Earnings Call: Q4 2015

Jun 3, 2015

Morning. My name is L'Ariel, and I will be your conference operator today. At this time, I would like to welcome everyone to the 4th Quarter Fiscal 20 15 Year End 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. Thank you. I would now like to turn today's conference over to Jay Koval. Please go ahead. Thanks, Fabriel, and good morning, everyone. Your patience. We were trying to accommodate an unusually large group dialing in at the last moment for Brown Forman's year end 2015 earnings call. Joining me today are Paul Varga, our President and Chief Executive Officer Jane Moreau, Executive Vice President and Chief Financial Officer and Brian Fitzgerald, Chief Accounting Officer. This morning's conference call contains forward looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward looking statements and the company undertakes no obligation to update any of these statements whether due to new information, future events or otherwise. This morning, we issued a press release containing our results for the Q4 of fiscal 2015. The release can be found on our site under the section titled Investor Relations. In the press release, we have listed a number of the risk factors that you should consider in conjunction with our forward looking statements. Other significant risk factors are described in our Form 10 ks, 8 ks and Form 10 Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non GAAP financial measures. These measures and the reasons management believes they provide useful information to investors regarding the company's financial conditions and results of operations are contained in the press release. And with that, I'll turn the call over to Jane for her prepared remarks. Thanks, Jay, and good morning, everyone. Thanks for joining us for our year end earnings call. I'll cover 3 topics today, which should leave plenty of time for questions after our prepared remarks. First, I'll review our fiscal 2015 results, including recent trends from the 4th quarter. 2nd, I'll discuss our earnings outlook for fiscal 2016. And finally, I'll update you on our capital investment plans. So with that, let me start by reviewing our Q4. As expected, we delivered strong results in the quarter with underlying net sales up 10%. This top line growth flowed nicely to the bottom line and resulted in 22% underlying operating income growth. As a reminder, the 4th quarter benefited from soft sales comparisons and unusually high SG and A in the prior year period. These 4th quarter underlying trends lifted our full year growth rates back into the ranges that we have shared with you since the start of the fiscal year. Underlying net sales grew approximately 6.5% in fiscal 2015 with price mix and volume contributing just under 3 and 4 points respectively. Pricemix helped us deliver gross margin expansion of 60 basis points in the year and underlying operating income grew over 9% through operating expense leverage. We believe these are terrific growth rates against our public competitors who we estimate are only growing organic operating income by low single digits. Looking at our business by geography, results in the U. S. Accelerated nicely through fiscal 2015, resulting in 8% underlying net sales growth for the year. Fiscal 2015 marked the 4th consecutive year of volume share gains for Brown Forman's portfolio in the United States. Looking at the most recent blended 3 month data for Nielsen and NAPCA, Brown Forman is growing value share at 8 point 2% versus TDS growth of 6.9%. We believe we are well positioned to keep driving value share gains over the coming years given the momentum in bourbon and American whiskey. In fiscal 2015, our U. S. Team worked closely with our partners to highlight the heritage and authenticity of our leading portfolio of American whiskey brands. We ended the year with completions of just under 5,000,000 cases for Jack Daniel's Tennessee Whiskey in the United States and underlying net sales growth of 5%. The U. S. Also drove Woodford Reserve's leadership of the super premium bourbon category with 30% underlying net sales growth, roughly 10 points ahead of the category growth, as well as accelerated Old Forester, which saw a 34% jump in underlying net sales. On the innovation front, we continue to focus on creating long term value through a disciplined approach and we couldn't be more pleased with the enduring success of Jack Daniel's Tennessee Honey brand growing underlying net sales by 10% as it begins its 5th year in the U. S. Market. The brand has helped reinvigorate the entire trademark, bringing in new consumers and allowing Jack Daniel's to participate in new drinking occasions. We expect our latest innovation Jack Daniel's Tennessee Fire to be equally adept at expanding our consumer base. After several quarters of testing, we began the nationwide rollout of Tennessee Fire in the U. S. During the Q4 and the trade and consumer reaction has been even better than what we experienced with Tennessee Honey. Preliminary takeaway data suggests that the brand is tracking above Honey's results at similar points in the brand's evolution. Despite its national rollout occurring late in the fiscal year, Tennessee Fire contributed almost 2 of the 8 points of growth in full year underlying net sales in the United States. Premiumization of the Jack Daniel's portfolio has been highly complementary to our flavor innovation. And between the 2, they are increasingly important contributors to our growth. For example, in fiscal 2015, we surpassed the 2,000,000 case milestone globally for Tennessee Honey, Gentleman Jack and Single Barrel combined. These brand extensions of Jack Daniel enjoy favorable economics in addition to fast rates of growth and are meaningful drivers to the company. Moving now to non U. S. Markets. Developed markets outside the U. S. Grew underlying net sales 4% in fiscal 2015. France, the United Kingdom and Canada continue to grow at a healthy clip. As a reminder, France's reported and underlying results benefited from comparisons with last year's route to market changes as we are no longer paying an agent to distribute our products there. Excluding this change, underlying net sales in France grew 17%. Total growth in developed markets outside of the U. S. Was pulled down by 2% decline in Germany, driven by reduced trade promotional activity. Results were also sluggish in Australia where weak consumer confidence and high spirits taxation is discounting its low priced bourbon brand to drive volume growth. Our emerging markets business grew 9% with great results in Turkey, Brazil, Ukraine, Indonesia and Sub Sahara Africa. Mexico grew underlying net sales 3%, but Poland declined 7%, largely due to the prior year tax increase and subsequent trade loading. Emerging markets excluding Poland grew underlying net sales by 14%, fueled by the Jack Daniel's family of brands that grew 19%. Let's now move to a reconciliation of So while our top line grew over 6% on an underlying basis for the year, foreign exchange negatively impacted our reported net sales by 30 percentage points. An increase in net trade inventories helped reported results by 1 point due in part to the pipeline spill associated with the U. S. Launch of Jack Daniel's Tennessee Fire. Net of FX and inventory changes reported net sales grew 4%. Underlying SG and A and A and P spend increased 4% in the year with lower rates of reported growth due to a stronger dollar. Our full year growth rate in underlying SG and A is more in line with the levels we are targeting in fiscal 2016 as we continue to focus on leveraging the investments we have been making over the last few years including the recent rapid market change in France. So putting this all together, we delivered almost 9.5% growth in underlying operating income for the full year and earnings per share of 3.21 percent, up 5%. Foreign exchange was a 7 point drag on reported EPS including 3 points of transactional impact, 3 points of translational impact and 1 point driven by the higher than expected tax rate. Moving now to my second topic, our outlook for fiscal 2016. We are encouraged to see that the favorable trends that have been fueling our business over the last 4 years appears to be well entrenched and positioned to continue to for the foreseeable future. These include strong global demand for authentic American whiskey, consumer interest in flavored whiskey and continued premiumization globally. In fiscal 2016, we expect net sales growth of 6% to 7%. This range is consistent with the 6% rate we delivered in both fiscal 2014 and fiscal 2015. While fiscal 2016 won't have the 0.5 point top line benefit from the France, we're out to market change and we expect Jack Daniel's Tennessee Honey to grow at a slower rate than this past year's 28% growth. 