Brown-Forman Reports Strong Third Quarter Results and Updates Full Year Outlook
Louisville, KY, March 6, 2013 – Brown-Forman Corporation (NYSE:BFA, BFB) today reported financial results for its third quarter and the first nine months of fiscal 2013 ended January 31, 2013. Reported net sales increased 7% in the quarter1 to $1,027 million (+8% on an underlying basis2). Reported net sales growth was negatively impacted by the absence of Hopland-based wines, offset by favorable foreign exchange. Reported operating income increased 15% in the quarter to $237 million (+14% on an underlying basis). Diluted earnings per share in the quarter increased 18% to $0.73 compared to $0.62 in the prior year period.
For the first nine months of the year, reported net sales increased 4% (+8% on an underlying basis), reported operating income increased 13% (+13% on an underlying basis), and diluted earnings per share increased 18% to $2.22 compared to $1.89 in the prior year period.
Paul Varga, the company’s chief executive officer said, “We continue to be pleased with our top-tier results in this well-performing industry. Our third quarter and year-to-date results reflect the excellent geographic breadth of our company, as well as improved portfolio and volume/margin balance. Given the momentum we observe today for the North American whiskey category, emerging markets, and premium-priced spirits generally, we believe Brown-Forman is positioned well for continued strong growth.”
Year-to-Date 2013 Highlights
• Underlying net sales increased 8%, driven by broad-based geographic gains and brand strength, with constant currency net sales3 up 5%
o Price/mix contributed three points to net sales growth
o Jack Daniel’s family of brands grew net sales 10%
o The company’s super and ultra-premium whiskey brands grew net sales 19%
o El Jimador’s family of brands grew net sales 7%
o Finlandia’s family of brands grew net sales 5%
• Underlying operating income increased 13%, driven by strong top-line growth, gross margin expansion, and operating expense leverage
Year-to-Date 2013 Performance
The company’s underlying sales growth of 8% was driven by its premium skew of brands and strong global demand for North American whiskeys. Company-wide price/mix contributed approximately three points of year-to-date sales growth, while volumes continued to grow at a mid-single-digit rate. This balanced revenue growth allowed the company to more than offset inflationary pressures, driving gross margins up by 240bps. Gross margins also benefited from the absence of Hopland-based wines and lower costs associated with reductions in value-added packaging.
Brown-Forman’s brand portfolio enjoyed broad-based geographic gains. Performance in the emerging markets was particularly strong, with Turkey and Russia growing combined net sales over 35% year-to-date. Brazil and Mexico also grew at double-digit rates, up 14% and 11%, respectively. Other emerging markets with notable net sales growth rates included India, Thailand and Indonesia, up over 20% in the aggregate.
In the developed markets, net sales increased at a mid-teens rate in Germany, and grew mid-single-digits in Australia and the United Kingdom. France reported year-to-date net sales growth, but results were negatively impacted by the third quarter comparison to last year’s buy-in activity in advance of price and excise tax increases. The rest of continental Europe, and in particular, southern Europe, remained under pressure given the weak economic conditions, but the company’s portfolio continued to gain share in these challenging markets.
The company’s portfolio of brands gained value share in the U.S. market, with underlying sales growth of over 6%. The company attributes this outperformance to three main drivers, including improved pricing after successfully implementing increases at the beginning of the year, the strength of the North American whiskey category, and the continued growth of Jack Daniel’s Tennessee Honey. The pricing environment remained healthy during the critical holiday selling season, and the on- and off-premise channels benefited from improving U.S. consumer confidence.
The company’s Global Travel Retail business delivered 8% net sales growth, driven by price increases, successful innovation, and new product launches.
The Jack Daniel’s trademark experienced strong global demand, evidenced by 10% net sales growth. The company is pleased with the marketplace reaction to the global price increases implemented earlier this year after several years in a row of holding prices flat.
Jack Daniel’s Tennessee Honey’s global net sales nearly doubled year-to-date. This strong year-over-year growth has been driven by the targeted rollout of the brand in markets outside of the U.S., including the United Kingdom where Tennessee Honey has enjoyed positive consumer response. Global growth was also driven by strong double-digit gains in the U.S., primarily due to increased velocity in the off-premise, as efforts to increase brand awareness have been working.
Brown-Forman’s portfolio of super and ultra-premium whiskey brands, including Woodford Reserve, Jack Daniel’s Single Barrel, Gentleman Jack and Collingwood, grew net sales 19% year-to-date. This portfolio is well-positioned to benefit from growing consumer interest in super and ultra-premium whiskeys.
Finlandia vodka’s mid-single-digit net sales growth was driven by strong premiumization trends in Russia, offset somewhat by a competitive marketplace in Poland.
