Brown-Forman Corporation (NYSE:BFA) (NYSE:BFB) reported
financial results for its second quarter and the first half of
fiscal 2018, ended October 31, 2017. For the second quarter, the
company’s reported net sales1 increased 10% to $914 million (+8% on
an underlying basis2) compared to the same prior-year period.
Reported operating income increased 19% in the quarter to $346
million (+16% on an underlying basis) and diluted earnings per
share of $0.62 increased 23%.
For the first six months of the fiscal year, the company’s
reported net sales increased 10% to $1,637 million (+7% on an
underlying basis) compared to the same prior-year period. Reported
net sales growth benefited by two percentage points from changes in
distributor inventories and one percentage point of foreign
exchange. Reported operating income increased 17% in the quarter to
$590 million (+14% on an underlying basis) and diluted earnings per
share of $1.08 increased 24%.
Paul Varga, the company's Chief Executive Officer, said,
“Brown-Forman’s second quarter and first half results were
excellent on both a reported and underlying basis. Against a
backdrop of improving economies in the emerging markets, and
continued momentum in our categories of focus, our underlying net
sales have accelerated nicely due to strong performances from our
Jack Daniel’s, Woodford Reserve, Old Forester and Herradura brand
families, as well as timing-driven improvements in our used barrel
sales. We believe that an ever-improving combination of investment,
resource allocation, revenue management, innovation, and geographic
expansion are important contributors to our acceleration in fiscal
2018.”
Year-to-date Fiscal 2018
Highlights
- Underlying net sales grew 7% (+10%
reported), with balanced geographic and portfolio contribution:
- Emerging markets3 delivered strong
results, with underlying net sales up 15% (+24% reported)
- Developed markets3 grew underlying net
sales by 5% (+7% reported), with 6% growth in the United States
(+9% reported) and 5% growth outside of the United States (+5%
reported)
- The Jack Daniel’s family of brands grew
underlying net sales 7% (+10% reported), including 6% growth (+9%
reported) for Jack Daniel’s Tennessee Whiskey
- The company’s super- and ultra-premium
American whiskey brands3 grew underlying net sales 15% (+22%
reported), including 21% growth from Woodford Reserve (+23%
reported)
- Herradura grew underlying net sales 19%
(+15% reported) and el Jimador grew underlying net sales 10% (+15%
reported)
- Underlying operating income grew 14%
(+17% reported), helped by the timing of operating expenses
- The company increased its outlook for
underlying net sales growth to 6% to 7%, underlying operating
income growth to 8% to 9%, and FY18 EPS of $1.90 to $1.98.
Year-to-date Fiscal 2018 Performance By
Market
Year-to-date underlying net sales grew 6% (+9% reported) in the
United States. The increase in sales growth was driven by balanced
growth from the Jack Daniel’s family of brands, including Tennessee
Whiskey, Tennessee Honey, Tennessee Fire, Gentleman Jack and
RTDs/RTP (RTDs). The company also launched Jack Daniel’s Tennessee
Rye in the United States during the second quarter. The company’s
bourbon brands delivered sustained growth, including double-digit
underlying net sales growth from Woodford Reserve and Old Forester.
Herradura and el Jimador tequila grew underlying net sales
double-digits in the United States as the company continued to
invest in building brand awareness for both of these high quality
tequilas.
Sales in the company’s developed markets outside of the United
States rebounded as expected in the second quarter, and delivered
year-to-date underlying net sales growth of 5% (+5% reported). The
United Kingdom and Germany delivered strong, double-digit
underlying net sales growth in the second quarter after a sluggish
start to the year. Australia’s first half results benefited from
the first quarter buy-ins in advance of excise tax-driven price
increases, while Japan’s underlying net sales declined due to
comparisons with the prior year’s buy-ins in advance of price
increases. France’s underlying net sales grew mid-single digits,
Canada’s underlying results were flat, and Spain delivered improved
results following this summer’s transition to owned
distribution.
