Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Brown Formans second quarter fiscal 2020, <unk> earnings Conference call.
At this time all participants are in listen only mode. After the speaker's remarks, there will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone if he would like to withdraw your question press. The pound key please be advised that today's conference is being recorded.
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I'd now like to hand, the conference over to your Speaker today, Leann Cunningham Senior Vice President shareholders Relations officer. Thank you you may begin.
Thank you Dorothy and good morning, everyone I would like to thank each of you for joining us for Brown Formans second quarter and first half of fiscal 2020 earnings call. Joining me today, our Lawson Whiting, President and Chief Executive Officer, and Jay morale Executive Vice President and Chief Financial Officer. This morning's conference call contains forward looking statements space.
On our current expectations numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in the statement. Many of the factors that will determine future results are beyond the company's control to predict you should not place undue reliance on any forward looking statements and the company.
They 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 second quarter in first half of fiscal 2020. In addition to posting presentation materials that Jane will walk you through momentarily both the release in the presentation can be found on our website under the section titled Investor events and presentations.
In the press release, we have looked at a number of risk factors that you should consider in conjunction with our forward looking statements. Other significant risk factors are described in our Form 10-K and Form 10-K reports filed with the Securities and Exchange Commission.
During this call we will be discussing certain non-GAAP financial measures. These measures a reconciliation to the most directly comparable GAAP financial measures and the reasons management believes they provide useful information to investors regarding the companys financial condition and results of operations are contained in the press release and Investor presentation.
One quick item before I turn the call over to Las and then Jane and the interest sometime in fairness, we ask that you limit your questions to one for analysts you are welcome to rejoin the queue and we will take your follow up questions as time permits.
With that I would like to turn the call over to Jane.
Thank you lean and thank you everyone for joining us for second quarter earnings call.
Today in our earnings release, we reaffirmed our full year growth outlook for underlying net sales and earnings per share and modestly adjusted our outlook for underlying operating income.
I want to walk you through our first half results, which as Lee and just said our company by the presentation, we posted to our website. This morning to provide clarity to our performance given to remain some year over year noise, particularly related to terror and timing considerations.
After I finish my prepared remarks, I'll turn it over to losses for an update on progress against our strategic ambition and the overall health of the business.
But before I discuss for first half resolved I thought it might be helpful to remind you, though how that retaliatory terror, particularly from Europe continue to affect our performance.
As you know we've been discussing the tariff effect over the past six consecutive quarters, beginning with last year's Q1.
In fact in the first half of last year, the tariff related inventory by hands in Q1, and subsequent give backs in Q2 created noise in our underlying breed of cells growth both last year and this year.
In addition to the buying effects, which are essentially behind us now.
The cost of terrorists has reduced our margin.
Which are or is also either one lower pricing in certain markets, where we sell to our distributors are higher call in markets, where we import and distributor products directly.
Well, we expect tariffs to remain for the full year and to weigh on our margin the comparability issues, we will improve over the second half of the fiscal year as we cycle before your impact of terror beginning in Q3.
Aside from tariffs and somewhere to our first quarter.
Our year to date underlying results continued to be affected by timing related consideration, including customer buying patterns.
And promotional activities across a number of markets.
I will highlight these factors were expecting or underlying trends.
As I discuss our first half performance.
So with that let's dig into our first half performance.
As expected.
Our second quarter underlying net sales accelerated significantly growing 6% lifting out first half underlying net sales growth of 3%.
We estimate the timing related buying patterns and promotional activities across a number of markets negatively affected our underlying net sales growth during the first half fiscal year by two percentage points.
The key contributors to our topline growth during the first half of the fiscal year will first sustain momentum behind a premium Bourbon.
Into Keala brand.
Second accelerating growth for several of our Super premium brands, including gentleman, Jack and our single <unk> Scotches, particularly outside the U.S.
And third increased contribution from Jack Daniels, RTD injecting new flavors, most notably reflecting the October launch objecting <unk> Apple in the United States.
Well on the Jack Daniel's, Tennessee, Apple topic.
Probably note in our earnings release this morning that release that our underlying net sales growth was lower than our reported net sales growth.
Both on a quarter in a year to date basis that difference is due to the required pipeline and arching Phil associated with the launch of this Jack Daniels, Tennessee App.
And looking at our business from a geographic perspective, starting with United stage, which led our underlying net sales growth through October .
Underlying net sales increased 6%.
Doubling the rate of brophy registered in the first path and full year last year and accelerating since the first quarter. This year.
This acceleration was driven largely by the launch of Tennessee, Apple sustain double digit growth from our premium Bourbon brands and tequila portfolio and easy comps caused by a route to consumer change in last year's second quarter in one state.
Or in the very early days objective nanos, Tennessee, Apple launch, but so far with about four weeks of take away information that we have available to us it's compare favorably to our launch of fire and honey.
So a very.
Certainly cautiously optimistic at this point really exciting to see what the trade in the consumer reactions have been thus far which had been quite favorable.
Our takeaway trends and this important market the U.S. continue to increase over the past quarter growing mid single digits and largely in line with the healthy growth of total distilled spirits.
Let's turn to our emerging markets.
Underlying net sales were up 5% on top of last year's double digit growth.
We estimate timing related to certain customer buying patterns suppressed the topline growth of our emerging markets in the first half by about two percentage points.
As a result of this timing and incremental activities. We have planned for later in this year, we expect emerging markets underlying net sales to accelerate in the second half of the year.
Despite the second half acceleration awful your expectation is for slightly slower topline growth than what we've experienced over the last two fiscal years.
