Earnings Call: Q1 2015

Aug 27, 2014

Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brown Forman First Quarter Fiscal 2015 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 would now like to turn today's conference over to Mr. Jay Koval, Director of Investor Relations. Please go ahead, sir. Thanks, Jody, and good morning, everyone. I want to thank you for joining us today for Brown Forman's Q1 2015 earnings call. Joining me today are Paul Varga, our President and Chief Executive Officer Jane Moreau, Executive Vice President and Chief Financial Officer and Brian Fitzgerald, Chief Accounting Officer. This morning's conference call contains forward looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward looking statements and the company undertakes no obligation to update any of these statements whether due to new information, future events or otherwise. This morning, we issued a press release containing our results for the Q1 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 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 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. Thank you, Jay, and thanks, everyone, for joining us for our Q1 earnings call. I have the 3 topics I plan on covering today, and that will leave us plenty of time to address Q and A after Paul's brief comments. So first, I'm going to review the Q1 results, then I'm going to share some thoughts on flavor innovation on American Whiskeys and provide an update on our Jack Daniel's Tennessee fire test. And then 3rd, I'll discuss our full year outlook. So let me first start with reviewing our 1st 3 months of the fiscal year. As we discussed in June and as expected, we had a very challenging quarter in terms of comparisons versus last year. This was largely as a result of trade disruptions from recent pricing decisions. We anticipated these actions would result in significant reductions in both retail and trade distributor inventory levels. It caused some variability also in some of our buying patterns when we compare ourselves our results versus a year ago. So what I thought I would do here is share with you some more specifics as it relates to the markets that were most affected by these inventory shifts, the distorted both our underlying and reported trends to provide some context when you look at our underlying trends, which are depletion based and compare them to our consumer takeaway trends based upon syndicated data, whether it's Nelson or NavCast. The common theme though that you're going to hear as I talk is in each of these markets, the consumer takeaway trends are much stronger than our depletion trends, again illustrating the retail trade inventory reductions that happened in the quarter. So let's just first start with the United States. We discussed this with you in June that we had significant price increases over the last 2 years, as you know, particularly on Jack Daniel's Tennessee Whiskey, where we average somewhere in the 3% to 4% range of pricing per year. That drove large buy in at our distributor level and our retail level in the past 2 fiscal years in the Q1. This year, as we also discussed in June, we reduced the rate of our price increases and to the like 1% to 2% range. And so what that resulted in is we saw very little buy in activity in the Q1, but a subsequent reduction in the inventory levels at both the distributor and the retail. So we estimate when we look at the inventory levels at the retail and the distributor levels in the United States, they really have dropped significantly in the Q1 of this fiscal year compared to the last two fiscal years and then are fact below the pre price increases in Whiskey because, of course, it's our most important brand in the United States as well as around the world. In our underlying trend, our depletion results for Jack Daniel's Tennessee Whiskey declined 4.5% in the Q1 in the U. S. When we compare that to our adjusted blended takeaway trends, trends are up 2.5%. So you can see the significant difference between the depletion trends as well as the takeaway trends indicating the retail reduction in inventory levels, which is not in our numbers that we report on an underlying basis. Importantly, also is that we've seen the Jack Innes Tennessee Whiskey's volume takeaway trends have been accelerating by about 2 points in the most recent 3 months compared to the trailing 12 months, which we believe bodes well for the U. S. Business over the balance of the year when we look at our price and volume balancing that we're doing this year. So set aside the U. S. And let's go to the developed international markets, which we saw deceleration in results in the quarter. Net sales were actually down 1%. Some of that was due to lapping of comparisons to a year ago. Last year's Q1 was very strong and some of our key markets developed international markets. But a lot of it was driven by some strategic decisions we made to reduce our promotional activity. For instance, in the U. K, we moved from a high low pricing strategy there to an everyday low price in one of our channels. What that resulted in is a short term hit to our numbers as retailers reduce their inventories in that market. But we do believe that's the right action in the long term and we'll realize higher pricing as a result. A similar type of situation happened in Germany, different reasons, but awful to do with pricing, but it caused some what we call variability in the customer buying patterns. So similar to what I just did in the U. S, I want to give you a couple of examples of what happened in these two markets. Again, using Jack Daniel's Tennessee Whiskey, if we look at the U. K, the U. K. Depletion trends again in our underlying sales for the quarter were down 16%, while the takeaway trends are up much, much stronger and actually are growing. They were up 5%. In Germany, the depletion trends were down 23%, whereas the takeaway trends again were growing up 4%. So when you look at these two markets, there's roughly a 20 point spread between depletion and takeaway trends in these two important markets for us. Moving on to Poland. It had another very challenging quarter, very weak economy there and continued give back from the January 1 excess tax increase from a year ago from earlier from last fiscal year where we had buy ins. So what we've done because of all the noise in the numbers is we've made some adjustment. We estimate that adjusting for the reductions in the retail trade inventory levels that distorted our numbers significantly in the quarter. So the ones I just described for the U. S, U. K, Germany, Poland, actually resulted in our overall global net underlying sales for the quarter to be about 6%, which is right at the low end of our underlying sales growth for the We still We still are seeing some pressure, economic pressures, if you will, in Italy and Spain. But if you flip over to our emerging markets, they had a very, very nice quarter, grew quickly. In