Brown-Forman Reports Strong First Quarter Results; Increases Fiscal 2018 EPS Outlook
Varga added, “With only one quarter behind us, we are reaffirming our outlook for 6-8% underlying operating income growth while raising our EPS range to
First Quarter Fiscal 2018 Highlights
- Underlying net sales increased 6%, the fourth consecutive quarterly improvement in growth:
- Emerging markets continued to improve in the quarter, growing underlying net sales 19% (+27% reported)
- Developed markets grew underlying net sales by 3% (+7% reported), including 5% growth in
the United States(+10% reported)
- The Jack Daniel’s family of brands delivered broad-based growth, with underlying net sales up 6% (+10% reported), including underlying growth of 4% (+9% reported) for Jack Daniel’s
- The company’s super- and ultra-premium American whiskey brands3 experienced strong underlying net sales growth, including 16% growth from Woodford Reserve (+10% reported)
- Herradura grew underlying net sales 18% (+11% reported), el Jimador +13% (+19% reported) and New Mix RTDs grew double-digits.
- Underlying operating income grew 12%, and reported operating margin expanded from 32.2% to 33.7%
- Underlying SG&A declined 1% (-1% reported)
- The company reaffirmed full year expectations for 4-5% underlying net sales growth and 6-8% underlying operating income growth, and increased the FY18 EPS outlook to
First Quarter of Fiscal 2018 Performance By Market
Year-to-date underlying net sales grew 5% (+10% reported) in
Underlying net sales in the company’s developed markets outside of
Underlying net sales in the emerging markets continued to accelerate from last year’s sluggish start to the year, delivering 19% growth in the first quarter (+27% reported). The company’s two largest emerging markets,
Travel Retail continues to deliver solid rates of growth, with underlying net sales up 12% (+4% reported). The company is driving improved rates of growth through increased focus on key global accounts. Results also benefited from higher passenger volumes in markets such as
First Quarter of Fiscal 2018 Performance By Brand
The company’s underlying net sales growth was led by the Jack Daniel’s family, up 6% (+10% reported). Jack Daniel’s Tennessee Whiskey experienced 4% underlying net sales growth (+9% reported) globally, as an acceleration in the emerging markets offset a soft start in the developed markets outside of
Brown-Forman’s portfolio of super- and ultra-premium whiskey brands, including Woodford Reserve, Jack Daniel’s Single Barrel, and Gentleman Jack, delivered double-digit rates of aggregate growth. Woodford Reserve grew underlying net sales 16% (+10% reported), and Old Forester grew even faster.
Finlandia vodka grew underlying net sales 6% (+17% reported), helped by improved results in
el Jimador grew underlying net sales by 13% (+19% reported), fueled by strong and accelerating takeaway trends in
Other P&L Items
Company-wide price/mix contributed two percentage points to underlying net sales growth, with higher volumes accounting for the other four percentage points of growth. Year-to-date underlying gross profit grew 6% while reported gross profit increased 9%. The last three years of foreign exchange headwinds on net sales growth diminished in the quarter, and foreign exchange is now expected to be a slight positive in fiscal 2018.
First quarter underlying A&P spend increased 6% (+8% reported), as the company invested significantly behind the Jack Daniel’s family of brands, as well as the continued development of the fast growing bourbon and tequila brands. Cost discipline helped drive a continued decline in underlying SG&A, down 1% (-1% reported). The company delivered underlying operating income growth of 12% (+14% reported) during the first quarter, as operating margin expanded by 150 basis points to 33.7%.
Fiscal Year 2018 Outlook
The global economy remains volatile, particularly in the emerging markets, and the competitive landscape has intensified in the developed world, making it difficult to accurately predict future results. Assuming no deterioration in current trends, the company anticipates:
- Underlying net sales growth of 4% to 5%, led by our premium American whiskey and tequila brands, including disciplined innovation for Jack Daniel’s RTDs, as well as the launch of
Jack Daniel'sTennessee Rye and Slane Irish Whiskey.
- Flat underlying SG&A as the company expects to continue its disciplined approach to managing costs.
- Underlying operating income growth of 6% to 8%.
- Diluted earnings per share of
$1.85 to $1.95, which now incorporates a tax rate of approximately 28% and a slightly favorable impact from foreign exchange.