The full year growth rate deceleration in emerging markets is driven about Mexico in Poland or.
Our two largest emerging markets, which we expect to grow a bit slower than the last two years.
We have a number of emerging markets growing underlying net sales double digits for the first.
Me, including Southeast Asia, Turkey in Colombia, and collectively the BRIC markets.
You touch on a few of these markets.
Rushes underlying net sales continued to be fueled in part by strong consumer demand Objecting instance, whiskey and finlandia.
In Brazil consumer demand continues to expand for Jack Daniels, Tennessee, Whiskey injecting is Tennessee fire.
And we remain very encouraged but China and India is strong double digit underlying net sales growth led by the Jack Daniels family of brands and our single month Scotch portfolio as we believe we have.
Only just begun to reach consumers and these markets, where the long term potential is so significant.
It's similar to our first quarter. It was in our developed international markets were tariff related activity had the largest impact when looking at our Q2 growth rates.
Until two quarters, if you will.
We call the first quarter underlying net sales for a developed international markets were hurt down 3% in comparison to last year, when significant retail and wholesale buying boost itself in several markets in Europe .
Second quarter underlying net sales were up 8%. This year helped by easy comparisons to the same period last year, when we experienced get back from those buying.
The timing noise related to terror, essentially washes out when we look at our first half underlying net sales both a 2% developed markets.
This rate of growth is lower than our historical performance in our developed international markets due primarily to the timing of certain customer purchases and promotional activities.
Considering these factors, we estimate timing related activity had about a three point.
Drag.
On our overall top line performance in these markets through the first half of our fiscal year.
Just a touch on a handful of our develop international markets.
Spain in Taiwan continued to be standout performers.
Australian France also contributed solid underlying sales growth would take rate trends in both markets improving significantly for the most recent six month period compared to a year ago.
Well in Germany, and the UK, our largest developed international markets like or underlying net sales growth expectations for the first half of the fiscal year due impart to timing issues. We believe our portfolio is healthy in these markets as the latest six months consumer takeaway trends are growing ahead of the bill spirits.
Category in each of those markets.
And finally as expected treble retails underlying net sales remain down for the first half of the fiscal year declining 8% as we cycled against last year's first half very strong 14% growth.
Which was influenced significantly by the facing a certain customer purchases.
As we look ahead, we expect travel retail is underlying net sales trends to improve in the second half of the fiscal year as the timing effects smooths out resulting in full your underlying net sales growth in the low single digits.
Now looking at a business through a brand Lynn.
Jack Daniels family of brands underlying net sales for the first half of the fiscal year increased 2%.
As growth was propelled by the launch of Jack Daniels, Tennessee, Apple in the United States.
And broad based geographic growth for both checking is our Tds and Jack Daniels, Tennessee Honey.
Those gains were partially offset by 1% decline in underlying net sales growth for the first half of the year for Jack Daniels, Tennessee Whiskey due in part to timing related customer buying patterns and promotional activities in the U.S. and across a number of international markets in our travel retail channel.
We estimate these factors negatively the effected Jack Daniels, Tennessee Whiskey is underlying net sales growth by about three percentage points.
Our portfolio premium brands, including Woodford Reserve and old Forester continued their strong double digit underlying net sales growth of 22% through the first half.
We remain very pleased with the continued leadership of Woodford reserve in the Super premium Bourbon category growing underlying net sales with a double digit rate each year since its launch in 1996.
Oh for sustained and even faster rate of underlying net sales growth powered by volume metric gains across the portfolio expression, including the brands. Most recent innovation oak forced IRI and favorable mix driven by higher growth from our Super premium expression.
Once again, our to keep the portfolio provided double digit underlying net sales growth on top of the simply the same growth rate in last year's first half.
Are there are led the growth with underlying net sales up 19% driven by higher volumes and pricing in the United States and Mexico.
Oh human doors underlying net sales grew 13%, reflecting higher volumes in the United States as consumer takeaway trends remained strong.
Additionally, higher prices in Mexico, as well as a growing consumer brace for the brand and several other international markets contributed to the brands double digit increase.
Moving down our piano.
Gross margin declined 270 basis points, resulting in an underlying gross profit drop of 2% through the first half.
The margin decline was driven by the same two factors we've highlighted in the last two earnings call.
Tariff related costs and higher input costs, reflecting gabi in wood inflation.
Underlining MP increased 4% in the first half of this fiscal year, largely reflecting spending to support the launch of Jack Daniels, Tennessee, Apple and higher media investment behind Jack Daniels, Tennessee Whiskey in the United States.
We invested incrementally behind the growth momentum with several other brands in the portfolio, including Woodford Reserve gentleman, Jack and Glendronach.
Underlying net DNA decreased 1% for the first set for the fiscal year, driven by lower compensation related expenses.
In the aggregate our underlying operating income declined 5% through the first half driven by an approximate <unk> point drag.
Related to tariff related costs.
Our distributor inventory levels due largely to the launch of Jack Daniels, Tennessee, Apple and then the effective tax rate of just over 16%.
Which included a couple of discrete items recognized in the quarter drove 5% growth and diluted earnings per share to 97 cents.
So turning now to our full year outlook.
Our underlying net sales growth through October keeps us on track to deliver another year of solid results.
Starting with our topline growth expectations, we use.
Reaffirmed our underlying net sales growth of 5% to 7% for fiscal 2020.
As I discussed throughout my prepared remarks. This morning, we had a number of timing related issues across a number of markets affecting our first half results that when we consider these factors. We believe were topline trends continue to grow in the mid single digits.
We remain confident in the health of our business as our consumer takeaway trends in most of our major markets remain solid and supportive of our growth ambitions for the year.
