LOUISVILLE, Ky.--(BUSINESS WIRE)-- Brown-Forman Corporation (NYSE:BFA) (NYSE:BFB) reported financial results for its first quarter ended July 31, 2016. The company’s reported net sales¹, excluding excise taxes, declined 5% to $661 million (+2% on an underlying basis²). Reported net sales growth was adversely impacted by two percentage points due to foreign exchange and three percentage points due to the disposition of Southern Comfort and Tuaca. Reported operating income declined 6% in the quarter to $213 million (+6% on an underlying basis). Diluted earnings per share of $0.36 decreased 2% compared to the prior-year period.

Paul Varga, the company's Chief Executive Officer, said, “Our first quarter reported results came in largely as anticipated considering the absence of previously disposed brands and the difficult comparisons against last year’s launch of Jack Daniel’s Tennessee Fire in the United States. While our results continue to be hampered by the combined effects of adverse foreign exchange and challenging emerging market conditions, we still expect fiscal 2017 to be another year of solid underlying sales and operating income growth, driven by the Jack Daniel's family of brands, as well as our portfolio of premium bourbons and tequilas.”

First Quarter Fiscal 2017 Highlights

• Underlying net sales increased 2%:
  • Developed markets grew underlying net sales 5% (-4% reported), in-line with mid-single digit growth trends from fiscal 2015 and fiscal 2016
  • Price/mix contributed one percentage point to net sales growth
  • The Jack Daniel’s family of brands grew underlying net sales 3% (-3% reported)
  • Jack Daniel’s Tennessee Honey grew underlying net sales 5% (-1% reported)
  • The company’s super- and ultra-premium North American whiskey brands³ grew underlying net sales double digits, including 24% underlying net sales growth from Woodford Reserve (+19% reported)
  • Herradura grew underlying net sales 18% (+16% reported), El Jimador grew underlying net sales 10% (+9% reported) and New Mix RTDs grew underlying net sales 6% (-10% reported)
• Underlying operating income increased 6%
• The company repurchased $201 million of stock during the first quarter and implemented a two-for-one stock split on August 18, 2016.

First Quarter of Fiscal 2017 Performance By Market

Underlying net sales grew 5% (-3% reported) in the United States. Sales growth was driven by continued gains for the Jack Daniel’s family of brands, including Tennessee Whiskey, Tennessee Honey and Gentleman Jack. Double-digit declines in Jack Daniel’s Tennessee Fire were in part driven by very challenging comparisons against last year’s US activation in the off-premise. The company’s bourbon brands also delivered strong growth, including the Woodford Reserve family of brands, Old Forester and the recent launch of Cooper’s Craft. Herradura and el Jimador tequila both grew underlying net sales by double-digits in the United States, as did Sonoma-Cutrer.

The company’s developed markets outside of the United States also delivered solid underlying net sales growth, up 5% (-5% reported). In fact, each of the company’s top-largest non-US developed markets grew underlying net sales, including the United Kingdom, Australia, Germany, France, Canada, Japan, Spain, New Zealand and Italy. These results were fueled by the Jack Daniel’s family of brands.

The emerging markets did not stabilize as expected, and continued to decline during the first quarter. Underlying net sales dropped 5% (-17% reported), as the company believes that weaker economic conditions, devalued currencies and political instability have negatively impacted underlying demand. While our two largest emerging markets, Poland and Mexico, grew underlying net sales, results in Turkey, Russia, Brazil, China, Thailand and several markets in eastern Europe were down.

Global Travel Retail’s underlying net sales increased 12% (+9% reported), due in part to a soft comparison against the prior year.

First Quarter of Fiscal 2017 Performance By Brand

The company’s underlying net sales growth was led by the Jack Daniel’s family, up 3% (-3% reported). Jack Daniel’s Tennessee Honey grew underlying net sales by 5% (-1% reported), driven by better trends in the United States and continued gains outside of the United States. Jack Daniel’s Tennessee Fire’s underlying net sales declined 2% (+11% reported) as double-digit declines in the United States were largely offset by the brand’s continued rollout to a few markets outside of the United States. Gentleman Jack grew underlying net sales by high single digits, and Jack Daniel’s RTD/RTP business delivered solid results, with underlying net sales growth of 7% (-3% reported).

