Brown-Forman Corporation (NYSE:BFA) (NYSE:BFB) reported
financial results for its second quarter and the first half of
fiscal 2016 ended October 31, 2015. For the second quarter, the
company’s reported net sales1 declined 4% to $1,096 million (+5% on
an underlying basis2). Reported operating income was flat in the
quarter at $302 million (+7% on an underlying basis). Diluted
earnings per share were also flat at $0.97 compared to the
prior-year period. For the first six months of the fiscal year,
reported net sales decreased 3% (+6% on an underlying basis),
reported operating income grew 1% (+9% on an underlying basis), and
diluted earnings per share increased 3% to $1.72. Year-to-date
reported net sales growth was negatively impacted by eight
percentage points due to foreign currency exchange.
Paul Varga, the company's Chief Executive Officer, said, "While
adverse foreign currency exchange continued to dampen our reported
results, Brown-Forman's underlying results in the first half of the
year remain strong and keep us on track to achieve our full year
growth outlook. We expect our top-tier underlying results to be
driven by our Jack Daniel's-led portfolio, our leadership position
in the premium American whiskey category, and the breadth and
balance of our geographic development."
Year-to-date Fiscal 2016
Highlights
- Underlying net sales increased 6%:
- Price/mix contributed three percentage
points to net sales growth and gross margin grew 20bps
- The Jack Daniel’s family of brands grew
underlying net sales 7% (-2% reported)
- Jack Daniel’s Tennessee Honey grew
underlying net sales 14% (+1% reported)
- The company’s super- and ultra-premium
whiskey brands3 grew underlying net sales double digits, including
28% underlying net sales growth from the Woodford Reserve family of
brands (+29% reported)
- The el Jimador family of brands,
including New Mix, grew underlying net sales 17% (-1%
reported)
- Emerging markets grew underlying net
sales 8% (-11% reported)
- Underlying operating income increased
9%
- The company returned $869 million to
shareholders, including repurchases of 7.6 million shares for $739
million and dividends of $130 million.
Year-to-date Fiscal 2016 Performance By
Market
Underlying net sales grew 7% (5% reported) in the United States.
Sales growth was primarily driven by higher volumes, fueled by the
continued rollout of Jack Daniel’s Tennessee Fire, as well as
modest improvements in price/mix. Jack Daniel’s Tennessee Fire
continues to enjoy broad consumer and trade acceptance, helping
drive three percentage points of underlying net sales growth in the
United States, even as we lap the brand’s introduction to
additional states in the prior year period. Results in the United
States also benefited from continued strength across the company’s
portfolio of leading American whiskey brands, including the Jack
Daniel’s family of brands led by Jack Daniel’s Tennessee Whiskey,
the Woodford Reserve family of brands, and Old Forester.
Underlying net sales grew 8% (-11% reported) in the emerging
markets, powered by continued market share gains in many markets.
The company achieved particularly strong underlying growth in
Turkey and Brazil. Mexico and Poland also delivered mid
single-digit underlying net sales growth. Russia’s underlying net
sales growth improved in the second quarter, resulting in a modest
year-to-date decline. Underlying net sales declined in southeast
Asia and China, but emerging Africa4 and Ukraine grew double
digits.
In developed markets outside of the United States, underlying
net sales grew 6% (-6% reported). Underlying net sales in Germany,
France and the Czech Republic grew double digits. The United
Kingdom and Canada delivered solid gains in underlying net sales
while Australia and Japan were flat year over year.
Global Travel Retail’s underlying net sales declined -14% (-28%
reported) year to date. The landscape in travel retail remains
competitive, due in part to the decline of high spending Russian
and European travelers as foreign currency swings have impacted
travel and demand. The company also attributes some of this decline
to the timing of orders, which the company expects to normalize
over time.
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% (-2% reported). Jack Daniel’s Tennessee
Honey grew underlying sales by 14% (+1% 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
underlying net sales growth. Jack Daniel’s RTD business also
delivered strong results in the second quarter, resulting in
underlying net sales growth of 4% (-10% reported) during the first
six months.
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 double digits. Old Forester’s underlying net sales grew
well into the double-digits, and the Woodford Reserve family of
brands grew underlying net sales 28% (+29% reported).
The Finlandia vodka family of brands experienced a 2% decline in
underlying net sales (-15% reported). While Finlandia’s sales in
Russia improved sequentially, the trading environment remains
extremely competitive in Poland, exacerbated by weak consumer
demand.
The el Jimador family of brands grew underlying net sales by 8%
(-6% reported) as the brand is experiencing broadening demand from
consumers in the United States, particularly in the on premise. El
Jimador’s family of brands volumes declined in Mexico as the
company continues to reposition the brand at a higher level through
multi-year price increases. While New Mix’s underlying net sales
increase of 31% (+8% reported) benefited from customer buying
patterns, distribution gains in the convenience channel and a new
digital campaign also contributed to the strong year-to-date
results. The Herradura family of brands grew underlying net sales
by 7% (-2% reported), powered by double-digit gains in the United
States.
