Brown-Forman Reports Solid First Half Results in Fiscal 2019; Confirms Full Year Outlook
Louisville, KY, December 5, 2018 – Brown-Forman Corporation (NYSE: BFA, BFB) reported results for its second quarter and the first half of fiscal 2019, ended October 31, 2018. For the second quarter, the company’s reported net sales were flat1 at $910 million (+3% on an underlying2 basis) compared to the same prior-year period. The company estimates that second quarter’s underlying net sales growth was negatively impacted by approximately two percentage points primarily due to tariff-related inventory reductions (giveback) associated with the first quarter’s tariff-driven buy-ins. In the quarter, reported operating income decreased 5% to $332 million (flat on an underlying basis) and diluted earnings per share grew 4% to $0.52.
For the first six months of the fiscal year, the company’s reported net sales increased 2% to $1,676 million (+5% on an underlying basis). Reported net sales growth was negatively impacted by two percentage points from foreign exchange. Year-to-date reported operating income was flat at $596 million (+4% on an underlying basis) and diluted earnings per share of $0.93 increased 8%.
Paul Varga, the company’s Chief Executive Officer said, “Tariff-related buy-ins helped power first quarter results, while the anticipated giveback materialized in the second quarter, resulting in 5% underlying net sales growth during the first half. This growth demonstrates the consistency of our revenue delivery, especially against strong, 7% underlying net sales growth during the same period last year. Given easier back half comparisons and our momentum, we are on track for another year of 6-7% underlying net sales growth.”
Lawson Whiting, the company’s Chief Operating Officer and incoming Chief Executive Officer added, “Our premium portfolio of American whiskey brands, led by Jack Daniel’s and bolstered by Woodford Reserve, continued to deliver balanced geographic growth. While we are largely absorbing the tariff costs during fiscal 2019, we are confident in the long-term growth potential for our brands as we continue to build awareness with new consumers and increase our global distribution.”
Year-to-date Fiscal 2019 Highlights
• Underlying net sales grew 5% (+2% reported), with broad-based geographic3 and portfolio contribution:
◦ Underlying net sales in the emerging markets grew by 10% (+5% reported), developed international markets by 5% (+2% reported), and the United States by 3% (+1% reported)
◦ The Jack Daniel’s family of brands grew underlying net sales 5% (+2% reported), including 3% underlying net sales growth (flat reported) for Jack Daniel’s Tennessee Whiskey
◦ Super-premium American whiskey brands grew underlying net sales 19% (+12% reported), including 25% underlying net sales growth from Woodford Reserve (+24% reported)
◦ Herradura and el Jimador grew underlying net sales 15% and 11%, respectively (+11% and +8% reported)
• Underlying operating income grew 4% (0% reported) and earnings per share increased 8% to $0.93
• The company repurchased $122 million of stock during the three months ended October 31, 2018
Year-to-date Fiscal 2019 Results By Market – Balanced Geographic Delivery of Growth
The company delivered solid, broad-based growth around the world, with the strongest results coming from the emerging markets, where the company’s market shares are substantially below those in the developed world. As anticipated, the developed international markets, and more specifically Europe, experienced substantial giveback during the second quarter associated with the first quarter’s wholesale and retail level tariff-related buy-ins, effectively reversing the incremental benefit from the first quarter.
The United States grew underlying net sales 3% (+1% reported). Results accelerated quarter over quarter despite timing of promotional activities, a route to market change in one state, and more challenging second quarter prior year comparisons, which drove underlying net sales growth of 6% (+9% reported) in the first half of last year. According to syndicated data for the first half of fiscal 2019, Brown-Forman’s value-based takeaway3 trends remain in the mid-single digit range, also in-line with 12 month trends. The company’s premium bourbons, Woodford Reserve and Old Forester, remained standout performers in the United States. Woodford Reserve was the largest contributor to growth in the United States during the first half, delivering strong double-digit underlying net sales growth. Jack Daniel’s Tennessee Whiskey accelerated in the second quarter, but first half results were negatively impacted by some timing items as well as strong prior year comparisons. The Jack Daniel’s family of brands excluding Tennessee Whiskey grew underlying net sales mid-single digits, with gains from Gentleman Jack, Tennessee Honey, Tennessee Fire, and RTD/RTP products. Herradura and el Jimador tequila grew aggregate underlying net sales double-digits due to continued investments in the brands and favorable category momentum.