Conference Call Details
For nearly 150 years,
1 Percentage growth rates are compared to prior-year periods, unless otherwise noted.
2 We present changes in certain income statement line-items that are adjusted to an “underlying” basis, which we believe assists in understanding both our performance from period to period on a consistent basis and the trends of our business. Non-GAAP “underlying” measures include changes in (a) underlying net sales, (b) underlying gross profit, (c) underlying advertising expenses, (d) underlying selling, general and administrative expenses and (e) underlying operating income. A reconciliation of these non-GAAP measures for the three-month period ended
3 Super/Ultra-premium American whiskey brands include Woodford Reserve, Jack Daniel’s Single Barrel, Gentleman Jack, Sinatra Select, and No. 27 Gold.
This press release contains statements, estimates, and projections that are “forward-looking statements” as defined under U.S. federal securities laws. Words such as “aim,” “anticipate,” “aspire,” “believe,” “continue,” “could,” “envision,” “estimate,” “expect,” “expectation,” “intend,” “may,” “plan,” “potential,” “project,” “pursue,” “see,” “seek,” “should,” “will,” and similar words identify forward-looking statements, which speak only as of the date we make them. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. By their nature, forward-looking statements involve risks, uncertainties and other factors (many beyond our control) that could cause our actual results to differ materially from our historical experience or from our current expectations or projections. These risks and uncertainties include, but are not limited to:
- Unfavorable global or regional economic conditions, and related low consumer confidence, high unemployment, weak credit or capital markets, budget deficits, burdensome government debt, austerity measures, higher interest rates, higher taxes, political instability, higher inflation, deflation, lower returns on pension assets, or lower discount rates for pension obligations
- Risks associated with being a U.S.-based company with global operations, including commercial, political and financial risks; local labor policies and conditions; protectionist trade policies or economic or trade sanctions; compliance with local trade practices and other regulations, including anti-corruption laws; terrorism; and health pandemics
- Fluctuations in foreign currency exchange rates, particularly a stronger U.S. dollar
- Changes in laws, regulations, or policies - especially those that affect the production, importation, marketing, labeling, pricing, distribution, sale, or consumption of our beverage alcohol products
- Tax rate changes (including excise, sales, VAT, tariffs, duties, corporate, individual income, dividends, capital gains) or changes in related reserves, changes in tax rules (for example, LIFO, foreign income deferral, U.S. manufacturing and other deductions) or accounting standards, and the unpredictability and suddenness with which they can occur
- Dependence upon the continued growth of the Jack Daniel’s family of brands
- Changes in consumer preferences, consumption or purchase patterns - particularly away from larger producers in favor of smaller distilleries or local producers, or away from brown spirits, our premium products, or spirits generally, and our ability to anticipate or react to them; bar, restaurant, travel or other on-premise declines; shifts in demographic trends; unfavorable consumer reaction to new products, line extensions, package changes, product reformulations, or other product innovation
- Decline in the social acceptability of beverage alcohol products in significant markets
- Production facility, aging warehouse or supply chain disruption
- Imprecision in supply/demand forecasting
- Higher costs, lower quality or unavailability of energy, water, raw materials, product ingredients, labor or finished goods
- Route-to-consumer changes that affect the timing of our sales, temporarily disrupt the marketing or sale of our products, or result in higher implementation-related or fixed costs
- Inventory fluctuations in our products by distributors, wholesalers, or retailers
- Competitors’ consolidation or other competitive activities, such as pricing actions (including price reductions, promotions, discounting, couponing or free goods), marketing, category expansion, product introductions, or entry or expansion in our geographic markets or distribution networks
- Risks associated with acquisitions, dispositions, business partnerships or investments - such as acquisition integration, or termination difficulties or costs, or impairment in recorded value
- Inadequate protection of our intellectual property rights
- Product recalls or other product liability claims; product counterfeiting, tampering, contamination, or product quality issues
- Significant legal disputes and proceedings; government investigations (particularly of industry or company business, trade or marketing practices)
- Failure or breach of key information technology systems
- Negative publicity related to our company, brands, marketing, personnel, operations, business performance or prospects
- Failure to attract or retain key executive or employee talent
- Our status as a family “controlled company” under
New York Stock Exchangerules
For further information on these and other risks, please refer to the “Risk Factors” section of our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the
Use of Non-GAAP Financial Information: This press release includes measures not derived in accordance with U.S. generally accepted accounting principles (“GAAP”), underlying net sales, underlying gross profit, underlying advertising expense, underlying SG&A, and underlying operating income. These measures should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP, and also may be inconsistent with similar measures presented by other companies. Reconciliations of the underlying measures to the most closely comparable GAAP measures, and reasons for the company’s use of these measures, are presented on Schedules A and B attached hereto.
