Earnings Call: Q2 2015

Dec 3, 2014

Welcome to the Brown Forman Second Quarter Fiscal Year 20 15 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 Thank you. I'll now turn the call over to Jay Kobal, Director of Investor Relations. Please go ahead, sir. Thank you, Lori, and good morning, everyone. I want to thank you for joining us today for Brown Forman's Q2 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 results for the Q2 of fiscal 2015, and the release can be found on our website under the section titled Investor Relations. In the press release, we have listed a number of the risk factors that you should consider in conjunction with our forward looking statements. Other significant risk factors are described in our Form 10 ks, Form 8 ks and Form 10 Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non GAAP financial measures. These measures and the reasons management believes they provide useful information to investors regarding the company's financial conditions and results of operations are contained in the press release. And with that, I will turn the call over to Jane for her prepared remarks. Jane? Thanks, Jay, and thanks for joining us for our Q2 earnings call. I'm planning on covering 2 topics today, which should leave plenty of time to address Q and A after our prepared remarks. First, I will review our first half results, including recent trends in the Q2. And second, I'll discuss our updated outlook for fiscal 2015. So let's get started by reviewing our recent results. As expected, 2nd 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 Q1 was negatively impacted by trade inventory adjustments in the United States, the United Kingdom and Germany. So let's look at the United States, where underlying net 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 20 15. And U. S. Syndicated data from Nielsen and NAPCA suggests we are accomplishing this goal. Jack Daniel's Tennessee Whiskey blended 3 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 2nd quarter, a significant improvement from the 1st 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 benefits with 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 Sahara 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 as of the large excise tax increase taken at the start of calendar 2014. Excluding Poland and Mexico, our emerging markets through underlying net sales 22% in the first half. We estimate that after accounting for retail inventory adjustments in 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 due largely to the Jack Daniel's of brands, which grew underlying net sales by 9% in the 2nd quarter, up from the 5% in the 1st 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 underlying 4%. And 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 1st 6 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 and 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 Q1 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 3 percentage points in the 2nd quarter and 1 percentage point year to date. Underlying gross profit grew faster than net sales, up 7% as improving pricemix helped drive a 40 basis point improvement in gross margin. Underlying A and P spend increased 5%, while underlying SG and A grew 10%. The increase in SG and 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 elevated SG and A growth to not subside until we move into the 4th quarter and last such items as the January 1 route to market investments we have been making in France. So putting this all together, we delivered 6% underlying income growth in the first half of fiscal twenty fifteen. 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 in the other income and expense line on in the other income and expense line on the P and L. For the first half of fiscal year, foreign exchange negatively affected operating income by $33,000,000 equivalent to a 7 percentage point hit to our operating income growth and a $0.10 drag on reported EPS, which came in at $1.67 So 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 categories development. We continue to invest in our brands, our people and our markets with an eye towards delivering market leading returns for our shareholders. And 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%. 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 1 of the largest and fastest growing opportunities expect minimal impact on our underlying net sales and underlying operating income growth rates this fiscal year. And most of the positive impact from pipeline fill in the 4th 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. So while we will remain thoughtful in how we invest in A and P and SG and A, the pace and timing of our P and 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 are expected to continue to negatively impact our reported results in the back half of fiscal twenty fifteen. We anticipate foreign exchange will adversely impact our full year operating income by approximately $45,000,000 to $50,000,000 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 Q1 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 dollars 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 point 0 $7 So 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 homeplace 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. So 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 Bram Foreman's future growth prospects and positioning in the marketplace and our continued excitement for our American Whiskey portfolio. Paul? Thanks, Jane, and 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. So this has been particularly encouraging for all of us. You would have seen that the adverse impact of foreign exchange is an unwelcome reality for the company just now, but 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 observed from our global competitive set. Now 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 of the ways in which we believe Jack does this. 1st, 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 1 of the hottest categories in our industry right now, and 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 than a more limited geographic scope might, but it also enables us 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 2 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. But we consider this a very acceptable risk for the benefits of geographic diversification. And then 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. And 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. So favorable category concentration, geographic breadth