We anticipate our underlying net sales in the U.S. will celebrate particularly for Jack Daniels, Tennessee whiskey, reflecting our most recent value takeaway performance.
We continued to forecast sustained double digit growth for premium Bourbon and Keala portfolio.
And finally, we expect second half results to benefit from commendable contribution from the launch objective syncing Apple in the United States as well as from the focused promotional support an incremental media that we have plan, particularly during the important holiday season Thats upon us now across several markets.
We expect gross margins will be down around 200 basis points for the year split between tariff related costs and higher input costs.
Again as a reminder, we do not expect further drag on margin from terrace, beginning in the second half the year.
That being said, we do expect input cost pressures from ungodly in wood to continue.
Regarding our operating costs for fiscal 2020, we continue to plan for solid reinvestment behind our brands with underlying advertising growth only a bit lower than our rate of underlying net sales growth.
We are anticipating incremental investments we continue to support the launch of Jack Daniels, Tennessee, Apple as well as incremental spend to fuel the momentum of several brands in our portfolio.
We are thoughtfully continuing to reallocate certain investments from less efficient areas too broad reach media digital and scalable consumer facing activities, which we expect to drive an effective increase well above our actual increase since then.
We are expecting modest growth in SGN eight for the year, implying an acceleration in the back half still driving some leverage operating income.
So in summary, we are reaffirming our full year outlook for underlying net sales growth of 5% to 7% and earned or unearned per share of $1.75 to $1.85 for fiscal 2000.
We have modestly reduced our underlying operating income outlook by one point.
To a range of 2% to 4%, reflecting the full through continued input cost pressures in macro economic and geopolitical uncertainty, notably in a handful of emerging markets and our travel retail channel.
It's worth noting that in the absence of tariff related costs. We are on track to deliver mid to high single digit underlying growth in operating income for the year.
In closing despite the short term headwinds from tariff and input cost pressures, we continue to manage the business as we always have for the long term.
This includes our multiyear period of stepped up investment, including this fiscal year in maturing whiskey inventory in capex to support the organic growth of our business in the years ahead.
We expect this would drive additional free cash flow and in coming years and provide opportunities to return cash to our shareholders. As we always have thoughtfully disciplined and consistently including our recently announced cash dividend increase of 5%.
We believe we have some of the best brands in assets in the world along with a talented team of people across the globe positioning us well for a long runway of growth ahead and continued value creation for our shareholders.
Brown Forman remained strong in resilient as we look toward our hundred 50 anniversary.
In 2020, and with that let me turn the call over to Lawson for his comments.
Okay, well, thank you Jane and good morning, everyone.
Now that we've completed the first half of our fiscal year I thought it'd be helpful. For focus my comments really on the progress that we are making against our strategic ambitions and then the overall health of our business.
For those of you who are able to join us about a year ago at our Investor Conference in New York You May recall, we introduced our strategic framework and ambitions. This framework included our portfolio development efforts geographic expansion investments philosophy, and then most importantly or people in our culture.
I'll start first with our first portfolio ambition, which was to lead in premium American whiskey.
This is largely driven by the Jack Daniels trademark, but increasingly by Woodford Reserve and then also by old Forester.
First the Jack Daniels family of brands led by Jack Daniels, Tennessee, Whiskey remains strong healthy and relevant to our consumers worldwide.
We see can solid consumer takeaway trends in many of our major markets, including the U.S., where we've seen consumer takeaway accelerating in both volume and value.
Jack Daniels Super premium portfolio, the biggest of which would be gentleman. Jack is approaching 900000 cases worldwide and serves as a way to really premiumize the trademark.
Our Jack Daniels flavors continue to bring new consumers into the franchise as evidenced by our eighth consecutive year of growth projected annual Tennessee, Honey, our fifth consecutive year of growth for Jack Daniels, Tennessee fire and we anticipate similar success with the launch of our new flavor introduction innovation, Jack Daniels, Tennessee Apple.
So it's very early certainly the consumer excitement for this product seems to be very high.
Woodford Reserve continues to enjoy its leadership position as the number one super premium Bourbon in the world.
It's grown underlying net sales 20% during the first half for this fiscal year on a global basis and remains one of the company's most important growth drivers.
And then we've also got old forester growing faster, even then Woodford driven by higher volume growth on its core brands and then also by its premium line extensions.
I'm pleased with the progress again first second portfolio, which has increased our focus against the super premium portfolio brands.
One example of this increased focus was the accretion of the emerging brands team in the United States last year.
The results of an excellent with meaningful acceleration across the portfolio and I know, we've talked about that quite a bit over the last couple of quarters.
It's worth highlighting again, the Glendronach Slane Irish whiskey old Forester now, there's a lot of excitement around Ford's Gen and all are doing very very well.
And as Jane mentioned, we remain very excited about the continued double digit underlying net sales growth for articular brands.
The growth opportunities for aired or an even more exciting not only in an established market like the U.S., but also the potential for these brands to lead fewer category growth internationally.
Finally in as early as part of our efforts to grow our portfolio around the world and ensuring that Jack Daniels Woodford reserve old Forester, Burger and I'll humidor.
Properly supported in their global expansion, we recently announced the selection of energy Vvo as our new global Creative agency of record.
This is the first time the Brown Forman is consolidated the majority of our brands under one create a partner in the first time the Jack Daniels has has changed agencies in more than 50 years.
The teams are all excited to work with energy be video to find new and interesting ways to communicate and with our consumers around the world.
So moving from portfolio geography, our ambition is to deliver balanced geographic growth with competitive routes to consumer.
