Welcome to the Brown-Forman second quarter fiscal year 2015 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I'll now turn the call over to Jay Koval, Director of Investor Relations. Please go ahead, sir.
Thank you, Laurie, and good morning, everyone. I want to thank you for joining us today for Brown-Forman's second quarter 2015 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 second quarter of fiscal 2015. 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 will turn the call over to Jane for her prepared remarks. Jane?
Thanks, Jay, and thanks for joining us for our second quarter earnings call. I'm planning on covering two topics today, which should leave plenty of time to address Q&A after our prepared remarks. First, I'll review our first half results, including recent trends in the second quarter, and second, I'll discuss our updated outlook for fiscal 2015. Let's get started by reviewing our recent results. As expected, second quarter underlying net sales of 7% represented a solid acceleration from our first quarter's 3% growth and resulted in first half underlying net sales growth of approximately 5.5%. You'll recall that the first quarter was negatively impacted by trade inventory adjustments in the U.S., U.K., and Germany.
Let's look at the United States, where underlying net sales rebounded from flat sales growth in the first quarter to an increase of 10% in the second quarter as U.S. retail trade inventory levels began to normalize. This resulted in our first half underlying net sales growth of 5% in the U.S. On prior calls, we have discussed our efforts to drive a more balanced mix of price and volume growth in the United States in fiscal 2015, and U.S. syndicated data from Nielsen and NABCA suggests we are accomplishing this goal. Jack Daniel's Tennessee Whiskey blended three-month value trends are up over 6%, a 3.5 point acceleration from the 12-month trends we were experiencing at the start of the fiscal year. Lower gas prices appear to be helping to drive better on-premise trends and a modest acceleration in TDS.
Moving now to our developed markets outside of the U.S. Underlying net sales increased 8% in the second quarter, a significant improvement from the first quarter's 1% decline and driving our year-to-date underlying net sales growth of 4%. A strong sequential acceleration in underlying net sales growth in the United Kingdom led to a high single-digit increase in the first half. Underlying net sales in Germany grew slightly in the second quarter, but our year-to-date results in that market are still down mid-single digits due to continued variability in trade buying patterns. France and our Benelux markets grew double digits. Canada continued to grow nicely, while results in Japan were flat and Australia declined slightly. Underlying sales in emerging markets grew 8% year to date. Results were particularly strong in Turkey, Brazil, Ukraine, Sub-Saharan Africa, and Indonesia.
It's worth noting that our recent initiatives in South Africa are driving strong gains in a very competitive marketplace. Russia's growth stalled in October, due in part to a depreciating currency and waning consumer confidence, which have negatively impacted consumer demand in that market. Mexico's underlying net sales grew slightly in the first half, following the first quarter's growth on easy comparisons. Poland's underlying net sales declined double digits as the market continued to struggle after the large excise tax increase taken at the start of calendar 2014. Excluding Poland and Mexico, our emerging markets grew underlying net sales 22% in the first half. We estimate that after accounting for retail inventory adjustments in the U.S. and Germany, our overall first half underlying net sales grew over 6%, in line with the low end of our outlook we shared with you for fiscal 2015.
On a brand basis, our results accelerated sequentially largely to the Jack Daniel's family of brands, which grew underlying net sales by 9% in the second quarter, up from the 5% in the first quarter. Woodford Reserve and Old Forester also enjoyed strong double-digit gains as favorable dynamics continue to support the growth of our authentic American whiskey brands. Finlandia Vodka's underlying net sales declined 6% year-to-date due to continued softness in Poland. Southern Comfort's underlying net sales declined 4%. el Jimador and Herradura's underlying net sales both grew nicely in the first half, up 4% and 19% respectively. Moving now to the reconciliation of underlying to reported growth for our first six months. The big story is the rapid appreciation of the U.S. dollar, which is driving a large difference between our reported and underlying results throughout the P&L, even after considering our hedges.
The movement of our key currencies has been significant over the last few months, with most of them depreciating versus the U.S. dollar. The euro, for example, is down roughly 7% since our call for the first quarter in late August. Let's start by looking at sales, where our top line grew 5.5% on an underlying basis, fueled by equal contributions of volume growth and price mix. Foreign exchange negatively impacted our reported net sales by three percentage points in the second quarter and one percentage point year-to-date. Underlying gross profit grew faster than net sales, up 7%, as improving price mix helped drive a 40 basis point improvement in gross margin. Underlying A&P spend increased 5%, while underlying SG&A grew 10%.
The increase in SG&A was driven primarily by our France route-to-market investments, some one-time items, and the investments in our people, processes, and systems to drive our company's continued globalization. We expect elevated SG&A growth to not subside until we move into the fourth quarter and lap such items as the January 1 route-to-market investments we have been making in France. Putting this all together, we delivered 6% underlying income growth in the first half of fiscal 2015. Foreign exchange headwinds hurt our reported operating income growth more than reported sales through the combined and roughly equal effects of a transactional impact on net exposure and revaluation of net current assets denominated in foreign currencies. As our non-U.S. business has expanded, so have our overseas net assets, particularly cash, and most notably in Europe.
