Brown-Forman Corp (BF.B) 2005 Q2 法說會逐字稿

Good morning.

My name is April, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Brown-Forman second-quarter earnings for fiscal 2005 conference call. (OPERATOR INSTRUCTIONS).

Mr. Graven, you may begin your conference.

Good morning.

This is T.J.

Graven, the Director of Investor Relations at Brown-Forman.

Thank you for joining us for our second-quarter fiscal 2005 conference call.

I'm pleased to be joined today by Paul Varga, President and Chief Executive Officer of Brown-Forman Beverages and a member of the Brown Foreman Board of Directors, and by Phoebe Wood, Executive Vice President and Chief Financial Officer out Brown-Forman Corporation.

This morning Paul will give an update on our progress towards several key strategic objectives in our Beverage segment and provide an overview of current business trends.

Phoebe will then follow with a review of our financial results for the second quarter and guidance on our expectations for the balance of this fiscal year.

We will then take questions from investors.

Before we begin, I would like to remind you that this morning's conference call contains forward-looking statements based on management's current expectations.

Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements.

Many of the factors that will determine future results are beyond the Company's ability to control or predict.

You should not place undue reliance on any forward-looking statements.

The Company undertakes no obligation to update any of these statements whether due to new information, future events or otherwise.

Earlier this morning we issued a press release announcing our fiscal second-quarter results.

The release is available on our website at www.Brown-Forman.com under the section titled Investor Relations -- Investor Information, excuse me.

We have listed on page six of the press release a number of the risk factors that you should consider in conjunction with our forward-looking statements.

Other significant risk factors are described in our Form 10-K, Form 8-K and Form 10-Q reports filed with the SEC.

During this call, we will also be discussing certain non-GAAP financial measures.

These measures, the purposes for which management uses them and the reasons why management believes they provide useful information to investors regarding the Company's financial condition and results of operations are contained in the press release.

And now let me turn the call over to Paul Varga.

Good morning, everyone.

Before we go into the financial results for the quarter, I would like to take a few minutes to update you on progress we are making toward our goal of becoming the best brand builders in the wine and spirits industry.

I will do that by revisiting five key strategic priorities for our Beverage business.

These five will sound familiar to those of you who either joined us at our meeting in Lynchburg, Tennessee last December or who may have subsequently reviewed the material on our website.

Priority number one for us is to stay focused on growing Jack Daniel's.

Since last December, Jack Daniel's 12-month volume has grown more than 500,000 cases and today exceeds 7.5 million cases for the 12 months ending October.

While we have certainly had the good fortune of operating in a favorable environment for premium spirits, particularly in the United States, the rate of volume growth for our flagship brand has been substantially higher than the overall industry both within the U.S. and in the brand's largest markets.

Six-month depletion trends also year-to-date for Brown-Forman are even more favorable than the last 12 months, and today Jack Daniel's six and 12-month rates both stand at levels that the brand hasn't experienced since the early 1980s.

We believe that this recent progress is attributable to strong and consistent investment, increasingly relevant marketing programs, and highly prioritized and focused selling efforts in an environment that is conducive to these activities.

All of this is being accomplished while continuing our program of regular, modest price increases.

When the pricing is combined with production efficiencies from the brand's growing scale, lower excise taxes and favorable foreign exchange rates, the results is margin improvement that is as impressive as the volume performance.

All of us at Brown-Forman are very proud of the work we are doing on behalf of Jack Daniel's.

The brand stands today as the number five premium spirits brand in the world, and we believe that there are tremendous growth opportunities still ahead.

Realizing the full potential of this 138-year-old brand will no doubt have a few challenges such as the recent media attention surrounding the brand's proof change.

But we continue to find inspiration from one of Mr. Jack Daniel's original business philosophies which states, "Every day we make it, we make it the best we can."

This commitment to continuous improvement, along with our deep respect for the past, will serve us well as we work to attract new friends to the brand, while also retaining the loyalty of our existing consumer franchise.