Our first half results reflect growth across all of our major geographic aggregations.
United States is our largest market as you wouldn't known representing nearly half the company's net sales.
Tds remains fairly strong in the US. This is the most important spirits market the world and Brown Formans and really the industry overall continue to show relatively healthy growth.
We're optimistic that our current portfolio can continue to grow at or above Tds for the foreseeable future.
Our emerging markets remain our least develop geographic sector. However, we believe that we also have enormous opportunity. There. We continue to see these markets with a very focused portfolio really led by Jack Daniels, Tennessee, Whiskey and while our first half topline growth in emerging markets was a bit slower than we expected.
This really was due to to the two largest markets in that bucket Mexico in Poland.
It's worth commenting that Asian General remains very strong most notably China Southeast Asian, India have all been performing nicely for us lately and all have a lot of long term potential and as Jane mentioned, the other half with brick, Brazil, and Russia is also performing very well this year.
Our long term ambition to grow emerging markets at a faster rate than the overall company and becoming a larger and larger source of our bit piece of our business.
Remains unchanged.
Our developed international markets, which includes most of the EU has been the geography, most affected by tariffs and as a result this region has been volatile in challenging over the last 12 months.
Despite the geopolitical headwinds we've continued to invest in the consumer momentum and absorb the majority of these tariffs.
I think from a more for more strategic perspective in these markets. We're also focused on building a broader based portfolio brands that mirrors the portfolio development, we have seen in the United States. So although early days gentleman, Jack Woodford reserve in the single most or all getting incremental investments and focus and building a nice base of business that we expect tool.
Prove our growth rates in the coming years.
Collectively our entire Super premium whiskey portfolios growing underlying net sales double digits. This fiscal year outside of the U.S. So we're encouraged by the initial results of this of the sourcing incremental investment.
Finally, we're always looking for ways to increase our competitiveness through improved route to consumer.
Our most recent example, these efforts as the change in the distribution model in the UK that we announced earlier this year, which is anticipated to be effective may one 2020.
We believe this kind of change will provide us with the opportunity to increase the level of focus on all the brands in our portfolio and believe it positions us well for the next generation of growth.
Our third strategic ambition relate store investment philosophy, as we look to deliver shareholder friendly capital allocation and talk to your total shareholder returns.
For nearly 150 years, the company and Brown and the Brown family have been committed to preserving brown formans as a thriving family controlled independent company with the ability to create long term value for all shareholders.
We recently increased our quarterly cash dividend by 5% working with 74th consecutive year of paying regular quarterly dividends, but 36 consecutive year of increased dividends and we continue our membership and the S&P 500 dividend aristocrats index.
From form and has and will continue to be very purposeful with our capital allocation decisions. We're always looking for smart investment opportunities whether that be investments to grow our brands make acquisitions or initiate share buybacks. We balance these capital deployment decisions with our desire to return cash to our shareholders. This has served us well for many generation.
Ones and we will continue that into the future.
Our final strategic ambition relates to our people and culture, we're focused on continuing to build a strong and agile workforce and everything I've shared with you. So far this morning could not have been up could not have been accomplished without our talented and dedicated team of employees and partners around the world.
Our thriving culture is committed to living our values and delivering on our commitments to diversity and inclusion alcohol responsibility environmental responsibility and caring for the communities in which our employees live and work.
We've accomplished much in this space in the first six months of this fiscal year, but I'll take a moment just to highlight a couple the recent accolades.
We were named one of the disability Equality Index Best places to work receiving a top sort of 100.
Our offices in Spain in Mexico, We're just recognize as best places to work within their countries and Forbes recently published the world's best employers list with Brown Forman ranking in the top 15% of the 2000 largest public companies in the U.S.
In summary for the first half of fiscal 20, I believe we've made meaningful progress towards our strategic ambitions and have delivered solid broad based growth.
With that I'd, just like to say, thank you to all of our employees around the world for their talents their dedication and wishing them all a wonderful holiday season, the Dorothy I'll turn the call back over to you and open the lineup for questions.
As a reminder, if you would like to ask your question. Please press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q in a roster.
Your first question comes from the line of Peter Grom with JP Morgan.
Hey, good morning, everyone.
Morning, Pete.
So my question is this kind of more on the phasing implied in your guidance for the back half of the year you. Both from a provenance sales one of them is going to kind of focus on sales right now so kind of get from the 3% from the first.
Yeah at least although on a 5% you kind of would need to accelerate underlying sales to the high single digit range to kind of get solo and so maybe could you provide any color commentary, it's kind of what you're seeing that gives you confidence that the trends can accelerate that meaningfully from here, particularly against tougher comp and then.
And then just kind of the just the benefit of Tennessee, Apple and then the fees timing related issues that you kind of mentioned throughout the call. I mean have you already starting to see a reversal of these issues in Q3.
Thanks.
Sure.
So let me take that.
And as it relates to the top line and you're right, we're expecting past single digits.
Growth in our underlying net sales in the second half of the year and this is why we're confident that we will do that first of all you saw the acceleration and we expected that acceleration in second quarter, we grew 6%.
As we look to the rest of the year and then we would call in my prepared remarks, I talked about several timing related items.
Customer buying patterns and promotional activities.
In particular.
We said our first half results will pull down about two percentage points because of that so with that we would be in the mid single digits. We expect that to reverse in the second half of the year. As you were just asking about and we are starting to see some of those activities in certain markets in November and more in December .
So.
That and we look at the Jack Daniels, Tennessee Apple.
Launch.
