Brown-Forman (BF.B)

Q1 2013 Earnings Call

August 29, 2012 10:00 am ET

Executives

Jason Koval - Director of Investor Relations

Donald C. Berg - Chief Financial officer and Executive Vice President

Paul C. Varga - Executive Chairman, Chief Executive Officer and Member of Executive Committee

Analysts

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Vivien Azer - Citigroup Inc, Research Division

Thomas Adrian Russo - Gardner Russo & Gardner

Presentation

Operator

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Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brown-Forman Corporation First Quarter Fiscal 2013 Conference Call. [Operator Instructions] It is now my pleasure to hand the program over to Mr. Jay Koval. Please go ahead.

Jason Koval

Thanks, Christy, and good morning, everyone. I want to thank you for joining us today for Brown-Forman's Fiscal 2013 First Quarter Earnings Call. Joining me today are Paul Varga, our President and CEO; and Don Berg, EVP and CFO; as well as Jane Morreau, Senior Vice President of Finance.

This morning's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward-looking statements, and the company undertakes no obligation to update any of these statements, whether due to new information, future events or otherwise.

This morning, we issued a press release containing results for the fiscal 2013 first quarter. The release can be found on our website under the section titled Investor Relations. In the press release, we have listed a number of the risk factors that you should consider in conjunction with our forward-looking statements. Other significant risk factors are described in our Form 10-K, Form 8-K and Form 10-Q reports filed with the Securities and Exchange Commission.

During this call, we will be discussing certain non-GAAP financial measures. These measures and the reasons management believes they provide useful information to investors regarding the company's financial conditions and results of operation are contained in the press release. And with that, I'll turn the call over to Don for his prepared remarks.

Donald C. Berg

Thanks, Jay. Good morning, everyone. On today's first quarter earnings call, I'd like to cover 3 topics, including a review of our first quarter results, a quick update on our price increases and recent takeaway trends and our current outlook for fiscal 2013. So let me start with my first topic, a review of our first quarter results.

We are pleased to report that we kicked off our fiscal 2013 with underlying sales growth of 10%. We expected a strong first quarter, and while this 10% increase likely included some benefit due to retail buy-ins in advance of price increases, we believe that we grew underlying net sales faster than the industry. This outperformance is driven by our premium product SKU and our strength in outperforming categories, such as North American whiskey.

These top line results were also driven by broad-based geographic strength. Emerging markets, an increasingly large contributor to our results, delivered 13% underlying growth, fueled by Poland, Mexico, Russia and Turkey. The developed world also performed well, with the U.S. growing underlying net sales by 10%. In Western Europe, underlying sales grew in the low single-digits, a slight slowdown from what we've been seeing over the last few years. We believe this is primarily due to price increases we took in some major markets earlier in the calendar year, as well as weaker economic conditions. In spite of that slowdown, some countries continued to power ahead, such as France, with double-digit constant currency net sales growth and continued market share gains.

Compared to our overall 10% underlying net sales growth, the reported growth of 4% was negatively impacted by the strengthening of the dollar and the absence of the agency relationship for the Hopland-based wine business. Adjusting for these 2 factors, constant currency net sales for our existing portfolio of brands grew 14%. We estimate that inventory changes that help drive shipments ahead of depletions account for the remaining 4 percentage points of the difference to our underlying trends.

Our overall brand portfolio similarly enjoyed broad-based growth. Jack Daniel's, el Jimador and Finlandia each experienced double-digit increases in constant currency net sales. Our super-premium brands, which include Herradura, Woodford Reserve, Tuaca and Chambord, together saw a 20% increase in constant currency net sales. And while it is early on in the new campaign for Southern Comfort, we have been encouraged by the improving trends we are seeing in the U.S. marketplace. Southern Comfort's Family of Brands constant currency net sales declined only 1% globally, the smallest decline in over 2 years. U.S. net sales for the family grew in the first quarter, on the heels of a stronger and more consistent media presence, more effective promotional efforts with the trade and continued flavor innovation. The positive momentum in the U.S. was offset by a slow start in some key international markets, such as the United Kingdom and Germany.

Reported gross margins increased by almost 3 percentage points in the quarter. Approximately 1/2 of this increase was due to the absence of the agency relationship for the lower-margin Hopland-based wines and the other 1/2 from improved price/mix. During the quarter, we continued to invest in our brands, with underlying A&P spend up 9% and underlying SG&A increased 10% due to some timing issues, resulting in underlying growth in operating income of 17%. On a reported basis, operating income grew 19%, and earnings per share jumped 27%. The leverage to the EPS line was due to lower interest expense in the prior year, lower taxes and a lower share count after last year's share repurchase program.

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