We intend to do this balancing act very well.

A second important strategic priority for our Company is to further enhance the profitability of Southern Comfort in both domestic and overseas markets.

Since our meeting in Lynchburg last December, Southern Comfort's gross profit has grown more than twice the rate of its volume growth.

Consistent price increases, particularly in the U.S., where the brand has been fundamentally repositioned, lower costs and a favorable foreign exchange environment have resulted in steady expansion of the brand's gross margin.

Stronger advertising and promotional presence, premium packaging, and product optimization have supported this profit enhancement program, which has driven the brand's U.S. gross margin up over 10 points in the last five years.

Southern Comfort has also taken advantage of the increasing access to cable television in the United States, and we believe that the introduction of this form of consumer communication into the media mix is an important factor in the brand's recent excellent performance.

In addition to the U.S.

TV access, a stronger communication of the brand's New Orleans Heritage and consistent drink programs which promote the brand's drinkability and mixability have propelled Southern Comfort to a 12-month runrate in the second quarter that is its best in 14 years.

The economics underlying Southern Comfort are especially appealing as they combined high volumes, relatively low production costs, and increasingly premium price points and low levels of invested capital.

This yields attractive margins and superior returns on investment.

We will continue to invest substantial organizational and financial resources behind this brand in key markets such as the U.S., UK, Australia and South Africa.

Developing a winning brand building model for Finlandia Vodka is yet another strategic priority for our Beverage business.

Finlandia is our most global brand in terms of the dispersion of its volume, so it plays a key role in our efforts to geographically diversify our business.

Over 80 percent of the brand's volume comes from markets outside of the United States.

In many markets in Eastern Europe and Latin America Finlandia is the number one or number two premium imported vodka providing a solid position from which we can deliver incremental growth for both Finlandia and other Brown-Forman brands.

Poland is Finlandia's second-largest market, and the brand is performing extremely well with robust year-to-date depletion growth and we are optimistic about continued growth in this important vodka market.

In the U.S., improved consumer awareness, consistent on premise promoting, the brand's new bottle and the introduction of exciting new flavors are critical to our growth strategy.

We recently introduced a new mango flavored product into the U.S. market and are encouraged by its initial reception.

We have received distribution authorizations from a number of national drug and grocery store chains, as well as significant amounts of favorable press coverage in major metropolitan areas.

Flavors have been an important contributor to overall U.S. vodka category growth, and Finlandia has traditionally lagged the competition in this arena.

We're hopeful that mango and other flavors like it will help us make up for the lost time and that flavors will be an important contributor to the brand's U.S. success.

Yesterday we announced that we will be acquiring the remaining 20 percent minority interest in Finlandia, which Phoebe will cover in more detail later in the call.

We began the process of revitalizing this brand in the United States in 1996 via an agency agreement with no accompanying equity investment and consequently no assurance regarding the brand's permanency in our Beverage portfolio.

In 2000 Brown-Forman and Altia formed a joint venture called Finlandia Vodkas Worldwide and we took a 45 percent equity stake.

Two fiscal years ago we acquired a 35 percent stake in a joint venture, gained control of the wholly-owned distribution companies in Poland and the Czech Republic and assumed 100 percent control of the development of the brand and business strategy.

The recently announced transaction, which is expected to close on or before the end of the calendar year, represents the final stage of this creeping acquisition.

The brand has many challenges, not the least of which is the competitiveness of the vodka category worldwide, yet we remain optimistic that if we pick our spots wisely, the brand's premium presentation, high-quality, and finish authenticity will connect with consumers and result in sustained and profitable growth for the Company.

We also talked last December about the importance of nurturing the smaller, developing brands in our portfolio with the ultimate goal of creating important profit contributors for the future.

We're very pleased about the recent performance of brands such as Woodford Reserve, a superpremium Kentucky bourbon brand;

Tuaca, an imported Italian liqueur that we acquired 100 percent of in 2003 and it has recently surpassed 100,000 cases;

Don Eduardo, on ultra premium 100 present blue agave tequila brand, and the Appleton family of rums, which we began distributing via an agency agreement only a couple of fiscal years ago.

