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 Brown-Forman Third 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 of Investor Relations. Sir, you may begin.

Thanks, Dorothy, and good morning, everyone. I want to thank you for joining us for Brown Forman's third quarter 2019 earnings call. Joining me today are Lawson Whiting, President and 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. 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 third quarter of fiscal 2019, In addition to posting presentation materials that Lawson and 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, Form 8-K, and Form 10-Q reports filed with the Securities and Exchange Commission. During this call, we'll 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 company's financial conditions and results of operations are contained in the press release and investor presentation. So with that, I'll pass the call over to Lawson.

All right. Well, thanks, Jay, and good morning, everyone. Overall, I'm pleased with the third quarter and the year-to-date results that we released this morning. In particular, we're focused on maintaining our top-line momentum around the world. Underlying net sales are largely where we expected them to be at the beginning of the fiscal year, growing about 6% after adjusting for the impact for tariffs. As a reminder, we chose to absorb the majority of the tariffs this fiscal year in order to maintain that solid business momentum, and Jane's going to talk a lot more about that in just a few minutes. As a result, though, we are on track for another year of strong, sustained, top-line growth. Given recent trends and our expectations for a relatively strong fourth quarter, we reaffirmed our fiscal 2019 outlook of 6% to 7% underlying net sales growth and 4% to 6% operating income growth. Importantly, these estimates have been unchanged since Q1. So, as I said, Jane will run through the financials in more detail, but before she does, I'd like to take a few minutes this morning to talk about the ongoing evolution of both our geographic and our brand growth drivers and really how they've changed over the past decade or two. For many years, Brown Foreman's growth was powered by Jack Daniel's Tennessee Whiskey in the United States. But over the last decade, we've invested significantly in the international expansion of the company, as all of you are very well aware. We've broadened the portfolio within the Jack Daniel's family of brands, We've reshaped the rest of the portfolio to get out of weaker businesses and invested in faster growing premium spirits categories. And we've put significantly more resources to organically accelerate the growth behind two of the fastest growing spirits categories, bourbon and tequila. This increasingly balanced approach has been an integral driver of the company's ability to deliver consistently high rates of growth with limited volatility. So let me use the U.S. as an example. where we've really been focused on portfolio diversification. We're seeing an increasing share of growth coming from other brands in our portfolio beyond just Jack Daniel's Tennessee Whiskey. For example, Gentleman Jack, Jack Daniel's Single Barrel, and Jack Daniel's Tennessee Rye continue to grow nicely and provide margin benefits to the trademark. Jack Daniel's Tennessee Honey is now about 750,000 cases in the U.S., And Jack Daniel's Tennessee Fire is roughly 400,000 cases, and both continue to grow. Additionally, we've been investing in what is now a leading portfolio of bourbon and tequila brands. So Woodford Reserve and the Old Forester trademarks have been registering impressive gains in the bourbon category over the last several years, approaching one million cases between the two brands. Woodford is on track to be the single largest contributor to growth in the U.S. market this fiscal year. The brand is simply on fire and has a long runway ahead of it. Old Forester continues to present itself as a leader in American whiskey. The brand has really gained a reputation for quality and innovation with a balance of its core 86 and 100 proof expressions, the popularity of the Whiskey Rose series, and the annual release of the acclaimed Birthday Bourbon. The opening of the Old Forester home place on Louisville's Main Street and the recent release of the Old Forester Rye contributed to its position as a real leader in the renaissance of American whiskey. We're also seeing very nice growth in our tequila portfolio in the U.S., with Herradura over 200,000 cases now at a $40 price point. El Jimidor was a 160,000 case brand when we purchased the company 12 years ago, and today it's over 600,000 cases in the United States. These brands are the most material drivers of our U.S. growth, but we're also hard at work on developing the growth drivers for the next decade, Last summer, we created an emerging brands team in the U.S. to focus on some of our high-end super premium brands, including Benrioc, Glendronic Single Malt Scotches, and Slain Irish Whiskey. We also put Aradura and Old Forrester into this group. And I'm pleased to say that we have accelerated the growth rate on every one of these brands over the past year. The team has really done a fantastic job in growing these brands a bit faster and making them into – brands where we will see a meaningful impact in the future. We believe we've positioned these burgeoning brands to really become the future growth drivers in the highly profitable yet competitive U.S. spirits market. In terms of our increasing geographic breadth, 30 years ago, roughly 20% of Jack Daniel's Tennessee whiskey volumes were from outside the U.S., so it was sort of an 80% U.S., 20% international. Today, it's flipped, where over 60% of the volumes are international and only 40% inside the United States. And over the last decade, 80% of its incremental growth has come from markets outside of the U.S., split evenly between developed, international, and emerging markets. Our developed international markets are performing well, growing comfortably in the mid-single-digit range, in line with our historic rates of growth. Europe and Australia remain solid contributors as we have been steadily investing in our route to consumer capabilities and markets that many peers view as mature, including most recently Spain. We're also putting more focused resources on building our super premium portfolio in Europe. Although much smaller than the emerging brands team in the U.S., the idea is the same. Invest additional resources to focus on super premium brands that will fuel the next generation of growth. For Europe, that is primarily about American whiskey leadership led by Gentleman Jack and Woodford Reserve. And while tariffs complicate our near-term American whiskey strategy, we'll continue to invest in momentum against our medium to long-term goals in the developed world. Emerging markets and travel retail have been delivering even higher rates of growth as we are in the early stages of building our brands in these major population centers of the world, including outstanding results over the last few years in both Mexico and Brazil. And at approximately 20% of total company revenues, we believe these markets are rich with opportunity for our brand portfolio and over time, additional route to market investments. This is also an area where we under index relative to our big competitors. So we also really believe that we've got a long runway ahead. The key takeaway is that we've been expanding the geographic and portfolio drivers of our growth and diversifying our revenue base in categories that we believe have the best long-term global growth potential. At our investor day this past December, we shared with you our strategic framework. If you'll recall, the framework covered four focus areas, including portfolio, geography, investment, and people. We believe that through executing against this framework, we'll extend our leadership of premium American whiskey around the world and continue our track record of consistently delivering profitable growth. While tariffs remain a near-term challenge on American whiskey exports, We'll weather the storm as we have so many other challenges over the last 150 years as we look to create value for our shareholders. Now I'm going to turn the call over to Jane for a review of the financials.