Underlying net sales in the emerging markets jumped 15% (+24%
reported) year-to-date. The company’s two largest emerging markets,
Mexico and Poland, grew aggregate underlying and reported net sales
by double-digits, with both countries experiencing solid demand for
the Jack Daniel’s family of brands. Underlying net sales in the
emerging markets excluding Mexico and Poland grew at an even faster
rate, as economies and currencies have stabilized in most markets.
Russia, Turkey, Brazil, Thailand, China and Ukraine grew underlying
net sales double-digits, helped by comparisons to a soft first half
of fiscal 2017.
Travel Retail3 continued to deliver solid rates of growth, with
underlying net sales up 11% (+18% reported). The company continued
to drive growth from key global and regional accounts, while also
benefiting from improved distribution, higher passenger volumes in
Russia and Turkey, and more stable foreign exchange. The company
expects comparisons in the emerging markets and Travel Retail to
become more challenging during the second half of fiscal 2018 due
to solid growth in the same prior-year period.
Year-to-date Fiscal 2018 Performance By
Brand
The company’s underlying net sales growth was led by the Jack
Daniel’s family, up 7% (+10% reported). Jack Daniel’s Tennessee
Whiskey experienced 6% underlying net sales growth (+9% reported)
globally, with solid increases across most major markets, including
sizable gains in the emerging markets. Jack Daniel’s Tennessee
Honey’s underlying net sales grew 8% (+10% reported). Gentleman
Jack grew underlying net sales 9% (+11% reported), driven by a new
ad campaign and higher media spend. Jack Daniel’s Tennessee Fire’s
underlying net sales grew 14% (+22% reported), as the brand
continues to benefit from its global rollout and on-premise gains
in the United States. Jack Daniel’s RTD business grew underlying
net sales 15% (+14% reported), helped by innovation such as Jack
Daniel’s Cider, Jack Daniel’s American Serve, Jack Daniel’s
Lynchburg Lemonade and Southern Peach Country Cocktails.
Brown-Forman’s portfolio of super- and ultra-premium whiskey
brands, including Woodford Reserve, Jack Daniel’s Single Barrel,
and Gentleman Jack, delivered 15% underlying net sales growth (+22%
reported). Woodford Reserve grew underlying net sales 21% (+23%
reported), and Old Forester grew even faster, helped by the
combination of higher price, favorable product mix and volumetric
gains.
Finlandia vodka grew underlying net sales 8% (+18% reported).
Improved results in Russia more than offset the very competitive
pricing environment in Poland.
el Jimador grew underlying net sales by 10% (+15% reported),
fueled by strong takeaway trends in the United States. Herradura
grew underlying net sales by 19% (+15% reported), driven by
double-digit gains in both the United States and Mexico, where
results were helped by continued growth of Herradura Ultra. New
Mix’s underlying net sales growth increased at a high single-digit
rate.
Other P&L Items
Company-wide price/mix contributed nearly two percentage points
to the 7% underlying net sales growth (+10% reported) year-to-date.
Underlying gross profit grew 7% (+10% reported), as first half
results benefited from higher volumes of barrel sales. The company
expects higher cost of goods in the second half.
Year-to-date underlying A&P spend increased 5% (+5%
reported), as the company continued to invest in the Jack Daniel’s
family of brands, increased its investment in the development of
the fast growing bourbon and tequila brands, and invested in the
seeding of brands that are early in their development, such as
Slane, GlenDronach and BenRiach. Cost discipline helped drive a
continued decline in underlying SG&A, down 1% (-1%
reported).
The company delivered underlying operating income growth of
14%(+17% reported) during the first six months of the year, as
operating margin expanded by 220 basis points to 36.0%. The company
expects the favorable phasing of operating expenses that helped
drive operating leverage during the first half will normalize in
the back half of fiscal 2018.