These brands are growing 12-month depletion volumes at ninth double-digit rates, but they are still in stages of their development where we're investing a significant percentage of the brand's gross profit in order to expand distribution and increase consumer awareness.

These brands and a few others like them represent the acorns in our portfolio that we believe have the potential to turn into much more significant profit contributors in the mid to long-term.

An example of how these acorns can progress and become meaningful can be seen in our collection of superpremium whiskeys -- Gentleman Jack, Jack Daniel's Single Barrel and Woodford Reserve -- all priced significantly above the Jack Daniel's price point.

On a rolling 12-month basis, the combined volume of these superpremium whiskeys has now exceeded 250,000 nine-liter cases.

We're proud of this milestone.

Our focus now is not only on growth in volume and gross profit but on finding the appropriate balance of brand and capital investment that maximizes the long-term purpose potential of this group of high margin brands.

Finally, our work continues in reversing the generally disappointing business trends we have experienced with our wine portfolio over the last few fiscal years.

The consumer fundamentals for table wines, both domestic and imported, are solid.

Consumers are drinking more wine, both in the aggregate and on a per capita basis.

However, profits from the U.S. wine business for most suppliers have deteriorated, and it is fair to say that most competitors have underperformed either by volume shortfalls or margin erosion.

New upstart wine labels from Australia, California and Italy have captured significant market share at relatively low price points.

They have been able to achieve these low price points due to the industrywide oversupply of grapes which has made cheap fruit readily available.

Some of Fetzer and Bolla's existing competitors chose to lower their prices in an attempt to preserve market share, but have had mixed results.

Fetzer's higher cost structure, which results from great purchase contracts entered into a few years back when the market price for grapes was significantly higher and future access to high-quality grapes was uncertain, along with our desire to preserve long-term brand equity has made us reluctant to match these price points.

It was our hope that focused marketing and strong field sales force execution, combined with Fetzer's existing loyal consumer base, might stabilize volume as we managed our way through this particular cycle of the wine business.

Unfortunately the volume losses have been worse than (technical difficulty) Fetzer and Bolla this fiscal year.

The last quarter of Nielsen data, however, has shown some improvement in the negative trend.

We have introduced new packaging for both labels, targeted advertising and promotional investments behind the important holiday season, and are hopeful that the second half will bring better results.

Our market research indicates the consumers continue to hold both Fetzer and Bolla in high regard, and it is important for us to regain the retail presence that has been lost to lower price competitors over the past couple of years in order to make the brand more readily available to consumers who are predisposed to purchasing them.

Korbel continues to maintain its market share leadership and steady volume growth in the sparkling wine category as the brand continues to benefit from creative and consistent brand building efforts.

Additionally, innovation and new products are core components of our wine strategy as evidenced by this year's introduction of our new low-carb wine and Bolla chianti.

We are encouraged by early trade and consumers support for these brands, and we will continue to look for new and exciting ideas that can satisfy unmet needs in the growing wine business.

Now before turning the call over to Phoebe, let me briefly comment on some geographic business trends.

Outside of the U.S., the environment for premium spirits remained mixed.

In Continental Europe volumes continue to rebound nicely compared to last year due in part to soft comparisons where Jack Daniel's buying patterns were impacted by price increases in Germany.

However, even after adjusting for this, we are still seeing signs of improvement in several other markets in that region of the world.

The United Kingdom is still a bright spot for both Jack Daniel's and Southern Comfort as we continue to reap the benefits from having a dedicated sales team, the cost of which we share with Bacardi Martini.

We're very encouraged by the continued growth for Jack Daniel's in China, South Africa and throughout Eurasia.

Additionally, Jack Daniel's (indiscernible) is well over 1 million cases on a 12-month basis with most of the business in Australia, a market where ready to drink products continue to experience significant growth.