Underlying net sales in the company’s developed international markets grew 5% (+2% reported), driven primarily by volume gains. Germany and the United Kingdom grew underlying net sales by 16% (+14% reported) and 4% (-5% reported), respectively. Australia and France grew underlying net sales by 7% (+1% reported) and 4% (+2% reported), respectively. Canada’s underlying net sales declined 4% (-10% reported) due in part to disruption associated with a recent change in selling and marketing structure, while Spain continued to grow well into the double-digits as we benefit from last year’s transition to owned distribution.
Emerging markets continued their double-digit gains, delivering underlying net sales growth of 10% (+5% reported) on top of last year’s first half underlying net sales growth of 15% (+24% reported). Mexico remained the largest growth driver, with underlying net sales up 12% (+2% reported), fueled by strong gains across the portfolio of brands, but most notably in Herradura and New Mix. Brazil grew underlying net sales 36% (+7% reported) due to strong demand for Jack Daniel’s Tennessee Whiskey, helped in part by timing. Poland delivered modest underlying net sales growth of 2% (+4% reported) as strength in Jack Daniel’s Tennessee Whiskey was offset by soft results for Finlandia. Russia experienced a 2% decline in underlying net sales (+18% reported). While Turkey’s underlying net sales grew mid single-digits, reported sales were down due to adverse foreign exchange. Most other emerging markets, including China, India, Ukraine and sub-Saharan Africa delivered double-digit underlying net sales growth during the first half of fiscal 2019.
Travel Retail delivered strong growth in the first half, with underlying net sales up 14% (+3% reported). The company’s premium American whiskey brands, including the Jack Daniel’s family of brands and Woodford Reserve, enjoyed solid consumer demand, helped by new product launches such as Jack Daniel’s Bottled-in-Bond and Jack Daniel’s Tennessee Rye, increased travel, and the timing of customer orders.
Year-to-date Fiscal 2019 Results By Brand – Strong Growth in American Whiskey and Tequila
The company’s underlying net sales growth was led by the Jack Daniel’s family of brands globally, up 5% (+2% reported). Jack Daniel’s Tennessee Whiskey experienced 3% underlying net sales growth (flat reported), with strong volume gains in the emerging markets and several developed international markets. Gentleman Jack grew underlying net sales 10% (+5% reported). Jack Daniel’s Tennessee Honey’s underlying net sales gained 8% (+11% reported) and Jack Daniel’s Tennessee Fire increased underlying net sales 7% (+7% reported), fueled by continued global growth for both brands. Jack Daniel’s RTD business maintained its momentum from fiscal 2018, delivering underlying net sales growth of 12% (+6% reported) despite increasingly difficult comparisons.
Brown-Forman’s portfolio of super-premium American whiskey brands, including Woodford Reserve, Jack Daniel’s Single Barrel and Gentleman Jack, delivered 19% underlying net sales growth (+12% reported), fueled by increased consumer demand for the brands, primarily in the United States. Woodford Reserve grew underlying net sales 25% (+24% reported). Old Forester grew double-digits due to the combined effects of volumetric gains and favorable mix.
el Jimador grew underlying net sales by 11% (+8% reported), propelled by volume gains and higher prices in the United States as well as strong takeaway trends in Mexico. Herradura grew underlying net sales by 15% (+11% reported). The brand registered double-digit gains in the United States and Mexico, where Herradura Ultra helped power results. New Mix’s underlying net sales grew double-digits.
Finlandia vodka’s underlying net sales declined in the first half by 8% (-9% reported). The decrease in underlying net sales was driven by unfavorable channel mix in Poland and lower volumes in Russia and the United States.
Other P&L Items
Company-wide price/mix contributed two percentage points to the 5% underlying net sales growth (+2% reported) in the first half. Underlying gross profit also grew 5% in the first half (+1% reported), while gross margins began to be negatively impacted during the second quarter due to the cost of tariffs.