Financial Stewardship
Through October 31, 2017, the company delivered a trailing
twelve month reported operating margin of 34.2% and ROIC2 of
21.2%.
On November 16, 2017, Brown-Forman declared a regular quarterly
cash dividend of $0.1975 per share on the Class A and Class B
common stock, an 8.2% increase of the prior dividend, resulting in
an annualized cash dividend of $0.79 per share. The quarterly cash
dividend is payable on January 2, 2018 to stockholders of record on
December 7, 2017. Brown-Forman has paid regular quarterly cash
dividends for 72 consecutive years and has increased the dividend
for 34 consecutive years.
Regarding the second half of fiscal 2018, Varga added, “We now
expect 6-7% growth in underlying net sales for the full year. We
also are planning for a second half reversal of the very positive
operating leverage we experienced during the first half due to
moderately higher cost of sales expectations and a higher operating
investment posture associated with the favorable environment for
our brands. Even after incorporating these expectations for higher
costs in the back half, we are increasing our full year range for
underlying operating income growth to 8-9%, and our EPS
expectations to $1.90 to $1.98.”
Revised Fiscal Year 2018
Outlook
The global economy has improved modestly over the last year, but
emerging markets remain volatile, and the competitive landscape has
intensified in the developed world, making it difficult to
accurately predict future results. Assuming current trends
continue, the company anticipates:
- Underlying net sales growth of 6% to
7%.
- A slight increase in underlying
SG&A, and underlying A&P growth roughly in-line with sales
growth.
- Underlying operating income growth of
8% to 9%.
- Diluted earnings per share of $1.90 to
$1.98.
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://www.brown-forman.com/, 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 & Cola, 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 4,700 employees and sold in more than 165
countries worldwide. For more information about the company, please
visit http://www.brown-forman.com/.
Important Information on Forward-Looking Statements:
This report 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 those described
in Part I, Item 1A. Risk Factors of our 2017 Form 10-K and those
described from time to time in our future reports filed with the
Securities and Exchange Commission, including:
- 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; 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 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, 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
Brown-Forman CorporationUnaudited
Consolidated Statements of OperationsFor the Three Months Ended
October 31, 2016 and 2017(Dollars in millions, except per
share amounts)
2016 2017
Change Sales $ 1,055 $ 1,166 11 % Excise taxes 225
252 12 % Net sales 830 914 10 % Cost of sales 278 304
9 % Gross profit 552 610 11 % Advertising expenses 107 111 4
% Selling, general, and administrative expenses 163 163 0 % Other
expense (income), net (9 ) (10 ) Operating income 291 346 19 %
Interest expense, net 15 15 Income before income
taxes 276 331 20 % Income taxes 79 92 Net income $
197 $ 239 21 % Earnings per share: Basic $
0.51 $ 0.62 23 % Diluted $ 0.50 $ 0.62 23 % Gross margin
66.5 % 66.8 % Operating margin 35.1 % 37.9 % Effective tax
rate 28.6 % 27.9 % Cash dividends paid per common share $
0.1700 $ 0.1825
Shares (in thousands) used in the
calculation of earnings per share
Basic 389,050 384,120 Diluted 391,848 386,627
Brown-Forman CorporationUnaudited
Consolidated Statements of OperationsFor the Six Months Ended
October 31, 2016 and 2017(Dollars in millions, except per
share amounts)
2016 2017
Change Sales $ 1,911 $ 2,095 10 % Excise taxes 420
458 9 % Net sales 1,491 1,637 10 % Cost of sales 486