fact, they accelerated from last fiscal year. They were up 15% in the quarter. We knew and we had described some of this to you previously that Mexico's growth was going to be up because of some favorable comparison against weak periods last year where there were large givebacks. But beyond that, the majority of our other countries in emerging markets really enjoyed strong growth. And I could name a lot of them, but I was just going to name a few of them. Brazil had very nice growth, Russia, Turkey, Indonesia, summary, while I said our underlying trends were up 3 percent net sales for the quarter, so were reported. We really believe that the underlying trends themselves when adjusting for these retail inventory adjustments were closer to 6%. When I look though, however, it's the 3% growth that we had in top line for the quarter, about 2 points of that was driven by price mix. That combined with a reduction in our cost actually helped drive the 50 basis point improvement you see in our gross margins as well as our 5% gross profit growth that you saw in the quarter. Moving on to A and P. You saw a reduction in A and P spend. That's really timing related only, where you saw 8% increase in SG and A as we continue to invest behind our people to drive our business, including the route to consumer change we made in France last fiscal year. We discussed this at the end of last quarter call, too. We actually expected our first half of the year SG and A to be higher. And so as the year goes on and we start cycling against these investments, this is a step up investment we made in France in the second half of the year, we expect SG and A rate of growth to go down. So pulling this all together, our underlying growth in operating income was up 7% for the quarter, 1% on a reported basis. Our EPS grew 5% to $0.70 per share. So let me now move on to my second topic, and I want to discuss flavored whiskey and its impact on American Whiskey Renaissance. And then I'll update you on the Jack Daniel's Tennessee fire test. I thought it would help to frame the American whiskey opportunity that we see by going back in time. So let's go back to 1970s and look at how many cases of American whiskey were sold at the time. It's about 100,000,000 cases. And that's when the consumption of American whiskey actually peaked. We'll fast forward it to today where there's 40 year secular decline in the category, it was roughly cut in half. So it's about 50,000,000 cases. If you look at the U. S. Population of legal drinking age at that time, it's grown about 50%, meaning the per capita consumption of American whiskey has fallen by almost 70% over that period. So we witnessed an inflection point in the U. S. American Whiskey around 2010, where we really saw consumer interest in the category reignited. And so when we look at the work we've been doing over the last 4 years, and the growth that has resulted, we think is the first of many, many years to come of recapturing the lost market share that I just described to you. So when we look at what we think is the cause of this renewed demand, of course, there's a multiple factors, but I'm just going to mention a few. One is the rise of craft distilling, which is led by our own Woodford Reserve, the consumer interest in heritage and authenticity and what appears to be vodka fatigue. But I'm going to focus on another factor, I'm calling a 4th factor today, which is the important of the flavored whiskeys. So in 2013 in the U. S, our flavored whiskeys accounted for about 45% of the American whiskey volume growth. Looking at what drove that was definitely demographics played a major role in that. It was increased interest from women and minorities based on their changing taste profiles and preferences as well as convenience. I can speak to this. I have a couple of millennial kids myself and I know I probably taught them to like things that taste it differently, but millennials definitely have grown up with many different flavor offerings, whether it's cereals or soda or water or juices. So they now expect to have all kinds of choices and taste and they want great tasting things. And of course, mixability and drinkability have played an important part too in the Bourbon Renaissance. So it's of course, it's natural for Brown Forman, our company to take these and leverage these sought after characteristics through our disciplined approach that we have toward innovation combined with our great American Whiskey brands and innovate. And so that leads me to how we've been innovating and approaching flavored innovation. And we've been doing it in 2 main ways right now. And first, we've been focusing on different taste profiles and expression of existing brands. So some examples would be Woodford Reserve, Doubled Oak, Old Forester Single Barrel or Jack Daniel's Sinatra. And what these products had were different tastes built off of grain recipes or barreling technology or aging requirements. But they serve to be what we believe are great extensions of our core brand offerings. They also were tended to be in the super premium price point. They definitely have generated positive publicity and also satisfying what is new in this era of consumers' desire for discovery. So you can expect that we'll continue to selectively release these innovative offerings into the future. So the second way that we've been introducing flavor into our portfolio of brands is through flavor liqueurs into our whiskeys. And of course, we did that with Jack Daniel's Tennessee Honey. That's selling over 1,000,000 cases just after a 3rd full year into the marketplace. We reached that last this past January and we think that speaks volumes to the global interest in the brand and really the success of our innovation strategy. So it's allowed us to introduce new consumers to the brand and as well as offer new drinking occasions. And so while we've seen some recent bit of slowdown in growth rates of the brand in the U. S. As it begins its 4th year in the category and the law of large numbers take over. We really do believe there remain untapped opportunities for the brand in this important market in the U. S. As well as we can continue to expand it outside the U. S. As we continue to do this year where the brand grew underlying sales well over 50%. So you can expect that we'll continue to drive the Tennessee Honey's growth around the world, but we've been testing, as we've discussed with you previously, our 2nd full strength flavored expression, which is Jack Daniel's Tennessee Fire. So the test results from these 3 markets where we entered where we started to test have been really, really encouraging, both from a trade perspective as well as a consumer perspective. We've also seen nice halo in these three markets. On the jet gain, there's trade market sell where it's gained share with minimal cannibalization to both whiskey, Tennessee whiskey as well as Tennessee honey. So now with that, our plan is on rolling