Unaudited Consolidated Statements of Operations
For the Three Months Ended July 31, 2016 and 2017
(Dollars in millions, except per share amounts)
|Cost of sales||208||230||11||%|
|Selling, general, and administrative expenses||163||161||(1||%)|
|Other expense (income), net||(5||)||(1||)|
|Interest expense, net||12||15|
|Income before income taxes||201||229||14||%|
|Earnings per share:|
|Effective tax rate||28.2||%||22.1||%|
|Cash dividends paid per common share||$||0.1700||$||0.1825|
Shares (in thousands) used in the calculation of earnings per share
Unaudited Condensed Consolidated Balance Sheets
(Dollars in millions)
|Cash and cash equivalents||$||182||$||238|
|Accounts receivable, net||557||576|
|Other current assets||342||352|
|Total current assets||2,351||2,503|
|Property, plant, and equipment, net||713||719|
|Other intangible assets||641||661|
|Accounts payable and accrued expenses||$||501||$||454|
|Accrued income taxes||9||57|
|Current portion of long-term debt||249||250|
|Total current liabilities||970||1,089|
|Deferred income taxes||152||135|
|Accrued postretirement benefits||314||298|
|Total liabilities and stockholders’ equity||$||4,625||$||4,802|
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended July 31, 2016 and 2017
(Dollars in millions)
|Cash provided by operating activities||$||128||$||102|
|Cash flows from investing activities:|
|Acquisition of business, net of cash acquired||(307||)||—|
|Additions to property, plant, and equipment||(16||)||(28||)|
|Cash used for investing activities||(324||)||(28||)|
|Cash flows from financing activities:|
|Net change in short-term borrowings||(43||)||45|
|Proceeds from long-term debt||717||—|
|Debt issuance costs||(5||)||—|
|Acquisition of treasury stock||(201||)||(1||)|
|Cash provided by (used for) financing activities||398||(31||)|
|Effect of exchange rate changes on cash and cash equivalents||(6||)||13|
|Net increase in cash and cash equivalents||196||56|
|Cash and cash equivalents, beginning of period||263||182|
|Cash and cash equivalents, end of period||$||459||$||238|
|Supplemental Information (Unaudited)|
|Three Months Ended||Fiscal Year Ended|
|July 31, 2017||April 30, 2017|
|Reported change in net sales||9%||(3)%|
|Acquisitions & divestitures||1%||3%|
|Impact of foreign exchange||(1)%||2%|
|Estimated net change in distributor inventories||(3)%||1%|
|Underlying change in net sales||6%||3%|
|Reported change in gross profit||9%||(6)%|
|Acquisitions & divestitures||—%||4%|
|Impact of foreign exchange||1%||3%|
|Estimated net change in distributor inventories||(3)%||1%|
|Underlying change in gross profit||6%||3%|
|Reported change in advertising||8%||(8)%|
|Acquisitions & divestitures||—%||8%|
|Impact of foreign exchange||(1)%||2%|
|Underlying change in advertising||6%||2%|
|Reported change in SG&A||(1)%||(3)%|
|Acquisitions & divestitures||—%||—%|
|Impact of foreign exchange||—%||1%|
|Underlying change in SG&A||(1)%||(2)%|
|Reported change in operating income||14%||(35)%|
|Acquisitions & divestitures||(1)%||35%|
|Impact of foreign exchange||5%||4%|
|Estimated net change in distributor inventories||(6)%||3%|
|Underlying change in operating income||12%||7%|
|Note: Totals may differ due to rounding|
We use certain financial measures in this report that are not measures of financial performance under GAAP. These non-GAAP measures, defined below, should be viewed as supplements to (not substitutes for) our results of operations and other measures reported under GAAP. The non-GAAP measures we use in this report may not be defined and calculated by other companies in the same manner.