These revaluations are captured in the $17 million negative swing in the other income and expense line on the P&L. For the first half of fiscal year, foreign exchange negatively affected operating income by $33 million, equivalent to a seven percentage point hit to our operating income growth and a $0.10 drag on reported EPS, which came in at $1.67. Now moving on to my second and final topic for this morning, an update on our outlook for fiscal 2015. We have a significant presence in the American whiskey category, which is enjoying favorable trends. Global demand for the category continues to grow, and we believe that we have the best American whiskey portfolio in the world, measured by breadth, global appeal, and leadership of the category's development.
We continue to invest in our brands, our people, and our markets with an eye towards delivering market-leading returns for our shareholders. With consumer takeaway trends in the U.S. acting as a tailwind, coupled with our disciplined approach to innovation, we believe we are well positioned to drive long-term growth through further development of our whiskey brands. Today, we are reconfirming the ranges we shared with you for our full-year outlook for underlying net sales growth of 6% to 8%. This rate of growth would represent significant outperformance of our competitive set, given their flat to modest declines over the last 12 months. The 6% to 8% range also assumes continued momentum in our U.S. business, stable economic conditions in Europe, and no further disruption from markets such as Russia.
We also announced today the nationwide rollout of Jack Daniel's Tennessee Fire later this fiscal year after several months of strong and very positive response from consumers and the trade. We believe that this brand extension will help us seize one of the largest and fastest-growing opportunities in flavored whiskeys with a premium cinnamon flavor whiskey under the Jack Daniel's trademark. Given the time needed to gain distribution and build momentum with consumers, we expect minimal impact on our underlying net sales and underlying operating income growth rates this fiscal year. Most of the positive impact from pipeline fill in the fourth quarter will be offset by investments to support the successful launch of the brand. We also anticipate delivering 9% to 11% growth in underlying operating income.
While we will remain thoughtful in how we invest in A&P and SG&A, the pace and timing of our P&L investments will determine where within the range we land as we continue to find good opportunities to drive long-term growth through investments in our brands and our people. Moving now to foreign exchange. Assuming current spot rates as well as our existing hedges, the foreign exchange headwinds that hurt our first half reported results are expected to continue to negatively impact our reported results in the back half of fiscal 2015. We anticipate foreign exchange will adversely impact our full-year operating income by approximately $45 million to $50 million, removing 4 to 5 points from reported growth in fiscal 2015 and about $0.15 from EPS. This EPS headwind is $0.09 worse than our first quarter outlook of a $0.06 negative impact from foreign exchange.
This is the principal driver for our revised EPS outlook for the year of $3.15 to $3.35. As a sensitivity, assuming our foreign currency cash exposure collectively move 10% in either direction, our EPS over the balance of the year would be impacted by approximately $0.07. To summarize, our underlying business fundamentals remain robust, and we are confident about our future growth prospects despite the challenging trading environment for the industry. We are investing heavily to meet future demand as seen through the large-scale distillery, warehouse, and home place investments at Jack Daniel's, Woodford Reserve, and Old Forester. Meanwhile, we continue our track record of returning capital to shareholders through dividend growth, as well as our share buybacks.
Before I turn the call over to Paul for his comments, we wanted to say how much we're looking forward to spending more time with you next Wednesday, December 10 in New York, where we plan to share our perspective on Brown-Forman's future growth prospects and positioning in the marketplace, and our continued excitement for our American whiskey portfolio. Paul?
Thanks, Jane. Good morning, everybody. I'll be brief here, but just wanted to add a couple of additional comments. Overall, I was pleased with the quarter as we did see the acceleration in underlying net sales that we had anticipated when we spoke with you back in the summer. It was particularly nice to see the U.S. Jack Daniel's Black Label acceleration. It has been some time since we've seen quarterly takeaway growth in the U.S. at this level. This has been particularly encouraging for all of us. You would've seen that the adverse impact of foreign exchange is an unwelcome reality for the company just now. I am heartened by the fact that the first half underlying results generally met our expectations, and as Jane mentioned, they continue to compare quite favorably to what we observe from our global competitive set.
As we've commented many times in the past, our wonderful Jack Daniel's brand is the primary driver of this differential performance, and I'm going to cite just three of the ways in which we believe Jack does this. First, as the undisputed leader of American whiskey, premium priced or otherwise, Jack Daniel's, along with some of our other well-performing premium bourbon brands like Woodford Reserve and Old Forester, disproportionately skew the company to one of the hottest categories in our industry right now. We continue to believe that American whiskey is still at a relatively early stage of global development. Secondly, Jack Daniel's widespread global consumer appeal is the source of the company's exceptional geographic balance and diversification today.