and diversification and impactful innovation, all driven by Jack Daniels, are 3 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. Spirit renaissance from your vodka competitors. So 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 some of the syndicated data that supports improved consumer takeaway. I mean, as I think about it, there are a couple things that we might point to. Of course, the category continues to do very, very well, but 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 quite aggressive in the U. S. And consistent over the last couple of years of taking price. And 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. So you put together the fact that we have improved relative pricing, even though we haven't been like dramatically lowering prices, it's just that others have caught up to us as we've been less aggressive with pricing this year. And you put that together with maybe this benefit that the consumer is seeing from lower fuel discretionary income. And I think we might be at a sweet spot where it's easier for our consumer who drinks us on occasion to trade up more frequently is maybe the bottom line. And then I would add to it entering we consciously mobilized our U. S. Sales and marketing teams in the United States with the renewed and focus on the Jack Daniel's Black Label brand. I mean, we in some ways, I would call it asserting our category leadership. I mean, 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 made it of course more competitive. And 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, the 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 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, 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? And then to follow-up on that, the implications for lapping some of the give you a little background So 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. And we don't hedge in excess of our underlying net exposures either. And we don't fully hedge our transaction exposure. So in other words, we're not in to take a get 100% all taken care of or we wouldn't go the other way and have none. So what instead we do, we do something that we call more like you're used to dollar cost averaging. So 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. And so I thought 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 And I thought I'm going to spend a minute and break it down a bit more because what I was just referring to largely centered around our transactional exposure. And 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. So 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. And so when I look at that $0.10 that we had heard our results in the first half, about half of it was due to that was if you looked at the currency shifts, as I said early on, how much they moved in just a couple of month period of time, was pretty dramatic. The other half of it, but it worked as we had planned in terms of how we hedge and what we would have been expecting in terms of our net and it is referred to as our net assets, largely cash in this case. And I think I referred to in the Q1, we had of so although that other $0.05 hit, we had a $0.02 hit in the Q1 that onetime 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 that will become bigger overseas. So 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. And that's where the nickel was coming from. So when you think about the FX and how much is ongoing versus how much is onetime in nature, I would split them in 2 pieces and then think of the rest of this year as a nickel. You're right in terms of the following year until we start lapping these rates, you'll still have some downside in that some downside in that 16% to some extent. That's terrifically. 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 and that's a big ready to drink market for you guys as well. Have you made any adjustments to your ABV? Yes. So 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 slowing their Smirnoff down to and Captain Morgan's, they did some time ago. We're already there. And so but we are having plans for our premium Jack Daniel's RTDs to reduce them to them to those rates this time, but 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 and different things like that where the alcohol products are allowed to be sold but at a a much lower rate. So 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. And so 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. So you do end up having a trade off between alcohol content and price. And so their move, in my view, is understandable. Yes. Excellent. Terrific. Thank you very much. You're welcome. Your next question comes from the line of Nik Modi of RBC Capital Markets. Good morning, everyone. Thank you. Just a couple of quick questions from me. On the pricing, it had a looked like a real nice result. I was wondering if you can break it down for us in terms of rate and mix and just provide some context around that. And then the second and third question just quickly, are you guys doing Jack Winter Jack this season? I usually buy it for Thanksgiving. I didn't see it in the stores. So just curious if you guys are going to have that back out there as we think about comparison versus a year ago. And then just the last question is that the guidance really looks like it's implying a nice acceleration in the back half of the year. And if JackFire is not really the going to be a big driver of that, I'm just curious on what will be the driver? Thanks. Yes. By the way, where do you live? We're going to make sure that in your liquor stores, we've got checked in or checked. It will be available, yes. It should be, yes. Maybe it was sold out. Yes. There you go. But yes, we are planning on selling it. In terms of pricing, recall at the beginning of the year, when we communicated that, and I think we're very much on track to deliver this price mix that we've been talking about. But we took very Paul already alluded to it. After 2 years of really hefty, strong pricing in the U. S. In 4% to 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. And so it's very low, about 1% is all we were planning. But we were still planning pricing outside U. S. And so we are still seeing pricing coming from outside the U. S. And we were expecting, I believe, when we talked about this early on that we were expecting about onethree of our growth in net sales to come from pricing for the year. So I think we're still on target on that. And then your question in terms of the acceleration on the back half of the