Market Overview

Brown-Forman Reports Strong Year-to-Date Results; Operating Income Up Double-Digits

Share:

Brown-Forman Corporation (NYSE:BFA) (NYSE:BFB) reported financial
results for its third quarter and the first nine months of fiscal 2018,
ended January 31, 2018. For the third quarter, the company's reported
net sales1 increased 9% to $878 million (+6% on an underlying
basis2) compared to the same prior-year period. Reported
operating income increased 11% in the quarter to $304 million (+5% on an
underlying basis) and diluted earnings per share of $0.39 increased 4%.
Earnings per share incorporates the five for four stock split
implemented on February 28, 2018, and was negatively impacted by $0.05
due to the net impact of U.S. tax reform.

For the first nine months of the fiscal year, the company's reported net
sales increased 9% to $2,515 million (+7% on an underlying basis)
compared to the same prior-year period. Reported net sales growth
benefited by two percentage points from foreign exchange and one
percentage point from changes in distributor inventories. Reported
operating income increased 15% year-to-date to $894 million (+11% on an
underlying basis) and diluted earnings per share of $1.25 increased 17%.

Paul Varga, the company's Chief Executive Officer, said, "Brown-Forman's
business momentum continued through the third quarter, resulting in
year-to-date underlying net sales and operating income growth of 7% and
11%, respectively, and even stronger on a reported basis. The results
were well-balanced by geography and driven by 8% underlying net sales
growth for our Jack Daniel's led American whiskey portfolio. Our
accelerated rates of growth keep us on track to deliver high quality,
top-tier results in fiscal 2018. We are reaffirming our underlying
outlook for net sales growth of 6-7% and operating income of 8-9%, and
adjusting our EPS range to account for tax reform and related items."

Year-to-date Fiscal 2018 Highlights

  • Underlying net sales grew 7% (+9% reported), with balanced geographic3
    and portfolio3 contribution:
    • Emerging markets grew underlying net sales by 15% (+19% reported)
    • The United States grew underlying net sales by 5% (+7% reported)
      and non-US developed markets grew underlying net sales by 6% (+9%
      reported)
    • The Jack Daniel's family of brands grew underlying net sales 7%
      (+10% reported), including 5% growth (+7% reported) for Jack
      Daniel's Tennessee Whiskey
    • The company's super- and ultra-premium American whiskey brands
      grew underlying net sales +16% (+21% reported), including 22%
      growth from Woodford Reserve (+25% reported)
    • Herradura and el Jimador grew underlying net sales 20% and 9%
      (+19% and +13%, reported)
  • Underlying operating income grew 11% (+15% reported)
  • The company reaffirmed its fiscal 2018 underlying outlook for net
    sales growth of 6% to 7% and operating income growth of 8% to 9%.
    Split-adjusted fiscal 2018 EPS of $1.43 to $1.48 includes an expected
    full year negative impact due to tax reform of $0.03 and a negative
    impact of $0.10 from creating the previously announced charitable
    foundation during the fourth quarter.

Year-to-date Fiscal 2018 Performance By Market

Year-to-date underlying net sales grew 5% (+7% reported) in the United
States. The increase in sales growth was driven by broad-based gains
from the Jack Daniel's family of brands, including Tennessee Whiskey,
Tennessee Honey, Tennessee Fire, Gentleman Jack and the portfolio of
RTDs/RTP (RTDs). The company also continued to roll-out Jack Daniel's
Tennessee Rye in the United States, with a solid initial response from
our trade partners and consumers. The company's American whiskey
portfolio continues to grow rapidly in the United States, including
strong double-digit underlying net sales gains from Woodford Reserve and
Old Forester. Herradura and el Jimador tequila also grew underlying net
sales double-digits in the United States as both brands maintained their
solid momentum in the on and off-premise.

Sales in the company's developed markets outside of the United States
remained robust, delivering year-to-date underlying net sales growth of
+6% (+9% reported). The United Kingdom and Germany grew underlying net
sales by +6% (+10% reported) and +11% (+16% reported), respectively.
Australia's underlying net sales jumped 10% (+10% reported). Japan was
the only one of our top ten markets that declined, due primarily to
volume declines in Early Times. France's underlying net sales increased
+5% (+10% reported) and Canada grew +2% (+4% reported). After launching
our owned distribution in Spain last summer, results have continued to
accelerate, resulting in double-digit year-to-date underlying net sales
growth.

