Market Overview

Brown-Forman Reports Strong First Quarter Results; Increases Fiscal 2018 EPS Outlook


Brown-Forman Corporation (NYSE:BFA) (NYSE:BFB) reported financial
results for its first quarter of fiscal 2018, ended July 31, 2017. For
the first quarter, the company's reported net sales1
increased 9% to $723 million (+6% on an underlying basis2)
compared to the same prior-year period. Reported operating income
increased 14% in the quarter to $244 million (+12% on an underlying
basis). Diluted earnings per share of $0.46 increased 27%.

Paul Varga, the company's Chief Executive Officer, said, "Fiscal 2018 is
off to a strong start with 6% growth in underlying net sales and 12%
growth in underlying operating income, both metrics representing a nice
acceleration versus the company's solid fiscal 2017 underlying results.
We continue to foresee growth potential for our brands, most notably in
American Whiskey, and accordingly, we intend to invest against this
opportunity with ever-improving prioritization, competitiveness,
effectiveness, and efficiency."

Varga added, "With only one quarter behind us, we are reaffirming our
outlook for 6-8% underlying operating income growth while raising our
EPS range to $1.85 - $1.95 due to expected full year benefits from our
tax rate and foreign exchange."

First Quarter Fiscal 2018 Highlights

  • Underlying net sales increased 6%, the fourth consecutive quarterly
    improvement in growth:
    • Emerging markets continued to improve in the quarter, growing
      underlying net sales 19% (+27% reported)
    • Developed markets grew underlying net sales by 3% (+7% reported),
      including 5% growth in the United States (+10% reported)
    • The Jack Daniel's family of brands delivered broad-based growth,
      with underlying net sales up 6% (+10% reported), including
      underlying growth of 4% (+9% reported) for Jack Daniel's Tennessee
    • The company's super- and ultra-premium American whiskey brands3
      experienced strong underlying net sales growth, including 16%
      growth from Woodford Reserve (+10% reported)
    • Herradura grew underlying net sales 18% (+11% reported), el
      Jimador +13% (+19% reported) and New Mix RTDs grew double-digits.
  • Underlying operating income grew 12%, and reported operating margin
    expanded from 32.2% to 33.7%
    • Underlying SG&A declined 1% (-1% reported)
  • The company reaffirmed full year expectations for 4-5% underlying net
    sales growth and 6-8% underlying operating income growth, and
    increased the FY18 EPS outlook to $1.85-$1.95.

First Quarter of Fiscal 2018 Performance By

Year-to-date underlying net sales grew 5% (+10% reported) in the United
States. Sales growth was driven by continued gains for the Jack Daniel's
family of brands, including Tennessee Whiskey, Tennessee Honey,
Tennessee Fire and Gentleman Jack. 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 mid-teens in the United States as the
company continues to invest behind building consumer brand awareness for
both of these 100% agave tequilas.

Underlying net sales in the company's developed markets outside of the
United States were flat in the first quarter (+2% reported). Australia's
17% (+12% reported) underlying net sales growth was fueled by buy-ins in
advance of excise tax driven price increases. Japan's underlying net
sales declined due to comparisons with the prior year's buy-ins related
to last year's large price increases. Declines in other large developed
markets were also negatively impacted by timing, including the United
Kingdom and Germany, but the company expects these markets to normalize
in the second quarter as the comparisons ease considerably.

Underlying net sales in the emerging markets continued to accelerate
from last year's sluggish start to the year, delivering 19% growth in
the first quarter (+27% reported). The company's two largest emerging
markets, Mexico and Poland, grew underlying and reported net sales
double-digits, with results in both countries driven by solid growth for
the Jack Daniel's family of brands. Mexico also benefited from continued
growth of New Mix RTDs, el Jimador, and Herradura. Underlying and
reported net sales in the company's other emerging markets, such as
Russia, Turkey, Brazil, China, and Ukraine experienced strong
double-digit rates of growth. Results were propelled by improving
consumer demand in a more stable exchange rate environment, while also
benefiting from easy comparisons to a soft prior year period.