I would just launched in October so we expect incremental contribution over the balance of the year. When we got it earlier in the year back in June we thought it would have about a half a point impact to the year, we're now saying about a point impact to the year, we that addresses your question to.
And then finally, our our takeaway trends as we remain healthy and really in many markets. So what were seen in the PML today and therefore, that's also indicates the timing related activities that we expect to reverse.
I would say one more thing theres nothing in our trends that we've seen today that would.
We just the believed that our premium bourbon into key the portfolios won't sustain their growth, which we're seeing in the back half figure to so think of timing I think a sustained growth on bourbon into keyless think about incremental contribution from Jack Daniels, Tennessee, Apple when you got to there.
Okay Thats helpful. Thank you mean just.
If I could just is it fair to assume that the kind of the high under the range in the context that 3%.
Hearing aid is kind of.
We'll be a challenge.
To get too.
To get somewhat faster.
You have to six to seven.
Yes, again, a lot of this depends on our.
So from forgot early days of Jack Daniels, Tennessee, Apple and then we've got so much of our.
And that we've been talking about earlier in my call Rms grip.
Taking a reallocated broadbeach reach media got a lot of that happening now and so we're hopeful that impacts our momentum even more which is not built in its in a range, but we don't know how far that about so could get you. There then I'd just add a point on that our men are the us business for us is as strong as it's been.
In a number of years right now and Cvs remains ups is strong, but we've seen improvements as we've talked about in Tennessee whiskey itself with the rest of portfolio is all really supporting our growth rates right now and so.
One of the reasons, we've got I think pretty decent confidence in the outlook is that that this us market continues to pull forward and.
Yes, I mean, I think that the fact that Woodford reserve itself Herradura, all human or have gotten much bigger in recent years and so they are more meaningful to the overall mix and they're all growing very very quickly with these days. So yes, we feel very good about.
Thanks, I'll pass it on.
Your next question comes from the line of Steve powers with Deutsche Bank.
Thanks, Good morning.
Another question on the outlook.
Moving to the the operating income growth outlook just to clarify the.
On the lower the lower outlooks that you're calling for now we are is that going to show up in the CNL in terms of Cogs versus asked today because.
You mentioned incrementally higher input costs, but you also if I if I heard you right seemed to reiterate the the 200 basis points.
Outlook from before as well so little confused as to where the Incrementality is on that front and then you also made some comments on.
Geopolitical risk as a driver for the lower profit outlook I guess I'm just somewhat surprised that those are showing up in the cost structure, rather as and does it impact of the topline what's your you're not getting too. So just what are those and where are they going to show up thanks, Mark I'm sure.
Again, I think that.
Pointed out of a couple fair questions for sure.
What I guided to this morning, those the reason why we took our.
Bottom line down about a point, which is very modest.
Was because of cost pressures as you said I got it from beginning of the year to now to about 200 assets about 200 basis points.
You bet or realize it a couple few million give or take either way.
Is your talking still rounding to 200 basis points My only point this out because as I get into this is more meaning hopefully.
You will follow this our second piece does relate to the topline and it does relate to a little uncertainty with our emerging markets in travel retail because of the economic and geopolitical uncertainties I'm talking 10 civil points. There. So given our structure of our PNM very small changes in our net sales growth very small 10th of points.
Very small changes in our cost of sales related to input costs since the points.
These changes are well within our range can flow through as somewhat larger impacts on our awhile.
So.
Just realize our intention at this point in time, we want to continue to invest behind the business, we're not talking up a one on reduce our GMP or or anything like that because we want to sustain what we believe is already healthy topline growth and continued to sustain in propelled the launch of Tennessee, Apple as we look ahead, so I hope that helps a bit.
You're talking it Doesnt, if you go and do a little math, it's very small.
Yes, okay. So just to play it back.
Yes, it's all its all within the within the prior outlook.
On the within the ranges, but a little bit more pressure on gross margin a little bit more pressure on the topline versus versus what you would have the two three months ago I'm talking I'm talking 10 cents a point.
Yes, yes understood. Okay. Thank you very much.
Your next question comes from the line of Nik Modi with.
RBC.
Yeah, good morning, everyone.
I guess the question I kind of inter related but.
Maybe we can get a quick update on just what you're seeing in the competitive landscape as it relates to.
Craft distillers, there what you're seeing from some of the bigger players.
And then just kind of dovetailing into that discussion about pricing in the U.S. market in particular.
And kind of what you're seeing because we're seeing some.
Deceleration over the last several quarters on an underlying basis on pricing and so just wanted to get a sense of what's going on there. Thank you.
Well I.
You can start going a little bit I mean I.
I guess set us on.
Previous calls and the market share growth of what we would call. The craft distillers has been a little bit less than was predicted a couple of years ago and I haven't seen anything that's really change that.
In recent quarters.
Where are the big brands continue to hold their share pretty well and the big players continue to hold their share pretty well so sorry.
I've said this before.
I've got a little bit of criticism for from the craft industry, but they haven't pulled they havent pulled through to the extent that maybe other spot as a competitive threat a few years ago. So that's most of the U.S. comment, but we will see how it plays going forward. The brands that are really growing the fastest in the market with these days are source.
To the mid like ours, Woodford, which has gotten actually quite big but there's other competitive brands out there to that or 100200, 300000 cases that are growing quite well and quite strongly that seems to be where the biggest competitive threats.
His these days.
On pricing Yeah, I can say this stuff and then I think you're talking about the U.S market as well.
As losses said in his prepared remark and I did as well the overall total distilled spirits markets in the U.S. remains quite healthy we estimate when we look at our Nelson NABCA. Other income syndicated data, we see it's up 6% to 7% so really quite nice.