Trends in the emerging markets remained strong, despite increasingly
difficult comparisons. Underlying net sales in the emerging markets
jumped 15% (+19% reported) year-to-date. The company's two largest
emerging markets, Mexico and Poland, both grew underlying net sales by
10% (+13% and +25% reported, respectively), fueled by strong demand for
the Jack Daniel's family of brands as well as growth of tequilas in
Mexico. In emerging markets excluding Mexico and Poland, underlying net
sales grew in the high teens, as economic conditions have improved and
currencies have stabilized. Russia, Turkey, Brazil, Thailand, China and
Ukraine grew underlying net sales well into the double-digits.

Travel Retail continued to deliver solid rates of growth, with
underlying net sales up 11% (+17% reported) through the first nine
months of the fiscal year. Jack Daniel's Tennessee Whiskey is growing
well across travel retail, and other brands, such as Gentleman Jack and
Woodford Reserve are growing quickly as the company brings this great
super-premium American whiskey portfolio to new markets through this
channel. Passenger volumes are also continuing to improve, including
Russian travelers, and foreign exchange volatility has lessened.

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 5% underlying net sales growth (+7% reported) globally, with
strong volume gains in markets outside of the United States. Jack
Daniel's Tennessee Honey's underlying net sales grew 9% (+11% reported).
Gentleman Jack also grew underlying net sales 9% (+11% reported), as the
new advertising campaign and increased media spend is bolstering
results. Jack Daniel's Tennessee Fire's underlying net sales grew 15%
(+22% reported), as the brand continues to benefit from its global
rollout and U.S. on-premise momentum. Jack Daniel's RTD business has
delivered strong underlying net sales growth, up 14% (+17% reported).
This growth has been helped by innovation, including 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 American whiskey
brands, including Woodford Reserve, Jack Daniel's Single Barrel and
Gentleman Jack, delivered 16% underlying net sales growth (+21%
reported). Woodford Reserve grew underlying net sales 22% (+25%
reported). Old Forester grew well into the double-digits, powered by a
shift in product mix to more premium offerings and volumetric gains.

Finlandia vodka grew underlying net sales 7% (+14% reported). Russia's
results grew nicely due to the combination of better takeaway trends and
buy-ins in advance of a route-to-consumer change. This strength was
partially offset by a continued pressure in Poland due to the extremely
competitive marketplace.

el Jimador grew underlying net sales by 9% (+13% reported), fueled by
strong takeaway trends in the United States as the company continues to
invest in building brand awareness. Herradura grew underlying net sales
by 20% (+19% reported). Both the United States and Mexico experienced
double-digit gains, and Mexico benefited from 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 two percentage points to the 7%
year-to-date underlying net sales growth (+9% reported). Underlying
gross profit grew 7% (+10% reported). As expected, higher cost of goods
began to materialize, resulting in modest pressure on underlying gross
margins during the third quarter, although year-to-date reported gross
margins remain up slightly due to an increase in volumes of higher
margin brands and foreign exchange tailwinds. The company expects higher
costs in the fourth quarter, due in part to the phasing of expenses
during fiscal 2018.

Year-to-date underlying A&P spend increased 5% (+8% reported), as the
company continued to invest in the Jack Daniel's family of brands, the
fast growing bourbon and tequila brands, as well as brands such as Slane
Irish whiskey. Underlying SG&A was flat compared to the prior year (+2%
reported) as the company maintained its focus on tightly managing costs,
including leveraging its assets and prior investments.

The company delivered underlying operating income growth of 11% (+15%
reported) during the first nine months of the year, and operating margin
expanded by 170 basis points to 35.5%, buoyed by the favorable phasing
of year-to-date operating expenses. Operating expenses are expected to
be higher in the fourth quarter, resulting in a more modest operating
margin expansion for the full fiscal year.

U.S. Tax Reform/Other

Tax reform reduces the U.S. corporate income tax rate from 35% to 21%.
Given the company's fiscal year ends on April 30, 2018, the lower U.S.
corporate tax rate will phase in to the company's results over two
fiscal years, resulting in a 30.4% statutory rate for fiscal 2018, and
then dropping to 21% for fiscal 2019.