534 10 % Gross profit 1,005 1,103 10 % Advertising expenses
190 200 5 % Selling, general, and administrative expenses 326 324
(1 %) Other expense (income), net (15 ) (11 ) Operating income 504
590 17 % Interest expense, net 27 30 Income before
income taxes 477 560 17 % Income taxes 135 143 Net
income $ 342 $ 417 22 % Earnings per share:
Basic $ 0.87 $ 1.08 24 % Diluted $ 0.87 $ 1.08 24 % Gross
margin 67.4 % 67.4 % Operating margin 33.8 % 36.0 %
Effective tax rate 28.4 % 25.5 % Cash dividends paid per
common share $ 0.340 $ 0.365
Shares (in thousands) used in the
calculation of earnings per share
Basic 390,994 384,076 Diluted 393,889 386,504
Brown-Forman CorporationUnaudited
Condensed Consolidated Balance Sheets(Dollars in millions)
April 30,
2017
October 31,
2017
Assets: Cash and cash equivalents $ 182 $ 212 Accounts receivable,
net 557 753 Inventories 1,270 1,359 Other current assets 342 337
Total current assets 2,351 2,661 Property, plant, and
equipment, net 713 740 Goodwill 753 756 Other intangible assets 641
659 Other assets 167 162 Total assets $ 4,625 $ 4,978
Liabilities: Accounts payable and accrued expenses $ 501 $ 556
Accrued income taxes 9 11 Short-term borrowings 211 235 Current
portion of long-term debt 249 250 Total current liabilities 970
1,052 Long-term debt 1,689 1,719 Deferred income taxes 152
139 Accrued postretirement benefits 314 287 Other liabilities 130
134 Total liabilities 3,255 3,331 Stockholders’ equity 1,370
1,647 Total liabilities and stockholders’ equity $ 4,625 $
4,978
Brown-Forman CorporationUnaudited
Condensed Consolidated Statements of Cash FlowsFor the Six Months
Ended October 31, 2016 and 2017(Dollars in millions)
2016 2017 Cash
provided by operating activities $ 169 $ 214 Cash flows from
investing activities: Acquisition of business, net of cash acquired
(307 ) — Additions to property, plant, and equipment (36 ) (64 )
Other (1 ) (1 ) Cash used for investing activities (344 ) (65 )
Cash flows from financing activities: Net change in
short-term borrowings 6 21 Proceeds from long-term debt 717 — Debt
issuance costs (5 ) — Acquisition of treasury stock (442 ) (1 )
Dividends paid (134 ) (140 ) Other (5 ) (7 ) Cash provided by (used
for) financing activities 137 (127 ) Effect of exchange rate
changes on cash and cash equivalents (14 ) 8 Net
increase (decrease) in cash and cash equivalents (52 ) 30
Cash and cash equivalents, beginning of period 263 182
Cash and cash equivalents, end of period $ 211
$ 212
Schedule A
Brown-Forman Corporation Supplemental Information
(Unaudited) Three Months
Ended Six Months Ended Fiscal Year Ended
October 31, 2017 October 31, 2017 April 30,
2017 Reported change in net sales
10 % 10 % (3 )%
Acquisitions & divestitures 1 % 1 % 3 % Foreign exchange (1 )%
(1 )% 2 % Estimated net change in distributor inventories (2 )% (2
)% 1 %
Underlying change in net sales 8
% 7 % 3 %
Reported change in gross profit 11 % 10
% (6 )% Acquisitions & divestitures — % —
% 4 % Foreign exchange — % — % 3 % Estimated net change in
distributor inventories (2 )% (3 )% 1 %
Underlying change
in gross profit 8 % 7 %
3 % Reported change in advertising
4 % 5 % (8 )%
Acquisitions & divestitures — % — % 8 % Foreign exchange (1 )%
(1 )% 2 %
Underlying change in advertising 3
% 5 % 2 %
Reported change in SG&A — % (1
)% (3 )% Acquisitions & divestitures — % —
% — % Foreign exchange (1 )% (1 )% 1 %
Underlying change
in SG&A (1 )% (1 )%
(2 )% Reported change in operating
income 19 % 17 % (35
)% Acquisitions & divestitures — % (1 )% 35 % Foreign
exchange 1 % 3 % 4 % Estimated net change in distributor
inventories (3 )% (5 )% 3 %
Underlying change in
operating income 16 % 14 %
7 % Note: Totals may differ due to rounding
See "Endnote 2 - Non-GAAP Financial
Measures" for details on our use of Non-GAAP financial
measures, how these measures are calculated and the
reasons why we think this information is useful to readers.