The el Jimador family of tequila brands grew net sales by 7% with New Mix RTDs up 15%. El Jimador grew net sales in the mid-teens in the U.S., offset by declines in Mexico. Herradura grew net sales by 22% globally, as the brand enjoyed strong share gains in the U.S. and Mexico.
Southern Comfort’s net sales grew 1% year-to-date in the U.S., and returned to growth in the third quarter in the United Kingdom on the launch of the new consumer engagement plan for the brand in that market. Continued softness in Australia, Germany and South Africa prevented the brand from growing on a global basis however, with year-to-date net sales down 4% compared to a 7% decline in fiscal 2012. The company intends to roll out the consumer engagement strategy that has had good early success in the U.S. and the United Kingdom into several of Southern Comfort’s other key international markets.
Sonoma-Cutrer’s 15% growth was driven primarily by improving price/mix with some modest volume gains, while Korbel grew net sales by 4%.
The company is also making significant investments behind its brands, including increases in A&P spend, as well as investments in additional headcount in emerging markets and enhanced route-to-market initiatives. Brand investment grew 7% on an underlying basis year-to-date, and SG&A increased 10% on an underlying basis, primarily due to timing.
Dividends and Other
On November 15, 2012, Brown-Forman increased its regular quarterly cash dividend 9.3% to $0.255 per share. On January 22, 2013, Brown-Forman declared a regular quarterly cash dividend of $0.255 per share on its Class A and Class B common stock. This cash dividend is payable on April 1, 2013 to stockholders of record on March 8, 2013. Brown-Forman has paid regular cash dividends for 67 consecutive years and increased them for each of the last 29 years.
On December 12, 2012, Brown-Forman issued $750 million of senior unsecured notes. The notes consist of the following tranches:
$250 million of 1.00% 5 Year Senior Notes due January 15, 2018
$250 million of 2.25% 10 Year Senior Notes due January 15, 2023
$250 million of 3.75% 30 Year Senior Notes due January 15, 2043
Proceeds from the issuance were used to fund a $4.00 special dividend paid to shareholders on December 27, 2012.
On February 25, 2013, Brown-Forman announced that it had completed the redemption of its outstanding $250 million 5% notes due 2014 with a combination of cash and short-term borrowings. The company expects to record pre-tax expenses of approximately $9 million in its fourth quarter. The redemption is expected to lower pre-tax interest expense by approximately $2 million in the fourth quarter of fiscal 2013, and $8 million in fiscal 2014.
Fiscal Year 2013 Outlook
The company is updating its fiscal 2013 earnings outlook to a range of $2.60 to $2.68 from $2.58 to $2.70. This outlook now incorporates a negative $0.05 impact in the fourth quarter from the charges associated with the redemption of the company’s 2014 notes, as well as adverse foreign exchange moves. While uncertainty persists in the fragile global economy, the company continues to expect high single-digit growth in underlying net sales and low double-digit growth in underlying operating income in fiscal 2013. Leverage to the operating income line in fiscal 2013 is expected to come primarily from gross margin expansion.
Brown-Forman will host a conference call to discuss the results at 10:00 a.m. (EDT) this morning. All interested parties in the U.S. are invited to join the conference call by dialing 888-624-9285 and asking for the Brown-Forman call. International callers should dial 706-679-3410. The company suggests that participants dial in ten minutes in advance of the 10:00 a.m. start of the conference call.
A live audio broadcast of the conference call will also be available via Brown-Forman’s Internet website, http://localhost/, through a link to “Investor Relations.” For those unable to participate in the live call, a replay will be available by calling 855-859-2056 (U.S.) or 404-537-3406 (international). The identification code is 12883934. A digital audio recording of the conference call will also be available on the website approximately one hour after the conclusion of the conference call. The replay will be available for at least 30 days following the conference call.
For more than 140 years, Brown-Forman Corporation has enriched the experience of life by responsibly building fine quality beverage alcohol brands, including Jack Daniel’s Tennessee Whiskey, Southern Comfort, Finlandia, Jack Daniel’s & Cola, Canadian Mist, Korbel, Gentleman Jack, el Jimador, Herradura, Sonoma-Cutrer, Chambord, New Mix, Tuaca, and Woodford Reserve. Brown-Forman’s brands are supported by nearly 4,000 employees and sold in approximately 160 countries worldwide. For more information about the Company, please visit http://localhost/.
1 Percentage growth rates are compared to prior year periods, unless otherwise noted.
2 Underlying change represents the percentage increase or decrease in reported financial results in accordance with generally accepted accounting principles (GAAP) in the United States, adjusted for certain items. A reconciliation from reported to underlying net sales, gross profit, advertising expense, SG&A, and operating income (non-GAAP measures) increases or decreases for the three-month and nine-month periods ended January 31, 2013, and the reasons why management believes these adjustments to be useful to the reader, are included in Schedule A and the note to this press release.