Third quarter results were negatively impacted by one-time items related
to U.S. tax reform, but will benefit on an ongoing basis due to the
lower statutory rate. The third quarter impact included a combined
negative impact to earnings per share of $0.05 due to three main items:

     
One-time transitional items:

3Q18 EPS
Benefit/(Expense)

Repatriation tax $ (0.19 )
Re-measurement of net U.S. deferred taxes $ 0.10
Ongoing effect of U.S. tax reform       $ 0.04  
Total 3Q18 Tax Impact $ (0.05 )
 

Looking ahead to fiscal 2019, the company anticipates that the effective
tax rate will be in the 21-23% range, and that the immediate annualized
ongoing cash tax savings will be in the $65 to $75 million range, a
portion of which will be realized in fiscal 2018.

Additionally, U.S. tax reform afforded the company an opportunity to tax
efficiently fund the pension and charitable giving programs that would
have otherwise been funded in future years. As a result, the company
funded the pension liability of $120 million and plans to establish a
$60 to $70 million foundation during the fourth quarter to support the
company's charitable giving program in the communities where
Brown-Forman employees live and work. The formation of the foundation
will result in a one-time negative impact to earnings per share of $0.10
in fiscal 2018, and is expected to partially reduce the P&L impact of
the company's annual giving on an ongoing basis.

In total, the company anticipates that full year, fiscal 2018's earnings
per share will be negatively impacted by roughly $0.13 due to the full
year impact of tax reform and the creation of a charitable foundation.

Financial Stewardship

Through January 31, 2018, the company delivered a trailing twelve month
reported operating margin of 34.4% and ROIC2,4 of 21.0%.

On January 23, 2018, Brown-Forman declared a five for four stock split,
paid on February 28, 2018. Third quarter and year-to-date results are
presented using the new, split-adjusted diluted share count of 484
million shares.

On January 23, 2018, Brown-Forman declared a special dividend of $1.00
on the split-adjusted Class A and Class B common stock. The special cash
dividend is payable on April 23, 2018 to stockholders of record on April
2, 2018. On January 23, 2018, Brown-Forman also declared a regular
quarterly cash dividend of $0.158 per share on the split-adjusted Class
A and Class B common stock, equating to an annualized cash dividend of
$0.632 per share. The quarterly cash dividend is payable on April 2,
2018 to stockholders of record on March 5, 2018.

Brown-Forman has paid regular quarterly cash dividends for 72
consecutive years and has increased the dividend for 34 consecutive
years.

Regarding the updated outlook for fiscal 2018, Varga added, "In line
with what we shared last quarter, we still anticipate that higher
operating investments and cost of sales during the fourth quarter will
moderate the rate of full year operating margin expansion.
Notwithstanding the phasing of costs, some of which are one-time in
nature, we remain on track to deliver significantly accelerated top-line
growth in fiscal 2018 given the strength of our premium American whiskey
portfolio. While we expect an ongoing benefit to our earnings and cash
flow in future years due to tax reform, we will carefully evaluate
additional opportunities to invest in the long-term growth of our
business as part of our fiscal 2019 annual planning process."

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 modest increase in underlying SG&A driven in part by compensation
    related expenses, and underlying A&P growth roughly in line with
    underlying net sales growth.
  3. Underlying operating income growth of 8% to 9%.
  4. Diluted earnings per share of $1.43 to $1.48, which now includes $0.03
    of expense from tax reform, $0.10 of expense from the establishment of
    a foundation, and $0.03 of foreign exchange benefit.
     
        FY18 EPS
Prior FY18 Outlook as of 2Q18a $1.90-$1.98
Split adjusted Prior Outlookb $1.52-$1.58
Underlying changes to Outlook $0.00
Foreign exchange $0.03
Tax Reformc ($0.03)
Establishment of Charitable Foundation - 4Q18d       ($0.10)
Updated FY18 Outlook       $1.43-$1.48
a FY18 GAAP EPS Outlook shared on 12-6-17
b Adjusted for the five for four stock split from
February 28, 2018
c Includes provisional net negative effect of $0.05 in
3Q18 and ongoing tax benefit of $0.02 in 4Q18
d Foundation expected to be created in 4Q18 and result in
an ongoing P&L benefit
 

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 press release contains statements, estimates, and projections that
are "forward-looking statements" as defined under U.S. federal
securities laws. Words such as "aim," "anticipate," "aspire," "believe,"
"continue," "could," "envision," "estimate," "expect," "expectation,"
"intend," "may," "plan," "potential," "project," "pursue," "see,"
"seek," "should," "will," and similar words identify forward-looking
statements, which speak only as of the date we make them. Except as
required by law, we do not intend to update or revise any
forward-looking statements, whether as a result of new information,
future events, or otherwise. By their nature, forward-looking statements
involve risks, uncertainties, and other factors (many beyond our
control) that could cause our actual results to differ materially from
our historical experience or from our current expectations or
projections. These risks and uncertainties include, but are not limited
to:

  • Unfavorable global or regional economic conditions, and related low
    consumer confidence, high unemployment, weak credit or capital
    markets, budget deficits, burdensome government debt, austerity
    measures, higher interest rates, higher taxes, political instability,
    higher inflation, deflation, lower returns on pension assets, or lower
    discount rates for pension obligations
  • Risks associated with being a U.S.-based company with global
    operations, including commercial, political, and financial risks;
    local labor policies and conditions; protectionist trade policies or
    economic or trade sanctions; compliance with local trade practices and
    other regulations, including anti-corruption laws; terrorism; and
    health pandemics
  • Fluctuations in foreign currency exchange rates, particularly a
    stronger U.S. dollar
  • Changes in laws, regulations, or policies – especially those that
    affect the production, importation, marketing, labeling, pricing,
    distribution, sale, or consumption of our beverage alcohol products
  • Tax rate changes (including excise, sales, VAT, tariffs, duties,
    corporate, individual income, dividends, capital gains) or changes in
    related reserves, changes in tax rules (for example, LIFO, foreign
    income deferral, U.S. manufacturing, and other deductions) or
    accounting standards, and the unpredictability and suddenness with
    which they can occur
  • Dependence upon the continued growth of the Jack Daniel's family of
    brands
  • Changes in consumer preferences, consumption, or purchase patterns –
    particularly away from larger producers in favor of smaller
    distilleries or local producers, or away from brown spirits, our
    premium products, or spirits generally, and our ability to anticipate
    or react to them; bar, restaurant, travel, or other on-premise
    declines; shifts in demographic trends; 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

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 Securities and Exchange Commission.

     

Brown-Forman Corporation

Unaudited Consolidated Statements of Operations

For the Three Months Ended January 31, 2017 and 2018

(Dollars in millions, except per share amounts)

 
2017 2018 Change
 
Sales $ 1,059 $ 1,156 9%
Excise taxes 251   278   11%
Net sales 808 878 9%
Cost of sales 272   291   7%
Gross profit 536 587 9%
Advertising expenses 102 114 11%
Selling, general, and administrative expenses 162 173 7%
Other expense (income), net (1 ) (4 )
Operating income 273 304 11%
Interest expense, net 15   15  
Income before income taxes 258 289 12%
Income taxes 76   99  
Net income $ 182   $ 190   4%
 
Earnings per share:
Basic $ 0.38 $ 0.39 4%
Diluted $ 0.38 $ 0.39 4%
 
Gross margin 66.4 % 66.8 %
Operating margin 33.8 % 34.6 %
 
Effective tax rate 29.4 % 34.4 %
 
Cash dividends paid per common share $ 0.146 $ 0.158
 

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

Basic 480,650 480,361
Diluted 483,958 484,244
 
     

Brown-Forman Corporation

Unaudited Consolidated Statements of Operations

For the Nine Months Ended January 31, 2017 and 2018

(Dollars in millions, except per share amounts)

 
2017 2018 Change
 
Sales $ 2,969 $ 3,251 9%
Excise taxes 670   736   10%
Net sales 2,299 2,515 9%
Cost of sales 758   825   9%
Gross profit 1,541 1,690 10%
Advertising expenses 291 314 8%
Selling, general, and administrative expenses 488 497 2%
Other expense (income), net (16 ) (15 )
Operating income 778 894 15%
Interest expense, net 42   45  
Income before income taxes 736 849 15%
Income taxes 212   242  
Net income $ 524   $ 607   16%
 
Earnings per share:
Basic $ 1.08 $ 1.26 17%
Diluted $ 1.07 $ 1.25 17%
 
Gross margin 67.0 % 67.2 %
Operating margin 33.8 % 35.5 %
 
Effective tax rate 28.7 % 28.5 %
 
Cash dividends paid per common share $ 0.418 $ 0.450
 

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

Basic 486,105 480,193
Diluted 489,620 483,511
 
   

Brown-Forman Corporation

Unaudited Condensed Consolidated Balance Sheets

(Dollars in millions)

 
April 30,
2017
January 31,
2018
Assets:
Cash and cash equivalents $ 182 $ 287
Accounts receivable, net 557 725
Inventories 1,270 1,343
Other current assets 342   286
Total current assets 2,351 2,641
 