2016 does incorporate the anticipated incremental benefit of selling Tennessee Fire in the United States for a full year. And we also anticipate to begin testing the brand in a few markets outside the U. S. This year. Looking at our outlook by geography, we expect solid momentum in the United States, improving trends in Europe, soft results in Australia and a solid contribution from our rapidly growing emerging markets. In fiscal 2016, we anticipate driving both volume growth and improved price mix. We have delivered 2 60 basis points of organic expansion over the past 3 years, but our gross margin should expand more modestly than this past year's 60 point basis point improvement given expectations for higher contribution from volume in fiscal 20 16. Gross profit growth should help drive underlying operating income growth of 8% to 10% as we expect operating expenses to grow at a slower rate than sales. Moving on to foreign exchange. The stronger dollar is forecast to negatively impact reported sales by approximately 3 to 4 points. But assuming current spot rates, we do not expect this dramatic $30,000,000 foreign exchange loss in our other income and expense lines that occurred in fiscal 2015 due to the revaluation of non U. S. Net current assets. The absence of this translational loss is expected to result in positive year over year variance that offset some of the negative transactional impact that we are currently forecasting in fiscal 2016. We also anticipate that a reduction in inventory levels will negatively impact reported sales by another point as we comp against fiscal 20 fifteen's pipeline build associated with Tennessee Fire's U. S. Launch in the Q4. This inventory reduction should be offset by a lower tax rate of 30% to 31%. And share repurchase should be accretive to the full year EPS based on past repurchases. In total, we are anticipating diluted earnings per share of $3.40 to $3.60 For sensitivity on FX, a 10% move in the dollar in either direction would impact full year EPS by approximately $0.13 Just one quick comment on the phasing of fiscal 20 16. The launch of Jack Daniel's Tennessee Fire in the Q4 of 2015 will create a challenging top line comparison in the 4th quarter of 2016. Let me now move on to the 3rd and final topic, an update on our capital investment plan. Fiscal 2015 CapEx of approximately $120,000,000 was a bit lighter than we largely due to some delayed timing into fiscal 2016. But we continue to evaluate our long term growth assumptions and the resulting opportunities to invest in meeting our future anticipated demand. This includes plans $200,000,000 in CapEx during fiscal 2016. For example, late yesterday, we announced our entry into the Irish Whiskey category, modeled up our success at Woodford Reserve. Irish Whiskey is a small, but fast growing segment and we believe the business shares many similarities to American Whiskey. The total anticipated spend for the project over the next few years is $50,000,000 and this includes building a new distillery, constructing warehouses and creating a home place for Slane Castle Irish Whiskey at the historic Slane Castle site. Additionally, our stepped up capital spending includes the Old Forester Urban Distillery as well as plans for a major bottling expansion at Jack Daniel's and the purchase of a new stave mill in Indiana. To share some perspective on the reasons to invest in our business, let's look at some of the anticipated 5 year growth rates from fiscal 20 12 to fiscal 2016. Over this period, we expect to deliver underlying net sales growth of roughly 40% and underlying volume growth of around 30%. This type of growth combined with low market shares in the majority of markets around the world reinforces our view that these investments in our organic growth are some of the highest return opportunities we possess to create value for our shareholders and we should be aggressively investing behind them. We are halfway through this stepped up investment to increase our total capacity, but still delivered an impressive return on invested capital of 22% in fiscal 2015. We expect capital spending to return toward more historic rate as we move past fiscal 2017. So in summary, fiscal 2015 was another great year for Brown Farming as we drove market leading growth, while simultaneously investing in our brands, our people and our assets. We are fortunate that our business model lends itself to visible and sustainable long term growth. We generate tremendous free cash flow, which allows us to invest in our future and return $718,000,000 of cash to our shareholders in fiscal 2015 through ongoing dividend and buyback programs. Over the last decade, we returned $4,300,000,000 to shareholders with nearly half of that occurring over the last 3 years. Other companies are capable of returning these levels of capital, but few do it at the same time that they are rapidly growing their top and bottom lines and investing in future growth at stepped up rates. We believe that this balancing act between reinvesting in the business and returning capital to shareholders is one of the reasons we have generated a market leading TSR over the last 10 years, well ahead of others in the industry and almost double the S and P 500. As we look ahead, we remain focused on delivering top tier returns for all of our stakeholders by continuing to execute on the strategy necessary to achieve our long term growth ambitions, enabled by our family control and their commitment to thrive and endure for future generations. And so with that, let me turn the call over to Paul for his comments. Thank you, Jane, and good morning, everyone. Jane, I appreciate you taking the time to recap FY 2015 and give a good detailed understanding of our forecast for FY 2016. Yesterday in preparation for this morning's call, I glanced back at my comments from the last several fiscal years and I noticed something interesting. Although I've emphasized various points in certain years or said things a bit differently each year, what was interesting was that the themes from each of these last many years were largely the same. As I read through them, some of the words and phrases that I found common were strong organic growth, high margins led by the Jack Daniel's trademark, focused portfolios of premium spirit brands, successful and impactful innovation, balanced and diversified geographic results, consistent investment behind our brands and people, long term view. I was really struck by how consistently I was using these same phrases over and over again. There are a few more worth mentioning as well. Excellent capital deployment, favorable balance of risk and reward, industry leading returns on invested capital, strong track record of financial performance and financial responsibility, top tier total shareholder returns, outperformance relative to the competition, Brown family commitment, engagement and support and of course, very importantly, diverse group of talented employees that