year. I think one of the things you have to think about is what happened in the Q1. There was only a 3% growth rate in the Q1. We had tough comps in the Q1. We talked what was going on. It was largely retail inventories, if you will, and we adjusted for that. We come along we knew we were going to get an acceleration in the 2nd quarter. We grew 7% in the 2nd quarter. I don't expect that 7% to slow down for the balance of the year. So in fact, when we get to our Q4, we had a pretty weak Q4 in a couple of markets, particularly we've been talking about for some time in Poland and Germany, and we're expecting a rebound in both of those places. They had some buy ins in their Q3 of last year. And so that we're not even growth. So along with the U. S. Acceleration that we've been seeing, I mean, I think that And 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 that was slower in the Q1 than it will be through the remainder of the 9 months. So when you think about key markets in Europe and you think about the U. S. And then focus on the results of the Q2 and think about that over the remainder of the second half, it can account for the kind of guidance we're giving you. Exactly. And 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 really are we've written down very, very minimal, if any, a very small amount in the forecast. And then we know there will be a pipeline. So our reported results will get some benefit from that at the top. 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. Your 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 market outside the U. S. So 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? And then if you strip out the inventory movement, what are you really seeing from an underlying perspective? And then the second question is really related to Russia. I know it's only 2% of your business, but clearly a pretty volatile situation. So how much of risk are you factoring in as you look out for the next 6 months, 12 months? And what are you what have you noticed so far just in terms of your trend in that market? Lots of questions. Great, Judy. Yes, in terms of the what we're seeing in markets outside the U. S, particularly, you're focusing on the U. K. And Germany, and those were the 2 markets we called out in our Q1 outside the U. S. That were having some disruption in trade inventory adjustments. The U. K. Is back and balanced. And so in our numbers, they had a great second quarter, and they're back and balanced. They're growing half single digits year to date. Doing very well in Jack Daniel's Tennessee Honey for 2. Absolutely. Thanks, Paul. And then 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 a 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. And so we continue to work through the situation with them, with our retail partners in that market, but we have not worked through all that yet. So 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. And so if we take in consideration, those are the 2 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 percent underlying growth. Got it. Okay. And then the answer to the question? Yes. In Russia, yes. I think on Russia, Jane alluded to it a bit in her comments. But I think the thing that we're focused on, I mean, 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 United States. I mean, we're just continuing, as we said in the Q1, to cooperate fully. There's no news for us to report on that today. The thing that we have seen in Q2 relative to Q1 was, 1, very much prevalent in a lot of people's results is just weakening economic some hesitancy at the trade level associated with buying and putting into inventory the brands while there's uncertainty around the government's actions. So 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 sort of three factors influencing what's been going on in the last 90 Russian regulatory agencies and how that affects our business, we'll certainly bring those forward to you all. Okay. And then just following up on the national expansion of Fire. Any color just in terms of is there any changes to the approach you're taking here 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. Because it's a we're, of course, number 1, by nature, conservative on this front because we're dealing with the Jack Daniel's trademark. And I think we're just, as you would expect, and I hope you would expect it, we really want to measure not just short term, but continue to monitor long term the impact of these line extensions off of Jack Daniels. And 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 served I mean, has really served us well. Now 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 the U. S. Particularly the U. S. Right now with the flavored whiskey segment. And so 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 1,000,000 cases, approximates $25 a bottle and is growing in excess of 30%. And so 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. And so 1st 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. And I'll remind everybody, it's in year, I think, 4, 4.5, I guess, of maybe in the United States, that'd be early. Yes, starting its 4th year. So part of this is to not have these things be flash in the pan and to make sure they're nice and during profitable growing brands at Brown Forman. So 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 United States in a relatively short amount of time. So with this, we wanted to make sure that what we were doing was well received in the marketplace. And understand what it was doing to our own brand. Yes, you bet. And understand cannibalization, understand competitive reference, understand how the trade puts the brands into distribution and promotes them. So all these things that are just a little more complicated on the second one. Now 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 in test market. I mean, we've seen exceptionally strong test market results. And of course, we're reading not only what's happening volumetric 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. And I would just say, of course, 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. Now the one thing about it is the leader in this case is popular price and we're going in at the premium level and that's something we accept as a reality. But 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 a really important dimensions, at least they're very important to us, such as taste, premiumness, quality, authenticity, masculinity. So those are the types of things that we look to, to help us make these decisions. So