Brown Forman Inc

Good morning. My name is Dorothy, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter fiscal 2019 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Jay Koval, Vice President and Director of Investor Relations. Sir, he may begin.

Thanks, Dorothy, and good morning, everyone. I want to thank you for joining us for Brown Forman's second quarter 2019 earnings call. Joining me today are Paul Varga, our Chairman and Chief Executive Officer, Lawson Whiting, Executive Vice President, Chief Operating Officer, and incoming Chief Executive Officer, and Jane Moreau, Executive Vice President and Chief Financial Officer. 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, and 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 second quarter of fiscal 2019, in addition to posting presentation materials that Jane will walk through momentarily. Both the release and the presentation can be found on our website under the section titled Investors, Events, and Presentations. 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, 8-K, and 10-Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures, the reconciliation to the most directly comparable GAAP financial 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 investor presentation. One additional housekeeping item, we evaluated changing today's call given the passing of former President George Bush, but decided that the change would be more disruptive to everyone's calendars than keeping our originally scheduled date and time. That being said, we plan on ending our call today at 10.50 a.m. to ensure that all of our participants have adequate time to join the funeral ceremony for our 41st president at 11 a.m. EST. With that, let me turn the call over to Lawson.

Okay, well, thank you, Jay, and good morning, everyone. Today, Jane and I will be talking about the first half of our fiscal year 2019, where Brown Forman continued to deliver solid top-line growth. However, there are a couple of factors, most obviously and notably tariffs, that are causing fluctuations in our quarterly results. But overall, I'd characterize the first half as a continuation of the solid, fundamental growth story that we have seen for much of the past decade. So first, I just want to start out by thanking our fourth 4,800 employees around the world for the solid start to fiscal 19, delivering 5.5% top-line underlying growth on top of last year's strong 7% top-line gain. We're planning for modestly faster underlying sales growth in the back half of the year, doing part to easier prior year comps of 5% growth. More details to follow from Jane, but if not for the tariffs, we would be on track to not just deliver another great year of top-line results, but also bottom line, where underlying operating income growth, X tariffs would be on track to be up in sort of the high single digits, consistent with our sort of our most recent historical 10-year numbers, as well as the ambitions that we have going forward. Even so, we believe we've taken the appropriate measures that should position us for mid-single-digit underlying operating income growth for the year, which would result in EPS growth in the range of 11 to 18 percent for fiscal 2019. So these tariffs have certainly presented challenges across many areas of the company, including our production and supply chain operations and, of course, our commercial teams in the affected markets across Europe, Mexico, and Canada, to name a few. We're in a unique position as the market leader in American whiskey, competing against so many non-impacted spirits categories. But over the short term, we're assuming the tariffs remain in place. In our first quarter earnings call, we reduced the midpoint of our underlying operating income growth for the year by roughly three points, or approximately $35 to $40 million net impact due to tariffs. That has not changed. As a reminder, the cost of the tariffs is going to be largely a hit to our gross margin. To date, we have chosen to largely absorb these costs so that we could maintain the solid commercial and consumer momentum through the critical O&D period. As we communicated previously, we are and we will continue to evaluate pricing on a market-by-market, customer-by-customer basis. In other words, our approach is what I would describe as surgical, and we will continue to do this as long as the tariffs remain. Despite these short-term headwinds, our long-term goals and our growth ambitions remain unchanged, which is what we'll be talking about next week at the Investor Conference in New York. We'll spend the afternoon discussing our strategy and why we're so bullish on the global growth potential for our premium American whiskey brands and how we intend to lengthen our lead in a rapidly growing category. I'll introduce our strategic framework as well as discuss how we have organized our teams to better focus and execute our strategy. Our Chief Brands Officer will focus on some new thinking on how we build our brands and share more specifics on how we intend to capitalize on the global demand for our premium American whiskey brands. We'll hear from our commercial leaders on where we see the greatest growth opportunities and how we'll seize them. Jane will share how we invest to fuel growth and deliver returns for shareholders. Garvin will also be there to talk about the Brown family and their ongoing commitment to building forever at Brown Foreman. And finally, Paul will be there in his final appearance as CEO to lead some bourbon tastings with the investment community. Easy. So now I'm going to hand the call over to Jane, let her walk you through the first half of the year of results, and then give you some more color on our reconfirmed guidance for fiscal 2019.