The Southern Comfort family of brands experienced a 7% decline
in underlying net sales (-11% reported) year-to-date, driven by
competitive pressure from new flavored whiskies and continued
weakness in the on-premise.
Other P&L Items
Company-wide price/mix improvements contributed approximately
three percentage points of underlying sales growth and helped
deliver gross margin expansion of 20bps. Year-to-date gross margins
were held back primarily due to higher wood costs. Underlying
A&P spend increased by 1% (-6% reported) and underlying
SG&A increased by 3% (-2% reported).
Financial Stewardship
On November 19, 2015, 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 December 30, 2015 to stockholders of record on December
3, 2015. Brown-Forman has paid regular quarterly cash dividends for
70 consecutive years and has increased the dividend for 32
consecutive years.
As of October 31, 2015, total debt was $1,782 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.
Additionally, during the first half of fiscal 2015, the company
repurchased a total of 7.6 million Class A and Class B shares for
$739 million, at an average price of $97 per share. The remaining
share repurchase authorization as of December 2, 2015 totaled $256
million.
Fiscal Year 2016 Outlook
Significant uncertainty remains around the global economic
environment and its potential impact on our business, making it
difficult to predict future results. Assuming no further
deterioration in the global economy, the company expects growth to
be driven by strong global demand for authentic American whiskey
brands, consumer interest in flavored whiskey, and a trend towards
premium spirits.
In fiscal 2016, the company continues to expect:
- 6% to 7% growth in underlying net sales
with modest gross margin expansion
- 8% to 10% growth in underlying
operating income driven by leveraging prior investments
- Diluted earnings per share of $3.40 to
$3.60 in fiscal 2016. At today’s spot rates, the company
anticipates an additional $0.05 negative impact from adverse
foreign currency exchange compared to prior expectations for the
full 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 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://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, Gentleman
Jack, Jack Daniel’s Single Barrel, Finlandia, Southern Comfort,
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://www.brown-forman.com/.
Footnotes: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 each of these non-GAAP measures for the
three-month and six-month periods ended October 31, 2015, to the
most closely comparable GAAP measure, and the reasons why
management believes these adjustments to be useful to the reader,
are included in Schedule A 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.
Brown-Forman Corporation
Unaudited Consolidated Statements of
Operations
For the Three Months Ended
October 31, 2014 and 2015
(Dollars in millions, except per share
amounts)
2014 2015 Change Net sales $ 1,135 $ 1,096 (4%)
Excise taxes 258 242 (6%) Cost of sales 268 268 0%
Gross profit 609 586 (4%) Advertising expenses 123 115 (7%)
Selling, general, and administrative expenses 178 171 (4%) Other
expense (income), net 5 (2 ) Operating income 303 302 0%
Interest expense, net 7 12 Income before income taxes
296 290 (2%) Income taxes 88 90 Net income $ 208
$ 200 (3%) Earnings per share: Basic $ 0.98 $
0.98 0% Diluted $ 0.97 $ 0.97 0% Gross margin 53.6 % 53.5 %
Operating margin 26.6 % 27.6 % Effective tax rate 29.9 %
31.0 % Cash dividends paid per common share $ 0.290 $ 0.315
Shares (in thousands) used in the
calculation of earnings per share
Basic 212,087 204,055 Diluted 213,569 205,431
Brown-Forman Corporation
Unaudited Consolidated Statements of
Operations
For the Six Months Ended October 31,
2014 and 2015
(Dollars in millions, except per share
amounts)
2014 2015 Change Net sales $ 2,056 $ 1,995 (3%)
Excise taxes 474 444 (6%) Cost of sales 478 475 (1%)
Gross profit 1,104 1,076 (3%) Advertising expenses 223 209 (6%)
Selling, general, and administrative expenses 348 340 (2%) Other
expense (income), net 10 (2 ) Operating income 523 529 1%
Interest expense, net 13 21 Income before income
taxes 510 508 0% Income taxes 152 152 Net income $
358 $ 356 0% Earnings per share: Basic $ 1.68
$ 1.73 3% Diluted $ 1.67 $ 1.72 3% Gross margin 53.7 % 53.9
% Operating margin 25.4 % 26.5 % Effective tax rate 29.9 %
29.9 % Cash dividends paid per common share $ 0.580 $ 0.630
Shares (in thousands) used in the
calculation of earnings per share
Basic 212,674 205,558 Diluted 214,202 206,933
Brown-Forman Corporation
Unaudited Condensed Consolidated Balance
Sheets
(Dollars in millions)
April 30,2015 October 31,2015 Assets: Cash and cash