Schedule B
Brown-Forman
CorporationSupplemental Brand Information
(Unaudited)Six Months Ended October 31, 2017
% Change vs. Prior Year Period
Brand
Depletions3 Net Sales2
Equivalent
Conversion3
Reported
Acquisitions
and
Divestitures
Foreign
Exchange
Estimated Net
Change in
Distributor
Inventories
Underlying
Jack Daniel’s Family 8 % 10 % — %
(1 )% (2 )% 7 % Jack Daniel’s Tennessee
Whiskey 7 % 9 % — % (1 )%
(2 )% 6 % Jack Daniel’s Tennessee Honey 9 %
10 % — % (2 )% — % 8 % Jack
Daniel’s RTDs 11 % 14 % — % 1 %
— % 15 % Gentleman Jack 9 % 11 %
— % — % (2 )% 9 % Jack Daniel’s
Tennessee Fire 15 % 22 % — % (1
)% (7 )% 14 % Woodford Reserve 20 %
23 % — % — % (2 )% 21 %
Finlandia 5 % 18 % — % (3 )%
(7 )% 8 % el Jimador 8 % 15 %
— % (1 )% (4 )% 10 % Herradura
13 % 15 % — % — % 5 % 19
% All Other Brands 1 % 3 % — % 0
% (3 )% 1 % Subtotal 6 % 10 %
— % (1 )% (2 )% 7 % Other Non-Branded
NM (6 )% 21 % 0 %
— % 14 % Total Portfolio 6 % 10 %
1 % (1 )% (2 )% 7 %
Other Brand
Aggregations
Super/Ultra-premium American whiskey3
NM 22 % — % — % (6
)% 15 % Old Forester & Woodford Reserve NM
26 % 0 % 0 % (4 )% 22 %
el Jimador, Herradura, & New Mix NM
13 % 0 % (1 )% — % 13 %
See "Endnote 2 - Non-GAAP Financial
Measures" for details on our use of Non-GAAP financial
measures, how these measures are calculated and the
reasons why we think this information is useful to readers.
Note: Totals may differ due to
rounding
Schedule C
Brown-Forman
CorporationSupplemental Geographic Information
(Unaudited)Six Months Ended October 31, 2017
Geographic
Area
Net Sales2
Reported
Acquisitions
and
Divestitures
Foreign
Exchange
Estimated Net
Change in
Distributor
Inventories
Underlying
United States 9 % — % — %
(3 )% 6 %
Europe 16 % — %
(4 )% (2 )% 10 % United Kingdom 15 %
— % (8 )% — % 7 % Germany
13 % (1 )% (2 )% — % 11 % France
8 % — % (2 )% — % 6 % Poland
24 % — % (12 )% — % 12 %
Russia NM — % (18 )% NM
43 % Rest of Europe 6 % — %
(1 )% 3 % 8 %
Australia 7
% 2 % — % — % 10 %
Other
geographies 5 % — % — % 1 %
6 % Mexico 9 % — % (1 )%
1 % 9 % Japan (18 )% — % 3 %
1 % (15 )% Canada (3 )% — %
2 % 1 % — % Remaining geographies3
11 % (1 )% 0 % 1 % 11 %
Travel Retail3 18 % 0 % 2
% (9 )% 11 %
Other non-branded3
(6 )% 21 % 0 % — % 14 %
Total 10 % 1 % (1 )% (2
)% 7 %
Other Geographic
Aggregations
Developed - including United States3 7
% — % (1 )% (1 )% 5 % Developed -
excluding United States3 5 % — % (2 )%
2 % 5 % Emerging3 24 % — %
(2 )% (6 )% 15 %
See "Endnote 2 - Non-GAAP Financial
Measures" for details on our use of Non-GAAP financial
measures, how these measures are calculated and the
reasons why we think this information is useful to readers.
