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Brown-Forman H1 and Q2 results curbed by poor foreign exchange

Published:  04 December, 2014

The second quarter results from Brown-Forman show net sales have rebounded, growing 5% to $1.135 million in the second quarter, but operating income declined by 3% to $303 million due to the negative impact of foreign exchange.

Paul Varga, Brown-Forman's chief executive said: "While we have updated our guidance to reflect the significant impact expected from adverse foreign exchange, we still anticipate growing both underlying net sales and underlying operating income within the range provided in our original full-year outlook."

"The big story is the rapid appreciation of the US dollar, which is driving a large difference between our reported and underlying results throughout the P&L, even after considering our hedges.  The movement of our key currencies has been significant over the last few months, with most of them depreciating versus the US dollar. The Euro, for example, is down roughly 7% since our call for the first quarter in late August," said Jane Morreau, Brown-Forman's chief financial officer.

With the US economy rebounding, the US dollar strongly appreciated over the last five months. In the beginning of July the USD was trading at 1 GBP to 1.716 USD. The USD has now appreciated to 1.567 USD to 1 GBP. Foreign exchange negatively impacted operating income by ten percentage points in the second quarter.

It was a $17 million "negative swing" particularly in Europe in the second quarter and a $33 million drop in the operating income in the first half due to a negative impact of foreign exchange, according to Morreau.

It does not appear that foreign exchange challenges that Brown-Forman faces will be letting up anytime soon.

"The foreign exchange headwinds that hurt our first half reported results are expected to continue to negatively impact our reported results in the back half of fiscal 2015. We anticipate foreign exchange or adversely impact our full year operating income by $40-50 million," said Morreau.

The US market, which was relatively flat in the first quarter, rebounded and grew 10% in the second quarter, which was a major contributing factor to the increase in Q2's net sales growth.

"A strong sequential acceleration in underlying net sales growth in the United Kingdom lead to high single digit increase in the first half," said Morreau.

Despite the strong appreciate of the US dollar, net sales increased by 4%, but operating income decreased by 1% for the first half of the year.

The Jack Daniel's family is helping to drive a significant portion of growth.  The company is rolling out its Jack Daniels Fire brand today nationally across the US, which is a cinnamon flavoured whiskey.