a follow-up to Bill Schmitz's question. If you look at what's happened in the currency markets, the commodity markets, the equity markets in the last couple of weeks, markets are essentially trying to suggest that there's been some change, right? That either growth has slowed in some of the emerging markets, China especially, also maybe even, you're beginning to hear a little bit of concern that maybe there's a risk that you even see a slowdown in the U.S. I guess my question is, as you're doing your planning, going forward now from maybe where you were when you set your plans at the beginning of the year, is there anything at all that you're seeing that suggests that there's been any kind of change as the year has gone on?
Just trying to get a sense for whether or not there's been any signals, any indications, anything that you're seeing as you look into your markets, into your plans that suggest maybe the market's shifted a little bit.
It's a good question. Actually, I think next week, I'm looking at our distillery production plans, which is always a point in time in our process to review and reflect on whether your plans have changed. Obviously unfortunately, you have to look out many years, which means you're going to be inaccurate. Here's the way I'd say it. I'll do it by three large pieces of business we sometimes dissect our business into. In the U.S., generally, I think it's a continuation of what we would have felt and seen. I think the only factor, which it could be macroeconomic indirectly, has been some of the intensifying competition, I think, would be a point I'd make.
Otherwise, we really like the growth rates that we're experiencing and the performance of the company relative to the industry, in the U.S., and we're sort of sticking with those plans. There's always an uncertainty around innovation like Jack Daniel's Tennessee Fire and where it'll settle out and all that, but we're putting forth our best effort on that. That would be one bucket. Another bucket would be how do I feel today versus maybe a year ago or so, or even six months ago, I know your question was about versus three weeks ago, about the developed market. I actually feel better, about what's happening for our company this summer and going into the fall in Europe than I did previously, as we've seen the U.K. continue to do well, Germany, France, which has continued to be just a great market for us.
Coming off of a year that was, in our financials, had a lot of transitional things going on because of the start of the company. Emerging markets, Russia, you couldn't feel better about. Now, part of that is because we, to protect our margins, took a pretty large size price increase that was related to currency, which is rare for us to take directly related to currency price increases. I think we'll have a pretty uneven month-to-month business in Russia, some because we'll be trying to figure out what's going on in that economy, how our business is being affected by it, and as people acclimate to our new price level over there. In the same vein, some of the other emerging markets are doing very, very well. Again, the diversification we have across many emerging markets is a help in that.
We're paying particular attention to Australia. It's an important country for us, and it's having some difficulties. I think as Jane said, we're just trying to understand better what's going on in our travel retail. We think there's some seasonal impact, as she explained there, but that has been a very consistent and strong performer for the company for the last many years, so we'll be paying more attention to it. On balance, when you put it all together, here's the way I'd say it, our first quarter underlying in sales and operating income basically mirrored what our forecasts are for the full year and are also a continuation of basic results we had last year. I don't see anything right now. We could change our minds if we have a global financial crisis or something like that.
I think that was the point Jane was trying to make. Nobody really knows where this is headed. We're trying to stick to our own very focused plans around our business until we see something else, though.
Thanks, Paul. Just one follow-up, I think you might have addressed this in an earlier question. Just when you talk about intensifying competition in the U.S., you're talking about just a lot of new products hitting the market, not price competition-
Yeah
Discounting.
I think that's the dominant piece. You always have pricing competitiveness, but I don't see that is at some level of intensity. I just think that because of what's happening with American whiskey and flavored whiskey and our positions in both of those so prominently, you take note when there's a lot of new entrants. It's mostly on the innovation front.
Okay. Thank you.
You're welcome.
Our next question comes from the line of Mark Swartzberg.
Yeah, thank you, and good morning, everyone. Kind of looking at it from a different angle, Paul. When I first read this press release, I looked at this 3% depletion number for the JD family, and I was concerned. When I see the plus seven for the total portfolio and the plus four from last year, it seems like el Jimador is a part of that. It seems like one can make the case that these are end demand statistics, that your portfolio is actually getting stronger on a total underlying rate of growth basis. It's a bit of a softball, I realize, but is that a reasonable way to look at it? I do want to address some of the questions I have about the slowdown in JD.
There certainly was an element of our, what I'll call rest of portfolio outside of the Jack Daniel's brand, having a very good quarter. When I say rest of portfolio, I know you're referring to Schedule B. I'm talking about everything other than Jack Daniel's.
Okay.
The tequilas had a really good quarter. That might be one of the contributing factors. Woodford Reserve, it gets larger, and the larger it gets and the more it grows at 26%, the more it makes contributions. It's not specifically called out here, but even contributions from brands like Old Forester, Sonoma-Cutrer, et cetera. Yeah, it was a good quarter for the non-Jack Daniel's brands. I also don't want to take away from the fact that we expect the Jack Daniel's family, and particularly Jack Daniel's Tennessee Whiskey, over the balance of the year, to post better numbers than the 3% that was in there. I think it's a fair comment.
