Brown-Forman Class B Earnings Call Insights: Bourbon Category Growth Outlook and Pricing Analysis
Brown-Forman Corporation Class B (NYSE:BF.B) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Bourbon Category Growth Outlook
Vivien Azer – Citi: My first question has to do with the Bourbon category growth outlook. Where do you guys see the category growing either in next year or over the next three years?
Don Berg – EVP and CFO: Well, we don’t, Vivien, generally have – do category forecast as much as we do our brand forecast, of course because of the need to produce in advance. But I know right now as we look out we continue to see – I mean just using, I am just seeing the U.S. data for Bourbon over the last sort of 12 months, I mean that category is growing at a sales level at the start of close to high single digits and it was about 7% sales growth year ago. It looks like more like 8% this year, so that’s a nice continuation of that momentum. I am seeing of course a different story outside the United States for Bourbon’s less-developed but from a small base you would expect that the category would continue to develop around the world. I mean the largest contributor to American whiskey’s growth for the last, of course decade plus has been the expansion of the Jack Daniel’s brand. With all of the excitement around flavors and the excitement around – it was really nice expressions like the Woodford Double Oaked and things like that and the ability to innovate, we would expect that that momentum was are seeing today to continue.
Vivien Azer – Citi: My second question has to do with potential acquisitions. Just can you just frame out how you think about the need for potentially additional whiskey brands or exposure to other categories or is it kind of more of a geographic focus where you want more distribution footprint?
Don Berg – EVP and CFO: Actually it’s both. We actually do look at it along both those lines. When you think about the expertise that we have in whiskey, I was looking at whiskey opportunities as a natural for us. That kind of comes into play really when you think about anything along aged spirits where that kind of capability is required. We also like the whiskey arena because it’s such a great global category. When you look at how much breadth it has and how far reaching it is in all the different geographies and it tends to be very premium in nature. There just seems to be a very high consumer interest in those types of genuine, authentic higher-end brands, and so given, kind of where the consumer is at, given where we think our capabilities lie, it’s really natural for us to look at all the different areas of whiskey that are kind of growing in that premium, super-premium arena. We still tend to like vodka in terms of looking at it as a category in terms of global growth, but it does tend to be more of a regional play than a global play, so you have to take more of a regional lens to that and see, where you think those bigger opportunities might lie, and then we continue for a lot of the markets where we own our own distribution, if we think that there is some local opportunities that would help us in developing the rest of our owned portfolio, we’ll certainly take a look at those as kind of unique opportunities, but in looking at them, we’ll also look at them to see if we think there are some opportunity to go beyond that one individual market…
Paul C. Varga – Chairman and CEO: I think you had referenced in your question, if they’d help us with the distribution platform or anything else strategic, as – for example our acquisitions in Mexico and previously what Finlandia did, the only other thing I’d add is, we just look at our Company’s history and our track record and where we tend to play. We have a fairly limited portfolio relative to a number of other of our competitors around the world and we tend to favor higher margin brands that are sort of positioned at higher price points we think that have long runways for growth, and so the type of characteristics Don just described point us toward things like higher end whiskey brands, whether it’s through innovation or acquisition. So, we think those give us opportunities, not only to expand geographically but also as we proved this past year to be able to get price more readily.
Vivien Azer – Citi: Then, my last question is for Don. For A&P, can you just give a little color in terms of the cadence of the spend just for our modeling purposes for FY ’14?
Don Berg – EVP and CFO: You mean in terms of, like quarter-to-quarter?
Vivien Azer – Citi: Yeah, just, it seems to me like it might be a little bit lumpy, so if there is anything you want to call out there?
Don Berg – EVP and CFO: We’ve actually – we’ve actually kind of spread it – over the last couple of years, we’ve actually tried to take some of that lumpiness out of it and kind of spread it out a little bit more. So, I mean, I would probably look at it in terms of how you kind of view our shipments coming through. That’s being a nice barometer around how our A&P spend would go.