Japan continues to be a bit of a struggle for us as we recover from price increases that were taken on Jack Daniel's last fiscal year.

And in Korea, consumer confidence is still relatively low, and the imported whiskey business there remains sluggish.

In the U.S. the positive industry momentum that we discussed in our first quarter conference call continues as evidenced by both our own internal financial results and recent Control State data which we believe is a good indicator of overall U.S. consumer take-away.

According to Control State data, the 12-month growth rate through this September for total distilled spirits is 4.5 percent, which exceeds the 4 percent growth experienced in all of 2003.

The growth rates accelerate when you look at even shorter periods of time, so these trends are certainly boosting our confidence in our premium spirits portfolio.

This concludes my update, and I will now turn the call over to Phoebe Wood, our Chief Financial Officer, who will walk you through more specifics on our second-quarter results and update our guidance for the full fiscal year.

Thank you, Paul, and good morning, everyone.

This morning Brown-Forman reported earnings per share of 84 cents, up 16 percent over the same period last year.

Operating income in the Beverages segment, which represents 92 percent of our earnings, increased 22 percent during the quarter.

But operating income in our Consumer Durables segment, representing 8 percent of earnings, was down 30 percent.

Reported earnings growth is obviously very strong due to excellent underlying profit trends in our premium spirits portfolio.

However, there are several items that influence the quarter that merit special attention.

First, results for the quarter benefited from a weaker U.S. dollar contributing about 7 cents per share to earnings.

Second, higher net trade inventory for our premium spirits brands contributed approximately 3 cents per share to earnings.

Some of this growth in inventory is related to an increase in advance of the holiday season and some is due to a change in distributor buying patterns for Jack Daniel's.

Third, in the quarter we made additional advertising investments behind our new low carbohydrate wine brands, 1.6 Chardonnay and 1.94 Merlot.

Our first-quarter results benefited from revenues associated with the buildup of trade inventory of those brands, targeted at consumers interested in low-carb lifestyles.

In the second quarter advertising investments behind the brand reduced earnings per share by about 1 cent.

Finally, incremental pension expenses and advisory fees associated with the prospectus sale of our investment in Glenmorangie PLC each reduced earnings per share by about 1 cent.

If we adjust our quarterly figures for the items I have just mentioned, our underlying growth in the second quarter was closer to 5 cents per share or about 7 percent.

After adjustments, the Beverages segment's contribution to earnings of 8 cents was partially offset by a 3 cent decline in the contribution from the Consumer Durables segment.

For the first half of the fiscal year, Brown-Forman has earned $1.26 per share, up 29 percent from the 98 cents earned last year.

This year-to-date growth is also very strong, and I will review a few items to give you a sense of our underlying growth in earnings in the first half of the year.

First, on a year-to-date basis, favorable foreign exchange rates, that is a weaker U.S. dollar, contributed about 11 cents to earnings.

Looking ahead, we would expect that if foreign exchange rates remain unchanged over the remainder of year, our year-over-year benefit will be a few more cents.

Second, prior year results included legal settlement expenses associated with our change in distribution in the United Kingdom which reduced earnings per share last year by 6 cents.

Third, the increase in global trade inventories, which had a significant impact in the second quarter, also contributed 3 cents per share to earnings on a year-to-date basis.

Fourth, profits from the introduction of our new low-carb wine brand contributed 2 cents to earnings per share.

Adjusting for these items just mentioned and an additional 3 cents due to higher SG&A associated with incremental pension expenses and Glenmorangie advisory fees, which both reduced earnings, our first half underlying growth in earnings per share was approximately 8 cents or 8 percent.

Before I review the performance of our two business segments, I would like to mention a few significant events that occurred this past quarter.

As Paul mentioned, yesterday we reached agreement with Altia to acquire the remaining 20 percent of the capital stock of Finlandia Vodka Worldwide Ltd for EUR46.8 million or $61 million at the current exchange rate.

