Brown-Forman Reports Solid Underlying Growth; Revises Full Year Outlook
Louisville, KY, March 2, 2016 – Brown-Forman Corporation (NYSE:BFA, BFB) reported financial results for its third quarter and the first nine months of fiscal 2016 ended January 31, 2016. For the third quarter, the company’s reported net sales1 declined 1% to $1,083 million (+4% on an underlying basis2). Reported operating income grew 2% in the quarter to $278 million (+5% on an underlying basis). Diluted earnings per share of $0.94 increased 7% compared to the prior-year period. For the first nine months of the fiscal year, reported net sales decreased 2% (+5% on an underlying basis), reported operating income grew 2% (+7% on an underlying basis), and diluted earnings per share increased 4% to $2.65. Year-to-date reported net sales growth was adversely impacted by eight percentage points due to foreign exchange.
Paul Varga, the company’s Chief Executive Officer said, “Against a backdrop of deteriorating economic conditions in emerging markets, weakness in the global travel retail channel, and headwinds from a strengthening dollar, we had another solid quarter of underlying growth, led by the Jack Daniel’s family and our American whiskey brands.”
Mr. Varga added, “The organic growth of Jack Daniel’s and our premium brand portfolio against a diversified geographic opportunity, an ever-improving portfolio positioned for sustained growth, our efficient use of capital, and the consistent return of capital to shareholders remain key ingredients in Brown-Forman’s value proposition.”
Year-to-date Fiscal 2016 Highlights
• Underlying net sales increased 5%:
◦ Price/mix contributed four percentage points to net sales growth and gross margin grew 40bps
◦ The Jack Daniel’s family of brands grew underlying net sales 7% (-1% reported)
◦ Jack Daniel’s Tennessee Honey grew underlying net sales 11% (+2% reported)
◦ The company’s super- and ultra-premium whiskey brands3 grew underlying net sales double digits, including 29% underlying net sales growth from Woodford Reserve (+30% reported)
◦ Herradura grew underlying net sales 12% (0% reported), El Jimador grew underlying net sales 4% (-7% reported) and New Mix RTDs grew underlying net sales 25% (+4% reported)
◦ Developed markets grew underlying net sales 6% (+1% reported), in-line with trends through the first half of fiscal 2016 as well as results in fiscal 2015
• Underlying operating income increased 7%
• On January 14, 2016, the company announced the $542 million sale of Southern Comfort and Tuaca, which closed on March 1, 2016. Underlying net sales for these brands declined 6% (-11% reported)
• On January 28, 2016, the company announced a new buyback authorization of $1 billion.
◦ The company has returned almost $1 billion to shareholders in the first nine months of fiscal 2016, including share repurchases of $762 million and dividends of $199 million.
Year-to-date Fiscal 2016 Performance By Market
Underlying net sales grew 7% (+5% reported) in the United States. Sales growth continues to be primarily driven by higher volumes, including the successful rollout of Jack Daniel’s Tennessee Fire, as well as improving mix. Jack Daniel’s Tennessee Whiskey experienced solid underlying demand through the important holiday selling season. Results in the United States also benefited from continued strength in other brands in the company’s portfolio of American whiskeys including Gentleman Jack, the Woodford Reserve family of brands, and Old Forester. Herradura and el Jimador tequilas both grew underlying net sales by double-digits in the United States.
The developed markets outside of the United States maintained their momentum, growing underlying net sales 5% (-4% reported). The United Kingdom, Australia, France, Canada, and Spain each delivered solid gains in underlying net sales. Underlying net sales growth was flat in Japan and up slightly in Germany, where results were negatively impacted by trading patterns.
The emerging markets have experienced a significant slowdown over the last few quarters, as weaker economic conditions and further devaluations of their local currencies have negatively impacted underlying demand. While year-to-date underlying net sales grew 5% (-12% reported) in the emerging markets, during the third quarter underlying net sales grew only 1% (-11% reported) despite continued market share gains in many markets. Brazil, Turkey, Mexico and South Africa all delivered solid year-to-date underlying sales growth, while markets such as Poland, Russia, southeast Asia, emerging Africa4, and other emerging markets in South America declined in the third quarter.
Global Travel Retail’s underlying net sales decreased 13% (-24% reported) year-to-date. Travel retail’s results continue to be pressured by the decline in spending from travelers, as well as continued volatility in foreign exchange, which has also resulted in weaker consumer demand.