Pricing still is fairly muted.
Are we might say stable I missed its barely there is so maybe a teeny tenths of a point improvement, but it's really still fairly muted unstable theres a couple of categories that were seen pricing then.
Rahm to kilos look course for us to keyless is what we've been paying attention to given our large portfolios tequila brands and we've taken pricing than we've seen pricing and the key like category from other brands now really over the past summer has accelerated some.
We see American whiskey as still very healthy when look at it that.
Continues to grow faster than Tds, and really pricing for American whiskey is flat now.
But still no I wouldn't call market healthy for pricing. If you will it hasn't the American whiskey pricings improved a little bit, but again similar to the overall tdf. So I hope that answers your question as it relates to the pricing environment in the U.S. if not I do think it's it's less I would say.
Bad, but the pricing environment has been pretty weak over the last few years and there are some nuggets of change that make it look like it just gets a little bit better, but as Jane said, it's it's small incremental benefits, it's not big John but.
And I do think we expect to the tequila will be probably the category that we'll see the strongest pricing with over over there we've already seen it a little bit and expect that will continue say over the next year.
Yeah, that's very helpful and just one one more quick one on the I've got a cost pressures any visibility on when.
That could start to improve I mean, because it's been so volatile over the last few years.
Yeah, you're right and just.
A reminder, for us the God they costs related to start hitting us in a big way until this fiscal year. That's why you purchase dialed up so much this year.
Because we had so much internally sourced the Gabi before then which was was significantly lower than if we had been band on the external market you look at the external market.
The price has increased pulse.
Five both since 2015 from about.
Pesos per kilogram to.
Over 25 pesos per pillar in but the real rapid increase has been 2016 2018. It seems like it's slowed a little bit this calendar year 2019 still going up.
Hit an unprecedented levels.
So we're hoping that leveling off but we still don't see that reversal that high cost pressures comment until late calendar 2021 R. 22 early 2022, that's based upon what we have seen that's made available to us on the plantings and when the planting star.
The excel or increased significantly and can meet and exceed the demand that's out there.
Great very out on.
Ill just add a quick comment on it is.
To kill a business to consumer takeaway in the US has been so strong over the last few years. Meanwhile, we're well into double digits as our a lot of our competitors.
Response, so far has been people up and much more aggressive with pricing in Mexico, which is generally a lower margin market you had to take price down there or are you.
A lot of brands would have become unprofitable very quickly. So we'll see how that what happens to consumer demand in Mexico, and what that may happen to the long term cost of mcgarvey in the United or well for globally. So.
There's optimism that it can start to come down, but we have enough visibility into the supply and demand forecast that you can see as James said that sort of late 2021 early 2022 seems like when the lines will start across new start to see some relief.
Great. Thanks, so much happy holidays.
Yes, Thank you Nick.
Your next question comes from a line of Vivien Azer with Cowen.
Hi, good morning.
Learning Vivian.
I wanted to dig in a little bit on AMC and your outlook around that in particular, given the change in your agency of record is certainly I think encouraging to see that you guys are investing behind your brands that generally has been very good long term strategy.
Brown Forman.
But there is a little bit of a disconnect. It seems right in terms of Lawson, what you'd kind of said as you start to your tenure as CEO you acknowledge it today the double digit growth that you had expected kind of sustainably in emerging markets and how much of a factor was that in terms of changing your agency of record and maybe taking a more global approach to brand building.
And obviously you have innovation and in a very large us business that you have to support but is there any thought that maybe more NP in emerging markets can kind of get you back to that healthier run rate. Thanks.
Well I would the healthier run rate in emerging markets.
I think as we said is largely Mexico issue and then Poland in Poland, We do expect to get back on track and sort of back to its always a very very healthy growth rates and it's one of the reasons the back half of the year, we think will be stronger.
We the reason for appointing BBD I mean after.
I do find it interesting that Jack Daniels essentially have the same agency, although it has morphed through variations over the years, but have the same agency for 50 years.
And if I could say is nothing more than it was just time to take a fresh look and getting more global agency to help support us and then the other brands, but tequila brands Woodford all those their budgets aren't really big enough to sustain a global partner around the world very easily it's much better I think if we consolidate those together and sort of a team.
Partnership effort, but but there is true to it's not only emerging markets. It's the developed international markets to where the where the most.
Focuses on developing those other brands. These days and we will be supporting those with a lot of new and hopefully better advertising. So.
It's so we've got a new Chief brand Officer, we've got a new leader on Jack Daniels.
And the combination that with new agency I think can only bring positive things.
That's helpful. If I could just follow up since you mentioned Woodford in particular internationally can you just remind us what woodford domestic versus international mixes Ccs. Thanks.
At 82 warning.
Yes, 80, 20, Volumetrically Yep perfect.
Perfect. Thank you.
Okay.
Your next question comes from the line of amid Sharma with BMO capital.
Hi, Good morning, everyone. This is truly going on from it.
I wanted to jump back to the commentary on.
Cogs line, you know again.
Horse, perhaps by tend to a point here or there can you just talk about the internal productivity initiatives that you have in place.
Are you could push on more to offset.
Sorts of tens of a point moves here in there.
Maybe you should push harder on that and then just a housekeeping item, obviously, the tax rate, which a lot lower than expected and previously I think we're looking for 20% to 20.5%. So just any update on that would be helpful. Thank you.
We start off with the tax rate.
So is this.
The tax rate was lower in the quarter and in our year to date because of a couple of discrete item and so when we look at our full year, we which includes our diseases discreet items that happened in the quarter, we expect our rate to be between 18 and 19% for the year slower than the number you just said, but I would on an.