out Tennessee Fire to 5 additional states during the fall and we're readying our plans for further geographic expansion. But our goal with Farr is really in line with what we've been able to do with Honey And it's to create a brand extension of Jack Daniel versus the flavor of a week approach. So we'll of course update you on our plans in future calls as we go through this process. So now that leads me to my 3rd and final topic and I want to update you on our growth outlook for fiscal 20 15, which we reaffirmed this morning. So I know you can tell from my earlier discussion about the Q1, there's a lot of noise in it. And so we do not believe the Q1 results provide a good read for our full year and that's why we provided the adjustment for you to give you an idea that we believe that the underlying trends are there to keep we Now this does assume that there's no further deterioration in what we call the very fragile geographic geopolitical environment in Russia, where there's uncertainty around the government policies, how local laws may be interpreted and enforced. Just to put in context, Russia is an important market for us, but in fiscal 2014, it represented 2% of Brown Forman's total net sales. So we have and we continue to expect to take price increases this year, which we believe will drive modest gross margin expansion that we also described to you in June. This coupled with the gross profit growth continued leverage in A and P and SG and A, but we will continue to invest in both of these categories. We believe we're on track to deliver the 9% to 11% operating income growth that we discussed in our last call. So while our outlook for earnings per share remains unchanged, it's still $3.25 to 3.4 $5 We do see a drag as a result of foreign exchange about $0.06 But we also are seeing a slightly lower forecasted slightly lower effective tax rate somewhere around 29 point 5%. So we expect that to offset and led to the drag from the negative impact of foreign exchange. So in summary, I know there's a lot of noise in the quarter and I think you're going to have quarterly noise and that's why we like to step back and pull back and look over long periods of time and really to look at the future. And when we look at the global demand for American Whiskey, it remains solid. We talked about innovation of both with Honey and what we're doing with Fire and that definitely has helped power our results over the last few years. The premiumization trends continue. And so what we think all that combines together is it positions Brown Forman for what will be another record year what we believe will be another record year of both top and bottom line performance. And we look to the future, we know that we've got a strong balance sheet, growing cash flow and that will allow us to invest in the future growth while returning cash to our shareholders through dividends and share buybacks as you saw in the quarter. So with that, I'm going to turn the call over to Paul for some quick comments. Thanks, Jane, and good morning to everyone. I'm just going to add a couple of supplementary comments to Jane's, and I'll be rather brief given that we're only 90 days into the fiscal year and we actually did a pretty thorough presentation on the company here a few weeks back at our recent shareholders meeting. So all in all, the quarter was pretty much in line with what we had anticipated. And in many ways, it was similar in my view to what I recall from the it was similar in my view to what I recall from the Q1 last year when inventory changes and buying patterns distorted the short term results somewhat. And of course, changes that Jane emphasized in her part are, of course, accentuated by the reality that, of course, we're just talking about a very short period of time here in 3 months. So I thought most important were Jane's examples comparing the recent growth rates in consumer takeaway versus depletions for Jack Daniel's in 3 of our key countries, the U. S, U. K. And Germany particularly. I thought they were really illustrative of this inventory point that she was making. So it also not as important for understanding the results, but it's a source of reassurance to me that results should improve over the balance of the year as inventories come back into line and the takeaway actually drives the business versus the inventory shift. So all in all, the expectation of improving underlying growth rates in both sales and gross profit, coupled with the continuing expectations as we had at the beginning of the year and had last year of decent spending leverage, gives us the comfort to reaffirm at this stage the full year earnings forecast that we provided just 12 weeks or so ago. So that sort of is a nice summary of that I feel of what the quarter said to me. A couple of other things, looking ahead, Jane touched on Russia. It is a bit more of a risk today for us than it was when we did our full year plans. And while no doubt an important market, particularly to the very long term for Brown Forman, we do take some comfort from the fact that our emerging market business today is quite well diversified. And as we reported this morning, those markets collectively continue to perform very well with underlying sales in the quarter up 15%. And finally, I just want to add a point or 2 here on Jane's comments about the flavored whiskey opportunity. As she said, Jack Daniel's Tennessee Honey is off to another great start globally and we continue to have high hopes for it. Less visible to everyone has been the fact that alongside it, we've been assessing the potential for this possible entry into marketplace, which is Jack Daniel's Tennessee Fire. And so far, I'm very encouraged by what I've seen in the 3 state U. S. Test. As expected, this happens almost any Jack Daniel's product that gets tested and introduced. There was had has been high trade and consumer curiosity and then therefore early demand for the product correlates well with that. So it is quite high. And as I said, we just we get this almost anything we take out into the marketplace with Jack Daniels. But beyond this, we try to read the test results. And what we're seeing is that they're indicating a very strong acceptance of the product itself, which is always really important when we go out and introduce the product either on a large scale or into tests or even if it's in simulated tests before an entry. So the product performance in the marketplace itself, we consider very important and that seems to be very well accepted in these test markets as well an appreciation by many for Jack Daniel's Tennessee Fire being a premium, authentic and masculine alternative in this space. So not surprisingly that Jack Daniel's would bring that kind of relevant imagery to the category. So we will be expanding to a few more states here in October. And in the meantime, we will read the original 3 states for couple of months more, while we assess the timing and manner in