The benefits of this geographic breadth are not only that it provides Brown-Forman with a larger consumer marketplace and much longer runway for growth than a more limited geographic scope might, but it also enables us to weather those periodic regional or country setbacks that inevitably come along over time. Poland and Russia are two such examples in the results we've reported today. This vast geographic footprint also carries with it foreign exchange volatility that is also evident today. We consider this a very acceptable risk for the benefits of geographic diversification. Third, the strength of the parent Jack Daniel's Black Label brand provides the foundation for thoughtful, meaningful line extensions such as Jack Daniel's Tennessee Honey, which has been a noteworthy contributor to the company's growth over the last few years.
With today's announcement that we'll be expanding Jack Daniel's Tennessee Fire nationally in the U.S., we are hopeful that it will follow the successful lead provided by Gentleman Jack, Tennessee Honey, and the Jack Daniel's RTDs over the last 20 years or so. Favorable category concentration, geographic breadth and diversification, and impactful innovation, all driven by Jack Daniel's, are three of the primary factors that we believe account today for our company's favorable and differential performance. Accordingly, we will continue to invest in these areas, and of course, behind the Jack Daniel's trademark. This concludes our prepared remarks for this morning, and we're now happy to take any questions that you have.
At this time, I would like to remind everyone, in order to ask a question, press star one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, press the pound key. We ask that you please pick up your handset to allow optimal sound quality. Your first question comes from the line of Vivien Azer of Cowen and Company.
Hi, good morning.
Morning, Vivien.
My first question has to do with the strong acceleration that you saw in the United States, in particular for Jack Daniel's. From time to time, we've discussed the potential for a competitive disruption to the brown spirit renaissance from your vodka competitors. Can you talk a little bit about what you're seeing from a competitive stance, in particular from the white spirit players in the market?
Sure. I mean, as I just commented, we were pleased to see this acceleration, not only in the results that Jane discussed, but also with some of the syndicated data that supports improved consumer takeaway. As I think about if there are a couple of things that we might point to, of course, the category continues to do very well. The category has been doing well for some time, and the jump that we've seen in the Jack Daniel's Black Label trends recently, we think it may be attributable to a couple of factors. One is, this year relative to past, we think we just have improved relative pricing. We had been quite aggressive in the U.S., and consistent over the last couple of years of taking price.
I think in some places around the country, we got ahead of some of our competitive set, and particularly at a time when the consumer might not have had as much disposable income. You put together the fact that we have improved relative pricing, even though we haven't been dramatically lowering prices, it's just that others have caught up to us as we've been less aggressive with pricing this year. You put that together with maybe this benefit that the consumer is seeing from lower fuel prices, which might be giving them better discretionary income. I think we might be at a sweet spot where it's easier for our consumer who drinks this on occasion to trade up more frequently, is maybe the bottom line.
I would add to it, entering FY 2015, we consciously mobilized our U.S. sales and marketing teams in the United States with a renewed focus on the Jack Daniel's Black Label brand. In some ways, I would call it asserting our category leadership. Just making sure we weren't taking for granted the fact that Brown-Forman was the leader of the American whiskey business in the United States at a time when it was booming, and that therefore it made it, of course, more competitive. I just think in some ways, through either investment focus, just the heavy reminder of the importance of Jack Daniel's Black Label to Brown-Forman in its home country at a time that's very important for the category, has really helped to focus attention promotionally, and from an investment standpoint, to also add to it.
I think the combination of that improved relative pricing, maybe an improved posture from the consumer, and then our promotional efforts around it, may be the primary factors contributing to the uptick.
That's very helpful. Thank you. Jane Morreau, thank you so much for all the color on currency. Can you just remind us what your hedging strategy is, whether it's hitting transaction, translation, a little bit of both? Then to follow up on that, the implications for lapping some of the expense hits that you're seeing right now as you go into 2016.
Sure. Just to give you a little background on our hedging philosophy, I think that's what you're asking for is, first of all, we aren't in the market for speculating about FX. We have never done that. We don't hedge in excess of our underlying net exposures either. We don't fully hedge our transactional exposure. In other words, we're not in to get 100% mitigated exposure, all taken care of, or we wouldn't go the other way and have none. What instead we do, we do something that we call more like you're used to dollar cost averaging. That we're, over any period of time, a 12-month period of time, you would see about 50% of our transactional exposure, if you will, hedged.
While I'm here, I thought I might just spend a little bit more talking about FX, because I'm sure there's going to be more color to this, and thinking about what happened in our first half of the year, the $0.10. I thought I would spend a minute and break it down a bit more, because what I was just referring to largely centered around our transactional exposure. Our transactional exposure I'm referring to is really our business, our ongoing business, our sales of our product, less the expenses to sell those products. Our people, our advertising and spending that we would do in foreign currency, as well as any costs that might be incurred in a local market.