make it all happen. So when you put them all together, I think it makes for a very nice list of ingredients in Brown Forman's recipe for success. It has been such a privilege to be able to discuss our company and its progress using phrases such as these. Know that all of us feel really fortunate. And as you can tell from our release this morning in Jane's comments just a moment ago, these same many descriptors can be applied to our FY 2015 performance. The largest exception in the last 12 months would be the impact of foreign exchange on our reported results and the drag we believe that has had on our shorter term TSR. While it is beyond our capacity to precisely forecast future currency rates, when we study the U. S. Dollar's historical value against an index of currencies, we observe that its current strength is notably beyond its historical trading range. Now foreign exchange fluctuations aside, it is also our plan for these descriptors to be the relevant themes for FY 2016 and of course we hope they remain relevant for many years to come. I want you to know however that we do not take any of them for granted. Inevitably there are years that present more challenges than others and we have had brands or countries which have struggled. We try to pay close attention to competitive forces and trends that might limit our ability to describe Brown Forman in this way. I sometimes refer to this as the company's healthy paranoia in evaluating risks and threats. As a result, in the face of economic or competitive pressures, we strive to adjust, to innovate, to be adaptive without overreacting, to be balanced, to persist, so that these enviable descriptors I've shared with you this morning will still apply when we discuss Brown Forman's progress in the future. Now before we take your questions, I thought I would touch just briefly on the news we announced yesterday about our intent to enter the premium Irish whiskey category through a blend of acquisition, innovation, partnership and investment. We believe that the premium plus Irish Whiskey segment has many of the attractive characteristics we've long admired and benefited from in premium American whiskeys and bourbons. These characteristics include excellent category and segment momentum, high gross margins with the ability to further premiumize, attractive returns on capital once sufficient scale has been achieved, shorter aging horizons relative to some categories, strong heritage in history, but with a contemporary flare, the ability to innovate within the same trademark, great usage versatility ranging from straight to mixed and very importantly still at very early stages of global development. Something we find attractive about the category that is in contrast to the American and Scotch whiskey categories is that there are simply fewer competitors in Irish whiskey today. While I expect this to change over time, this is a uniquely attractive attribute of Irish whiskey at the present time. Given the very limited number of Irish brands and distilleries in existence, along with the fact that few if any have any interest in selling, we've chosen to take this unique approach to apply our company's long term view and over time try to build something similar to what we've done with Woodford Reserve over the last 20 years or so. Needless to say, it's a very exciting opportunity for Brown Forman. When you consider this alongside our significant capital investments behind our production operations and consider the enthusiasm we have for Jack Daniel's Tennessee Fire and Tennessee Honey and consider that we believe the prevailing descriptors of Brown Forman will remain relevant and further consider that we've stepped up our share repurchase program recently, it brings into focus our belief that the best investment Brown Forman can make at this time is in Brown Forman. We will of course keep you updated on our progress as it unfolds. That concludes our remarks for the morning and thank you for listening. So we're now happy to take any of your questions. Operator, And your first question comes from Vivien Azer with Cowen and Company. Hi, good morning. Good morning. Good morning. My first question has to do with the outlook please for price mix and if you could unpack that a little bit price versus mix and how that might vary U. S. Versus international? Okay. I can take that. So we'll talk about the top line. We forecasted the growth in the 6% to 7% range. And we're forecasting that this next year we have a bit more volume than we had this past year. So volume will be a bigger contributor to our top line growth than it has been this year. But we do continue to expect price to deliver and mix to deliver in the low single digit couple of percentage points. But I will say what we're doing as it relates to pricing, we're taking nominal pricing, if you will, in the U. S. And many markets around the world. But in some markets, we are being very focused on pricing. So for instance, I'll focus on el Jimador, which is our largest full strength tequila. In the Mexico market itself, we're in our 2nd year of pretty major pricing activity. So we've got a second year, we're repositioning the brand to be more premium and really trying to improve that brand business, if you will. And we think over the long term that will improve the equity of the brand, the growth of the brand and more importantly, the returns on that brand. And so that's a place where we're focusing heavily on taking pricing. Some markets where the FX has hurt the results and where we see competitors also taking pricing such as Brazil and Russia, we're also taking pricing in those markets too. And so we're obviously very looking around, being very aware of what's going on in the marketplace and where the economics and so forth support pricing and we'll take further as things happen to improve in certain markets. But that's kind of the way we're looking at volume price mix this next year. I hope that helps. That does help. Yes. I might add one thing on this. I think it's helpful if you think about the pricing over a multiyear, I mean, if you go back a few years, we have been a little more aggressive. And I would say this year, we're leaning a little bit more on volumes and pricing and the total mix. And some of that's because as we look ahead as well, if you think about the consumer trends and their volumetric interest, particularly for the premium brands where we're already very well positioned, this is a great year for us to get volume, I think. And in future years, because of the capital investments we've been making over these last many years, we'll start to see some of the costs associated with those. I think there'll be more responsibility on our part to to cover some of that with pricing. So if you think about it over like a which we try to do over a 3 or 5 or 7 year period, once the pricing and mix, this is a particularly good year, we think. And I think our people feel that way too when we did our planning that this is a good volumetric year. And so we lean a little bit more toward that and we still get a lot of benefit from the mix we think. Yes. That's a good point Paul. Just building on Paul's point on mix. You've heard us talk about some of our brands, Jack Daniel brands exceeding 2,000,000 cases this year our premium in the Gentleman Jacks, the Single Barrels and actually the Honey brands. And those are higher priced brands if you will. Those coupled with if you get Ridgeville Reserve over 30%, those are higher priced and that mix alone as they continue to grow will help. Yes. They become effective price increases on the whiskey. Absolutely. That's terrific. My second question has to do with your outlook for advertising spending, please. Yes. So I don't have specific I think what we said, what we're looking to do next year is get from our operating some leverage between operating expenses. Most likely