which we will more substantively expand it geographically. It's just an exciting opportunity for our U. S. Business, and we know there will be interest beyond the U. S. As well, which, of course, we'll also be evaluating. So we'll keep you apprised in the weeks months to come on our plans more specifically for Jack Daniel's Tennessee Fire. So that's all for our prepared remarks and we're now happy to take any of your questions. Your first question comes from the line of Bill Schmidt from Deutsche Bank. Hi, good morning. Good morning. Hey, can you just talk about how much of the emerging market growth excluding Mexico in your mind do you think is distribution gains versus same store sales? Is there a way to quantify that? We have fewer syndicated resources that cover the broad distribution, particularly the Jack Daniel's in those markets. So but you're always building a little bit of inventory because we're still at early stage development there. But I think we've been in many of those markets now long enough that these double digit growth rates we're seeing, I feel, are reflective of consumer takeaway versus inventory build. And they're not all these markets will be very different market by market. But you tend not to see some of the buying patterns that you will see with these major customers that you have in the developed markets that have the ability to inventory and build 4 to 6 to 8 months worth of inventory. So I think there were generally my feel is just because of the consistency with which the results have been coming forward over the last many years that it's indicative of consumer takeaway in those markets more so than any kind of inventory bill. Great. Thanks. And then just a quick follow-up. Did you set a revised time for the broader rollout of Tennessee Fire? Did I miss that in the prepared comments? So is there a timeline when you think you'll have national distribution? The only thing we just said was, if you missed it, was that we're going to go in October to 5 more states in the United States. And between now and then, we'll be assessing the plans for doing something more substantively in terms of a broader geographic expansion. And we'll keep you posted on it. But we've got some work still to do in observing a little bit of the performance in those original three states and we want to keep looking at how best to sell and market the brand when we go to a broader geographic platform. But all the signs are really encouraging that we're going to be well accepted with it. It's just getting our ducks in a row. Great. Thank you very much. You're welcome. Your next question comes from the line of Bill Chappell from SunTrust. Good morning. Good morning. Paul, Jane, can you maybe just help us understand what was different from your internal expectations in the quarter? Because it sounds like a lot of the pricing and the timing of shipments and was pretty much what you expected 12 weeks ago. So I'm just trying to understand if we look at like maybe Finlandia or if we look at the growth in the tequila market, what was different from what you were expecting internally? I think the only difference from my perspective was not understanding the impact of some of the pricing decisions that we were making in the developed international markets. Now we understand them. But I think that was the main one. We were still somewhat uncertain as it related to our brand Finlandia and what that was going to be, what the price increases 2 price increases last fiscal year was going to have on the brand itself in Poland and still are evaluating that. But I think that those were the main two things. By and far, the largest thing that happened was affected our quarter was the U. S. And we anticipated. Yes. I thought Jane's examples on particularly the Europe, we I don't think any of us would have anticipated that you cited a 20 point difference between the depletion trends and the consumer takeaway trends in Germany and the U. K. We would have anticipated some of that, not to that size. So you hope that will correct here in the ensuing months as you start to have trading patterns that match the consumer takeaway. So that would have been a bit bigger than we would have thought. I think the U. S. One we largely were in line with. And does that change kind of your longer term outlook on pricing and or how you would pass through pricing? Not at all. No, not at all. I think I mean some of it is we got more aggressive for 2 fiscal years. We had some of the same thing with the building of inventories in the Q1 back when we did it. Now you're coming back off of it a little bit in terms of the size of it. So it's accordingly appropriate adjustments and it hits the quarter. It does work itself out throughout the year though. It does. And but the one thing you are always monitoring and it's the reason we're doing a little less pricing this year than we did in the prior 2 fiscal years is just want to make sure the cumulative impact of the pricing isn't too much, particularly on a franchise like Jack Daniel's where you have both ultra premium or super premium pricing paired with very large volumes. And so that balancing act we're always doing. But I think that's the more important thing than and we always try to give you transparency to what's happening as it relates to these shifts in the inventories. But in any event, I think the more important thing is how the consumer and in some parts of the trade too are reacting to your pricing plans. Got it. And last one for me. Just on further color on Tennessee Fire. I mean, as you said, Paul, you expected pent up demand and to have a good initial response. Is there any more kind of color in terms of cannibalization versus Honey? Or is it incremental? Or anything else you can kind of give us? I know it's still very short. Yes, we would anticipate the early reads, like I said, were so encouraging because it is very limited in terms of what we're seeing in terms of cannibalization so far relative to both Jack Daniel's halo. And some of it can be expected. The flavor halo. And some of it would be expected. The flavor profile that we're testing of this Jack Daniel's Tennessee Fire is a really different taste than either Jack Daniel's Tennessee Honey or Jack Daniel's Tennessee Whiskey Black Label. So some of it by design, I think, you would expect to be for different occasions or for different consumer palates. And that in fact is playing out in this test. So that's encouraging. I think it's more us wanting and we're also very much trying to we're trying to do a lot of things at Brown Farm and but also within the Jack Daniel trademark, making sure that in the U. S. Market and other markets that we are appropriately focused on building Jack Daniel's Tennessee Whiskey and Black Label. We continue to be really enthused about the potential for Jack Daniel's Tennessee Honey. And so part of it is to make sure that we don't get distracted by the enthusiasm that's out