When I look at that $0.10 that we had hurt our results in the first half, about half of it was due to that. If you looked at the currency shifts, as I said early on, how much they moved in just a couple of months period of time was pretty dramatic. It worked as we had planned in terms of how we hedge and what we would have been expecting in terms of our net exposure. The other half of it is what I was referring to that shows up on the other income and expense line item, it is referred to as our net assets, largely cash in this case. I think I referred to, in the first quarter, we had I saw all of that other $0.05 hit.
We had a $0.02 hit in the first quarter that was one time in nature that related to an intercompany transaction. The remaining $0.03 is really driven by the revaluation of cash balances that we have growing cash balances, so we've become bigger overseas. When I look ahead and think about what to expect for the rest of the year, this piece that I'm talking about, this $0.05 piece I'm talking about, I would say that that is done and behind us. It's the transactional piece that you still have exposure on, meaning at today's spot rates, and you compare to what we're looking to do for the rest of the year compared to those spot rates, you got downside. That's where the $0.05 was that was coming from.
When you think about the FX and how much is ongoing versus how much is one time in nature, I would split them in two pieces and then think of the rest of this year, as a $0.05. You're right in terms of the following year. Until we start lapping these rates, you'll still have some downside in that 2016. Some exposure.
That's perfectly, that's very helpful. My last question has to do on Australia. I think recently Diageo announced that they had reduced the ABV on some of their ready-to-drink products. I know that's a big ready-to-drink market for you guys as well. Have you guys made any adjustments to your ABV?
Yeah. Vivien, that's something that we constantly look at. We're looking at our proof and consumers and what they're looking for and what they see in the products and what they're wanting in our products all the time. We actually are currently, and have been for a number of years, SoCo RTDs, our Southern Comfort RTDs in that market, have been at that rate that Diageo is lowering their Smirnoff down to and Captain Morgan, they did some time ago. We're already there. We don't have any plans for our premium Jack Daniel's RTDs to reduce them to those rates this time. It's an ongoing thing that we always look at and consider the consumers while we're at it.
It's interesting to note, we do have an RTD, that we do have at a lower proof than even the Diageo one, and it's more for special events where your camps and mining, different things like that, where the alcohol products are allowed to be sold, but at a much lower rate. But no plans right now.
I'll tell you, I will add that that move by Diageo is, I suspect, a direct reflection of them trying to remain competitive given what's been going on in that country with what I consider to be excessive excise taxation. One of the tools available to any of the brand owners is to reformulate in order to make the products to continue to be affordable and attractive to consumers. You do end up having a trade-off between alcohol content and price. Their move, in my view, is understandable.
Yeah. Absolutely.
Terrific. Thank you very much.
You're welcome.
You're welcome.
Our next question comes from the line of Nik Modi of RBC Capital Markets.
Good morning, everyone. Thank you. Just a couple quick questions from me. On the pricing, how to look like a real nice result, just was wondering if you can break it down for us in terms of rate and mix and just provide some context around that. The second and third question, just quickly, are you guys doing Winter Jack this season? I usually buy it for Thanksgiving. I didn't see it in the store, so just curious if you guys are going to have that back out there, as we think about comparison versus a year ago. The last question is, the guidance really looks like it's implying a nice acceleration in the back half of the year. If Jack Fire is not really going to be a big driver of that, I'm just curious on what will be the driver. Thanks.
Yep. By the way, where do you live? We're going to make sure that in your liquor stores, we've got Jack Daniel's Winter Jack.
Yeah, it will be available. Yeah.
It should be.
Maybe it was sold out.
Yeah. There you go. We are planning on selling it. In terms of the pricing, recall at the beginning of the year, when we communicated that. I think we're very much on track to deliver this price mix that we've been talking about. We took very. Paul already alluded to it. After 2 years of really hefty, strong pricing in the U.S., in the 4%-5% range, 2 consecutive years of those rates, we chose in the U.S. to moderate, take time out, get some of the competitors to catch up from a relative perspective. It was very low, about 1% is all we were planning. We were still planning pricing outside the U.S. We are still seeing pricing coming from outside the U.S.
We were expecting, I believe, when we talked about this early on, that we were expecting about a third of our growth in net sales to come from pricing for the year. I think we're still on target on that. Your question in terms of the acceleration on the back half of the year. I think one of the things that you have to think about is what happened in the first quarter. There was only a 3% growth rate in the first quarter. We had tough comps in the first quarter. We talked what was going on. It was largely retail inventories, if you will. We adjusted for that. We knew we were going to get an acceleration in the second quarter. We grew 7% in the second quarter.
I do not expect that 7% to slow down for the balance of the year. In fact, when we get to our fourth quarter, we had a pretty weak fourth quarter in a couple of markets. Particularly, we've been talking about for some time in Poland and Germany. We're expecting a rebound in both of those places. They had some buy-ins in their third quarter of last year. We're not even including Fire in it. These are the things that we're talking about that will give us a lift in our sales growth.
Along with the U.S. acceleration that we've been seeing.
the U.S. momentum
we're certainly dependent on that continued performance in the U.S. from Jack Daniel's Black Label is one of the contributing factors. Whereas, again, it was another piece of the business.