it will come in the form of SG and A. SG and A is the biggest of our 2 components. So we're going to continue to invest behind our people and we will continue to invest behind our brands. I think what I'd like to do is look at similar to what Paul said about pricing is to look at what we've invested over the last 5 years, particularly as it relates to SG and A and I think our stepped up investment whether it was in route to consumers in France or Turkey and Brazil and We've had invested quite a bit and we want to think this is a good year ahead to start leveraging that. As it relates to A and P, we'll continue to invest behind our brands in the markets where we think that consumers are willing to listen and where we can listen. I think one other point to make here is on dark markets. More and more markets are becoming dark. And so I think that we all need to be aware of the people are the ones building the brands in those markets. So in those markets you may see SG and A to support the A and P spend too. I think within the mix too, to support the A and P spend too. I think within the mix too, Vivian, you would as you would imagine, there's quite a bit of not quite a bit of, but reallocation has been going on within our mix of A and P investments. So like for example in the first half of this year, you would expect us to be spending more money on Jack Daniel's Tennessee Fire as it launches and we go out and support its initial reception in the marketplace. Our American whiskeys increasingly have been receiving more A and P because the trends are so favorable to them. And it might be coming like I know like for example last year it came a little bit of expenses in media budget for Southern Comfort which had not been traveling as well with its trends. So there's been some reallocations within the mix as well. But we think because of the past investments and the level we're going to have of investing behind it now, I think we're pretty comfortable that we should still get nice leverage. Terrific. Thank you very much. You're welcome. And your next question comes from John Falter with JPMorgan. Thank you. Good morning. Wanted to follow-up a little bit on some of the comments about the SG and A leverage on investment. And I guess what I'm trying to figure out is you improve the profitability per case by sort of bringing this stuff in house, but there also was I guess a level of investment in terms of building that capability. So as we look at you cycling those, is it 2 benefits as we look out to fiscal year 2016 in terms of the additional profit plus the lower spending? Or is it just sort of one benefit from that standpoint? Thanks. You might can I ask you to clarify that which benefit are you talking about? Maybe missed the first part. Are you talking about the absence or presence of the French investment? I was trying to read into your question. Well, I guess what I would say is right my understanding is the investments in France create a business that is structurally a higher profit per case business. And then along with that you have additional were there additional investments? So as we look at the leverage are there 2 things driving the SG and A leverage as opposed to just one if that makes sense? I think it let me go ahead. I'll take the first part of your question. The benefit from France happened in F 2015 in terms of our net sales benefit that will occur to you. You're not going to have another benefit and that's 16 as it relates to that. So that happens. But just to step back for a moment when we change these routes to consumers, it's really what happens is someone else was representing us in the market and we were paying them a margin. So our sales were lower at the time. Now we brought it in house. Our sales are higher and we brought the capabilities in house. And so that SG and A which started when we geared up this route to consumer about a year ago January. So we had 9 months of it in this fiscal year roughly that won't repeat itself again next year. So you will get a benefit from that next year that we won't have that year over year increase if you will. Yes. So it's now in the base and there will be less benefit to the sales line of incorporating it and less hurt to the SG and A line of hurting it in F 2016. Yes. There's no more hurt coming through. It's in the base. Just in the base. Okay. Great. Yes. Yes, it does. Thank you. Welcome. Your next question comes from Judy Hong with Goldman Sachs. Good morning, Judy. Judy, are you there? Do you have your phone on mute? Somehow lost her. Your next question comes from Robert Ottenstein with Evercore ISI. Hi, it's Eric Saroda in for Robert. Couple of questions with respect to Flavors. First on previous calls you talked about fire indexing at about 130 to 140 relative to Honey at similar stage of its development. I know you mentioned this call it's also tracking favorably. Wondering if you could put some quantification around that? And second, hoping you could you Paul could talk a bit about flavors more broadly. Diageo is having a lot of success recently with Crown Royal, Apple. Wondering how you're thinking about whether a year round Apple variant for Jack is needed or next? Any context would be greatly appreciated. Let me take the first part and you take the second part. Sure. Okay. So, yes, as we talked about injecting this Tennessee fire, it just got launched in our Q4 nationally. And we know there continues to be an enormous amount of interest in flavored as you noted in the U. S. And very pleased with Honey just completing its 4th year and having the type of growth it had this year in the U. S. Of 10%. So as we look at our read on fire, what we had communicated last quarter, we had really had just focused on our 3 test markets. And we've now since had 5 other markets that we had expanded to in October. So we got a little bit more read and we feel very good about what we're seeing. It still is in the 130% to 130% range as it relates to how it's relating to the same period of time of the Jack Daniel's Tennessee Honey launch. And so we know that cinnamon is a hot category and we have we're very cautiously optimistic about the Tennessee Fire and what it could do for us next fiscal year. And I'll turn it over to Paul to talk about flavors in general. Yes. I mean just building on what James said there. I think that as a general comment, I think we're going to continue to pace ourselves correctly, even with Tennessee Fire, which in my view sort of had a 3 stage introduction to the U. S. Market. We even there want to continue to evaluate its performance in the marketplace. As you can imagine with any Jack Daniel's product line extension in these cases, there's always initial interest in it. I mean, it's just such a big and powerful brand and people give it the benefit of trial oftentimes. And so in the test markets for Tennessee Fire, we wanted to make sure that that was repeatable that people actually would get through any barriers that might have been perceived. The biggest one oftentimes for products that are labeled flavored is whether the product in the bottle is working. And every indication we've had so far on Tennessee Fire is that in fact is. So when you move beyond that for us, I mean, it's always consider we Jack Daniel's tends to enter at very premium price points. And that's again the case here in the cinnamon world. So you're trying to test what level of consumer interest in affordability shakes out. So that's something we continue to watch. And with the national scale launch now, as the months unfold, we'll have more and more data to look at to see how that particular aspect plays out. As it relates to the increasing reference one of them, there are no plans on our part right now other than really implementing the Jack Daniel's Tennessee Fire and Jack Daniel's Tennessee Honey plans that we have in place for FY 2016. As a