Brown-Forman’s portfolio of super and ultra-premium whiskey brands, including Woodford Reserve and Woodford Reserve Double Oaked, Jack Daniel’s Single Barrel, Gentleman Jack, Sinatra Select, No. 27 Gold, and Collingwood, collectively grew underlying net sales by mid-teens. Old Forester delivered solid growth despite some meaningful pricing actions for the brand, and the Woodford Reserve family of brands grew underlying net sales 24% (+19% reported).

Finlandia vodka experienced a 4% decline in underlying net sales (-10% reported). Results in Poland stabilized somewhat while results in Russia remained under pressure given the challenging economic backdrop and ruble depreciation.

El Jimador grew underlying net sales by 10% (+9% reported) as the brand is growing in both the on-trade and off-trade in the United States, and is also performing well in Mexico as we reposition the brand at a higher level through multi-year price increases. New Mix’s underlying net sales increased 6% (-10% reported). Herradura grew underlying net sales by 18% (+16% reported), driven by double-digit gains in the United States and Mexico.

Other P&L Items

Company-wide price/mix improvements contributed approximately one percentage point of underlying sales growth. Underlying A&P spend declined 1% year over year (-14% reported) as the prior year period was elevated by the national rollout of Jack Daniel’s Tennessee Fire in the United States. Underlying SG&A decreased 2% (-4% reported) and the company is focused on continuing to leverage prior investments in SG&A, such as the route-to-market changes made over the last few years.

Financial Stewardship

The company implemented a two-for-one stock split, effective on August 18, 2016. On July 28, 2016, Brown-Forman declared a regular quarterly cash dividend of $0.17 per share on the split-adjusted Class A and Class B common stock. The cash dividend is payable on October 3, 2016 to stockholders of record on September 1, 2016. Brown-Forman has paid regular quarterly cash dividends for 71 consecutive years and has increased the dividend for 32 consecutive years.

During the first three months of fiscal 2017, the company repurchased a total of 4.2 million Class A and Class B shares for $201 million, at an average price of $48 per share. As of July 31, 2016, the remaining share repurchase authorization under our existing program totaled $690 million.

As of July 31, 2016, total debt was $2,241 million, up from $1,501 million as of April 30, 2016. During the quarter, Brown-Forman issued two bonds, including €300M 1.2% 10-year notes and £300M 2.6% 12-year notes. Proceeds were primarily used to pay for the acquisition of the BenRiach Distillery company on June 1, 2016.

Fiscal Year 2017 Outlook

The company believes that fiscal 2017 will be another year of continued growth in underlying net sales and operating income, despite the significant uncertainty that currently exists around the global economic and geopolitical environment. Assuming no further deterioration in the global economy, the company anticipates:

1. Underlying net sales growth, excluding excise taxes, of 4% to 6%
2. Underlying operating income growth of 7% to 9%
3. Diluted earnings per share of $1.71 to $1.81 in fiscal 2017, which includes foreign exchange headwinds of approximately $0.03 given current spot rates.

Conference Call Details

Brown-Forman will host a conference call to discuss the results at 10:00 a.m. (EDT) today. All interested parties in the United States are invited to join the conference call by dialing 888-624-9285 and asking for the Brown-Forman call. International callers should dial +1-706-679-3410. The company suggests that participants dial in ten minutes in advance of the 10:00 a.m. (EDT) start of the conference call. A live audio broadcast of the conference call will also be available via Brown-Forman’s Internet website, http://www.brown-forman.com/, through a link to “Investors/Events & Presentations.” For those unable to participate in the live call, a digital audio recording of the conference call will also be available on the website approximately two hours after the conclusion of the conference call. The replay will be available for at least 30 days following the conference call.

