Brown-Forman Management Discusses Q4 2012 Results - Earnings Call Transcript

Brown-Forman (BF.B)

Q4 2012 Earnings Call

June 06, 2012 10:00 am ET


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

Jason Koval - Director of Investor Relations

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


Vivien Azer - Citigroup Inc, Research Division

Dara W. Mohsenian - Morgan Stanley, 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

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

Thomas Adrian Russo - Gardner Russo & Gardner



Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Fiscal 2012 Year End Conference Call. [Operator Instructions] I would now like to turn the conference over to Don Berg, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Donald C. Berg

Thanks, Tiffany, and good morning, everyone. I'd like to start this morning by introducing Jay Koval, our new Director of Investor Relations. Jay joins us from Starwood Hotels and Resorts after leading their Investor Relations efforts since 2006. Prior to Starwood, Jay worked as an analyst on the buy-side at Invesco Funds Group and the sell side of Bank of America Securities. We're excited to have Jay as a part of Brown-Forman's team, and I know he's looking forward to meeting more of you over the coming year. So Jay?

Jason Koval

Thanks, Don, and good morning, everyone. I want to thank you for joining us today for Brown-Forman's Fiscal 2012 Fourth Quarter Earnings Call. Joining me today are Paul Varga, our President and Chief Executive Officer; Don Berg; Jane Morreau, Senior Vice President, 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 our results for the fiscal 2012 fourth 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, let me turn the call back over to Don for his prepared remarks.

Donald C. Berg

Thanks, Jay. On today's fourth quarter earnings call, I'd like to cover 3 main topics, including a review of our full year 2012 results, our preliminary outlook for fiscal '13 and an update on our balance sheet and uses of cash. So let me start with my first topic, a quick review of our results. In fiscal '12, we delivered another year of strong underlying results. Earnings per share of $3.56 were negatively impacted by foreign exchange by approximately $0.11 relative to our expectations a year ago, as the dollar continued to appreciate against most other currencies. Year-over-year EPS comparisons were also negatively impacted by $0.43 per share due to last year's sale of Hopland-based wines. Full year underlying net sales grew 9%, which we believe is about a point ahead of the industry's growth rate and an acceleration from our 4% growth in 2011 and the 1% growth rate in 2010. This underlying sales growth also translated into underlying operating income growth of 9%. Reported gross margins were down 1 point, underlying A&P increased in line with our sales growth, and SG&A growth of 6% provided some leverage to the bottom line.

Our net sales growth was broad-based. Each of our 12 largest markets grew, with these gains powered by volumes. But just as volumes have taken some time to accelerate post-recession to current rates of growth in the high single-digits, we are increasingly confident that the pricing environment has been slowly improving, driven today by improving mix and reduced discounting. I'll talk more about the pricing environment in a minute, when I get to our expectations for 2013, but the takeaway is that we expect price increases to drive better balanced sales growth in fiscal '13.

We estimate the product innovation, drove about 2 points of our 9% net sales growth, including our first full year of results from Jack Daniel's Tennessee Honey, which depleted over 400,000 cases in the year. We have been pleased to see what we believe, is a positive halo effect on Black Label from the launch of Tennessee Honey, proving that a new product can create momentum within the trademarks and actually accelerate the sales growth of the parent brand, rather than cannibalize existing sales.

Jack's family of brands grew global constant currency sales 12% in the year, powered by the return of market share gains in the U.S. and continued strong interest in the brand outside of the United States. RTDs grew sales in line with the parent brand, driven by growth in Mexico, Germany, the U.K. and Australia. Just as RTDs have created new opportunities for us to connect with consumers and new locations through convenience and great flavors, Tennessee Honey has recruited new consumers to the brand, including African-Americans, Latinos and females. While Gentleman Jack and Single Barrel grew well in the United States, depletions jumped over 30% outside of the U.S. and surpassed 0.5 million cases globally. So while the powerful Jack Daniel's trademark is essential to each of these line extensions, we have been diversifying our consumer mix across geographies, race, sex, socio-economic classes and expanding into new locations.

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