price will always be an inhibitor for some on any product, and we would expect that to be one of the things that for any period of time would be dealing with as it relates to this particular product. But nonetheless, we've been really encouraged by what we've seen. And just remember the other thing, the results of Tennessee Fire in its test markets have been as strong or stronger than what we would have seen for Tennessee Honey in its early days. And 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. So 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 Tennessee Honey's launch. So 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. Your next question comes from the line of Bill Schmidt of Deutsche Bank. Hi, good morning. Good morning. Hey, can you just talk about cash flow in the quarter? I think a lot of it has to do with like the accrued tax liability, but it seems like you had negative cash from operations in the quarter. So can just tell us if it's timing or something else that may be the outlook for the rest of the year? Sure. So if we look at you're right. Our cash flow was down, I think, about 100 cash flow from operations is really the driver. If you look at it, it was down about 130,000,000 dollars from the same period last year. And if you think about what drove that, I think I'd like to break 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 this normal seasonality or in our case, working capital increases because we got a growing business and we're laying down more whiskey for our expected demand as we get out 3, 4, 5, 6 years from now. So set that aside, the majority of it, as you pointed out, 80% to 85% of it was due to tax payments. And essentially, really, all of it is timing. But let me explain the timing to you a bit. About 40% of that timing will clear itself out in the current fiscal year, and the remaining piece is a onetime in nature that relates to some restructuring that we did in our European business. That onetime 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. So those three things together, net to the onetime item, is really just timing, if you will. And so when we look at the rest of the year, expect our cash flows to grow year on year, if you will. And our forecast would suggest that as our business grows. So nothing unusual as you look at the rest of the year. Hope that helps you. Your next question comes from the line of Bryan Spillane of Bank of America. Hey, good morning. Good morning, Bryan. I guess just a follow-up first on Bill's question just and 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. We're still projecting somewhere in the $120,000,000 to $140,000,000 range. Okay. And then 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. And I guess just the one thing if you could help maybe shape how the environment I mean you look at all the variables that went into projecting sales over the balance of this year from where we stand today versus sort of where they would have been when the year started, are there more negatives or positives in terms of kind of what you're looking at going forward today versus maybe what you were thinking about at the beginning of the year? And I guess as I kind of go through the list in my head, it just seems like Russia and maybe some emerging markets a little bit worse, Germany maybe a touch worse from a macro perspective. But on the other hand, you've seen some positive momentum in terms of some of the actions you've taken in the U. S. And then of course, we're layering fire on. So just trying to get a sense just sort of maybe your confidence in the 6% to 8% now versus maybe where it would have been at the start of the year relative to maybe some of those headwinds and tailwinds? I'll try it. I mean, I think well, the first thing, of course, Brian, is that we've got 6 months behind us. So I think by nature, you're more confident about 6 months ahead of you versus 12. You always have the holiday season that you in this industry particularly you worry about. But I think it's about the same. I think you'd mentioned most of the and I would say they largely offset each other if I think about my own confidence level. I think U. S. Is probably stronger and it's so it's a big it's our number one country. I would say I feel stronger about it today than I would have back in, say, May or something. And but I think you're right to call out Russia and actually the prolonged nature of the excise tax increases in Poland, I would have hoped that would have been a consumer and the trade would have adjusted more rapidly than we've seen them. But again, that gives us some of the confidence in the back half because you'll go against some pretty soft comps in the Q4 there particularly. And part of it is, too, you just will be a year away from this sort of sticker shock that comes from these excise taxes. So I think you hit it about right. Mean, you had some regional reallocations. But generally, I mean, I kind of said at the beginning, I like 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 there are smaller levels, but things like Herradura continuing to do better and the other premium products, Woodford Reserve. I mean, if you just look at over the years, brand like Woodford Reserve, it's just getting bigger and bigger. And so something like that size that's growing 30% plus starts to have an impact. And so I think a lot of it will of course reevaluate this after we see the December results because it's such a big period for us. But we do think we're going to have pretty favorable comps in Q4 for the company generally. And so that gives us a lot of confidence about the range we provided today. Okay, great. That's helpful. Thanks and look forward to see you guys next week. Yes. See you then. Your next question comes from the line of Mark Forsberg of Stifel. Yeah, thanks. Good morning, Paul. Hey, Jane. And that perspective on Tennessee Fire is 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? It'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, 2 of which happened in the Q1 related to a one time item intercompany item. The other $0.03 relates to our net current assets, primarily cash in Europe, by the way, that are just denominated in euros and exchange to U. S. Dollars. So it's just the revaluation impact on that. And so 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. Yes, it does. And that's great. And then on Germany, really a follow on to Judy's question. You're talking about the 4th quarter benefiting there. Can you speak to why why you expect this down performance to reverse in the second half and into next fiscal year? So actually I would 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. So they are growing again. So that bodes well for the rest of the year, plus in that market as well as Germany. Because of the price increases, so there was a large buy in, in the Q3 in both those markets in advance of price increases on January 1. 