For more than 145 years, Brown-Forman Corporation has enriched the experience of life by responsibly building fine quality beverage alcohol brands, including Jack Daniel’s Tennessee Whiskey, Jack Daniel’s & Cola, Jack Daniel’s Tennessee Honey, Jack Daniel’s Tennessee Fire, Gentleman Jack, Jack Daniel’s Single Barrel, Finlandia, Korbel, el Jimador, Woodford Reserve, Canadian Mist, Herradura, New Mix, Sonoma-Cutrer, Early Times, Chambord, and Old Forester. Brown-Forman’s brands are supported by over 4,600 employees and sold in approximately 160 countries worldwide. For more information about the company, please visit http://www.brown-forman.com/.

Footnotes:

¹ Percentage growth rates are compared to prior-year periods, unless otherwise noted. We changed our presentation of excise taxes from the gross method (included in sales and costs) to the net method (excluded from sales). As a result, the amounts presented as “net sales” in our financial statements now exclude excise taxes. We believe the change in presentation to the net method is preferable because it is more representative of the internal financial information reviewed by management in assessing our performance and more consistent with the presentation used by our major competitors in their external financial statements.
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 July 31, 2016, to the most closely comparable GAAP measure, and the reasons why management believes these adjustments to be useful, are included in Schedule A and B in this press release.
³ Super/Ultra-premium North American whiskey brands include the Woodford Reserve family, Jack Daniel’s Single Barrel, Gentleman Jack, Sinatra Select, No. 27 Gold, and Collingwood.

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 Exchange rules

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 SEC.

Use of Non-GAAP Financial Information: This press release includes measures not derived in accordance with U.S. generally accepted accounting principles (“GAAP”), including 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 these 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.

Notes:

We present changes in certain income statement line-items that are adjusted to an “underlying” basis, which are non-GAAP measures that we believe assists in understanding both our performance from period to period on a consistent basis, and the trends of our business.

To calculate each of the measures reflected above, we adjust for (a) foreign currency exchange and (b) if applicable, estimated net changes in trade inventories. These adjustments are defined below.

• “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 press release, “dollar” always means the U.S. dollar unless clearly denoted 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 trade inventories.” This term refers to the estimated net effect of changes in distributor inventories on changes in our measures. For each period being compared, we estimate the effect of distributor inventory changes on our results using depletion information provided to us by our distributors. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in our measures and allows to understand better our underlying results and trends.
• “Acquisitions and divestitures.” On June 1, 2016, we acquired 90% of the voting equity interests in The BenRiach Distillery Company Limited (BenRiach) for approximately $307 million in cash. The acquisition, which brings three single malt Scotch whisky brands into our whiskey portfolio, includes brand trademarks, inventories, three malt distilleries, a bottling plant, and BenRiach’s headquarters in Edinburgh, Scotland. The combination of the purchase price and legally assumed obligations reflects aggregate consideration of $407 million. On January 14, 2016, we reached an agreement to sell our Southern Comfort and Tuaca brands and related assets to Sazerac Company, Inc. The transaction closed March 1, 2016, for $543 million in cash (subject to a post-closing inventory adjustment), which resulted in a gain of $485 million in the fourth quarter of fiscal 2016. This adjustment removes (a) transaction-related costs for the acquisition and divestiture and (b) operating activity for the acquisition and divestiture for the non-comparable period, which is fiscal 2016 activity for Southern Comfort and fiscal 2017 activity for both Southern Comfort and BenRiach. We believe that these adjustments allow us to understand better our underlying results on a comparable basis.

Management uses “underlying” measures of performance to assist it in comparing and measuring our performance from period to period on a consistent basis, and in comparing our performance to that of our competitors. We also use underlying measures as metrics of management incentive compensation calculations. Management also uses underlying measures in its planning and forecasting and in communications with the board of directors, stockholders, analysts and investors concerning our financial performance. We have provided reconciliations of the non-GAAP measures adjusted to an “underlying” basis to their most closely comparable GAAP measures and have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.

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Brown-Forman Corporation
Phil Lynch, 502-774-7928
Vice President
Director Corporate Communications and Public Relations
or
Jay Koval, 502-774-6903
Vice President
Director Investor Relations

Source: Brown-Forman Corporation