Property, plant, and equipment, net 713 766
Goodwill 753 768
Other intangible assets 641 680
Other assets 167   187
Total assets $ 4,625   $ 5,042
 
Liabilities:
Accounts payable and accrued expenses $ 501 $ 584
Dividends payable 557
Accrued income taxes 9 18
Short-term borrowings 211 327
Current portion of long-term debt 249  
Total current liabilities 970 1,486
 
Long-term debt 1,689 1,770
Deferred income taxes 152 61
Accrued postretirement benefits 314 282
Other liabilities 130   242
Total liabilities 3,255 3,841
 
Stockholders' equity 1,370   1,201
 
Total liabilities and stockholders' equity $ 4,625   $ 5,042
 
   

Brown-Forman Corporation

Unaudited Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended January 31, 2017 and 2018

(Dollars in millions)

 
2017 2018
 
Cash provided by operating activities $ 445 $ 562
 
Cash flows from investing activities:
Acquisition of business, net of cash acquired (307 )
Additions to property, plant, and equipment (71 ) (100 )
Other (2 ) (1 )
Cash used for investing activities (380 ) (101 )
 
Cash flows from financing activities:
Net change in short-term borrowings (24 ) 111
Repayment of long-term debt (250 )
Proceeds from long-term debt 717
Debt issuance costs (5 )
Acquisition of treasury stock (561 ) (1 )
Dividends paid (203 ) (216 )
Other (35 ) (24 )
Cash used for financing activities (111 ) (380 )
 
Effect of exchange rate changes on cash and cash equivalents (20 ) 24  
 
Net increase (decrease) in cash and cash equivalents (66 ) 105
 
Cash and cash equivalents, beginning of period 263   182  
 
Cash and cash equivalents, end of period $ 197   $ 287  
 
 

Schedule A

 
Brown-Forman Corporation
Supplemental Information (Unaudited)
           

Three Months Ended

  Nine Months Ended Fiscal Year Ended
January 31, 2018   January 31, 2018 April 30, 2017
 
 
 
Reported change in net sales 9% 9% (3)%
Acquisitions & divestitures —% —% 3%
Foreign exchange (4)% (2)% 2%
Estimated net change in distributor inventories 1% (1)% 1%
 
Underlying change in net sales 6%   7% 3%
 
 
Reported change in gross profit 9% 10% (6)%
Acquisitions & divestitures —% —% 4%
Foreign exchange (5)% (2)% 3%
Estimated net change in distributor inventories 1% (1)% 1%
 
Underlying change in gross profit 5%   7% 3%
 
Reported change in advertising 11% 8% (8)%
Acquisitions & divestitures —% —% 8%
Foreign exchange (5)% (2)% 2%
 
Underlying change in advertising 6%   5% 2%
 
Reported change in SG&A 7% 2% (3)%
Acquisitions & divestitures —% —% —%
Foreign exchange (3)% (1)% 1%
 
Underlying change in SG&A 4%   —% (2)%
 
Reported change in operating income 11% 15% (35)%
Acquisitions & divestitures —% —% 35%
Foreign exchange (7)% (1)% 4%
Estimated net change in distributor inventories 2% (2)% 3%
 
Underlying change in operating income 5% 11% 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 believe this information is
useful to readers.

 

 

Schedule B

Brown-Forman Corporation
Supplemental Brand Information (Unaudited)
Nine Months Ended January 31, 2018
 
% Change vs. Prior Year Period

Brand3

Depletions3   Net Sales2
 

9-Liter

 

Equivalent
Conversion3

 

Reported

 

Acquisitions
and
Divestitures

 

Foreign
Exchange

 

Estimated Net
Change in
Distributor

Inventories

 

Underlying

Jack Daniel's Family   8%   8%   10%   —%   (2)%   (1)%   7%
Jack Daniel's Tennessee Whiskey   6%   6%   7%   —%   (2)%   —%   5%
Jack Daniel's Tennessee Honey   9%   9%   11%   —%   (2)%   —%   9%
Jack Daniel's RTDs   11%   11%   17%   —%   (3)%   —%   14%
Gentleman Jack   9%   9%   11%   —%   (1)%   (1)%   9%
Jack Daniel's Tennessee Fire   14%   14%   22%   —%   (1)%   (6)%   15%
Woodford Reserve   23%   23%   25%   —%   —%   (3)%   22%
Finlandia   3%   3%   14%   —%   (6)%   (1)%   7%
el Jimador   7%   7%   13%   —%   —%   (4)%   9%
Herradura   15%   15%   19%   —%   (2)%   2%   20%
All Other Brands   0%   0%   2%   —%   (2)%   —%   —%
Subtotal   6%   6%   10%   —%   (2)%   (1)%   7%
Other Non-Branded       NM   (2)%   15%   0%   —%   13%
Total Portfolio   6%   6%   9%   0%   (2)%   (1)%   7%