equivalents $ 370 $ 195 Accounts receivable, net 583 727
Inventories 953 1,067 Other current assets 348 359 Total
current assets 2,254 2,348 Property, plant, and equipment,
net 586 619 Goodwill 607 606 Other intangible assets 611 608 Other
assets 130 138 Total assets $ 4,188 $ 4,319
Liabilities: Accounts payable and accrued expenses $ 497 $ 549
Accrued income taxes 12 16 Short-term borrowings 190 303 Current
portion of long-term debt 250 250 Other current liabilities 9
12 Total current liabilities 958 1,130 Long-term debt
743 1,229 Deferred income taxes 107 116 Accrued postretirement
benefits 311 300 Other liabilities 164 143 Total liabilities
2,283 2,918 Stockholders’ equity 1,905 1,401
Total liabilities and stockholders’ equity $ 4,188 $ 4,319
Brown-Forman Corporation
Unaudited Condensed Consolidated
Statements of Cash Flows
For the Six Months Ended October 31,
2014 and 2015
(Dollars in millions)
2014 2015 Cash provided by operating activities $ 70
$ 161 Cash flows from investing activities: Additions to
property, plant, and equipment (59 ) (65 ) Other (4 ) (1 ) Cash
used for investing activities (63 ) (66 ) Cash flows from
financing activities: Net increase in short-term borrowings 117 113
Proceeds from long-term debt — 490 Debt issuance costs — (5 )
Acquisition of treasury stock (205 ) (739 ) Dividends paid (124 )
(130 ) Other 11 7 Cash provided by (used for)
financing activities (201 ) (264 ) Effect of exchange rate
changes on cash and cash equivalents (8 ) (6 ) Net decrease
in cash and cash equivalents (202 ) (175 ) Cash and cash
equivalents, beginning of period 437 370 Cash
and cash equivalents, end of period $ 235 $ 195
Schedule A
Brown-Forman Corporation Supplemental Information
(Unaudited) Three
Months Ended Six Months Ended Fiscal Year Ended
October 31, 2015 October 31, 2015 April
30, 2015
Reported change in net sales
(4)% (3)% 4% Impact of foreign currencies 8%
8% 3% Estimated net change in distributor inventories - 1% (1)%
Underlying change in net sales 5%
6% 6% Reported change in
gross profit (4)% (3)% 5% Impact of
foreign currencies 7% 7% 3% Estimated net change in distributor
inventories —% 1% (1)%
Underlying change in gross
profit 4% 6% 7%
Reported change in advertising (7)% (6)%
—% Impact of foreign currencies 6% 7% 4%
Underlying change in advertising (1)%
1% 4% Reported change in
SG&A (4)% (2)% 2% Impact of foreign
currencies 5% 6% 2%
Underlying change in SG&A
1% 3% 4%
Reported change in operating income —% 1%
6% Impact of foreign currencies 5% 4% 6% Estimated net
change in distributor inventories 2% 3% (3)%
Underlying
change in operating income 7% 9% 9%
Note: Totals may differ due to rounding
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.
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.
Schedule B
Brown-Forman Corporation
Supplemental Brand Information
(Unaudited)
Six Months Ended October 31,
2015
% Change vs. FY2015
Brand
Depletions1 Net Sales2
9-Liter
Equivalent
Conversion 3
Reported
Foreign
Exchange
Estimated
Net Change
in Trade
Inventories
Underlying
Jack Daniel’s Family 5% 6%
(2)% 8% 1% 7% Jack
Daniel’s Tennessee Whiskey 3% 3%
(3)% 7% —% 4% Jack
Daniel’s Tennessee Honey 12% 12%
1% 7% 6% 14% Other
Jack Daniel’s Whiskey Brands4 50% 50%
17% 7% 15%
39% Jack Daniel’s RTD/RTP5 3% 3%
(10)% 14% —% 4%
Southern Comfort Family (7)% (7)%
(11)% 5% —%
(7)% Finlandia Family (8)% (4)%
(15)% 16% (2)%
(2)% el Jimador Family6 —% —%
(6)% 10% 4% 8% New
Mix RTD7 22% 22% 8%
23% 0% 31% Herradura
Family8 5% 5% (2)%
12% (3)% 7% Woodford Reserve
Family 26% 26% 29%
2% (3)% 28% Canadian Mist Family
(8)% (8)% (10)%
0% 2% (8)%
Rest of Brand Portfolio(excl. Discontinued
Brands)
(1)% (1)% (1)%
8% (2)% 4%
Total Portfolio
4% 3%
(3)% 8% 1%
6%
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.
3Equivalent 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.
4 Includes Gentleman Jack, Jack Daniel's
Single Barrel, Sinatra Select, No. 27 Gold, Jack Daniel's Tennessee
Fire, Jack Daniel's Master's Collection, Jack Daniel's Rye, Jack
Daniel's 1907, and Jack Daniel's Single Barrel Barrel Proof
whiskey.
5 Refers to RTD and RTP line extensions of
Jack Daniel’s.
6 Includes el Jimador, el Jimador Flavors,
el Jimador RTDs.
7 New Mix RTD brand produced with el
Jimador tequila.
8 Includes Herradura, Herradura Ultra,
Herradura Coleccion De La Casa, and Herradura Seleccion
Suprema.
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version on businesswire.com: http://www.businesswire.com/news/home/20151202005652/en/
Brown-Forman CorporationPhil Lynch, 502-774-7928Vice
PresidentDirector Corporate Communications and Public
RelationsorJay Koval, 502-774-6903Vice PresidentDirector Investor
Relations
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