there and we manage it well and we can portfolio sell well and that we're in tune to any potentials that might exist for any cannibalization even though it's been minimalized so far. So I think and the other thing is just making sure we know how to market and sell and message these products to ensure the best collective success for the company and the trademark. And that is always a trial and error process, making sure you get that messaging right, the weight of spending and investment between channels. And so part of it is, I think the necessary exercise of using the test in fact as a test ground to see what might bring the best comes from the line of Ian Shackleton from Nomura. Yes. Good morning, Paul and Jane. Question around tax. You're going to a low rate this year. I wonder if that is reflecting a more sustainable lower base. I am aware I think some of the moves you made in Europe may be helping the tax situation. It seems to know how we should think about that going forward? Yes. So taxes as you know for us I think we have the highest tax rate of all of our competitors. It's been something that we've been very, very focused on and looking for smart ways to reduce our tax rate. And of course, one of the biggest ways is to continue to grow your business outside the U. S. Like we have been. We've been growing at a fast clip outside the U. S. So that definitely has provided a reduction in our tax rate and continue to do so. So if you look over the, I guess, the next several years period of time, I that you could expect our tax rate to be somewhere around 30 in the 30% range. Great. Thank you. And firstly just a follow-up. Australia was a market you were quite cautious about last year. It sounds like that's doing quite a bit better with the growth now. Has that changed for the better? I think a little combination of both. I think within the quarter there's maybe easier comps down there versus what we had a year ago. But I know that the team there is a little more it's a very competitive market. I'll say that as it relates to what's happening at the trade level. And so and of course, innovation remains really important down there, particularly as it relates to the RTD business. And that team is, think, in a better position today as they think about the marketplace. But it I will say that the one thing about that marketplace mid- to long term is the pressure from those excise taxes that have hit all distilled spirits have in my view have been significant and disproportionate to spirits and have been one of the influencing conditions to slow the lackluster growth in the marketplace. And I actually think getting some relief on that through government lobbying etcetera is a really important thing for the industry if it intends to have any kind of consumption growth down that market. And is there any sign of success there? Because I know it's an issue you've been campaigning on for a while there, Paul. Yes, it's a long slog, as you know. I mean, you're going to hear I mean, you would have heard it from a number of the competitive companies in this industry and Poland Jane highlighted here. I mean, it is as we look around, you think about the topical issues. You don't want these excise taxes to become so rhythmic in the way that they have from year to year, particularly within countries. And you occasionally have things like a U. S. Consideration of the legalization of marijuana becomes a big threat you try to assess and look at and think about long term. These excise taxes, though, particularly with governmental departments needing revenue and us perceived as an easy target, as regressive as sometimes these taxes are, have really, I think, been more present in our business over the last 5 years than any of us would have anticipated. And they do have you just look to Poland right now, they do have an impact on the affordability. And so it requires both lobbying and it requires innovation for the suppliers and owners to go and innovate around it, so that they can bring products to the market that may not be as high proof as the other way to do it, because a lot of this is based on proof. Understood. Thanks very much, Paul. You're welcome. Your next question comes from the line of Mark Schwartzberg from Stifel Nicolaus. Yes. Good morning, Paul. Hey, Jane. I guess a few questions. Firstly, as we think about your outlook for the year, your plus 3% start and your adjustments to plus 6%, given the takeaway dynamics being better than the shipping dynamics still implies you're looking for an acceleration over the balance of the year given your 6% to 8% view. So I know this is a mechanical question, but when you think about what's going to drive the acceleration, is it Tennessee Fire? Is it a particular country? I'm just trying to square that circle. Yes. I think that's a great question and something that we've been studying as you can imagine. So as we look at it, I think the main driver of it will be the United States is where we're looking for the growth to come from. It's not Tennessee Fire. Tennessee Fire is all we have in the numbers. We do not have a national rollout in the numbers. So it is the U. S. And as you recall, the discussion that we had in June in terms of our fat rebalancing of price and volume, if you will, this acceleration after the Q1. But even though I've made this adjustment, we're still expecting improving trends, which we have seen, and I alluded to that too in my comments in terms of the takeaway trends for the Jack Daniel's Tennessee Whiskey brand itself. So it's the U. S. Largely, it's one of them. We've got to see some continued growth improvement though in the Western Europe markets that I discussed, and we have reason to believe that, that will happen based upon some of the plans they have in place. I think the other thing I'd add that just helps particularly when you're discussing it during Q1 is that as tough as our expected comps within the fiscal year were going to be for us in Q1, we would anticipate at least based on history and borrowing any new news that our Q4 comps would have been on the easier side relative to what we had sort of facing us in Q1. So there is a counterbalancing things. But nonetheless, as we go along, in order to accomplish these the force outs as you indicate, things do have to accelerate. We expect some of it to come back through inventory, of course, but we also feel like you do need an acceleration as you go through the year. And there's other remember, some of these buy ins, there'll be particular periods in particular countries where we'll be up against other buy ins. Polish tax increase is one such example later in the year. But we'll try to keep you all current on where those inventory shifts are occurring and when they're not and how Brown Forman is either benefiting or being hurt by them. And but nonetheless, I mean, part of it is we really only do have 90 days. We think we have a decent feel for the inventory impact