Underlying advertising spend increased 7% (+2% reported) during the first half, outpacing the growth in underlying net sales, and due primarily to the timing of brand investments including the new Woodford Reserve Kentucky Derby sponsorship and the recent opening of the Old Forester distillery and homeplace. Underlying SG&A grew 3% in the first half (+2% reported), driven primarily by higher personnel costs. The company delivered underlying operating income growth of 4% (flat reported).
On November 15, 2018, Brown-Forman declared a regular quarterly cash dividend of $0.166 per share on the Class A and Class B common stock, a 5.1% increase over the prior year dividend, resulting in an annualized cash dividend of $0.664 per share. The quarterly cash dividend is payable on January 2, 2019 to stockholders of record on December 6, 2018. Brown-Forman has paid regular quarterly cash dividends for 73 consecutive years and has increased the dividend for 35 consecutive years.
During the second quarter of fiscal 2019, the company repurchased a total of 2.6 million Class A and Class B shares for $122 million, at an average price of $47 per share under the company’s $200 million share repurchase program. As of October 31, 2018, the remaining share repurchase authorization under the existing program totaled $78 million.
As of October 31, 2018, total debt was $2,546 million compared to $2,556 million as of April 30, 2018.
Fiscal Year 2019 Outlook
The global economy has continued to improve over the last year. However, the competitive landscape in the developed world remains intense, and recently enacted retaliatory tariffs on American whiskey have created additional uncertainty around the company’s near-term outlook, making it difficult to accurately predict future results. The company currently anticipates:
1. Underlying net sales growth of 6% to 7%.
2. Flat underlying SG&A, and underlying A&P growth roughly in-line with sales gains.
3. Underlying operating income growth of 4% to 6%.
4. Diluted earnings per share of $1.65 to $1.75. This range assumes tariffs remain in place for the full fiscal year.
Conference Call Details
Brown-Forman will host a conference call to discuss the results at 10:00 a.m. (EST) 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. (EST) start of the conference call. A live audio broadcast of the conference call, and the accompanying presentation slides, will also be available via Brown-Forman’s Internet website, http://localhost/, through a link to “Investors/Events & Presentations.” For those unable to participate in the live call, information regarding the digital audio recording of the conference call and the presentation slides will also be on the website. The replay will be available for at least 30 days following the conference call.
For nearly 150 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 RTDs, Jack Daniel’s Tennessee Honey, Jack Daniel’s Tennessee Fire, Gentleman Jack, Jack Daniel’s Single Barrel, Finlandia, Korbel, el Jimador, Woodford Reserve, Old Forester, Canadian Mist, Herradura, New Mix, Sonoma-Cutrer, Early Times, Chambord, BenRiach, GlenDronach and Slane. Brown-Forman’s brands are supported by over 4,800 employees and sold in more than 170 countries worldwide. For more information about the company, please visit http://localhost/.
Important Information on Forward-Looking Statements:
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,” “can,” “continue,” “could,” “envision,” “estimate,” “expect,” “expectation,” “intend,” “may,” “might,” “plan,” “potential,” “project,” “pursue,” “see,” “seek,” “should,” “will,” “would,” and similar words indicate 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, including potential retaliatory tariffs on American spirits and the effectiveness of our actions to mitigate the potential negative impact on our sales and distributors; 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, or capital gains) or changes in related reserves, changes in tax rules or accounting standards, and the unpredictability and suddenness with which they can occur
• The impact of the recently enacted U.S. tax reform legislation, including as a result of future regulations and guidance interpreting the statute
• 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 small distilleries or local producers, or away from brown spirits, our premium products, or spirits generally, and our ability to anticipate or react to them; legalization of marijuana use on a more widespread basis; shifts in consumer purchase practices from traditional to e-commerce retailers; bar, restaurant, travel, or other on-premise declines; shifts in demographic or health and wellness trends; or unfavorable consumer reaction to new products, line extensions, package changes, product reformulations, or other product innovation
• Decline in the social acceptability of beverage alcohol 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 fixed costs
• Inventory fluctuations in our products by distributors, wholesalers, or retailers
• Competitors’ and retailers’ 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, termination difficulties or costs, or impairment in recorded value
• Inadequate protection of our intellectual property rights
• Product recalls or other product liability claims, or product counterfeiting, tampering, contamination, or quality issues
• Significant legal disputes and proceedings, or government investigations
• 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, and our dual class share structure
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 Securities and Exchange Commission.
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