Market Overview

Brown-Forman Reports Strong First Half Results; Raises Full Year Outlook

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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:

  1. Underlying net sales growth of 6% to 7%.
  2. A slight increase in underlying SG&A, and underlying A&P growth
    roughly in-line with sales growth.
  3. Underlying operating income growth of 8% to 9%.
  4. 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 Corporation
Unaudited Consolidated
Statements of Operations
For 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 Corporation
Unaudited Consolidated
Statements of Operations
For 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 Corporation
Unaudited 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 Corporation
Unaudited Condensed
Consolidated Statements of Cash Flows
For 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 Corporation
Supplemental 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 Corporation
Supplemental 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 months
ended

April 30,
2017

 

Six months
ended

October 31,
2017

 

Twelve months
ended

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

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