It was a good quarter, there were some, as all these brands have, when you just look at 90 days at the beginning of a year, you have all kinds of things that are influencing sort of a quarterly number. I wouldn't expect, for example, our tequilas to continue to run at those rates for the full year. Nonetheless, we do think they're performing better than they were in the recent past.
Right. You did have a comparatively easy compare. Then, to your point about JD, I want to make sure I'm hearing you accurately. You think this plus 3 in the quarter from a depletion perspective accelerates as we move through the year, and that necessitates that the Black Label certainly accelerate, but perhaps too, Honey accelerates? Can you just tell me what the planning assumption is? I presume that's supported by August trends.
One of the big things is what's driving that 3% decline that you're referring to on the family, or slowdown that you're referring to, decline in the RTDs, RTPs.
Are in there, not at equivalent cases, but at their volumetric cases.
Yeah.
Yep.
We don't expect that to be the number. We'll still have tough comparisons coming from Australia.
Yeah, I think.
When we strip out Australia, the number's 7%.
You look at it, I think we've already commented on Tennessee Whiskey. On Tennessee Honey, we at least hope and plan that it will grow double digits. I posted, what is it here, 14%, underlying 18% for the quarter. I think it's off of a very large base, and the growth rates have moderated in the U.S. somewhat. Also internationally, if I look at countries like Czech Republic and Brazil and others, Tennessee Honey continues to do very well. It's always a challenge when you have new excitement for a brand like Jack Daniel's Tennessee Fire to make sure everybody's also continuing to focus on Tennessee Honey. I'll also add that it hadn't been a premier focus of the Jack Daniel's Tennessee Fire launch this year.
We thought it important to do a few international market tests, even if they're channel specific or within a country, even regionally specific. Some of the early results we're hearing back from, particularly the U.K. and Czech Republic, are quite encouraging as it relates to acceptance on the Jack Daniel's Tennessee Fire business out in those markets. As you'll recall, we did some of this with Tennessee Honey years ago. When we launched, we started in the U.S., but then began to test interest in the international markets. We used to have far more ability to control some of this, but with social media and the way that word travels today, an introduction, for example, in the U.S. by Jack Daniel's is instantly known amongst a lot of the devotees to the brand all over the world.
It becomes a little bit harder for us to manage some of that. Right now, I would say, even though it's more qualitative than anecdotal to these tests, I feel like the acceptance for Tennessee Fire in the international markets is perhaps a little better than we might have anticipated. There's a lot of factors that could influence the family's continuing performance over the balance of the 9 months. I'll remind you that the seasonality for our company really picks up in the next 6 months, over the fall and then through the holiday periods. Those will be more important to the full year than just even this first quarter.
That's great. If I could ask two quick ones on JD. Did you give us the U.S. rate of growth just for the Black Label? If not, could you give us that? Are you saying RTDs at negative four, you think moderates, or do we have several quarters of that continuing?
I think it will moderate. I think we may still see tough declines there. I don't think it'll be what we saw in the first quarter because it's going up against a price increase that we took a year ago.
Right
Where it had a buy-in.
Okay.
We did not talk about Jack Daniel's. What I referred to was NABCA's information yesterday that showed volumetric growth on Jack Daniel's Black Label, Green Label, up 4.5%.
4.5.
Yeah, I'll direct you to some of this.
That was the three months.
publicly available data. Here's just a trend line that I noted once we were sort of prepping for this, is that using just the NABCA data, not the Nielsen data, for the U.S., that one year ago, the 12-month trend for Jack Daniel's approximated -1. To date, the 12-month trend is +4.
Wow.
The three-month trend is +4, and the one-month trend was +6. As you see, as you're just traveling along, there's been some strengthening. It's very much in line with what Jane was directionally saying about the improvement in the parent brand's performance over the last 12 months.
That's very helpful. Excellent. Okay. Thank you, Paul. Thanks, Jane.
You're welcome.
Your final question comes from the line of Jon Fulcher.
Thanks. Good morning. I wanted to go back to one of the earlier questions, which was about the growth in the flavored whiskey category. One of the questions we get from investors a lot is, how do you guys avoid sort of the peak and then the fall off in flavored whiskeys that we saw in flavored vodkas from a number of years ago? I understand the supply constraints can be different on whiskey, but can you talk about the differences you're seeing in either the development or the management of the flavored whiskey category so that you avoid a sort of boom bust type cycle like maybe we saw in flavored vodkas? Thanks.
I don't know that the boom bust on flavored vodkas boom was 20 years, and it busted then more recently. The initial entries into flavored vodka back at the early days of Absolut and Stoli, to some extent, Finlandia was back around then in the U.S., goes back quite some time. It became a prominent part of the category, growing to what I recall being something like 20% or something of the total category. I think flavored vodka today, if you were to just independently review it as a category, would be huge. Of course, that took some time as well. What can we do? I can't speak as an industry. I can only speak to what we can do as a corporation, and how we responsibly develop the category and the brands.