Brown-Forman acquired 45 percent of Finlandia Vodka Worldwide in 2000 and an additional 35 percent in 2002.

The 2002 acquisition agreement granted Altia an option to require Brown-Forman to buy its remaining interest in Finlandia Vodka Worldwide during a two-year window beginning December 31, 2004.

Altia exercised that option, and Brown-Forman will soon have 100 percent ownership of Finlandia Vodka.

The transaction is expected to close in the Company's third quarter.

Also, on October 20, we announced our intention to tender our shares of Glenmorangie PLC to Moet Hennessy for 51 million pounds sterling.

We expect this transaction to close during our third quarter and to realize a gain of between 36 cents and 38 cents per share.

We continue under the current contract to represent the brand in the United States and in several European markets.

Now let me turn to the performance of our two business segments.

Beverages first.

As Paul mentioned, our premium spirits portfolio continues to fire on all cylinders.

Earnings growth in the second quarter was driven entirely by the Beverages segment premium spirits portfolio largely due to outstanding results for Jack Daniel's, which registered volume growth and margin improvement boosted by price increases and favorable exchange rates in nearly all of the brand's major markets.

While global shipment volumes for Southern Comfort were flat for the quarter, price increases improved profits for that brand.

Finlandia Vodka volumes posted healthy gains in several international markets, and the brand was a nice contributor to profit growth in the quarter.

Domestic depletion for Jack Daniel's grew in the mid-single-digits.

Outside of the United States, depletions grew at a double-digit rate with particular strength in Germany, South Africa, China, and Australia.

Southern Comfort's global depletions grew in the low single-digits for the quarter led by gains in the United States and in Germany.

Beverages revenues were up 14 percent for the quarter, although the weaker U.S. dollar accounted for about 4 points of that revenue growth as export sales of our four spirits brands continued to benefit from favorable foreign exchange trends.

Gross profit in Beverages was up 17 percent for the quarter and up 15 percent through the first six months of the fiscal year.

We are especially pleased that the gross margin in our beverages business has increased from 51.8 percent to the first six months of fiscal 2004 to 52.8 percent this fiscal year.

Advertising expenses increased 12 percent during the quarter and are up 10 percent year-to-date.

We expect that full year advertising expenses will be up double-digits led by healthy increases for our core spirits brands and several of our developing brands, offset slightly by a reduction in advertising for our wine brands.

We continue to see good opportunities for investing behind our brands, particularly within our premium spirits portfolio where we believe the returns will be substantial over the long term.

Beverage selling, general, and administrative costs, which I will refer to as SG&A, were up about 12 percent for the quarter and up 8 percent year-to-date.

These are significant increases in SG&A expenses, so let me expand upon the main drivers behind this increase.

Higher pension expenses in this segment, advisory fees associated with the expected Glenmorangie PLC transaction and foreign exchange rates accounted for about 4 points of this increase for the quarter.

The remaining 8 percent increase was split evenly between inflationary growth and higher compensation expenses directly related to the improving trends in our premium spirits portfolio.

For the remainder of the year, we expect a more moderate rate of growth in SG&A compared to the second quarter.

Putting it altogether, operating income grew 22 percent in the Beverages segment for the quarter and 32 percent for the first half.

Adjusting for a $13 million favorable foreign exchange impact, a $6 million benefit from higher global trade inventory, $2 million of advertising behind the Company's low-carb wine and $3 million of incremental SG&A from higher pension expense and Glenmorangie advisory fees, the Beverages segment operating income grew by 10 percent in the quarter.

On a year-to-date basis, Beverages benefited $22 million from foreign exchange, $6 million from higher trade inventories, $12 million from the absence of both legal settlement and wine restructuring expenses in the prior year, and $4 million from our low-carb wine introduction.

Now adjusting for these factors and $4 million of incremental SG&A from higher pension expense and Glenmorangie advisory fees, Beverages segment year-to-date operating income again increased 10 percent.