Travel Retail continues to deliver solid rates of growth, with
underlying net sales up 12% (+4% reported). The company is driving
improved rates of growth through increased focus on key global accounts.
Results also benefited from higher passenger volumes in markets such as
Russia, Turkey and Brazil.

First Quarter of Fiscal 2018 Performance By

The company's underlying net sales growth was led by the Jack Daniel's
family, up 6% (+10% reported). Jack Daniel's Tennessee Whiskey
experienced 4% underlying net sales growth (+9% reported) globally, as
an acceleration in the emerging markets offset a soft start in the
developed markets outside of the United States. Jack Daniel's Tennessee
Honey's underlying net sales grew 3% globally (+3% reported) as it
entered its seventh year in the marketplace. Gentleman Jack, the largest
super-premium American whiskey brand in markets outside of the United
States according to IWSR, grew underlying net sales 8% (+7% reported).
Jack Daniel's Tennessee Fire's underlying net sales grew 14% (+21%
reported), as the brand continues to benefit from its global rollout, as
well as solid growth in the United States. Jack Daniel's RTD/RTP
business grew underlying net sales 22% (+24% reported) due to continued
organic growth in this business, new product innovation such as Jack
Daniel's American Serve and Jack Daniel's Cider, as well as buy-ins
ahead of a price increase in Australia.

Brown-Forman's portfolio of super- and ultra-premium whiskey brands,
including Woodford Reserve, Jack Daniel's Single Barrel, and Gentleman
Jack, delivered double-digit rates of aggregate growth. Woodford Reserve
grew underlying net sales 16% (+10% reported), and Old Forester grew
even faster.

Finlandia vodka grew underlying net sales 6% (+17% reported), helped by
improved results in Poland against a very competitive environment,
strong growth in Russia, and gains in Travel Retail.

el Jimador grew underlying net sales by 13% (+19% reported), fueled by
strong and accelerating takeaway trends in the United States, and better
results in Mexico following the multi-year price increases as the brand
has been repositioned at a more premium level. New Mix's underlying net
sales increased double-digits as takeaway trends remained strong.
Herradura grew underlying net sales by 18% (+11% reported), driven by
double-digit gains in both the United States and Mexico.

Other P&L Items

Company-wide price/mix contributed two percentage points to underlying
net sales growth, with higher volumes accounting for the other four
percentage points of growth. Year-to-date underlying gross profit grew
6% while reported gross profit increased 9%. The last three years of
foreign exchange headwinds on net sales growth diminished in the
quarter, and foreign exchange is now expected to be a slight positive in
fiscal 2018.

First quarter underlying A&P spend increased 6% (+8% reported), as the
company invested significantly behind the Jack Daniel's family of
brands, as well as the continued development of the fast growing bourbon
and tequila brands. Cost discipline helped drive a continued decline in
underlying SG&A, down 1% (-1% reported). The company delivered
underlying operating income growth of 12% (+14% reported) during the
first quarter, as operating margin expanded by 150 basis points to 33.7%.

Financial Stewardship

On July 27, 2017, Brown-Forman declared a regular quarterly cash
dividend of $0.1825 per share on the Class A and Class B common stock,
resulting in an annualized cash dividend of $0.73 per share. The
quarterly cash dividend is payable on October 2, 2017 to stockholders of
record on September 7, 2017. Brown-Forman has paid regular quarterly
cash dividends for 72 consecutive years and has increased the dividend
for 33 consecutive years.

Fiscal Year 2018 Outlook

The global economy remains volatile, particularly in the emerging
markets, and the competitive landscape has intensified in the developed
world, making it difficult to accurately predict future results.
Assuming no deterioration in current trends, the company anticipates:

  1. Underlying net sales growth of 4% to 5%, led by our premium American
    whiskey and tequila brands, including disciplined innovation for Jack
    Daniel's RTDs, as well as the launch of Jack Daniel's Tennessee Rye
    and Slane Irish Whiskey.
  2. Flat underlying SG&A as the company expects to continue its
    disciplined approach to managing costs.
  3. Underlying operating income growth of 6% to 8%.
  4. Diluted earnings per share of $1.85 to $1.95, which now incorporates a
    tax rate of approximately 28% and a slightly favorable impact from
    foreign exchange.