Year-to-date Fiscal 2016 Performance By Brand
The company’s underlying net sales growth was led by the Jack Daniel’s family, up 7% (-1% reported). Jack Daniel’s Tennessee Honey grew underlying sales by 11% (+2% reported), powered by strong gains in markets outside of the United States. Jack Daniel’s Tennessee Fire contributed two percentage points to the family’s year-to-date underlying net sales growth. Jack Daniel’s RTD/RTP business also delivered solid results, with underlying net sales growth of 4% (-9% 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’s underlying net sales grew double-digits, and the Woodford Reserve family of brands grew underlying net sales 29% (+30% reported).
Finlandia vodka experienced a 5% decline in underlying net sales (-17% reported). Results in Poland were soft against a tough trading environment while results in Russia decelerated given the worsening economic backdrop and ruble depreciation.
El Jimador grew underlying net sales by 4% (-7% reported) as the brand is growing well in both the on-trade and off-trade in the United States, offset by volume declines in Mexico as the company continues to reposition the brand at a higher level through multi-year price increases. New Mix’s underlying net sales increase of 25% (+4% reported) continues to benefit from distribution gains and new sizes. Herradura grew underlying net sales by 12% (0% reported), driven by double-digit gains in the United States and Mexico.
Other P&L Items
Company-wide price/mix improvements contributed approximately four percentage points of underlying sales growth and helped deliver gross margin expansion of 40bps. Underlying A&P spend increased by 1% (-5% reported) and underlying SG&A increased by 4% (-1% reported).
On January 28, 2016, Brown-Forman declared a regular quarterly cash dividend of $0.34 per share on its Class A and Class B common stock, a 7.9% increase over the prior dividend, resulting in an annualized cash dividend of $1.36 per share. The cash dividend is payable on April 1, 2016 to stockholders of record on March 9, 2016. Brown-Forman has paid regular quarterly cash dividends for 70 consecutive years and has increased the dividend for 32 consecutive years. On January 28, 2016, the Board of Directors also approved a new share repurchase authorization of $1 billion, commencing on April 1, 2016.
During the first nine months of fiscal 2016, the company repurchased a total of 7.8 million Class A and Class B shares for $762 million, at an average price of $97 per share. As of January 31, 2016, the remaining share repurchase authorization under our existing program totaled $234 million.
As of January 31, 2016, total debt was $1,738 million, up from $1,183 million as of April 30, 2015. The increase reflects the issuance of $500 million of 4.5% 30-year senior unsecured notes in June 2015. On January 15, 2016, the company repaid $250 million of 2.5% notes.
On March 1, 2016, the company closed on the sale of Southern Comfort and Tuaca for $542 million.
Fiscal Year 2016 Outlook
Significant uncertainty around the global economic environment and its potential impact on our business makes it difficult to predict future results. Assuming no further deterioration in the global economy, particularly in the emerging markets, the company expects growth to be driven by global demand for authentic American whiskey brands, consumer interest in flavored whiskey, and premiumization trends.
In fiscal 2016, the company expects:
1. Approximately 5% growth in underlying net sales
2. 7% to 9% growth in underlying operating income
3. Diluted earnings per share of $3.32 to $3.42 in fiscal 2016, excluding the approximate $483 million gain on sale from Southern Comfort. Including the anticipated gain, earnings per share is forecast to be $4.97 to $5.07. This tightened EPS range incorporates six cents of additional foreign exchange headwinds, four cents due to the absence of earnings from divested brands*, three cents due to the one point reduction in underlying operating income growth, offset by five cents due to a lower expected tax rate and share count.
* Southern Comfort and Tuaca contributed $0.17 in EPS from May 1, 2015 to January 31, 2016, and $0.24 during Fiscal 2015.
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 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, 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, Gentleman Jack, Jack Daniel’s Single Barrel, Finlandia, Korbel, el Jimador, Woodford Reserve, Canadian Mist, Herradura, New Mix, Sonoma-Cutrer, Early Times, and Chambord. Brown-Forman’s brands are supported by nearly 4,400 employees and sold in approximately 160 countries worldwide. For more information about the company, please visit http://localhost/.
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 and nine-month periods ended January 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 whiskey brands include the Woodford Reserve family, Jack Daniel’s Single Barrel, Gentleman Jack, Sinatra Select, No. 27 Gold, and Collingwood.
4 Emerging Africa is defined as all markets in sub-Saharan Africa except the Republic of South Africa.
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.