All in all we're optimistic regarding the fundamentals of this segment for the remainder of the year.

I would like to shift now to our Consumer Durables segment which on a rolling 12-month basis contributed just 2 percent of our operating profit.

The U.S. market for tabletop and giftware remains very soft and results for the second quarter in this business segments were again disappointing.

Net sales declined 11 percent in the quarter.

The management team at Lenox continues to take aggressive steps to improve the health of this business, but reductions in the quarter in SG&A and advertising expenses, 7 percent and 11 percent respectively, were insufficient to offset sales declines.

Despite solid profit improvement at Hartmann Luggage, operating income for the entire segment was 30 percent below the second quarter last year.

Sales of Kate Spade cobranded patterns are making a very good revenue contribution, but the business is showing continued weakness in all three channels of distribution, including the traditional department store wholesale business, our retail business, and direct to consumer.

Following disappointing results for the quarter, Consumer Durables has posted a year-to-date operating loss of 1.5 million compared to operating income of $7 million for the same period last year.

This weakness is not unique to our Company, but is evident throughout the tabletop and giftware industry.

The management team is focusing all of our efforts toward deepening our understanding of consumer trends and buying patterns to improve the prospects for revenue growth while aggressively reducing cost in all areas of this business.

Not surprisingly, we're cautious about our outlook for this business segment for the remainder of the year.

On a positive note, incorporating results from both business segments, Brown-Forman's return on invested capital for the 12 months ended October 31, improved 160 basis points to 17.4 percent versus 15.8 percent during the last fiscal year.

This is a significant improvement, and although results will likely moderate over the balance of the fiscal year, we expect an increase over the level experienced in fiscal 2004.

Now that we've reviewed the quarter and year-to-date performance, let's turn to our outlook for the remainder of the fiscal year.

Underlying business trends for our premium spirits brands remains solid.

However, excluding the gain on the prospected sale of our interest in Glenmorangie, we expect modest growth in earnings per share for the remainder of the fiscal year.

Our outlook reflects several key assumptions.

One, a potential fourth quarter reduction in trade inventories as a result of possible new distribution arrangements in several international markets.

Two, double-digit growth in advertising investments behind the Company's spirits brands.

Three, a continuation of intense price competition in the U.S. table wine category and challenging business conditions for our Consumer Durables segment.

Four, modest benefits from foreign exchange, and five, higher pension expense.

We're narrowing our full-year earnings guidance at this time, and for fiscal 2005 we expect fully diluted earnings per share of approximately $2.38 to $2.43 per share, excluding the anticipated 36 to 38 cents per share gain from the expected sale of our interest in Glenmorangie PLC.

That concludes our prepared remarks for the second quarter.

Paul, T.J., and I will answer any questions that you may have.

(OPERATOR INSTRUCTIONS).

Mark Carlin with Bear Stearns.

There was no response from his line.

His question has been withdrawn.

Your next question comes from the line of Dara Mohsenian with J.P. Morgan.

You mentioned the possibility of new international distribution arrangements.

Can you give us some more clarity there, particularly which markets that may involve and what magnitude of impact that could have in Q4?

No, we really can't talk in great specifics about the actual markets or potential arrangements, just we wanted people to beware, though, of the fact that those are things we're considering that we would anticipate having a potential impact on the fiscal year's overall second half.

Okay.

And would that generally be a similar process to the UK where you guys become more involved in distribution?

You got it.

The whole idea of our investigation is to try to find the best ways that we can bring the right influence to our performance in every single market.

And just as the UK example that you referenced, it is a similar type of evaluation that is going on in a multitude of countries in Continental Europe.

And I will say, though, that we don't expect that just because of the size or the momentum that we were experiencing in the UK, that this would have a similar impact.

Okay.

Fair enough.

And in light of the increase in Finlandia stake, as well as your dividend increase, can you just review your priorities for free cash flow at this point?

Thanks for the question.