general, you should expect us to continue to be cautious. The Jack Daniel's Tennessee Honey sort of global rollout took 4 years. And I think with Tennessee Fire, beyond the things I've already mentioned related to what we'll evaluate there. Jane did mention these limited tests in a few of the international markets. We're going to want to look at those and read those. There's a lot of work still to be done and to be interpreted and evaluated before we consider anything beyond what we've done just now. But we will of course try to study the competitive landscape related to any flavor that's out there, so we can understand how it may impact the flavor entries we've got. So that's how we feel about it right now. Great. And just one housekeeping question, Jane. I think you gave specific guidance in terms of FX impact on net sales for fiscal 2016. I know you said that the EPS impact or the earnings impact wouldn't have that headwind of the $30,000,000 in translation balance sheet translation. Did you give specific EPS guidance as to what the year on year headwind would be for FX? I did not, Ana, but you can expect it to be some of the sense. Okay. Thank you. Thank you. And your next question comes from Tim Ramey with Pivotal Research. Good morning. Thanks. Paul, with respect to the list of superlatives that you rattled off and I mean this truly is probably the best company I've ever followed in 30 years of doing research. I did note 2 things that we frequently talked about on calls that were not talked about today, soCo and RTD. And just wondered if you'd offer up any thoughts about sort of stabilizing, reigniting growth, whatever it might be in those 2? Yes. I mean, well, thank you for the comment, number 1, and welcome to the call. I'm going to have you read it next time. Honestly, the Southern Comfort one we have talked about with regularity about challenges and part of this is a very interesting dilemma for Brown Forman. If you go back 5 or 6 years ago that Southern Comfort was one of the key targets of all this competitive flavor success that other companies were having. And to be I mean to be quite honest, our entry into flavored whiskey was a bit defensive. It was to protect Jack Daniel's and Southern Comfort and our company in some ways and Honey emerged mostly to be I mean really to be fair out of that. And then but I think our company and the people who launched it did a superb job of making it work in the marketplace in the way that it has. So Southern Comfort along the way we've been we have been actually I feel like shoring it up. I really do feel like it would have been competitively deteriorating more had we not been taking some of the steps we've taken. And as I look at the growth rates going back 7 years ago, 5 years ago, 3 years ago, some of them have moderated. And some of that's come through what I'll call innovation underneath the Southern Comfort umbrella and some of it has just been that there really is a core Southern Comfort user who likes the product in the bottle and is not going to be distracted by some of the flavor entries. And so we feel like we've done some of the best work we can do there. We had particularly with advertising and communications, we felt like we put forward a good step there. It's just competitively under assault. So I will say that from a corporate portfolio standpoint, when you add up the Southern Comfort volumes with the Jack Daniel's Tennessee Honey volumes and what we hope will be a successful Tennessee Fire volumes in the aggregate they add up to nice growth for Brown Forman's flavor portfolio as you can imagine. On the RTDs you make a point of I don't know if we mentioned we certainly mentioned it throughout the course of the year, but a lot of that's related to the difficulties of the Australia market and how competitive it's become, the difficulty really at the macroeconomic level for Australia right now, but also very much the competitive nature of PDs down there. There's been some impact from competition. Satter has done very well down there. So it's taken some of the steam out of what has been a very nice progress over more than a decade for Brown Forman largely under the Jack Daniels name of RTDs. And we're not done with innovation there. We think there's still a lot of opportunity there, particularly when you consider that against the denominator of all single serve beverage alcohol, which brings in the category of beer. So we don't quite have news to share on that today, but there's just trust that there's will be a lot of work going on to make sure our RTD business remains healthy. Great. And just one follow-up for Jane, if I could. Sure. The discussion of the 4th quarter tax rate, obviously, the quarter would have been a much better if you'd had a more normal rate. And also Old Forester up 30 some percent? Yes. All right. There you go. Can you elaborate on what I mean it sounded like you made comments I think in the release that suggests that it was getting more on premise feature. Is that correct? Yes. I'll comment on Old Forester and let Jane tackle the tax one. But yes, the Old Forester, there's this irony since you've known us for so long. The brand in some ways became so small that it became cool and relevant again because NUGS is our founding brand. And it has been sort of chugging along at the 100,000 case mark for a bunch of years. And of course everybody at Brown Forman is very passionate about it because of what it represents to the family. But it has met its time is the way I'd say it. It is an exceptional value in the marketplace for the quality of bourbon that's in the bottle and the price the consumer pays. And I think that recognition has come about. There's certainly some retro appeal to it. And I would give a lot of credit to the teams that have worked on Old Forester because the expressions of Old Forester birthday bourbon that has been out there now for many, many years have reminded people of the quality. And I was struck just within a very short amount of time this spring, we I observed somebody sent me a copy of people standing in line to get the latest release of Old Forester Birthday Bourbon right around the time that we announced that Old Forester would be flavored and be the mint julep of the Kentucky Derby. So there it was working both dimensions of the appeal of American Whiskey, both premiumizing but also adding flavor. And so I'd say Old Forester is at the sweet spot of opportunity for American Whiskey at Brown Forman. And that's why we're investing in the way we are down the historic whiskey row behind the new distillery. Okay. And Tim, just a follow-up on your question as it relates to the tax rate. It did come in a couple of points higher than what we had anticipated too. And a point of it was due really to a higher mix of our U. S. Business if you will, which unfortunately is taxed at a higher rate than we had anticipated if we had had more earnings outside the U. S. So said another way, our earnings outside the U. S. Were a little bit smaller than we had expected. That's about a point. The second point is what I would call more discrete in nature, more one time in nature and it relates to foreign exchange transactions. And I gave the forecast of 30%, 31% for 2016 is what we're assuming right now. Thanks so much. You're welcome. Thanks, Tim. And your next question comes from Bill Chappell with SunTrust. Thanks. Good morning. Good morning. Good morning. Just a couple quick questions. 