The way that I feel about it is to treat the entrants in there, even though they, in these cases, might be line extensions as bona fide brands. When you do that, it takes you into a consideration of how are you managing, in this case, to get truly new consumption to the category. I kind of referenced this in my comments that were prepared, that the success we've had, and I'll just use the U.S. in this example, of being able to attract new consumers through both Jack Daniel's Tennessee Honey and from what we're seeing in the early days of Jack Daniel's Tennessee Fire, to not only the whiskey category, but to the Jack Daniel's brand without cannibalizing Jack Daniel's Tennessee Whiskey. I find that, and we're looking at it from a bunch of different angles.
It's very different than, say, in the soda business of diet sodas versus mainline sodas, or light beer versus mainline beer, where there, with the passage of time, was considerable cannibalization as one went up and the other went down. So far, because these are occupying quite different drinking occasions, we think if you build the brands in, I think, a constructive way and have that in mind, you will have a more prolonged existence as an expression of, in this case, the Jack Daniel's trademark. That's what we can do. I can tell you, we're not going to be introducing a brand every 3 months in order to chase numbers or something like that. It would be irresponsible to the Jack Daniel's trademark.
I think there's a statistic we've been using that Tennessee Honey by itself, when you consider brands that average retail around the world for $25 and above, is something like the 16th or 18th or something like that, largest brand, because it occupies, I think, at year-end was about 1.4 million cases, and that is a very significant amount of business. I don't want to really treat it as some line extension of Jack Daniel's. You really have to think about how it can continue to be a prominent brand in the global marketplace. I think the other thing that we have had some unique experience with here is that there's a lot of course, natural focus on this emerging 7, 8 million case, and growing flavored whiskey market in the U.S.
When you leave the U.S., Tennessee Honey has played a very prominent role, if not the lead role, in developing the flavored whiskey category outside the U.S. We think that's why we continue to test and read it very closely, so that we can expand the world that's possible for flavored whiskey from just over 300 million people to perhaps 7 billion people. We really are taking a very long-term, even though it's a really dynamic category where there's a lot of competition and a lot of change and a lot of new entrants that'll make a bunch of noise. I think we intend to continue to build it along the lines of the way we've treated Jack Daniel's Tennessee Honey with a very long-term view and trying to create incremental value for Brown-Forman. Did that help you?
It does. Thank you. One follow-up, and I apologize for sort of pressing on this. Can you walk us through, I know you talked about sort of the impact of FX on the bottom line versus the top line for the year. Can you talk a little bit about what drove the positive leverage this quarter? Was it sort of recycling some of the changes last year? Can you give us an idea on the full year, just the difference that you're thinking now, you talked about this on the last quarter, the difference that you're seeing in terms of impact on revenue versus impact on EBIT and EPS. Thanks.
Jon, just to clarify, are you talking about FX only? Is that what you're talking about?
Yes, FX only.
Yes.
A little bit of the view in terms of the impact, transactional impact on the gross margin versus offsets that you're seeing below the gross margin line.
Yeah. I think if you refer to the table that we have in our appendix, you'll see the impact on our reported results from FX of 9% on net revenues, and then you'll see the gross profit. You'll see all the pieces as you go down.
Yeah.
As you said, it gets less as you go down, obviously, because we have expenses offsetting our revenue line items. The one big thing that you're not seeing on there is something that was in our other income and expense, which is also what I was referring to, that we expect to not happen again in Q2 or Q3 and a little bit in Q4, but was mainly Q2 and Q3. We had about a $5 million number or so in the first quarter of this year in other income expense that was not.
Not repeatable.
It's not repeatable. It's not. It was one time in nature, if you will. That's what you'll see if you take all the numbers from the Schedule at the end, and then consider that $5 million going the other way, or the absence of last year's hurt because of that. Okay? Does that answer the first part of your question?
Yes, it does.
Okay. Now repeat your second part again for me.
Just again, sort of mapping out that gap and the rough order of magnitude of the gap, revenue versus EBIT and EPS over the balance of the year.
Yes. Again, if we think about headwinds, we said we're going to have a few cents of headwinds by the time we get to the end of the year. We had $0.03 or so in the quarter, that's maybe a couple more cents. What I was trying to point out is in the next quarter, because if the rates stay essentially where they were as of last week, we had another pretty good hit versus last year's second quarter at the top line, or you'll see another pretty good-sized hit on a transactional basis, if you will, for our revenue line. I was pointing that out, but I think it'll be much less time you get to the bottom line for the second quarter.
You won't see a whole lot more coming through, but I wanted to make sure that you understood that your revenues for the first half of the year are going to be challenged because of the FX comparison. Set aside the absence of the other income and expense items. I don't know if that helps.
Okay. It's just that the only thing we really need to worry about from a comp standpoint is simply that Q2 comparison.
Well, yeah. Think about it as we go into the third and fourth quarter, if the Euro was somewhere around 111,112, that's somewhere where it got to in the third and fourth quarter. It's not going to change there.
Okay.
Yes. As an example.
Great. Thank you.
You're welcome.
Thank you, Paul and Jane, and thanks to all of you for joining us today for Brown-Forman's first quarter earnings call. Please feel free to reach out to us if you have any additional questions. Have a great week.
Thanks, everybody.
Thank you. This will conclude today's conference call. You may now disconnect your line.