on us. And we feel comfortable affirming the guidance today based on what we know. Fair enough. And if I could follow purely on the U. S. For a moment if you will ignoring the inventory dynamic. When you look at the takeaway you're actually seeing and look at it on a total North American whiskey basis, how would you characterize those rates of growth versus say earlier this year or year ago levels? Are they in fact accelerating? I heard your prepared remarks. I wasn't quite clear if indeed takeaway for your brown products if you will is in fact accelerating. And then kind of relating to that vodka fatigue in some ways is a good thing for you guys, but we're seeing promotional activity there pick up. So could you just speak about how that's affecting again the brown component of your portfolio from a takeaway perspective here in the U. S? I can I don't know if you've got Nielsen data? I can read you some numbers just to give you a feel for North American whiskey and their trends both on a 3 month basis as well as a 12 month basis. So the trends have accelerated. They are improving. So on a volume basis, our value basis, but let's look at volume basis, it's up nearly 8% on a 3 month basis. And it's about the same as it was a year ago, I guess, on a selling, but it's still much stronger than the TDS category, which has, I guess, slowed slightly in the 3 month period. I think some of that is due to the vodka category, if I look at the trends, which continue to slow down. And for us, within it, I think I'll highlight one little difference that we might have observed and James touched on it within the quarter, because this is now you're focused here only on United States is that and this is a continuation of last year's results where Woodford Reserve within our portfolio continues to really do well and performing very much above the performance of North American whiskey generally. 1 of the brands, one of our oldest brands, our oldest brand, Old Forester has been accelerating in its performance over the last 18 months to 2 years. So those would be real highlights. Of course, Tennessee Honey as a flavored expression has done very, very well. But those rates, as Jane mentioned, have been coming down some off the higher basis. The Jack Daniel's Tennessee Whiskey volume metrics are going up. But associated with it, just because we've been taking less price, you'll see less price, so price mix will come subtly on that. And then brands that have been performing below North American whiskey, and it depends on how broadly you define it within our category in United States would be, our Canadian Mist early times. And then even if you went so far as to include a brand that straddles it, which would be Southern Comfort, has been a brand that we from time to time refer to even though it's liqueur as a flavored whiskey, it would be performing below. But that's consistent with some prior year reports as well. So I mean, I think the big changes that people might note in the Q1 are slightly different delivery of the sales dollar growth on Jack Daniel's with volumes accelerating here more recently and Tennessee Honey coming down off some of those higher growth rates to more moderated levels of growth. And remember that's reporting only retail business primarily. The one encouraging thing about the U. S. Market that we're starting to hear and see some data for is improvements in the on premise trends. And we certainly can note that for our Jack Denial's Tennessee Honey brand as versus its 1st couple of years, it has really picked up its momentum in the on premise relative to the off premise. That's great. So the on is okay, so we've heard the same. Okay, so you are seeing the on. Final one is, just can you speak more to whether you think this dynamic with vodka is actually good or bad for your brown spirits? Well, I mean, I think certainly for the brown spirits, it's I mean, if people shift out of white goods and go to preference, net net that's great for brown formants, particularly its American business. But And what I'm referring to is the promotional activity picking up specifically? Yes. I mean, I actually I think promotional activity picking up and I would say not just New York City, I'd say globally and I wouldn't confine it just to vodka either. I just think when you have softness in emerging markets for some of our competitors, when you have some of the corporate growth rates that we've served with some of our competition, particularly the underlying sales growth rate, you anticipate that they will fight and compete for that sales dollar more aggressively. And that goes across categories in my view and can be observed on strong trademarks that might exist in everything from rum to gin to cognac to vodka. So we anticipate and observe, it varies market by market that people are will continue to be competitive and that sometimes will take the form of promotional pricing. I wouldn't say that it's at a level that I would find out of control or something that I would raise if any different than what I might have observed 3 or 6 months ago. I think the other thing that we continue to watch out for what are the new innovations the competition are bringing because it's new forms of competitive activity in the marketplace. And so it's a reminder to corporations like Brown Form a that are doing well that they too need to be innovating and continuing to bring products to the market that can meet the needs of the consumer and the trade. So the two things we'll keep a close eye on are what level of promotional pricing are out there and the level of competitive introductions to new products. Got it. Great. Very helpful. Thank you, guys. You're welcome. Thanks for the question. Your next question comes from the line of Bryan Spillane from Bank of America. Hi, good morning. Jane, I want to just go back through make sure I understood a few of the components that you outlined in terms of just breaking down the Q1. The underlying growth to the bridge, I guess, from 3% in underlying sales growth to a sort of adjusted 6% is really just the change or the effect of distributor inventories I'm sorry retailer inventories coming down. Is that right? That's correct. Okay. Because the distributor inventory is already reflected in our numbers. Yes. Okay. And then the just rough weighting, just how much of that gap, if you will, between 36 was, I guess, the U. S. Versus what you saw in the U. K. And Germany? Germany? Can you just just trying to get a rough idea of the proportions in terms of how much they might have contributed? It was about 2 thirds, 1 third U. S. Versus Europe. Okay. And then if I'm looking at operating income and I know you guys measure yourselves one of the measurements that you used for management is depletion based adjusted operating income. And I guess if you were kind of looking at that measure or just trying to get a sense for what the profit implication was in the quarter for that the change