1, can you give a little more color on el Jimador and kind of what was alluded to in kind of the change of the pricing in Mexico and how that's expected to kind of play out over the next few months or few quarters, I guess? Yes. We can maybe I'll start it and Jamie can add to it. Yes. I mean, I think part of it Bill is we our company is not largely in what I'll call the big local market categories. And the loan exceptions actually we probably would have referenced over the last fiscal year would be the very sizable at the popular price point el Jimador business in Mexico. And then the closest thing to that might be the Finlandia business, even though it's premium in that market to the and worldwide a lot of those segments are have been pressure for a while. And so we're not exposed to them too much and I think it's actually one of the reasons we have such nice competitive outperformance. But when we do have them, we try to improve them is the way I'd say it. And our teams in Poland and Mexico have been busy working on corrective actions. In the case of El Jimador down in Mexico, I mean, it has our attention because we just think it's not that great a business for Brown Forman at that price point. And so you get extra motivated to make sure the economics of the business improve not only trying to get the thing to grow, but also the economics of it improve. And that one is unique because it's at that price point, it's a 100% agave product, which means it has a pretty significant amount of raw material commitment behind it for multi years. And sometimes the math doesn't work for that unless you go fix it. And so part of it is like the Herradura business at a very super premium price point works pretty well, the math for Brown Forman, but down to those lower price points doesn't work as well. Even the el Jimador business in the United States works reasonably well. And because it's at a much it's a bunch more attractive price point than the Mexico price point. Now we go into that with our eyes wide open knowing that the Mexico price segment that we're in right now is ultra competitive. And so I think it's a pretty courageous thing by our company and particularly by the Mexico team to take on a very high quality product in that segment and try to generate incremental value through pricing and a different blend of pricing and volume. That's the whole idea there. And anywhere we see that in our company, we try to make sure that the businesses are attractive to us. And in that particular case, it needed some improvement. And just so I understand, is it there's new packaging Absolutely. No, no, no. Yes, you try to work the whole mix. The product continues to be 100 percent agave. I mean, the el Jimador product is exceptional. I mean, it really is across all three expressions. And so getting the value for it in the marketplace and of course we did repackage it here, I guess within the last 12 months. So there some packaging work and a lot of what I'd say trade relations and public relations that go with it. The sales force gets retrained on how to sell it. Then you try to give it the support it needs so that it can actually justify itself. In some of these instances, you're actually willing to accept lower volumes going into it. I mean, you sort of expect it, but there's a customer who won't travel with you to the higher price point. Got it. And then just on the Slane Cash Flow acquisition, is there are there any kind of dilutive cost to EPS this year? I understand the $50,000,000 is largely CapEx, but didn't know if you had start up costs or other financing costs or stuff like that would be net dilutive to your guidance this year? Very immaterial. I mean, we always are working we're working on brand positions and some of the initial development work. We're doing that kind of work all the time, but it's immaterial early on. Perfect. Thanks so much. You're welcome. And your next question comes from Ian Shackleton with Nomura. Good morning. And Paul congratulations on getting there on the Irish deal. I had a couple of questions around it if I may. Firstly, can you give us some idea pop ups to the size of the distillery? I know the family originally were looking to a much smaller investment a couple of years back and your $50,000,000 is a lot more. Can you give us some idea of how large this could be? And secondly, just from the phasing of the spend there, if I understood so Jane rightly within the $200,000,000 this year there will be a reasonable amount of the $50,000,000 but not all the $50,000,000 is that correct? Yes. I mean Jane you want to answer that last question and then I'll talk about the Yes. Anne, we plan on starting construction this summer. And the amount of money that I've announced the $50,000,000 are mentioned. It's not only for a distillery, but it's for building a couple of warehouses, which won't all happen right away as well as the home space. So of the $50,000,000 it's not even half of it, which I anticipate being spent in this fiscal year. Yes. And initial investments there is around hospitality and enabling your distilling. Those are the 2 big ones. And Ian, if I think I've got this right, I mean, I think it would enable I mean, if you're going to build it for success, it would enable us from a total capacity with that initial investment to do in excess of 500,000 cases. So I think it's 9 liter cases. So I think we would plan for success. I mean with and just to give you a scale of it, Woodford Reserve is not that large now. So and we've been at that for 20 years. So I mean, just a frame of reference. So we would be enabling a generation of development maybe is the way to think about it. That's very useful Paul. Look, just one quick follow-up. Jane, I think you answered the question on FX and EPS and you broke up. Could you just repeat what you said? Sure. What I had said was that it would be about he had asked, we're going to be by transactional as I said. We're still going to be hurt as you know there are freight sales throughout the year. And so we're still expecting a transactional negative impact, but the translational absence of the $30,000,000 from this year will offset some of it, but not all of it. So we're still expecting $0.07 hurt to EPS for fiscal 2016. Very good. Thanks for clarifying that. And your next question comes from Bill Marshall with Barclays. Hi, good morning. Hi. I was just wondering if you could give us a little bit more color on what you're seeing on the on premise versus off premise. I was hearing that maybe we've seen a little bit of a anticipating going forward? I mean, I haven't looked closely at the main numbers. I assume you're talking about the United States. Yes, yes. Yes, yes. Yes. Yes. Yes. Yes. Yes, metric. I mean, it's been ebbing and flowing a bit. Sometimes I try not to get too fixate on it because of the weather and some of these other things. But our assumption right now is that in the U. S. Market, the off premise will continue to be the driver with the on premise, at least the numbers I saw last time look more flattish as it related to traffic. So but I would continue to remind you that I just think the study of that is so interesting in the world of social media today because of the way at least in this country it appears to us that the consumption formats and locations have changed because and have been enabled by what I call the crowdsourcing ability of social media. And we've traditionally because it's convenient to do so and very important to do so bucketed it between on and off premise. But I continue to observe more anecdotally that the off premise environment increasingly is becoming many on premise environments as people host others. And some of that's affordability. Some of it is just the bang by the bottle versus by the drink is more affordable. And one thing that you hear this phrase of people warming up, so they'll assemble at each other's residences or whatever and have a drink or 2 before they go have dinner or go to a restaurant or go to a bar. And so it's almost like it's just changing patterns of consumption in the U. S. Market that I think are influential to trends and brands that might be relevant, but they also will change and show up I think over time in these metrics called just on premise and off premise. That's a good point. I would just build on