Was slowing
was slower in the first quarter than it will be through the remainder of the nine months. When you think about key markets in Europe and you think about the U.S. and then focus on the results of the second quarter and think about that over the remainder of the second half, it can account for the kind of guidance we're giving you.
Yes. Exactly. Back on your question on Fire, though, again, just to reiterate what we said in terms of the timing of this. This is a late fiscal year introduction. The time that it's going to take to get into the system from a distribution and really for the consumer to start pulling in and so forth like that, we've written down.
Very minimal.
Very minimal, if any, a very small amount in the forecast. We know there will be a pipeline. Our reported results will get some benefit from that at the top, but by the time you get to the bottom, it's minimal too because we want to introduce this brand in the best way we can and to be successful, and thus we're investing a lot to support the launch.
Perfect. Thank you so much.
You're welcome.
Our next question comes from the line of Judy Hong of Goldman Sachs.
Thank you. Good morning, everyone. I had a couple of questions really more around your markets outside the U.S. First, maybe just touch on the U.K. and Germany, related to number 1, if all of the trade inventory volatility, if that's behind us now, so we see more normalized buying patterns going forward. If you strip out the inventory movement, what are you really seeing from an underlying perspective? The second question is really related to Russia. I know it's only 2% of your business, but clearly a pretty volatile situation. How much of risk are you factoring in as you look out for the next six months, 12 months? What have you noticed so far just in terms of your trends in that market?
Lots of questions. Great, Judy. In terms of what we're seeing in the markets outside the U.S., particularly you're focusing on the U.K. and Germany, and those were the two markets we called out in our first quarter outside the U.S. that were having some disruptions in trade inventory adjustments. The U.K. is back in balance. In our numbers, they had a great second quarter, and they're back in balance. They're growing half single digits year to date.
Doing very well in Jack Daniel's Tennessee Honey too.
Absolutely. Thanks, Paul. Germany is still going through a period of, I would call it, buying disruptions, if you will. It's an interesting market right now. The economy is pretty difficult. We have set forward for ourself what we believe is the right strategy as it relates to the price positioning of our brands. The retail market there, as you can imagine, is very challenged with the economy and looking to take prices down. We continue to work through this situation with them, with our retail partners in that market. We have not worked through all that yet. As I've noted in our script today, we still have a little bit of hangover, if you will, from retail adjustments in the U.S. and in Germany.
If we take into consideration, those are the two primary markets left that we have that occurring in. If you take the 5.5% underlying growth that we reported this morning and adjust for these two things, you're over 6% underlying growth.
Got it. Okay.
Was that your question? Oh, forget your question.
Yeah, and Russia. Yep.
I think on Russia, Jane alluded to it a bit in her comments, but I think the thing that we're focused on, it's a place where of course as it relates to any relevance for our company as it relates to the trade disputes that are going on between Russia and the U.S. We're continuing, as we said in the first quarter, to cooperate fully. There's no news for us to report on that today. The thing that we would have seen in Q2 relative to Q1 was, one, very much prevalent in a lot of people's results is just weakening economic conditions within Russia associated with the consumer level. Also for brands who'd been in the press, like some of ours, some hesitancy at the trade level associated with buying and putting into inventory the brands while there's uncertainty around the government's action.
I think the combination of those, then you add to it, when you look at our reported results, what's happened with the ruble, you get three factors influencing what's been going on in the last 90 days in Russia for us. As we have updates to report on anything as it relates to the Russian regulatory agencies and how that affects our business, we'll certainly bring those forward to you all.
Just following up on the national expansion of Fire. Any color just in terms of, if there are any changes to the approach you're taking here versus Honey, whether it's faster rollout of the national expansion, given that you've already invested behind the Honey flavor line, is there less investments to be made here? Just any color just in terms of the difference between how you're approaching Fire expansion versus Honey.
Sure. Let me give you a little background on this. We're of course, number 1, by nature, conservative on this front because we're dealing with the Jack Daniel's trademark. I think we're just, as you would expect, and I hope you would expect, that we really want to measure not just short term, but continue to monitor long term, the impact of these line extensions off of Jack Daniel's. I think one of the reasons we've largely, over a very long period of time, done it well is because the conservative approach to it has really served us well. Having said that, there's this, what we think, a great opportunity out there for Jack Daniel's Tennessee Fire associated with what's going on in, particularly, the U.S. right now with the flavored whiskey segment.
I'll just draw a couple of comparisons between Tennessee Fire and Tennessee Honey. One is that Tennessee Honey itself is a brand that today is in excess of 1 million cases, approximates $25 a bottle, and is growing in excess of 30%. Number 1, we just think we want to make sure we keep our eye on that because the statistics I just cited there, those three things are very unusual to have brands of that size at that price point, at that growth rate. First and foremost, we wanted to make sure, and continue to make sure, that Jack Daniel's Tennessee Honey has every opportunity to realize its full potential. I remind everybody, it's in year, I think four and a half, I guess, of maybe in the United States, it'd be-
Starting its fourth.