Judy Hong – Goldman Sachs: First, just on the pricing side, so, I know you’ve talked about this year being a little bit more moderate level of pricing. Just competitively, is there anything on the horizon that points to that more modest pricing? Then, when you think about your low single-digit pricing outlook for the year, how does that sort of break down between Brown versus other parts of your portfolio?
Paul C. Varga – Chairman and CEO: We of course look at our competition, but I wouldn’t say there’s some individual or specific competitive reference that is driving our point of view on this. I mean, it’s – that’s in the mix of course. You try to look at that. It’s probably more us looking at the circumstances market by market and very much with the focus on Jack Daniel’s because of its importance to us. But – and I would say, we are – I think, we certainly feel stronger about the possibilities for pricing in our whiskeys relative to, say vodkas, and lot of that is – we are really primarily – our largest vodka brand is Finlandia, and it of course is in a competitive Vodka category and price segment. I mean certainly we don’t look for opportunities to price that but I just think that, compared to brands like Woodford Reserve or Jack Daniel’s or Gentleman Jack we just perceive stronger and more readily available pricing opportunities for the whiskey.
Judy Hong – Goldman Sachs: Then just going back to the A&P spending question. So I think in the last earnings call you said your A&P spending was going to be up in the mid-teens in the fourth quarter and it looks like maybe in the fourth quarter it wasn’t up as much at least on the advertising side. So can you just give us a little bit more clarity on whether the spending actually did happen on a total A&P side as you are expected or whether there was some type of a timing issue?
Paul C. Varga – Chairman and CEO: Yes. They were – in the fourth quarter there did end up being some timing issues. Some of that the spend that we had intended to make, a couple of examples, we had intended on getting the campaign on Gentleman Jack launched before the end of fiscal 2013, but it took a little bit longer than we anticipated to get everything in the can and to get it out there. So you’ll be seeing that in 2014 rather than 2013. So there is a little bit of timing there. We had some investments that we were looking to try to make in Russia but then when the regulatory environment changed there in terms of the regulations on advertising in that market, it turned out that we weren’t able to make that spend in that quarter. So it was a myriad of things to be honest across a lot of brands and in a lot of countries. But for the most part they were those types of different activities that we were facing…
Judy Hong – Goldman Sachs: Just lastly on Russia and Turkey, just what is your expectation in terms of how the advertising restriction would impact the category in your brands in those markets?
Don Berg – EVP and CFO: It’s pretty early to tell yet, given how recent those changes are, so, we’re not really sure. We can tell you that when you look at markets where we’ve experienced before and you can look at examples like Poland or France, a lot of times what you find is, is that brands that have already gotten in there and done their advertising, create awareness with consumers and our well-established brands end up not getting hurt that much. In a way it helps them a bit, in terms of creating a little bit of barrier of entry to other brands that weren’t as early going in. The other thing that I would just mention that we’ve also seen is that, there are a lot of ways to get to the consumer and in many of these markets, the best way in the early stages of brand building is the work that you’re doing in the on-premise channel and so, so long as you continue to be able to find ways to get directly to the consumer and tell your story and get them to sample your product and what have you, there are still a lot of ways that you can go about building your brands, even in spite of some of these restrictions around how you go about communicating to the consumer.
Paul C. Varga – Chairman and CEO: I’ll add to that too. Just for reference to those two particular countries. As you think about before and after the regulation, we were not massive advertisers in those two countries, going in anyway. When we think about our stage of development in those countries, and we still think we’re relatively early stages, where a lot of the good work has been going on has been in, either in store in account on-premise using the benefits of our sort of sales and promotional efforts, we actually don’t like when these regulations come down particularly a Company like us, we pride ourselves on being very responsible marketers and promoters, and so, it is a limitation, but we think as Don said, that it just forces us to be more creative about how we get our messaging out to the consumer.