what Paul had said and we haven't seen our numbers. They just came out this morning as it relates to on premise. And I agree with everything he said in terms of the change in where people are consuming and so forth. But for us, I will say through April, our results were actually trending quite well in the on premise, where we were flat over a year ago and we've been trending continue to improve month after month and both Jack Daniels and our overall company itself has been above EDF. And I think one of the big things we talked about earlier is really Old Forester. Tim Ramey mentioned Old Forester I think is growing 30 percent. It actually is the fastest growing brand we have in our portfolio and the off premise team is doing quite well. Yes. And we would expect I will tell you compared to the early experience we had on Tennessee Honey, we would expect Jack Daniel's Tennessee Fire to have a little bit more of a skew to the on premise versus the off premise. I think it will still be very off premise successful too. But I think the early reception to from what we've seen to Tennessee Fire is a little bit better development in the on premise than what we experience from Tennessee Honey. Perfect. Thank you. And then just one last question. I don't think I heard you give an update on the situation with the wood cost and the barrel making cost. And if you could just give us an update on that situation and then how that plays into your 2016 outlook and guidance? Okay. So our what we've done is it relates to that. We've taken more things under our control. We mentioned that we were investing behind a new mill in Indiana this year. And so that along with being able to be supplied with the logs around it will help us in terms of availability as well as cost. I think right now just the overall dynamics with the bourbon and whiskey just growing like is and the demand out there for new barrels, is putting pressure obviously on the cost of wood. And so with that, we've seen some stabilization, but it's definitely higher than what it's ever been. But if you flip it around and look at the other side of it, we also benefit from selling our barrels when they become used, if you will. So there's a 2 sided coin to this, if you will. We have those higher costs because they were already occurring in FY 2015 and we have those incorporated into our estimates for FY 2016. So they would be incorporated in our guidance. And yes, just I think maybe you were we if you're looking for what our cost increases for next year might be, I think we'll probably be still inflationary 2% to 3 percent range. Great. Perfect. Thank you very much. Welcome. And your next question comes from Mark Schwartzberg with Stifel Financial. Thank you and good morning. As good as the growth is and I think we can all see it and it's very reasonable for you to have the optimism you have, I want to probe on a couple areas of risk that are on my mind. One is the cinnamon whiskey category here in the U. S, you're off to a very good start. Of course, Fireball started the category. But when you look at the momentum for the category, never mind whether it's Fireball or You or another smaller brand, what are you seeing in terms of momentum in terms of consumption at the point momentum at the points of consumption for that category? Is it picking up? Is it slowing down? Is it holding steady? So that's one question I have as I kind of think about the effect of your performance a year from now with fire. And then the second is on the subject of advertising, Paul, when we talked last quarter, I think you made a very compelling case that even if you yourselves grow mid single digit in terms of advertising spend, which is lower than anticipated rates of revenue growth that's superior to your competitors. Can you talk a little bit about what is the anticipated rate in the guide for fiscal 2016 and whether there has been any change in your assumption and planning for ad spend given the anticipated rates of revenue growth? Okay. I'll try to tackle those and Jane chime in as you feel. On the slowing down, I think you would expect that the it will be interesting to see how Tennessee Fire adds to the if you were defining the sub segment called cinnamon or if you were looking at it broadly as flavored. I would say that flavored generally the leader in flavored whiskey has been decelerating, but off of very high levels. But then you would have the infusion of new entrants who continue to like Tennessee Honeybee and 1 continues to grow nicely, but then our new entrant in Cinnamon and then I think the aforementioned Crown Royal all those will be adding to the mix if you define it as flavored. Cinnamon, I would expect just because of the very large volume level of Fireball to slow down with the passage of time. And whether or not Jack Daniel's Tennessee Fire more than makes up that at the category level will have to be seen. But I would just if you just added up the volumes associated with these leading brands, I mean, you start to get bigger than entire categories that have been in existence in the United States for decades. I mean, so it really is an interesting development phenomenon for the industry that you have to pay attention to, but be very responsible about. And I think there's a I'm sure a part of your question about is this stuff just a trend is going to bust and go away. I mean, there's nothing we can do about the categories, marketing as it relates to that or the way that the consumer experiences it. We can't control that a little bit in the way we market our brands. And so one of the reasons we're being so focused on the particular 2 that we have out there right now is to try to make them enduring brands. And there are ways you can market these things that give you a better chance at that than others. And I think being at the premium end of the category helps in some levels. I think encouraging versatility and mixability in the products is another attribute. To the extent that they engage new consumers is another attribute that can make these things be more sustainable. So there are a lot of things that we'll continue to study. But I mean, I'm a bit probably like you. We're looking at it, observing it. In our case, we're trying to compete within it. But also we really don't know. But I would say so far it continues to be ultra impressive as it relates to the just sheer volumetric scale in this country particularly related to flavored whiskey. On the A and P, I think it is just continuation of what we've been saying. I mean, the alone exception to this year is probably more media around the launch of Jack Daniel's Tennessee Fire is sort of our new item. So you would expect that within the mix of Ramformin's investments. But if we're growing the way if I think back over time, if I was looking ahead, if we were growing at the rates we are in that 6% to 8% range at the sales line, I mean, I just feel like as focused as we are and with some of the influences like Jane mentioned of dark markets and the line extension benefits that you sometimes get, I think mid single digit levels of A and P for right now feel about okay. I mean, I don't feel like I do think versus at least past practices that would gain share of voice. I don't know what our competitors will do in the coming years. But over the last couple of years, I would still assess that we gained some share of voice. That's very okay, great. And if I could just kind of continue from a U. S. Perspective ask about a question that pertains to the gross margin evolution and we just got some color that was helpful on the wood costs. But on the last call we also talked about and in this call, you've talked about wanting to expand the consumer base, which brings a certain incentive not to raise prices and even to promote a bit more. As we think about the gross margin evolution here in the U. S. For the total portfolio or