Note: Totals may differ due to
rounding
Note 1 - Percentage growth rates are compared to
prior-year periods, unless otherwise noted.
Note 2 - Non-GAAP Financial Measures
Use of Non-GAAP Financial
Information. We use certain financial measures in this press
release that are not measures of financial performance under U.S.
generally accepted accounting principles (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
press release may not be defined and calculated by other companies
in the same manner. Reconciliations of these non-GAAP measures to
the most closely comparable GAAP measures are presented on
Schedules A, B and C to this press release.
“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 cost
of sales, (c) underlying gross profit, (d) underlying advertising
expenses, (e) underlying selling, general and administrative
(SG&A) expenses, (f) underlying other expense (income), (g)
underlying operating expenses and (h) underlying operating income.
To calculate these measures, we adjust, as applicable, for (a)
acquisitions and divestitures, (b) foreign exchange and (c)
estimated net changes in distributor inventories. We explain these
adjustments below.
- “Acquisitions and divestitures.” This
adjustment removes (a) any non-recurring effects related to our
acquisitions and divestitures (e.g., transaction gains or losses,
transaction costs, and integration costs), and (b) the effects of
operating activity related to acquired and divested brands for
periods that are not comparable on a year-over-year basis
(non-comparable periods). By excluding non-comparable periods, we
therefore include the effects of acquired and divested brands only
to the extent that results are comparable on a year-over-year
basis.In fiscal 2016, we sold our Southern Comfort and Tuaca brands
and related assets to Sazerac Company, Inc. and entered into 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, 2016, 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 period. For both fiscal 2017 and 2018, the
non-comparable period is the month of May.
- “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 use the non-GAAP measures “underlying change” for the
following reasons: (a) to understand our performance from period to
period on a consistent basis; (b) to compare our performance to
that of our competitors; (c) in connection with management
incentive compensation calculations; (d) in our planning and
forecasting processes and (e) in communications concerning our
financial performance with the board of directors, stockholders,
and investment analysts. We have consistently applied the
adjustments within our reconciliations in arriving at each non-GAAP
measure.
“Return on average invested
capital.” This measure refers to the sum of net income and
after-tax interest expense, divided by average invested capital.
Average invested capital equals assets less liabilities, excluding
interest-bearing debt, and is calculated using the average of the
most recent 13 month-end balances. After-tax interest expense
equals interest expense multiplied by one minus our effective tax
rate. We use this non-GAAP measure because we consider return on
average invested capital to be a meaningful indicator of how
effectively and efficiently we use capital invested in our
business.
Note 3 - Definitions
Geographic Aggregations.
From time to time, in order to explain our results of operations
or to highlight trends and uncertainties affecting our business, we
aggregate markets according to stage of economic development as
defined by the International Monetary Fund.
- “Developed” markets are “advanced
economies” as defined by the International Monetary Fund, with the
largest for Brown-Forman being the United States, the United
Kingdom, and Australia. Developed international markets are
developed markets excluding the United States.
- “Emerging” markets are “emerging and
developing economies” as defined by the International Monetary
Fund, with the largest for Brown-Forman being Mexico and
Poland.
In Schedule C, we provide supplemental information for our
largest markets ranked by percentage of total fiscal 2017 Net
Sales. In addition to markets that are listed by country name, we
include the following aggregations:
- “Rest of Europe” includes all markets
in the continent of Europe and the CIS countries other than those
specifically listed.
- “Remaining geographies” All other
markets (approximately 110), other than those specifically listed
or included in “Rest of Europe,” with the largest being Brazil,
South Africa, and China.