“Underlying change” in income statement measures.We present changes in certain income statement measures, or line items, that are adjusted to an “underlying” basis. We use “underlying change” for the following income statement measures: (a) underlying net sales, (b) underlying gross profit, (c) underlying advertising expenses, (d) underlying selling, general, and administrative (SG&A) expenses, and (e) underlying operating income. To calculate these measures, we adjust, as applicable, for (a) acquisition and divestiture activity, (b) foreign exchange, and (c) estimated net changes in distributor inventories. We explain these adjustments below.
- “Acquisitions and divestitures.” In fiscal 2016, we sold our Southern Comfort and Tuaca brands and related assets to
Sazerac Company, Inc.and entered in a related transition services agreement (TSA). During fiscal 2017, we completed our obligations under the TSA. This adjustment removes the net sales and operating expenses recognized in fiscal 2017 pursuant to the TSA related to (a) contract bottling services and (b) distribution services in certain markets. On June 1, 2017, we acquired The BenRiach Distillery Company Limited(BenRiach). This adjustment removes (a) transaction and integration costs related to the acquisition and (b) operating activity for the acquisition for the non-comparable periods. For fiscal 2017 and 2018, the non-comparable period for each fiscal year is the month of May. We believe that these adjustments allow us to understand better our underlying results on a comparable basis.
- “Foreign exchange.” We calculate the percentage change in our income statement line items in accordance with GAAP and adjust to exclude the cost or benefit of currency fluctuations. Adjusting for foreign exchange allows us to understand our business on a constant-dollar basis, as fluctuations in exchange rates can distort the underlying trend both positively and negatively. (In this report, “dollar” always means the U.S. dollar unless stated otherwise.) To eliminate the effect of foreign exchange fluctuations when comparing across periods, we translate current year results at prior-year rates.
- “Estimated net change in distributor inventories.” This adjustment refers to the estimated net effect of changes in distributor inventories on changes in our income statement line items. For each period compared, we use depletion information provided by our distributors to estimate the effect of distributor inventory changes on our income statement line items. We believe that adjusting for the effect of varying levels of distributor inventories on changes in our income statement line items allows us to understand better underlying results and trends.
We use the non-GAAP measures “underlying change” for the following reasons: (a) to understand our performance from period to period on a consistent basis and to compare our performance to that of our competitors; (b) to align with management incentive compensation calculations; (c) for consistency with our planning and forecasting processes; and (d) to communicate our financial performance with the board of directors, stockholders, and investment analysts.
|Supplemental Brand Information (Unaudited)|
|Three Months Ended July 31, 2017|
|% Change vs. Prior Year Period|
|Jack Daniel’s Family||6%||10%||—%||(1)%||(3)%||6%|
|Jack Daniel’s Tennessee Whiskey||4%||9%||—%||(1)%||(4)%||4%|
|Jack Daniel’s Tennessee Honey||5%||3%||—%||(1)%||1%||3%|
|Jack Daniel’s RTD/RTP||17%||24%||—%||—%||(2)%||22%|
|Jack Daniel’s Tennessee Fire||19%||21%||—%||(1)%||(6)%||14%|
|All Other Brands||(3)%||7%||—%||(1)%||(5)%||1%|
Note: Totals may differ due to rounding.
1 Depletions are shipments direct to retail or from distributors to wholesale and retail customers, and are commonly regarded in the industry as an approximate measure of consumer demand.
2 Net sales is a shipment based metric; shipments and depletions can be different due to timing. Please see the Notes to Schedule A in this press release for additional information on the impact of foreign currencies and estimated net change in distributor inventories and the reasons why we believe that the presentation of these non-GAAP financial measures provides useful information to investors.
3 Equivalent conversion depletions represent the conversion of ready-to-drink (RTD) and ready-to-pour (RTP) brands to a similar drinks equivalent as the parent brand for various trademark families. RTD volumes are divided by 10, while RTP volumes are divided by 5.
Phil Lynch, 502-774-7928
Corporate Communications and Public Relations
Jay Koval, 502-774-6903
Investor Relations and Community Relations