Yeah, starting its fourth year. Part of this is to not have these things be flash in the pan and to make sure they're nice, enduring, profitable, growing brands at Brown-Forman. If you think about that, then you approach Tennessee Fire, it being a second line extension in the flavored area, in a short amount of time. We're being cautious, that's why we went and tested it. For Jack Daniel's Tennessee Honey, we immediately went to a launch nationally in the U.S. in a relatively short amount of time. With this, we wanted to make sure that what we were doing was well received in the consumer marketplace.
Understand what it was doing to our own brand.
Yeah, you bet. Understand cannibalization, understand competitive reference, understand how the trade puts the brands into distribution and promotes them. All these things that just are a little more complicated on the second one. The one thing I will say that is really encouraging to us, that has sort of enabled us to go ahead and announce the national rollout, is how well it has done in test market. We've seen exceptionally strong test market results. Of course, we're reading not only what's happening volumetrically in the marketplace with sales and trial and all that, but really also focusing in on brand equity perceptions, doing a couple of ways of research to understand how the consumer is viewing Tennessee Fire.
I would just say, of course, one of the most important things that really points to great opportunity is that there's already a very large player in the cinnamon whiskey market that is both a potential source of volume, but also creates the opportunity for additional entrants. The one thing about it is the leader in this case is popular price, and we're going in at the premium level. That's something we accept as a reality. Even with that, one thing that we've learned from the research is that Jack Daniel's Tennessee Fire, against the marketplace today, is seen as having great advantage on really important dimensions, at least they're very important to us, such as taste, premiumness, quality, authenticity, masculinity. Those are the types of things that we look to help us make these decisions.
Price will always be an inhibitor for some on any product, and we would expect that to be one of the things that we, for any period of time, would be dealing with as it relates to this particular product. Nonetheless, we've been really encouraged by what we've seen. Just remember the other thing, the results of Jack Daniel's Tennessee Fire, in its test markets have been as strong or stronger than what we would've seen for Jack Daniel's Tennessee Honey in its early days. What really heartens us is that we really have had no media support behind it to speak of. It's mostly been promotional, some social media, and word of mouth, and in store. As we go national, we think there's an opportunity to build awareness and appeal at a higher level, similar to what we did with Jack Daniel's Tennessee Honey's launch.
I hope that gives you some background on why we've approached it the way we have. We'll continue to be both enthusiastic and optimistic about it, but also appropriately conservative about it.
Thank you. That's helpful.
You're welcome.
Our next question comes from the line of Bill Schmitz of Deutsche Bank.
Hi, good morning.
Good morning.
Bill.
Hey, can you just talk about cash flow in the quarter? I think a lot of it has to do with the accrued tax liability, but it seems like you had negative cash from operations in that quarter. Can you just tell us if it's timing or something else, maybe the outlook for the rest of the year?
Sure. You're right. Our cash flow was down, I think about Cash flow from operations, is really the driver if you look at it. It was down about $130 million from the same period last year. If you think about what drove that, I like to break it down in a couple of buckets. The first piece is what you would expect. You're going to have a small piece of it just due to just normal seasonality or, in our case, working capital increases because we've got a growing business, and we're laying down more whiskey for our expected demand as we get out three, four, five, six years from now. Set that aside. The majority of it, as you pointed out, 80%-85% of it was due to tax payments.
Essentially, really all of it is timing. Let me explain the timing to you a bit. About 40% of that timing will clear itself out in the current fiscal year. The remaining piece is of one-time in nature that relates to some restructuring that we did in our European business. That one-time item is really spread over this year, where we had a payment that we made, last year where we got a benefit, and next year where we're going to get a small benefit. Those three things together, net to the one-time item, is really just timing, if you will. When we look at the rest of the year, expect our cash flows to grow year-over-year, if you will. Our forecast would suggest that as our business grows.
Nothing unusual as you look at the rest of the year. Hope that helps you.
Our next question comes from the line of Bryan Spillane of Bank of America.
Hey, good morning.
Good morning. Hey, Brian.
I guess just a follow-up first on Bill's question. I might have missed it, but did you give an update on your capital spending guidance for the year?
I did not, but I'll be glad to.
Thank you.
We're still projecting somewhere in the $120 million-$140 million range.
Okay. I guess, a second question just related to some of the earlier questions you had related to the sales outlook for the balance of the year. I guess, just the one thing, if you could help maybe shape how the environment, when you look at all the variables that went into projecting sales over the balance of this year from where we stand today versus where they would've been when the year started. Are there more negatives or positives in terms of what you're looking at going forward today versus maybe what you were thinking about at the beginning of the year? I guess, as I go through the list in my head, it just seems like Russia and maybe some emerging markets are a little bit worse. Germany, maybe a touch worse from a macro perspective.