in depletions because of the inventory adjustment. Just trying to get an understanding of how much of a profit hit it might have been. Pretty good, I'd say. It would have been. Yes. You'd have to slow the 3 points all the way down to the OI line. Yes. Okay. It'd be more impactful than 3. Yes. So fair to say, right? I mean that the retail inventory I was going to say that the retail inventory adjustments that effect in this quarter was one of the things that was probably a little order of magnitude was a little bit more than what you were expecting. So when we kind of look at it from an operating profit and earnings per share basis, there was actually a more meaningful sort of unexpected drag in the quarter just because of that dynamic. Is that fair? I would yes, I don't want to over exaggerate it. I think we anticipated the U. S. We anticipated some in Europe, but just not quite to the extreme. So I wouldn't take that whole amount, if you will. So but in theory, it was a little bit Yes. And we weren't fine tuned in terms of our own even just as we don't go and provide quarterly guidance on our earnings. I mean, I think it was a simultaneous qualitative and quantitative exercise that informed our expectations. And so we just weren't that obsessed with trying to forecast it in advance how much of the inventory might impact the overall bottom line earnings. We try to give ourselves some sense of how it might hit the top line. But nonetheless, I think your point is relevant. It did, of course, have an impact on the underlying operating income growth rate. Okay. And it was and is approaching this quarter trying to the Q1 trying to model it was sort of like one of my kids' math word problems. I mean, there were just so many different components. And so and I guess not in terms of some of the big puts and takes that we might need to consider as we're modeling 2Q, do you have any color you could give us in terms of inventory adjustments or any of those types of things that just from a big picture at least that we may need to think about? I mean, nothing that we would guide. I mean, I think an expectation of improvement. The only the other thing that we know that is a difference from prior years that we anticipate being a help in the marketplace, particularly competitively during an important season, as we anticipate there being more gift and value added, this cycles in at a greater level. Some of that, I guess, could hit, Jane, Q2, just some of the shipments and but in Q3, so it might be spread between Q2 and Q3. But otherwise, I mean, it's the classic culprits of inventory shifts, FX, I mean, the things you're trying to read in order to get down to a really good underlying number. Yes. I mean, I would just pick off what Paul left off. I would think about, I think Q2 and Q3 probably more and more normal. I think Q4 will be a bit easier. And I think component pieces of the P and L, I talked about SG and A a little bit, it will continue to be high, definitely for the second quarter and start to come down somewhat in the 3rd quarter, but really come down in the 4th quarter. You'll see spend more A and P spend, which was abnormal obviously for the quarter here timing related only. But I think that's And nothing on anything from Tennessee Fire as Jane mentioned in Q2. I mean if anything had an impact in second half at the Irresist, I think, as it relates to significant impact. And of course, we'll just keep you posted on that as we have plans that we're ready to talk about. Okay. And just I got 2 other just short follow ups. 1, just if there's been any change in the expectation for the capital spending range for the year? And then the second, just I guess following up on Mark Schwartzberg's question about acceleration, just want to make sure I heard so there's acceleration that we should see just in terms of like shipments should accelerate because of some of this inventory noise and that type of thing. But is there an expectation that end takeaway should also accelerate meaningful? I guess that was wasn't quite clear to me whether the acceleration kind of referred to just what you'll be shipping versus expecting some meaningful acceleration in takeaway? Jump up jump up considerably, certainly versus Q1's reported results. But at the consumer takeaway level, I mean, I think if there's one thing that could have an impact, there are certain market by market examples we could give of this. But the one thing that you would anticipate having a positive impact is less pressure in the marketplace on consumer prices because we're in fact not getting as much benefit from taking price increases. So I think that as with the passage of each month and as the prices establish themselves, you're always thinking about that from a competitive reference point. So it will depend a bit on what our competition is doing as well. But I think versus prior years, if anything, that would be a potential contributor to acceleration versus deceleration, the fact that we're taking less price. Okay. And then just CapEx, any change in the CapEx guidance? No, it's unchanged. So 120 to 140 range is what we provided. Okay. Great. Thank you guys. Have a great Labor Day holiday as well. You too. Thanks. Your last question comes from the line of Robert Ottenstein from ISI Group. Thank you very much. I was wondering if you could help us ring fence the potential downside in Russia? How to think about the situation there? I know you said about 10% 2% of sales. But if things got really bad, kind of worst case scenario, how much potential income statement impact could there be? I think it's just really too early to quantify the potential impact. It's really fluid situation. So just Yes. I mean, I just we're obviously working more right now to frankly in some ways understand it, attempt to mitigate and communicate and in direct ways we can't cooperate with what we can consider to be the authorities who have in a very limited way from what we understand thus far with reflecting one region and with 3 stores, just literally open up those lines of communication to try to administratively cooperate with them. And that's sort of where we are, I think. And really, it's just premature to go and start doing any significant risk assessments at this stage. I think we want to get more information before we even undertake that exercise. Okay. And I can certainly, certainly appreciate that. Perhaps something easier to speak on. Could you just kind of give us a little bit of an assessment of how the new French infrastructure is working out? Great so far. It went live in the beginning of the calendar year. And so you have normal sort of transition issues in both the marketplace and the people themselves encounter as being a new company, but it was very well planned. And I think we put investment in upfront so that it could launch in the way that it has effectively done. And I would say that just more qualitatively the vibe that you pick up