Brown-Forman's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Brown-Forman (BF.B)

Q3 2012 Earnings Call

March 07, 2012 10:00 am ET


Mark Stegeman - Vice President, Interim Director of Investor Relations and Assistant Treasurer

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

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


Kaumil S. Gajrawala - UBS Investment Bank, Research Division

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Lauren Torres - HSBC, Research Division

Timothy S. Ramey - D.A. Davidson & Co., Research Division

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

Edward Mundy - Nomura Securities Co. Ltd., Research Division



Good morning. My name is Kathy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Fiscal 2012 Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Mark Stegeman, Interim Director of Investor Relations. Sir, you may begin.

Mark Stegeman

Thank you, Kathy. Good morning, everyone, and thank you for joining us for Brown-Forman's Fiscal 2012 Third Quarter Earnings Call. This is Mark Stegeman, Brown-Forman's Interim Director of Investor Relations. Joining me today on the call are Paul Varga, our President and Chief Executive Officer; Don Berg, Executive Vice President and Chief Financial Officer; and Jane Morreau, Senior Vice President and Director of Finance Management, Accounting and Technology.

Don will begin our call this morning with some thoughts on our performance and a few other topics of interest. Paul will then provide some additional remarks, and then we will open the call up for your questions.

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 our results for the fiscal 2012 third 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 operations, are contained in the press release.

And with that, I'll turn the call over to Don.

Donald C. Berg

Thanks, Mark. Good morning, everyone. With our third quarter earnings release this morning, I thought I'd spend some time addressing a number of topics. Let me start with a 30,000 foot summary of our third quarter and year-to-date results. Then I'll talk some about our gross margin and the pricing environment. Following that, I'll highlight some of our portfolio and geographic performances, and then lastly, I'll talk a bit about how we are thinking about the balance of our fiscal year.

So starting with our third quarter results. We are pleased with the quarter's continuation of year-to-date high single-digit underlying growth in net sales and operating income and the acceleration compared to last year. So far, this fiscal year, underlying net sales has grown 8% compared to 4% last year, and underlying operating income has also grown 8% compared to 4% during the same time period in fiscal '11.

Furthermore, we are also pleased that our year-to-date performance has essentially met our expectations and has continued to play out as we had outlined with our guidance at the beginning of this fiscal year.

Now let me talk for a bit about our gross margins and the slight erosion to margin that we have experienced in the last couple of quarters. Historically, our top line growth has come from a balance of price increases and volume gains. There have been times when price was the dominant driver of our net sales growth, improving our gross margin. But in the recent few years, during and following the global recession, a number of factors skewed our top line performance towards being essentially all volume driven.

First, as you'll recall, the consumer shifted their consumption to the off-premise, which is typically a more price-sensitive channel. Further, we were concerned about our consumers' ability to buy premium brands. And finally, price competition intensified. Given the overall economic environment, we took very little price increase, absorbing higher input costs and at times, excise tax increases.

Today, the global economy, while a bit firmer, continues to experience a very fragmented recovery, and in some economies, continues to struggle. However, in some markets, the competitive pricing environment seems to have abated somewhat, and we have seen some return to trading up to premium and super premium brands.

So as we think about pricing, there are really 3 key components we are thinking about: first, recapture a portion of the increase in the input costs of grain, glass and fuel costs; second, we believe for the positioning of a premium brand, price is a key component; and lastly, there is the delicate act of using price to help balance supply and demand, particularly as it relates to aged products.

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