Australia a "standout performer" for Brown-Forman in Q2
Brown-Forman has announced its Australian sales grew by 7% in its second quarter and the first half of fiscal 2019, ended October 31, 2018.
CFO Jane Morreau said: "Germany, Australia and Spain were standout performers, while we also registered solid growth from the UK and France. And travel retail continues to grow well into the double digits with underlying net sales growth of 14% on top of last year’s first half growth of 11%.
The Aussie result was led by favourable price/mix and volume growth of Jack Daniels RTDs.
Globally, the company’s reported net sales were flat at $910 million (+3% on an underlying basis) compared to the same prior-year period. The company estimates that second quarter’s underlying net sales growth was negatively impacted due to tariff-related inventory reductions (giveback) associated with the first quarter’s tariff-driven buy-ins.
Brown-Forman stockpiled inventories starting last summer to cushion the blow of EU tariffs on American whiskey and other US products. In the first quarter, the strategy was to ship product overseas to skirt the levies, which contributed about two to three points of its underlying net sales growth.
In the quarter, reported operating income decreased 5% to $332 million (flat on an underlying basis) and diluted earnings per share grew 4% to $0.52.
For the first six months of the fiscal year, the company’s reported net sales increased 2% to $1,676 million (+5% on an underlying basis). Reported net sales growth was negatively impacted by two percentage points from foreign exchange. Year-to-date reported operating income was flat at $596 million (+4% on an underlying basis) and diluted earnings per share of $0.93 increased 8%.
CEO Paul Varga said: “Tariff-related buy-ins helped power first quarter results, while the anticipated giveback materialised in the second quarter, resulting in 5% underlying net sales growth during the first half. This growth demonstrates the consistency of our revenue delivery, especially against strong, 7% underlying net sales growth during the same period last year. Given easier back half comparisons and our momentum, we are on track for another year of 6-7% underlying net sales growth.”
Woodford Reserve leads year-to-date highlights
The company’s premium bourbons, Woodford Reserve and Old Forester, remained standout performers in the United States and globally.
Woodford Reserve was the largest contributor to growth in the United States during the first half, delivering strong double-digit underlying net sales growth. Jack Daniel’s Tennessee Whiskey accelerated in the second quarter, but first half results were negatively impacted by some timing items as well as strong prior-year comparisons.
The Jack Daniel’s family of brands excluding Tennessee Whiskey grew underlying net sales mid-single digits, with gains from Gentleman Jack, Tennessee Honey, Tennessee Fire, and RTD/RTP products. Herradura and el Jimador tequila grew aggregate underlying net sales double-digits due to continued investments in the brands and favorable category momentum.
Globally, super-premium American whiskey brands grew underlying net sales 19% (+12% reported), including 25% underlying net sales growth from Woodford Reserve (+24% reported).
The Jack Daniel’s family of brands grew underlying net sales 5% (+2% reported), including 3% underlying net sales growth (flat reported) for Jack Daniel’s Tennessee Whiskey.
Herradura and el Jimador grew underlying net sales 15% and 11%, respectively (+11% and +8% reported)
Underlying operating income grew 4% (0% reported) and earnings per share increased 8% to $0.93.
Whiskey tariffs - a problem that won't go away
Executives reported that while sales of its signature Jack Daniel's Tennessee Whiskey and tequila remained strong, the retaliatory tariffs imposed by the European Union in response to President Donald Trump's steel and aluminum tariffs continue to be a wild card in the company's results for the next two quarters and beyond.
"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 ex-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," said incoming CEO Lawson Whiting.
"Even so, we believe we have taken the appropriate measures that should position us from mid-single digit on underlying operating income growth for the year which would result in EPS growth in the range of 11% to 18% for fiscal 2019."
He added: "These tariffs are certainly presenting challenges across many years with the company including our production and supply chain operations and of course our commercial teams and the affected markets across Europe, Mexico and Canada to name a few. We are in a unique position as the market leader in American whiskey competing against so many non impacted spirits categories."
Strategy moving forward to combat tariff impact
Brown-Forman confirmed that if tariffs remain in effect, the company will have to stop absorbing the incremental costs and increase prices in Europe in the next six months to recoup the $35 million to $40 million impact.
"I wish I could say there were positive developments," said Varga. "And I think, obviously Mexico, Canada has been moving in the direction or it feels that way. China seems to be a rollercoaster a little bit, and Europe gotten quiet. So, for us Europe is the largest of those buckets for sure. In August we were optimistic that the tariffs may get settle a little faster than they seem to be, but we’re sticking with it and we do continue to absorb the cost for now as we would say, we are investing in the momentum of the brands.
"But as we move further into the fiscal year and into the summer time, we’re going to be more motivated to recoup at least the portion of these tariff costs and we’re starting those conversations now. So, we will see. I don’t think our overall position has really change very much, but we’re trying stay agile as the situation is pretty fluid and the entire tariff discussion remains a very big part of how this fiscal year is unveiling."