Brown-Forman Earnings Call Insights: Industry Growth Trends, Price Increases

On Wednesday, Brown-Forman Corporation Class B (NYSE:BF-B) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analyst and investors.

Industry Growth Trends

Vivien Azer – Citigroup: My first question has to do with industry growth trends and your expectations for FY ’13. Are you expecting that this is going to be another year of market share gains, and if so, kind of order of magnitude?

Paul C. Varga – Chairman and CEO: Most of the industry, of course that’s going to vary market by market, but as I was referencing in my comments, we’ve seen such nice momentum for the area where we have the greatest concentration which is the whiskey, particularly the American whiskey business and we’ve talked on several call about the growing popularity of it, and we would anticipate that for example, used in the United States as one backdrop that we could look at. We would expect that the urban and American whiskey business to continue to grow share of what is a growing U.S. distilled spirits market. So, we consider the momentum that exists in a key country like the United States to be at our backs, and we don’t see any reason at this stage where that would cease.

Vivien Azer – Citigroup: In Europe, you mentioned that you expect your growth rates to slow. Do you expect the industry in Europe to be up next year?

Paul C. Varga – Chairman and CEO: No, actually, I think some of the numbers we’ve been seeing out of there it’s been – they’ve been soft at the distilled spirits levels. You can find pockets of categories that are doing better than others, but no, I mean it’s been – generally been I mean difficult flooding for the industry in many of those countries, that’s why I think it’s noteworthy how well Brown-Forman has continued to perform in Europe.

Vivien Azer – Citigroup: To be sure, helped in part by some of the route-to-market changes you guys have done, are there any new opportunities in terms of tweaking your route-to-market in the next year or two?

Paul C. Varga – Chairman and CEO: We’re always looking at that, but as it relates to a fundamental shift like the one we made in Germany, for example, a couple years ago, that has helped Brown-Forman’s German business, or one that we announced down in, for example, Turkey back in the beginning of this calendar year. There’s nothing we have to talk about right now as it relates to fundamental changes in the route to market that – we just don’t have any information on that at this time.

Don Berg – EVP and CFO: It’s not to say there couldn’t be some, Vivien. I mean there are couple of market contracts that are coming up which is when you typically will start to look at them, but they’re more in the back half of the fiscal year than the front half of the fiscal year.

Vivien Azer – Citigroup: My last question has to do with the incremental CapEx that you pointed to over the next two years. In terms of the amount of capacity that you bring online, what kind of percentage increase are we talking about?

Paul C. Varga – Chairman and CEO: Percentages, let me think about it. I mean, now we’ve averaged over the last many years something in like the $50 million to $60 million CapEx range. I think, Don, your comments.

Vivien Azer – Citigroup: No, in terms of the incremental capacity from production perspective? You get into X number of cases now, and two years from now, you’ll be able to do Y number of cases.

Paul C. Varga – Chairman and CEO: I see. It varies. I mean if you look at some of the distilling capacity that we’re looking at, anywhere, we’re designing in a way that we can basically continue to expand in phases. So, in total, over the host of a number of years, you’d probably be looking at the ability to keep up with Jack Daniel’s growth, I think is probably the best way to say it.

Don Berg – EVP and CFO: It’s very long-term volumetric growth rate. That’s why we refer to it, the once in a generational type investment.

Price Increases

Dara Mohsenian – Morgan Stanley: First, I just wanted to discuss the price increases in fiscal ’13. It sounds like you’re comfortable that consumers are returning to trade up a bit and your portfolios brand equity justifies the price increases. But I also just want to get some more detail on what you’re seeing here from a competitive standpoint and the competitive dynamics, as you look out over the next year here in the marketplace?