Other Brand

Aggregations

                           
American whiskey       NM   11%   —%   (2)%   (1)%   8%
Super/Ultra-premium American whiskey       NM   21%   —%   (1)%   (5)%   16%
Old Forester & Woodford Reserve       NM   26%   —%   —%   (4)%   22%
el Jimador, Herradura, & New Mix       NM   15%   —%   (2)%   (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 believe this information is
useful to readers.

 

Note: Totals may differ due to rounding

 
 

Schedule C

 

Brown-Forman Corporation

Supplemental Geographic Information (Unaudited)

Nine Months Ended January 31, 2018

 
 

Geographic Area3

Net Sales2
 

Reported

 

Acquisitions
and
Divestitures

 

Foreign
Exchange

 

Estimated Net
Change in
Distributor
Inventories

 

Underlying

United States   7%   —%   —%   (2)%   5%
Europe   15%   —%   (6)%   1%   9%
United Kingdom   10%   —%   (3)%   —%   6%
Germany   16%   —%   (5)%   —%   11%
France   10%   —%   (5)%   —%   5%
Poland   25%   —%   (15)%   —%   10%
Russia   62%   —%   (4)%   (22)%   37%
Rest of Europe   12%   —%   (6)%   3%   9%
Australia   10%   1%   (2)%   —%   10%
Other geographies   8%   —%   (1)%   1%   9%
Mexico   13%   —%   (3)%   1%   10%
Japan   (13)%   —%   2%   4%   (7)%
Canada   4%   —%   1%   (2)%   2%
Remaining geographies   11%   —%   —%   2%   12%
Travel Retail3   17%   —%   1%   (7)%   11%
Other non-branded3   (2)%   15%   —%   —%   13%
Total   9%   —%   (2)%   (1)%   7%

Other Geographic Aggregations

                   
Developed - including United States   7%   —%   (1)%   (1)%   5%
Developed - excluding United States   9%   —%   (4)%   1%   6%
Emerging   19%   —%   (5)%   —%   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 believe 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)
and (g) 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 press
    release, "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 and remove foreign exchange gains and losses from the
    current and prior-year periods.
  • "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

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 and we aggregate brands by spirits category.
Below are definitions of the aggregations used in this press release.

Geographic Aggregations.

  • "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 Commonwealth of Independent States 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.

  • "American whiskey" products include the Jack Daniel's family of
    brands, premium bourbons, and Early Times.
  • "Super/Ultra-premium American whiskey brands" include Woodford
    Reserve, Jack Daniel's Single Barrel, Gentleman Jack, Sinatra Select
    and No. 27 Gold.
  • "Premium bourbon" products include Old Forester and Woodford
    Reserve.
  • "Tequila" products include el Jimador, Herradura, and New Mix.

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 and Jack Daniel's No. 27 Gold 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 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.
  • "Consumer takeaway." When discussing trends in the market, we
    refer to "consumer takeaway", a term commonly used in the beverage
    alcohol industry. "Consumer takeaway" refers to the purchase of
    product by the consumer from the retail outlet as measured by volume
    or retail sales value. This information is provided by third-parties,
    such as Nielsen and the National Alcohol Beverage Control Association
    (NABCA). Our estimates of market share or changes in market share are
    derived from consumer takeaway data using the retail sales value
    metric.

Note 4 - Reconciliation of Non-GAAP ROIC

Non-GAAP ROIC Calculation
$ millions  

Three months
ended
April 30, 2017

 

Nine months
ended
January 31, 2018

 

Twelve months
ended
January 31, 2018

 
Reported net income {a} $ 144   $ 607   $ 751
Reported after-tax interest expense1 {b} 11     35     46  
Reported net income and after-tax interest expense $ 155 $ 642 $ 797
 
Average invested capital 3,796
ROIC 21.0 %
 
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 Comments and Join the Discussion!