Brown Forman FY 1Q16 Earnings Call Notes

We’re all anxiously watching market gyrations

“This leads me to my second topic, our outlook for fiscal 2016, which we reaffirmed today. Before I dig into that topic, I would like to add that while we are fortunate to have a business model that combines long-term growth with defensive characteristics, we realized that we are not immune to a further deterioration in the global economy. So, like all I view, we are anxiously watching the market gyrations over the last two weeks, particularly in the emerging markets.”

Our emerging market footprint is <10% of our total

“But for now, our emerging market footprint outside of Poland and Mexico is less than 10% of our total revenues. So our exposure is significantly less than the competition. Additionally, this approximate 10% is well diversified, spread over a 100 plus countries around the world.”

5 million cases of Jack Daniels is a lot

“One noteworthy milestone that occurred during the quarter was Jack Daniel’s Tennessee Whiskey surpassing 5 million cases in the United States for the first time in its 149 year history and to be clear here, I am referring to the parent brand Jack Daniel’s Black Label as most know it.

I’ve been reflecting some on this recent accomplishment. So I thought I’d share a few perspectives with you about it. First, I’ll simply note that attaining the 5 million case level in our industry is a rare event in its own right. This is a very high level of consumer acceptance achieved by very few brands.

Add to this the fact that Jack Daniel’s is priced the super premium price level, well above the price of most brands that have achieved the 5 million case level and the recent milestone is even more rare and impressive in my view”

Big brands have had a headwind

“The first factor outside is the difficulty the big brands have experienced both inside and outside our industry. As evidenced, consider that the largest ten brands by volume in calendar year 2010, in the United States have not only lost share, but cumulatively lost over 1 million cases in the last four years with six of the top 10 having lower volumes today versus 2010.”

There has been intense competition too

“A third factor has been the intensifying competition in the American Whiskey segment as new entrants in craft premium plus and flavored whiskey have exploded in recent years.”

149 years of Jack Daniels

I find it impressive the Jack Daniel’s is in its 149th year in the United States and sits today at all-time volumetric point. Aside these factors to illustrate that Jack Daniel’s is not just normal brand, I believe it to be a special brand and often the exception to the rule.”

Millenial’s social habits are changing

“if you just look at the behavior of Millenial’s , where they might have spent three or four hours at a bar for an evening, they may only be spending an hour and a half in the first portion of it is in their apartment on the couch with their friends and so, the brand selections that occur in those different environments are really important and I think that actually is a contributing factor to why the flavored whiskies are actually doing fairly well because they are convenient to pour and consume and don’t require a lot of mixtures et cetera. So, I think there is some changing dynamics that made be with us for a while.”

The last week has injected some uncertainty

“I think it’s more the uncertainty around where – what might go, what might occur going forward as a result of just the skittishness that we have seen over the last, I mean, literally week to ten days we are acting a little bit more I think to just the recency of some of these market sell-off. That I mean, I am not, at this stage see what happens, I am not obsessed with what’s going on out there”

Brown Forman 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Whiskey consumption has been in long term secular decline

“let’s go back to 1970s and look at how many cases of American whiskey were sold at that time, it’s about 100 million cases. That’s when the consumption of American whiskey actually peaked.

We’ll fast forward it to today where there is a 40-year secular decline in the category. It was roughly cut in half, so it’s about 50 million cases. If you look at the U.S. population of legal drinking age at that time, it’s grown about 50%, meaning the per capita consumption of American whiskey has fallen by almost 70% over that period. So, we were witnessing an inflection point in the U.S. American whiskey around 2010 where we really saw consumer interest in the category reignited.”

craft distilling and changing taste profiles have helped spur demand

“when we look at what we think is the cause of this renewed demand, of course, there is multiple factors, but I’m just going to mention a few. One, is the rise of craft distilling, which is led by our own Woodford Reserve, the consumer interest in heritage and authenticity, and what appears to be vodka fatigue.

I’m going to focus on another factor I’m calling a fourth factor today, which is the important as the flavored whiskey. So, in 2013, in the U.S. the flavored whiskeys accounted for about 45% of the American whiskey volume growth.

Looking at what drove that was definitely demographics played a major role in that with increased interest from women and minorities based on their changing taste profiles and preferences, as well as convenience.

I can speak to this. I have a couple of millennial kids myself, but I know I probably taught them to like things that tasted differently, but millennials definitely have grown up with many different flavor offerings whether it’s cereals or soda or water or juices. So they now expect to have all kinds of choices and tastes and they want great tasting things.”

We have one of the highest tax rates of our competitors

“I think we have the highest tax rate of all of our competitors’ business and something that we’ve been very, very focused on and looking for smart ways to reduce our tax rate. And, of course, one of the biggest ways is to continue to grow your business outside the U.S. like we have been”

Marijuana legalization is a threat

“you occasionally have things like a U.S. consideration of the legalization of marijuana becomes a big threat. You try to assess and look at and think about long term. “