Paul C. Varga – Chairman and CEO: Yeah. I think, part of it is influenced, but you know wanting to position particularly several of our brands, I mean Jack Daniel’s being one of them in the marketplace at the right premium position, which we considered to be super-premium position. I think those are the things you’re conscious of. We are very conscious of that watching that over the last several years, just because of the price sensitivity we’re observing around the world. But if you just look at the premiumization trends, whether they’re here in the U.S. or some of the consumer interest in ever more premium brands in emerging markets, I just want to make sure that Jack Daniel’s against that backdrop continues to be viewed for as large and successful it is as a very special brand. So these are decisions you make along the way as well. So, almost (along) said, the environments receptiveness to it or our desire to build our margins any of those other important considerations as well there is that aspect of it to this influencing it.

Dara Mohsenian – Morgan Stanley: Do you expect the price premiums for your portfolio to move up relative to the category over the next year. And then also just over the last few months, can you describe the competitive environment and any changes you’ve seen in the U.S. and Europe, in particular?

Paul C. Varga – Chairman and CEO: Yeah, I mean I think, (indiscernible) there is always the answer on whether the premium position will improve. I think at some markets, you have to look at is where you’re positioned at any point in time. I think absolutely our premium position will improve to the extent we go up either faster or more than some of our competition. And that in some cases will be the intent. We actually also think that if you just look at this maybe on a rolling 12 or 24 month basis as to what the activity is out there in the marketplace as it relates to how much people are discounting, how many frontline FOB increases where shift in the business are in terms of the retail outlets, what sizes are being sold, there are a lot of influences to what the consumers experience in terms of what they pay in the marketplace. But it continues to be an off-premise driven market, and therefore, you do have much more sensitivity to price and I do think the environment generally has improved and when you have the – when you compare like this last year, the last two years, to the prior year or two years and when you actually also think about the category that we are competing in, the fact that it has so much momentum should give you encouragement as well and a lot of that momentum is being generated to prices above some of our brands. So, all of that is encouraging, I think. So it adds up to us feeling better this year than we would’ve felt a year ago.

Dara Mohsenian – Morgan Stanley: Can you highlight if you are seeing in any pressure in Western Europe post the quarter in May or June? Your business obviously seems to be doing pretty well, but have you seen any impact on the category itself or even your portfolio and then on the other hand, it looks we are off to a very good start in U.S. this year in the alcohol category, particularly in the on-premise channel with the strong whether, do you think you’re seeing a more sustainable rebound in the U.S. consumer beyond that favorable weather and your thoughts on the U.S. consumer?

Don Berg – EVP and CFO: I will start with Europe and I think most recently in Europe we have – as Paul kind of alluded to earlier, we have been seeing spirits overall under I think some greater pressure. As far as our business goes, in general if you look out over, we had been taking share in most of the European markets. It’s gotten a little bit noisy of late, because of some of the price increases that we had already start implementing over there, particularly in the U.K. and France and so, there in terms of the buy-ins that we’re seeing and working through all those buy-ins and then starting to see reaction at the consumer level with new prices and what have you. It’s kind of hard to see penetrate through all that to see exactly how the brands are directly reacting with what’s going on in the overall spirits market. But generally, what we’ve been seeing is similar to what we’ve been seeing more recently in terms of pressure on the spirits business, but market share improvement for Brown-Forman.

Paul C. Varga – Chairman and CEO: By the way those European price changes for us were associated with the excise taxes, so those are very different consumer responses and retail responses. You see there, versus ones where we are fundamentally taking price on our own accord, not associated with excise taxes and shift into the U.S. I mean, I can only sight through this indicated data, had a chance to look at which is true about the end of our fiscal year be honest, and so – but all the sands that we’ve been talking about in that data continued on through that period. I mean the most encouraging number I saw that was – it’s on a dollar basis is what the spirits business generally seemed to advance on a dollar basis by about 3% for the last 12 months, just using the Bourbon category as a surrogate for the American whiskey, it was up just shy of 7, so I mean that was the continuation of the momentum where we get really mixed reports on your reference to the on-premise, off-premise. We hear a lot of things anecdotally and observe some things that encourage us, and we look at some of the reports, for example the NABCA data or something for signs of that showing up and some of it is not being as reinforced. We also look at of course, the public company casual dining reports and the things that they talk about, so we really see a mixed picture on that and we see most of the growth continuing right now to be pushed along by the off-premise segment.