3 All ‘net sales’ references are on a constant currency basis, unless otherwise noted. Constant currency represents reported net sales with the cost/benefit of currency movements removed. Management uses the measure to understand the growth of the business on a constant dollar basis, as fluctuations in exchange rates can distort the underlying growth of the business both positively and negatively.
Important Information on Forward-Looking Statements:
This report contains statements, estimates, and projections that are “forward-looking statements” as defined under U.S. federal securities laws. Words such as “aim,” “anticipate,” “aspire,” “believe,” “envision,” “estimate,” “expect,” “expectation,” “intend,” “may,” “plan,” “potential,” “project,” “pursue,” “see,” “will,” “will continue,” and similar words identify forward-looking statements, which speak only as of the date we make them. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. By their nature, forward-looking statements involve risks, uncertainties and other factors (many beyond our control) that could cause our actual results to differ materially from our historical experience or from our current expectations or projections. These risks and other factors include, but are not limited to:
• declining or depressed global or regional economic conditions, particularly in the Euro zone; political, financial, or credit or capital market instability; supplier, customer or consumer credit or other financial problems; bank failures or governmental debt defaults
• failure to develop or implement effective business, portfolio and brand strategies, including the increased U.S. penetration and international expansion of Jack Daniel’s Tennessee Honey, innovation, marketing and promotional activity, and route-to-consumer
• unfavorable trade or consumer reaction to our new products, product line extensions, price changes, marketing, or changes in formulation, flavor or packaging
• inventory fluctuations in our products by distributors, wholesalers, or retailers
• competitors’ consolidation or other competitive activities such as pricing actions (including price reductions, promotions, discounting, couponing or free goods), marketing, category expansion, product introductions, entry or expansion in our geographic markets
• declines in consumer confidence or spending, whether related to the economy (such as austerity measures, tax increases, high fuel costs, or higher unemployment), wars, natural or other disasters, weather, pandemics, security concerns, terrorist attacks or other factors
• changes in tax rates (including excise, sales, VAT, tariffs, duties, corporate, individual income, dividends, capital gains) or in related reserves, changes in tax rules (e.g., LIFO, foreign income deferral, U.S. manufacturing and other deductions) or accounting standards, and the unpredictability and suddenness with which they can occur
• governmental or other restrictions on our ability to produce, import, sell, price, or market our products, including advertising and promotion in either traditional or new media; regulatory compliance costs
• business disruption, decline or costs related to organizational changes, reductions in workforce or other cost-cutting measures
• lower returns or discount rates related to pension assets, interest rate fluctuations, inflation or deflation
• fluctuations in the U.S. dollar against foreign currencies, especially the euro, British pound, Australian dollar, Polish zloty or Mexican peso
• changes in consumer behavior or preferences and our ability to anticipate and respond to them, including societal attitudes or cultural trends that result in reduced consumption of our products; reduction of bar, restaurant, hotel or other on-premise business or travel
• consumer shifts away from brown spirits, premium-priced spirits, or spirits products generally; shifts to discount store purchases or other price-sensitive consumer behavior
• distribution and other route-to-consumer decisions or changes that affect the timing of our sales, temporarily disrupt the marketing or sale of our products, or result in implementation-related or higher fixed costs
• effects of acquisitions, dispositions, joint ventures, business partnerships or investments, or their termination, including acquisition, integration or termination costs, disruption or other difficulties, or impairment in the recorded value of assets (e.g. receivables, inventory, fixed assets, goodwill, trademarks and other intangibles)
• lower profits, due to factors such as fewer or less profitable used barrel sales, lower production volumes, decreased demand or inability to meet consumer demand for products we sell, sales mix shift toward lower priced or lower margin SKUs, or cost increases in energy or raw materials, such as grain, agave, wood, glass, plastic, or closures
• natural disasters, climate change, agricultural uncertainties, environmental or other catastrophes, or other factors that affect the availability, price, or quality of agave, grain, glass, energy, closures, plastic, water, or wood, or that cause supply chain disruption or disruption at our production facilities or aging warehouses
• negative publicity related to our company, brands, marketing, personnel, operations, business performance or prospects
• product counterfeiting, tampering, contamination, or recalls and resulting negative effects on our sales, brand equity, or corporate reputation
• significant costs or other adverse developments stemming from class action, intellectual property, governmental, or other major litigation; or governmental investigations of beverage alcohol industry business, trade, or marketing practices by us, our importers, distributors, or retailers
For further information regarding these risks, please refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC.
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