Conference Call Details

Brown-Forman will host a conference call to discuss the results at 10:00
a.m. (EDT) today. All interested parties in the United States are
invited to join the conference call by dialing 888-624-9285 and asking
for the Brown-Forman call. International callers should dial
+1-706-679-3410. The company suggests that participants dial in ten
minutes in advance of the 10:00 a.m. (EDT) start of the conference call.
A live audio broadcast of the conference call, and the accompanying
presentation slides, will also be available via Brown-Forman's Internet
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

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 period ended July 31, 2017, to the
most closely comparable GAAP measure, and the reasons why management
believes these adjustments to be useful, are included in Schedule A in
this press release.
3 Super/Ultra-premium American
whiskey brands include Woodford Reserve, Jack Daniel's Single Barrel,
Gentleman Jack, Sinatra Select, and No. 27 Gold.

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
  • 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
  • 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"), 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 the underlying 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 July 31, 2016 and 2017

(Dollars in millions, except per share amounts)

      2016     2017     Change
Sales $ 856 $ 929 8 %
Excise taxes 195   206   6 %
Net sales 661 723 9 %
Cost of sales 208   230   11 %
Gross profit 453 493 9 %
Advertising expenses 82 89 8 %
Selling, general, and administrative expenses 163 161 (1 %)
Amortization expense
Other expense (income), net (5 ) (1 )
Operating income 213 244 14 %
Interest expense, net 12   15  
Income before income taxes 201 229 14 %
Income taxes 57   51  
Net income $ 144   $ 178   24 %
Earnings per share:
Basic $ 0.37 $ 0.46 26 %
Diluted $ 0.36 $ 0.46 27 %
Gross margin 68.5 % 68.1 %
Operating margin 32.2 % 33.7 %
Effective tax rate 28.2 % 22.1 %
Cash dividends paid per common share $ 0.1700 $ 0.1825

Shares (in thousands) used in the calculation of earnings per share

Basic 393,018 384,038
Diluted 396,009 386,387

Brown-Forman Corporation

Unaudited Condensed Consolidated Balance Sheets

(Dollars in millions)

      April 30,
    July 31,
Cash and cash equivalents $ 182 $ 238
Accounts receivable, net 557 576
Inventories 1,270 1,337
Other current assets 342 352
Total current assets 2,351 2,503
Property, plant, and equipment, net 713 719
Goodwill 753 755
Other intangible assets 641 661
Other assets 167 164
Total assets $ 4,625 $ 4,802
Accounts payable and accrued expenses $ 501 $ 454
Dividends payable 70
Accrued income taxes 9 57
Short-term borrowings 211 258
Current portion of long-term debt 249 250
Total current liabilities 970 1,089
Long-term debt 1,689 1,720
Deferred income taxes 152 135
Accrued postretirement benefits 314 298
Other liabilities 130 140
Total liabilities 3,255 3,382
Stockholders' equity 1,370 1,420
Total liabilities and stockholders' equity $ 4,625 $ 4,802

Brown-Forman Corporation

Unaudited Condensed Consolidated Statements of Cash Flows

For the Three Months Ended July 31, 2016 and 2017

(Dollars in millions)

      2016     2017
Cash provided by operating activities $ 128 $ 102
Cash flows from investing activities:
Acquisition of business, net of cash acquired (307 )
Additions to property, plant, and equipment (16 ) (28 )
Other (1 )  
Cash used for investing activities (324 ) (28 )
Cash flows from financing activities:
Net change in short-term borrowings (43 ) 45
Proceeds from long-term debt 717
Debt issuance costs (5 )
Acquisition of treasury stock (201 ) (1 )
Dividends paid (67 ) (70 )
Other (3 ) (5 )
Cash provided by (used for) financing activities 398 (31 )
Effect of exchange rate changes on cash and cash equivalents (6 ) 13  
Net increase in cash and cash equivalents 196 56
Cash and cash equivalents, beginning of period 263   182  
Cash and cash equivalents, end of period $ 459   $ 238  