Ongoing.
Assumption assume that our rate from operations, which is included in this 18% to 19% for the rest of the year to assume between 20 and 21%.
So that's our tax rate.
As it relates to initiatives for cost. We are we have a number of initiatives underway. We 10 are looking at and have been looking and quite frankly cost would be even higher if we didnt already have some of these initiatives underway, where we are are getting.
Looking at everything from our packaging materials too.
How we get more efficient and the plant to.
The gift.
Cost of gifts that shows up and cost of goods.
And what if we charge or don't charge or how much we do for that and whether its pain for cell. So there is a number of things that we've already done and continue to do in that space.
We're also looking at Tech technology, we have big project this year that just.
Is really getting underway at our Cooper each operation. This is significant cost savings again, those cost savings just because of our aged inventory will not come through for three or four years from now, but these are utilizing technology and machine learning and.
Robotics and things of that nature, So theres, a number of things going on in that space.
Thank you.
Your next question comes from the line of Bill chapels with Suntrust.
Hi, This is actually going on for Bill. Thanks for taking my question had a quick one on tariffs, but actually on the U.S. tariffs.
And was wondering if you guys see any impact or any switching to your brands from the U.S. tariff on Scotch imports or whether you'd expect any lift to your brands going forward from that thanks.
Well, it's only single mode Scotch, it's not blended sort of the volume blended is obviously much bigger category than single mall. So we haven't seen any impact yet I mean, I'm going long enough that I don't think it's been a month or so for two months since Nicole thing we estimate wells there. They solve the same is we did in the prior summer when we moved a lot of inventory.
Across the border to get ahead of that they did the same thing and so.
We're just not seeing the pricing out changing yet but to be honest single more pricing is so much higher than the vast majority of our portfolio that.
Although I'd love to say, it's going to have a positive benefit on our brands I'm not sure I can honestly.
It's just not big enough categories, so far away from the price points when the majority of our portfolio.
Got it thank you.
Your next question comes from the line of Brian Delaney with Bank of America.
Hey, good morning, everyone.
Morning.
A couple of questions first I don't know if I missed it but Jay did did you give us the capital spend capex outlook for the year.
Yes, thats still within the 120 to 30 million range and has already is unchanged.
Thanks, and then.
Losses, I guess to two things one just travel retail I.
I guess, it's come up with some of your competitors as well.
In terms of just the softness there I guess I'm still not understanding how much of it is.
Just a change in I guess, how they're ordering or is there. Some other sort of just underlying softness in travel retail whether it's related to the consumer or something more.
At a macro that's that's driving softness in that channel if you could shed a little bit more light on that.
Yes, I mean, it's going to get it is a little bit of both I mean first of all for Brown Forman I don't know about the rest of the industry. As we said we had really doubles very very strong double digit growth last year. So the comps have been very very difficult.
But there has there has been some say there has been some weakness in terms of.
Mobile.
Passenger counts and things like that there's some odd things going on in China. There is other places where global travel retail I do think as an industry has taken a couple us.
A couple of points down in terms of its growth rates.
I'm not sure if that's a short term our long term thing as I don't really believe it is a long term funding.
But I do think to sort of global weakness in the economy is having an impact on on passengers and thats. The most important channel within global travel retail.
Alright, Thats Thats helpful. Then if I could just sneak one last one did.
Related to Apple of I guess based on the comments you made the prepared remarks. It sounds like it's at least initially gotten off to US a start that might suggest it could be as big as huddy or fire. So did I hear that correctly I'm just trying to get at understanding of like how big you think this could be.
I mean, you heard correctly.
Very early days, the only going out et cetera.
Six or eight weeks or whatever it is so but I.
I think we've said before the brand want to taste really really good too.
It is priced a little bit under the market leader in the United States as opposed to our last effort with fire, which was priced above the market leader. So that gives us a little bit of an advantage in terms of maybe in the on premise and sustainability there and.
Yes, I just think it's a flavor to that when you leave the United States Apple Apple is a very it's a common flavor consumers really love it and there really is no market leader in terms of Apple outside the United States is really only inside the United States. We've got to establish so that's a world it's pretty world wide open to us.
And it Doesnt make us optimistic that can be something big.
Alright, great. Thanks.
Your next question comes from the line of Rob Ottenstein with Evercore.
Great. Thank you very much loss and I'm wondering if.
Good stepped back a little bit and can you give us your updated views on on the spirits market, and particularly kind of brown spirits whiskey.
Where we're that sourcing the growth in your view what your marketing people are saying you know as it is it beer is why is it vodka.
You know and how that may be that may differ on and off premise.
And is it a question of development of consumer case, or maybe you know as you said before in there hasn't been a lot of pricing is it is it kind of the pricing you should just just love to get your big picture thoughts. Thank you.
So I would I mean break it up between the us and the rest of world for a second so so what American whiskey, which has been growing at a high single digit rate now for a number of years in a row and those trends really have pretty much continued now where its existing everybody's been talking about the help the trends in health and all these seltzer.
Brands that are has absolutely boomed in the last few years and what's it going to do so your brands are your business and I'd, just say CBS is strong as ever in fact, it's up a little bit so.
So I don't necessarily think that we're sourcing or that seltzer phenomenon has really had a much of an impact on spirits, yet there's people that would say that impacting back a bit.
But whiskey as farther away from that I believe and so I think we at least have some insulation against some of that phenomenon. So.
So the US business is largely I think the use of American whiskey business is largely the same reasons, it's been before consumers want that sort of full taste.