when being around the people who are undertaking the Brown Forman brands today is really encouraging. And of course, Jack Daniels has been a very leading performer in that marketplace now for some time. And actually, we continue to have very high hopes for it. So for this year, you'll probably hear more about the margin as it makes its way in as well as some of the costs. But the margin impact is significant for us this year as it makes its way into this 1st full year. And then from there on going out, I mean, it really becomes about implementing in the marketplace, innovating, doing the right Jeff Sanders Tennessee Honey is entering that market, which I think is very it's off to a great start. And so all of that becomes the important exercise and we'll keep you posted. I know there's a lot of interest on what might happen in France and Europe more broadly. But as a counter to the sort of these trading patterns that we talked about in the UK and Germany, I'm glad you brought it up because France continues to do very well for Brown Pharma. Can you give us any sense of the volume acceleration that you're seeing now? No. And actually, it wasn't planned, I think, is some massive acceleration to help either pay for it or to recoup it. It was really more that probably more captured in the margin than it is in any volume acceleration. And I know one of the things that group is doing now is they've got their own companies looking to what possibilities might exist for some forms of acceleration or innovation in marketplace now that we have more direct influence over the marketplace. And so those tend to come in the forms of 3 5 year plans. And then my last question, I was very interested to hear your comments on Flavors and I know you guys planned long term. Any I mean just so we have an idea of kind of how to ballpark these things 10 years out? I mean, do you imagine I mean, how many flavors do you think that the Jack Daniel's brand could carry long term? And as expressed, your example of a flavor being kind of the Tennessee Honey or Tennessee Fire? Exactly. I mean, obviously, I don't anybody expects anything like vodka. We talk about 2 or 3, a dozen. I mean, just kind of sort of round numbers. How should we think about what you see the long term potential for different types flavors? I don't see it. I mean, it's hard, of course, crystal ball is really difficult. I mean, at this point, I'd find it hard to think a number that you just using a number like 10 that at least for my limited visibility looking into the future, I something about that doesn't make me feel real good. The 2, and I'd say that we've which is 1 with still studying and looking at the second one at a preliminary stage feels about right for us right now. I think what you want to do though is with Jack Daniel's and there have been times where Jack Daniel's may lead the consumer marketplace. It's harder for a big trademark like this. You want to be innovative and all that, but we also are simultaneously quite protective. And so if the consumer marketplace evolved to the point where actually to be competitive, it required the trademark to do more than a couple. That would create a different opportunity than I would say exists today. I mean, what we've seen right now in terms of flavor, it's really been in any kind of scale, really just 2 flavors for whiskey. I mean, it doesn't mean there be broad acceptance of other forms, because there's no way 6 or 7 years ago, I would have forecasted 2 pretty significant very scaled volume metric markets associated with honey flavored whiskey and cinnamon flavored whiskey. I just we wouldn't have been able to anticipate it. So some of it you'll we'll have to see where the consumer marketplace evolves to, but our current plans wouldn't forecast a rapid expansion of flavors. I'll give you another example. Jane referenced this of a different type of flavor that would we might forecast is and we've been slowly releasing this into very limited distribution in the United States the last couple of years has been the possibilities of going into rye whiskey, which has been a very hot category in the United States of late. And we've been making rye whiskey and then releasing limited amounts of it at its various stages of aging to wet the appetite of the marketplace. So that's a different flavored whiskey. It's not necessarily, what I'll call, the liqueur type of flavored whiskey that you're referring to. So I think that kind of innovation could be important as well. And then the other extremely attractive potentially area of innovation around the Jack Dinos trademark beyond flavors and RTDs is really the higher rungs of the ultra premium ladder, which the Jack Daniel's Gold Number 27 and Jack Daniel's Sinatra would represent the latest, very limited distribution and very limited offerings associated with those. But really important not only to marketing, but if in fact we get those to any sort of SaaS, they could become important to particular markets or to because they're very efficient in their production of profit. So the ultra premium end alongside the flavored end, and I continue to think that at least to date has been a unique opportunity for trademarks like Jack Daniel's that exist in American Whiskey. We haven't seen that potential to go both upward on the pricing ladder and across on flavor in many other categories. No, that's very helpful. So I take it from your comments that you don't see maple as having a lot of potential? There's not a big I know there's a couple of expressions of Maple in the market and they've kind of gone up and down a little bit. So nothing has really been developed there. Of course, that is a very natural flavor in a lot of whiskeys anyway. So I don't know how different as a taste that is for attracting new consumers. I mean one of the tests we consider when we look at these is does it bring new people who otherwise appreciate either, maybe let's say appreciate the trademark, but don't like all the offerings provided by the trademark, but might enjoy it in a different format. So the ability of it to bring in new consumers, it's been my just very distant observation that particularly with the example of Maple that there were high levels of cannibalization in some instances, at least that was at least anecdotally or qualitatively what I was observing. I can't don't have any facts behind that. But it would make sense because it's a much more slight variation on the whiskey than something more where the flavor itself is quite different as it is with the honey and the cinnamon. Terrific. Thank you very much. You're welcome. Thanks for your question. Thanks, Paul. And thanks to all of you for joining us today for Brown Forman's Q1 earnings call. Please feel free to reach out to us if you have any additional questions and have a great Labor Day weekend. Thank you. That concludes today's Brown Forman's Q1 fiscal 2015 earnings conference call. You may now disconnect.