- “Travel Retail” represents our sales to
global duty free customers, travel retail customers, and the U.S.
military.
- “Other non-branded” includes used
barrel, bulk whiskey and wine, and contract bottling sales.
Brand Aggregations.
From time to time, in order to explain our results of operations
or to highlight trends and uncertainties affecting our business, we
aggregate brands by spirits category.
- “Super/Ultra-premium American whiskey
brands” include Woodford Reserve, Jack Daniel’s Single Barrel,
Gentleman Jack, Sinatra Select and No. 27 Gold.
In Schedule B, we provide supplemental information for our
largest brands ranked by percentage of total fiscal 2017 Net Sales.
In addition to brands that are listed by name, we include the
following aggregations:
- “Jack Daniel’s family of brands”
includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s
Tennessee Honey (JDTH), Jack Daniel’s RTD and RTP products (JD
RTDs/RTP), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF),
Jack Daniel’s Single Barrel Collection, Jack Daniel’s Tennessee Rye
Whiskey, Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold
Tennessee Whiskey, and Jack Daniel’s 1907 Tennessee Whiskey.
- “Jack Daniel’s RTD and RTP” products
include all RTD line extensions of Jack Daniel’s, such as
Jack Daniel’s & Cola, Jack Daniel’s & Diet
Cola, Jack & Ginger, Jack Daniel’s Country Cocktails,
Gentleman Jack & Cola, Jack Daniel’s Double Jack, Jack Daniel’s
American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s
Cider (JD Cider), Jack Daniel’s Lynchburg Lemonade (JD Lynchburg
Lemonade), and the seasonal Jack Daniel’s Winter Jack RTP.
Other Metrics.
- “Depletions.” When discussing volume,
unless otherwise specified, we refer to “depletions,” a term
commonly used in the beverage alcohol industry. Depending on the
context, “depletions” means either (a) our shipments directly to
retailers or wholesalers, or (b) shipments from our distributor
customers to retailers and wholesalers. We generally record
revenues when we ship our products to our customers, so our
reported sales for a period do not necessarily reflect actual
consumer purchases during that period. We believe that our
depletions measure volume in a way that more closely reflects
consumer demand than our shipments to distributor customers
do.
- “Drinks-equivalent.” Volume is
discussed on a nine-liter equivalent unit basis (nine-liter cases)
unless otherwise specified. At times, we use a “drinks-equivalent”
measure for volume when comparing single-serve ready-to-drink (RTD)
or ready-to-pour (RTP) brands to a parent spirits brand.
“Drinks-equivalent” depletions are RTD and RTP nine-liter cases
converted to nine-liter cases of a parent brand on the basis of the
number of drinks in one nine-liter case of the parent brand. To
convert RTD volumes from a nine-liter case basis to a
drinks-equivalent nine-liter case basis, RTD nine-liter case
volumes are divided by 10, while RTP nine-liter case volumes are
divided by 5.
Note 4 - Reconciliation of Non-GAAP
ROIC
Non-GAAP ROIC Calculation $ millions
Six monthsended
April 30,2017
Six monthsended
October 31,2017
Twelve monthsended
October 31,2017
Reported net income
{a} $ 327 $ 417 $ 744
Reported after-tax interest expense1
{b} 23 22
45 Reported net income and after-tax interest
expense $ 350 $ 439 $ 789 Average invested capital 3,729
ROIC 21.2 % 1 After-tax interest expense equals interest
expense from the consolidated income statement multiplied by one
minus our effective tax rate also from the consolidated income
statement {a} Consolidated income statement {b} Consolidated income
statement and accompanying notes
View source
version on businesswire.com: http://www.businesswire.com/news/home/20171206005618/en/
Brown-Forman CorporationPhil Lynch, 502-774-7928Vice
PresidentCorporate Communications and Public RelationsorJay Koval,
502-774-6903Vice PresidentInvestor Relations and Community
Relations
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