1 was excess tax driven, that was Poland. And the second one was a price increase on in the German market on our brands. There was a large buy in in the market on both those brands in the Q3, which resulted in, of course, in Poland, the sticker shock, there wasn't buy in, in the 4th quarter. So 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 or 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, there is just the retail activity itself. The retailers in that market, I mean, the takeaway trends have been softer this year than they were a year ago. And but 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. I mean, more you and I might call it one of these sort of everyday low pricing version of that. And that always, I think, takes the marketplace time to adjust to their at the consumer level, time to adjust to new buying patterns as well. So some of those show up in our consumer takeaway numbers, of course. And so 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. And that's beyond the levels of just favorable comps because there was buy ins and then basically very low sales afterwards. But I do think some of it is that you really in the end want to focus on the consumer level. And we think just time away from those higher prices and acclimation to them held. Got it. And can you speak to order of magnitude what takeaway rates you're seeing right now in Germany? Hang on just a second. We can refer to let's see if we've got something we can refer. Yes. So Germany category is our growing whiskey category itself is growing in the mid to high single digits. And in Poland, whiskey is back growing in half single digits. So you have a very good backdrop here once you get these inventory adjustments taken care of. That's great. Yes. Okay. Yes. Okay. Yes. The inflammation of the prices, yes. That's great. Okay. And then two final ones. One is vodka segment here in the United States heading into the holidays, anything notable in terms of pricing behavior among the competition? Any changes there? And then 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 of your apps in any deals. Can you just speak to why you're not returning more cash more aggressively to shareholders? We're not returning more cash to shareholders? Yeah. Taking the opportunity to lever up a bit, nothing crazy, but get a little more leverage and return more cash? Yes. I mean, we always look at that as you've seen. I mean, we tend to look at that over much longer periods of time than just what's happening in the particular year or quarter. But I would certainly say that over the past several years, we've been returning more shareholders than, for making acquisitions returning more to shareholders than making acquisitions. And of course, that's been a good investment on behalf of the company and the shareholders. But 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. So and that's reflected in sort of the absence of really any acquisitions in some time at the company. On the by contrast, we've been very successful with innovation. So as companies think through how to win in the marketplace, you always have the opportunity to buy it or to build it. And in the case of the last few years, we've been successful in innovating. Around vodka, I mean, my general comment about that globally is it is brutally competitive right now. I mean, if you think about the large markets for it, you've got Russia, Poland, the United States as being the premier market. And we've already talked about Russia and Poland quite a bit here. So with excise taxes and people repositioning or innovating to hit lower price points, I mean, it's just very, very competitive, particularly in Poland and Russia. And then I would say over in the United States, I mean, a lot 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. And so there's it's undeniable that Tito's is the sort of leading growth brand and if not in the flavor business, It's benefiting from the organic and local and sort of craft benefit. There's and so one of the lessons that 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 in New Amsterdam. That's great. And one quick follow-up on that. On the margin here in the U. S. Price competition similar to what it was 3 months ago, what's the dynamic here in the U. S. On price in vodka? It 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. And 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. Now is this primarily impacting just the vodka sales or is it more broad based across brands? And then secondly, just on your rollout of Tennessee Fire, are we going to start seeing maybe shipments for like half the country starting in the Q3 with the majority launch in the Q4? Or is it all kind of primarily in 4Q? Thanks. On the last question, just to expect Q4, it will be sort of February and beyond for us. And on Russia, the impact, I mean, I break it into the consumer impact because of the weakening Russian economy would apply to all categories. I mean, just really, it would be difficult whatever impacts the consumer will influence their purchasing patterns generally. I mean, overall, the whiskeys in that market tend to be more premium priced than the vodkas, Janet, because there's so many local important vodka brands in Russia. But the 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 Jack Daniel's and would not have applied as much to Finlandia. So in Finlandia, we would worry more about the competitiveness in the economy in Russia. Whereas on Jack Daniel's, we worry about that. We worry about also some of these regulatory concerns we've surfaced. And on both of them, of course, for our company, you worry about the translation effect of the ruble. Got it. No, that's very helpful. And then just quickly on housekeeping. Are you still expecting the 29.5 percent tax rate for the year? Because I noticed it's a little bit higher in the Q2. Just I would pencil in just use 30%. 30%. Okay. I got it. Thanks so much. Okay. Thank you, Paul and Jane. And thanks to all of you for joining us today for our Q2 earnings call. Many of you have already RSVP'd for our Investor Day on December 10, 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's Q2 fiscal year 2015.