On the other hand, you've seen some positive momentum in terms of some of the actions you've taken in the U.S. Of course, we're layering Fire on. Just trying to get a sense, just maybe your confidence in the 6%-8% now versus maybe where it would've been at the start of the year relative to maybe some of those headwinds and tailwinds.
I'll try it. Well, the first thing, of course, Brian, is that we've got six months behind us. I think by nature, you're more confident about six months ahead of you versus 12. You always have the holiday season, in this industry particularly, you worry about. I think it's about the same. I think you'd mentioned most of the-- and I would say they've largely offset each other. If I think about my own confidence level, I think U.S. is probably stronger, and it's our number one country. I would say I feel stronger about it today than I would've back in, say, May or something. I think you're right to call out Russia and, actually, the prolonged nature of the excise tax increases in Poland. I would've hoped that the consumer and the trade would've adjusted more rapidly than we've seen them.
Again, that gives us some of the confidence in the back half because you'll go against some pretty soft comps in the fourth quarter there particularly. Part of it is too, you just will be a year away from this sticker shock that comes from these excise taxes. I think you hit it about right. You have some regional reallocations, generally, I said at the beginning, I continue to like the balance of our growth across the globe, and that diversification we have allows us to make adjustments. The other thing is, they're smaller levels, but things like Herradura continuing to do better and the other premium products, Woodford Reserve. If you just look at over the years, particularly a brand like Woodford Reserve, it's just getting bigger and bigger.
Something like it at that size that's growing 30% plus starts to have an impact. I think a lot of it, we'll, of course, reevaluate this after we see the December results because it's such a big period for us. We do think we're going to have pretty favorable comps in Q4 for the company generally. That gives us a lot of confidence about the range we've provided today.
Okay, great. That's helpful. Thanks. I look forward to seeing you guys next week.
Yeah. See you then.
Once again, if you'd like to ask a question, please press star one. Your next question comes from the line of Mark Swartzberg of Stifel.
Yeah, thanks. Good morning, Paul. Hey, Jane. That perspective on Jack Daniel's Tennessee Fire was very helpful, Paul, so thank you for that. I guess a few questions. Firstly, Jane, the $0.05 you mentioned from FX in the quarter. Could you just repeat what that was that's not going to be recurring here, at least as far as you can tell for the second half?
Sure. The $0.05 that I was referring to was actually the first half, $0.02 of which happened in the first quarter related to a one-time intercompany item. The other $0.03 relates to our net current assets, primarily cash in Europe, by the way. That are just denominated in EUR and exchanged to USD. It's just the revaluation impact on that. Again, we have to use today's spot and say, "Okay, here's what your exposure is," and we've got that all captured. Whereas if you look at your transactional aspect of it at today's spot rate, you still have downside relative to the prior year as a result of the spot rate.
Got it. Great.
Does that help? Yes.
Yeah, it does. That's great. Then on Germany, really a follow-on to Judy's question. You're talking about the fourth quarter benefiting there. Can you speak to takeaway or give us a little more color on why you expect this down performance to reverse in the second half and into next fiscal year?
Actually, I want to start with Poland. We actually have seen some recent takeaway trends that are showing some positive improvement on both Finlandia and Jack from a takeaway perspective. They are growing again. That bodes well for the rest of the year. Plus, in that market, as well as Germany, because of the price increases, there was a large buy-in in the third quarter in both those markets in advance of price increases on January 1st. One was excess tax-driven, that was Poland, and the second one was a price increase in the German market on our brands. There was large buy-in in the market on both those brands in the third quarter, which resulted in, of course, in Poland, the sticker shock. There was very little activity was going on .
We know we'll get back in balance in terms of our inventory levels, and if we see takeaway trends accelerating, we would expect to see our results to have a benefit, not only cycling against a weak comp where no activity was going on, or very little activity was going on, to where we're seeing some growth now.
I also think in Germany, just the retail activity itself, is the retailers in that market. The takeaway trends have been softer this year than they were a year ago. Part of it, I think, is associated with, there's some very large retailers there, and a couple have changed. One particular has changed their manner of which they price to the consumer. You and I might call it one of these everyday low pricing, a version of that. That always, I think, takes the marketplace time to adjust, at the consumer level, time to adjust to new buying patterns as well. Some of those show up in our consumer takeaway numbers, of course. I think part of it is just time away from higher prices. As you move from month-to-month or quarter-to-quarter, I think your confidence level raises.
That's beyond the levels of just favorable comps because there was buy-ins and then basically very low sales afterwards. I do think some of it is you really, in the end, want to focus on the consumer level. We think just time away from those higher prices and acclimation to them helps.
Got it. Can you speak to order of magnitude, what takeaway rates you're seeing right now in Germany?
Hang on just a second. Let's see if we've got something we can refer to.
Yeah. Germany whiskey category itself is growing in the mid to high single digits.
Okay.
In Poland, whiskey is back growing in high single digits.