Schedule A

Brown-Forman Corporation
Supplemental Information (Unaudited)
Three Months Ended Fiscal Year Ended
July 31, 2017 April 30, 2017
Reported change in net sales 9% (3)%
Acquisitions & divestitures 1% 3%
Impact of foreign exchange (1)% 2%
Estimated net change in distributor inventories (3)% 1%
Underlying change in net sales 6% 3%
Reported change in gross profit 9% (6)%
Acquisitions & divestitures —% 4%
Impact of foreign exchange 1% 3%
Estimated net change in distributor inventories (3)% 1%
Underlying change in gross profit 6% 3%
Reported change in advertising 8% (8)%
Acquisitions & divestitures —% 8%
Impact of foreign exchange (1)% 2%
Underlying change in advertising 6% 2%
Reported change in SG&A (1)% (3)%
Acquisitions & divestitures —% —%
Impact of foreign exchange —% 1%
Underlying change in SG&A (1)% (2)%
Reported change in operating income 14% (35)%
Acquisitions & divestitures (1)% 35%
Impact of foreign exchange 5% 4%
Estimated net change in distributor inventories (6)% 3%
Underlying change in operating income 12% 7%
Note: Totals may differ due to rounding


We use certain financial measures in this report that are not measures
of financial performance under 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 report may not be defined and
calculated by other companies in the same manner.

"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 gross profit, (c) underlying advertising expenses,
(d) underlying selling, general, and administrative (SG&A) expenses, and
(e) underlying operating income. To calculate these measures, we adjust,
as applicable, for (a) acquisition and divestiture activity, (b) foreign
exchange, and (c) estimated net changes in distributor inventories. We
explain these adjustments below.

  • "Acquisitions and divestitures." In fiscal 2016, we sold our
    Southern Comfort and Tuaca brands and related assets to Sazerac
    Company, Inc. and entered in 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, 2017, 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 periods. For fiscal 2017 and 2018,
    the non-comparable period for each fiscal year is the month of May. We
    believe that these adjustments allow us to understand better our
    underlying results on a comparable basis.
  • "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 believe that adjusting for the
    effect of varying levels of distributor inventories on changes in our
    income statement line items allows us to understand better underlying
    results and trends.

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 and to compare our performance to that of our
competitors; (b) to align with management incentive compensation
calculations; (c) for consistency with our planning and forecasting
processes; and (d) to communicate our financial performance with the
board of directors, stockholders, and investment analysts.


Schedule B

Brown-Forman Corporation
Supplemental Brand Information (Unaudited)
Three Months Ended July 31, 2017
% Change vs. Prior Year Period


Depletions1     Net Sales2









Estimated Net
Change in




Jack Daniel's Family     6%     10%     —%     (1)%     (3)%     6%
Jack Daniel's Tennessee Whiskey     4%     9%     —%     (1)%     (4)%     4%
Jack Daniel's Tennessee Honey     5%     3%     —%     (1)%     1%     3%
Jack Daniel's RTD/RTP     17%     24%     —%     —%     (2)%     22%
Gentleman Jack     8%     7%     —%     —%     1%     8%
Jack Daniel's Tennessee Fire     19%     21%     —%     (1)%     (6)%     14%
Woodford Reserve     16%     10%     —%     —%     6%     16%
Finlandia     6%     17%     —%     —%     (10)%     6%
el Jimador     11%     19%     —%     1%     (7)%     13%
Herradura     13%     11%     —%     —%     7%     18%
All Other Brands     (3)%     7%     —%     (1)%     (5)%     1%
Subtotal     4%     10%     —%     (1)%     (3)%     6%
Other Non-Branded     NM     (8)%     23%     1%     —%     16%
Total Portfolio     4%     9%     1%     (1)%     (3)%     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.
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.
3 Equivalent
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.

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