the Jack Daniel's family, can you just talk a little bit more about how you're thinking about that average selling price at retail and what you need to do with the family given what's going on within the larger bourbon segment, but of course what also is going on in the vodka segment? Yes. I mean, probably that's you just basically referenced the most artistic exercise that goes on in brand management. I mean, it really is. And I think on balance, so you think about that challenge within the Jack Daniel's framework and let's use your example of the United States. Simultaneously, what we're trying to do is to continue to and by the way, the brand Jack Daniel's Black Label finished in the United States in fiscal 2015 at its all time volumetric high level. I mean, it's just as a wonderful attribute of a brand that next year will celebrate its 150th year in the United States. So I mean, it's just I mean, sort of staggering to think about that and had some pricing and also was the basis for the success of Jack Daniel's Tennessee Honey, Gentleman Jack, Jack Daniel's Single Barrel, Jack Daniel's Sinatra. And so the ability the Delegate Balancing Act is continuing to advance Jack Daniel's Black Label's brand equity, its net sales, its volumetrics, while also advancing these other consumer opportunities that maybe Jack Daniel's Black Label can't so readily or easily accomplish through its own programs and they're more efficiently accomplished through line extensions in these cases. And you have to be very selective. You have to be very thoughtful. In our case, we sometimes are a little more patients than people would like, but it has worked very well for us. And the thing I would point to is the level of cannibalization that we experience is so minimal and it's because we will continue to support Jack Daniel's Black Label while we're introducing Jack Daniel's Tennessee Fire, for example. And when the line extension emphasis is on items that have higher gross margins, you effectively take the pressure off Jack Daniel's pricing and permit it to grow a little bit more volumetrically because you what you end up doing on the mix of Jack Daniel's Whiskey is get a mix increase. You get an effective price increase because of the mix. And so elements of that are at play right now and we like it. I mean, we actually like it. It's not that we're anti price increase because we believe one of the elements of making Jack Daniel's continue to be exceptionally special, well valued, is to keep its price premium. I would even refer to it today in most markets around the world as super premium. So I hope that gives you a little more color on it. It is a really artistic exercise as you can imagine. I mean, I wish we could write even a roadmap for ourselves, but you are always dealing with the influences of the competitive environment around you. And so far so good. And I think it's in our results, but it's why we get paid to do what we do every day. Yes, fair enough. Very good. Thank you, Paul. You're welcome. And your last question comes from the line of Brett Cooper with Consumer Edge Research. Hey, guys. A couple of questions. Can you just talk about the phasing of how we see Sling and Castle come to market? Phasing it coming to market, the Irish Whiskey project? Yes. So the plan on the Irish Whiskey project, if you will, is to purchase some new whiskey, if you will, that we can make our own product on From the bulk market. From the bulk market. So we plan on starting to do that in F-sixteen, hopefully put our proprietary blending and so forth with it and go to market probably in F 2017 if you will. What we're actually building now in terms of the capital and we won't have that all completed probably till F 2017 early F 2018. So we won't be distilling making our own distillate if you will until about that time. So that actual whiskey that we'll be producing with the $50,000,000 investment that I referenced won't be available till 2022. But in the meantime, we'll continue to purchase on the bulk market. Yes. So we'll have a product that we're very proud of that we haven't constructed yet that would be made and available for the 5 years while we're aging the product that we in fact can distill after 2017. So yes, I mean we did that. Some of this when you at least in my time we've only done it once, which was Woodford Reserve. When we renovated the distillery and built out the distilling capacity, you wait a few years before the distillate comes in. And so I think the key thing is to make an excellent Irish whiskey, there's very few competitors and the products themselves are generally and very genuinely of very high quality. So you're going to want to make sure you put something out there that works very, very well in the marketplace. So the standard I think for Irish whiskey is fairly high in my view. And then if I may on the pricing question, if you think about the mix that's going on in the U. S. Specifically within U. S. Whiskey, I mean, you're seeing average price per volume increases of 4% or more. I mean, how do you balance Black Label pricing with kind of the goal, I assume, of never having Black Label be equivalent price to average price volume for the average U. S. Whiskey? Well, I'd have to look at your data, but I mean it's traditionally number 1, it's so big within American Whiskey. It helps to set the price for American Whiskey. I mean, it certainly makes a big contribution. But again, I go back to that, how do we do it? I mean, we look at it literally each half year or so to make sure we're comfortable with the pricing. And I mean, there's a if you think about this American whiskey market, I mean, most of the excitement right now is if you just think about it on 2 dimensions price up and down and flavor sort of going views that across or horizontally. There's so much interest in flavor. We talked about that earlier on the call and how large that segments come. Well, Jack's participating in that and those brands by the way have excellent gross margin. We also are very much participating in the super premium and ultra premium expressions in the United States above us and that's where a lot of the growth is too. There's been less buoyant growth in this category down at those very low price points. I mean they're getting some halo effect from ultra premium arena where we're playing, where a lot of competition is playing and then in the flavor where we've also been successful. So I mean, I think all told, we will be advancing our sales dollars through the combination of and also because we also take price price increases from time to time that we think are reasonable on Jack Daniels, on Gentleman Jack, on Tennessee Honey, we take price increases on Woodford and its expression. I mean, I can't tell you how impactful it is too when you look at an individual brand. The example of Woodford Reserve, which is growing very, very well, been growing 30%, very premium price, periodically takes price increases. But the impact of introducing Woodford Reserve Double Loped at about double the price. What that does to the Woodford Reserve family's overall pricing is really exceptional. And so we're getting into a combination of them. And I think what we're highlighting a little here today is in FY 2016, we're just saying we just expect a little bit less from pricing, more from mix and in the sales composition a little bit more from volume. Thanks. Welcome. Thank you, Paul and Jane. And thanks to all of you for joining us today for Brown Forman's year end earnings call. And for those of you who are planning on attending our Jack Daniel's distillery and Cooperage tours at the end of June, we ask that you please RSVP by the end of this week, so we can make sure we have accurate counts. Thanks again for the time and have a great week. Thank you all. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you to please disconnect all lines.