Like the people behind the brands, we like the stories behind the brands it just fits into.
Sort of American culture. These days outside of the United States amend demand, it's been thrown around what the tariffs situation a little bit so it's been volatile but.
We still look at the enormous runway for our brands, particularly those that becomes a conversation around sourcing from Scotch for the most part.
We've said said a few times around here that Scotch had 100 year head start on us, but if you go when you look at where the British colonized a world 100 years ago, and really planted scotches core drink. We continue to go after that that that consumer and have been doing that well for 20 years.
So yes, I mean, I think we still feel pretty good about that and we still feel pretty good about the emerging markets opportunity, where we are well we're way behind Scotch in those markets and we particularly as we said today places like China Places like India and Asian General, we're so under index relative to other categories that.
We're going after that in a bigger and bigger way and allocating more resources that way so.
Yes, I mean American whiskey categories is very healthy.
And feels like it's going to stay that way.
Just just in terms of the U.S. do you see most of the sourcing.
From beer or from Weiner from vodka.
Well, it's spirits had been taking from beer and wine for 20 years you haven't.
Beer has.
Edits.
Troubles over the last few years and certainly we've been a benefactor of that.
Vodka has been a funny category because it's had one brand it has been an explosive brand for decades now.
Maybe even longer than that and certainly they're taking share from the rest of ivanka brands and would probably benefiting a little bit from taking share from other bunker brands too.
Okay. Thank you very much.
The build on what losses that I do think not only all the things that they said about the offices people behind his home places and so forth our.
Leann today had given us today is the national repeal day for prohibition and I do think that American whiskey, which has great mixability and to take a step further to further it's the cocktail culture, the mall and cocktails culture.
So again that was lost during prohibition are actually created during prohibition. So.
We are happy Prohibition day for US then and I do think the mixability that consumers like the cocktails today is a piece of it as well.
Thank you all day will only be happy for me if they've repeal sir.
[laughter].
That's fair.
Thank you very much.
Your next question comes from a line of Kevin Grundy with Jefferies.
Thank you good morning, everyone.
Two questions for me I wanted to pick up on Tennessee up on that I had a lot of its or question on the operating income growth. So.
First for the call for on Brian's question I know, it's really early days still with Tennessee, Apple, but you're clearly feeling a little bit better tweaked up the guidance a bit.
Talk a little bit about retail takeaway.
Maybe touch on where you where the branded stores in share at this point, where you're getting incremental shelf space.
Touched on cannibalization a little bit.
Maybe margin implications for the products.
Yes, I mean I can ticket, we've only seen four weeks of takeaway data that's always Scott.
And that's what we're referring to as this comparison to the early days of both.
Our Anthony.
Comparing favorably to that so it's very very early words sourcing from.
It's too early to tell you that in terms of cannibalization. We get this question each time, we've introduced a product from Jack Daniels.
So both hunting in fire and we sell minimum off any cannibalization, what we've seen instead as we bring in new consumers into the for franchise the taste profile the lighter taste, the particularly this one with Apple in it we believe we're going to be forced an even more new consumers to it. So it's very early to really get into any.
More speculation in term, we're still in primer, where it might be I think people just trying it now.
Okay.
Fair enough.
I hope is on longer term operating income growth for the company. So I think the comment was before you expect to return to high single digit growth beyond fiscal 20, as the income from tariffs states, but I guess kind of stepping back you're a little and understanding swimming issues in travel retail and emerging mark.
It's slowing.
It looks like it'll probably be the lower end of that range seemingly this year as comps get more difficult. So and then the conversation has been sort of constrain us pricing for a long time not enough to offset input cost inflation. So what's the level of confidence if the topline.
It looks like it's something closer to five to seven and ability to take pricing in the us to offset input cost inflation, what's the level of confidence that high single digit operating income growth is the number you can hit even over the intermediate term, let alone sort of medium or longer term.
So stardock, yes, I mean look we've had the conditions that you just talked about right. There for the most weren't had been in place for last 10 years I mean, there hasn't been use pricing in quite a long time, what's different compared to 10 years ago is we've got a much broader portfolio thats growing.
You saw knowing you guys are you seeing the earnings release, how many brands, we have growing into the double digits, and so and as those get bigger.
That's obviously dropping more and more money to the bottom line and becoming a bigger percentage of our mix and then so it is more of a volume or lead story than a pricing led story, but I do think the shape of the TNL.
After we get through this sort of very difficult margin compression time will return to something that looks more like what we have delivered for last 20 years or something like that so I would I mean look the story hasn't changed all that much I don't think.
Even even though the tariffs I mean, a lot of the cost problems that we have or not they are not permanent.
Well hopefully not permit.
Context of tariffs.
And as those start to fall off you'll start to see more gross margin expansion of the annual.
Hopefully as I say that will return to the shape of old.
Okay. Good enough I'm very confident in our topline really I think you're seeing in the lower end, but at the lower end just with timing issue without incremental.
Contribution from Apple as an example, and some other things that we're doing in the back half of the year.
Competent [laughter] than that.
Thanks very much.
The thing just all short termination nature and yet we still believe in the long term viability of emerging markets and travel retail to.
Okay very good thank you both.
And there are no further questions at this time I will turn the call back over to our speakers for closing remarks.
I would just like to say, thank you to loss and Jane and thanks to you all for joining us today for Brown Formans second quarter in first half fiscal 2020 earnings call. If you have any additional questions. Please feel free to contact us with that we'd like to close with wishing you all have wonderful holiday season.
Thank you, ladies and gentlemen that does conclude today's conference call you may now disconnect.
Yes.