You have a very good backdrop here once you get these inventory adjustments taken care of. That's great. Okay.
Yeah. Acclimation to prices. Yeah.
That's great. Okay. Two final ones. One is vodka segment here in the U.S. heading into the holidays. Anything notable in terms of pricing behavior among the competition? Any changes there? Finally, capital allocation. You authorized another round of repurchase. You're below one times EBITDA in terms of leverage. I think you're going to continue to be below one times when you look out at your acquisitions and any deals. Can you just speak to why you're not returning more cash, more aggressively to shareholders?
How we're not returning more cash to shareholders?
Yeah.
I think it-
Taking the opportunity to lever up a bit. Nothing crazy, but get a little more leverage and return more cash.
Yeah, we always look at that as you've seen. We tend to look at that over much longer periods of time than just what's happening in the particular year or quarter. I would certainly say that over the past several years, we've been returning more to shareholders than making acquisitions, and of course, that's been a good investment on behalf of the company and the shareholders. We'll always look at that. I just think that compared to what we've seen out there as the uses of cash, particularly around the acquisition area, it's been pretty thin as it relates to things that we found attractive and advisable. That's reflected in the absence of really any acquisitions in some time at the company. By contrast, we've been very successful with innovation.
As companies think through how to win in the marketplace, you always have the opportunity to buy it or to build it. In the case of the last few years, we've been successful in innovating. Around vodka, my general comment about that globally is it is brutally competitive right now. If you think about the large markets for it, you've got Russia, Poland, the U.S. as being the premier markets, and we've already talked about Russia and Poland quite a bit here. With excise taxes and people repositioning or innovating to hit lower price points I mean, it's just very competitive, particularly in Poland and Russia. Then I would say over in the U.S., it's really been interesting to watch. It's harder to get prices these days.
The flavored aspect of the U.S. vodka market has gone soft here in the last couple of years, and the winning brands happen to be coming from, as was the case 5 years ago, to the established brands from upstarts. It's undeniable that Tito's is the sort of leading growth brand, and it's not in the flavored business. It's benefiting from the organic and local and sort of craft benefit. One of the lessons you see over time from vodka is that once you think you have an established brand, because there's very few barriers to entry, particularly in this U.S. market, you really see new brands come in and capture the imagination of the consumer. It's true of both Tito's and this Gallo entrant, New Amsterdam.
That's great. One quick follow-up on that. On the margin here in the U.S., price competition similar to what it was three months ago? What's the dynamic here in the U.S. on price in vodka?
Looks stable. I mean, tough to get prices, it looks like to me. I think the big dynamic that's influencing growth in vodka right now is the flavors have, in terms of their ability to add to growth versus the prior years, have become soft.
Yeah.
It's always been the case that the ability to get price in whiskey was far greater than it was in vodka in most of the key markets.
Got it. Great. Thank you, Paul. Thanks, Jane.
You're welcome.
The final question comes from the line of Bill Chappell of SunTrust.
Hey, guys. This is actually Stephanie on for Bill. Just kind of going off Judy's question earlier. First, in terms of what's going on in Russia, is this primarily impacting just the vodka sales or is it more broad-based across brands? Secondly, just on your rollout of Jack Daniel's Tennessee Fire, are we going to start seeing maybe shipments for half the country starting in the third quarter with the majority of the launch in the fourth quarter? Or is it all kind of primarily in 4Q? Thanks.
On the last question, you should expect Q4.
Yeah.
It'll be sort of February and beyond for us.
On Russia, the impact, I'd break it into the consumer impact because of the weakening Russian economy would apply to all categories. I mean, it would be difficult. Whatever impacts the consumer will influence their purchasing patterns generally. Overall, the whiskeys in that market tend to be more premium priced than the vodkas, Jenna, because there's so many local important vodka brands in Russia. As it relates to our company, some of the concerns and risks we've identified through this first half have been more associated with some of the things that have been in the public side related to Jack Daniel's and would not have applied as much to Finlandia. On Finlandia, we would worry more about the competitiveness and the economy in Russia. On Jack Daniel's, we'd worry about that. We'd worry about also some of these regulatory concerns we've surfaced.
On both of them, of course, for our company, worry about the translation effect of the ruble.
Got it. No, that's very helpful. Then just quickly on housekeeping, are you still expecting the 29.5% tax rate for the year? I noticed it was a little bit higher in the second quarter.
Yeah. I would pencil in, just use 30%.
30? Okay.
Yeah.
I got it. Thanks so much.
Okay.
Okay. Thank you, Paul and Jane, and thanks to all of you for joining us today for our second quarter earnings call. Many of you have already RSVP'd for our Investor Day on December 10th, but for those of you who haven't yet, please feel free to follow up after our call, and we'll make sure you have all the details. Have a great week, and we look forward to seeing you next week in New York.
Thanks.
Thanks.
Thank you for participating in the Brown-Forman second quarter fiscal year 2015.