We take a look at what we should do with our free cash flow it seems all the time, and I'm not sure that we can set out for you exactly in priority what they are because we try to respond to the multitude of priorities that we think are out there.

First of all, we want to invest behind our brands.

We want to make sure that there is enough Jack Daniel's out there for the future.

We want to seek opportunities that are appropriate for brands to add to our portfolio.

We want to take care of our shareholders by returning dividends to them in a very tax-friendly time.

So we're going to do those things that are in the best long-term interest of the shareholders and try to take advantage of the great cash generation of this Company to do the kinds of things that makes short-term returns to shareholders and long-term really solid decisions for grand investments, not only adding portfolio but also continuing to build up those brands.

Does that help?

That does.

From an acquisition standpoint, do you think you guys will continue to be focused more on the spirits business in wine?

You don't have as much scale.

Are you looking to add to the wine business, or is it more the spirits business you're focusing on?

Definitely would be skewed much more towards the spirits.

We will look at a lot of different possibilities that arise, but right now as it relates to wine, we are much more focused on putting to good use the existing assets we've got, making them perform better in the marketplace, the brands that we currently have, and you will probably see us skewed more toward new product activity on wine.

And I would say it is the same story as it relates to acquisitions on the spirits side.

We remain alert to a lot of possibilities, but we're going to be really smart about what we buy and when we buy it.

And then I'm overstaying my welcome, so last question.

On the Consumer Durables business, it is obviously a drag on returns and margins and really not adding that much to EPS anymore.

I know you guys have said in the past you want to fix the business before you would consider divesting it, but at this point it seems like it is perpetually struggling.

Can you just give us an update on your thinking on the Consumer Durables business and why it fits strategically in your portfolio?

Well, you note our disappointment in the performance of that segment.

And I think what you have heard us say before remains true.

We are trying to focus our attention on fixing the business, and that is our main -- really our main focus at this point in time.

It is interesting that we will do what is in the long-term best interest of the shareholders, and we think that that really is to keep on fixing, trying to fix yhis business.

And so that is where our energy.

I'll note, though, that I think the reason for -- the reason we entered the business in the early '80s, which was as a diversification against the antialcohol sentiment of that time, I think that reason probably no longer exists with the kind of great performance that our beverage segment is having.

And I think the performance of Durables is really overshadowed by the great performance of our Beverages segment.

Andrew Conway with CSFB.

A question in the U.S. first on Jack Daniel's.

Paul, if you could share us the quarter performance and maybe six-month runrate on on-premise, off premise?

Are you seeing different trends or similar trends?

The on-off split remains about the same regardless of the period you look at at least when the last groups of numbers I was looking at.

The really interesting thing about Jack Daniel's performance both globally and domestically and both on a three-month basis and a 12-month basis is the amazing similarity in the trends.

It is very steadily progressing at improved rates, and for right now it really helps, as you can imagine, for a company to be able to see synchrony in some of the varying rates we've studied because it helps us as we have to forecast out into the future on making whiskey.

So we have studied these things awfully closely, and right now we're seeing a nice continuation at an elevated rate.

Great.

And your view is the synchronicity also across demographic age groups as well?

No, I do think it is being -- it would surprise people that we remain so strong as a 35 plus brand in the United States.

One of the great things about Jack Daniel's is that unlike a lot of other brands that have great business between the ages of 21 and 29, they subsequently lose that business, and Jack Daniel's, and we work very hard at this, actually tends to retain a great portion of its consumers that are introduced to the brand during their mid-20s.

So it is something that we will continue to study.

But there is no doubt that the improving demographics in that 21 to 29-year-old segment are contributing not only to Jack Daniel's business but also to Southern Comfort and a number of our competitors.

Okay, great.

And as you look at the fourth-quarter inventory shifts potentially as you alter distribution methods in Europe, in your view is it the learning experience of the UK that has led you to change strategy?

Is it changes in distribution agreements?

And is it your view that this can accelerate your underlying brand trends as you make your changes?

Absolutely.

One of the reasons you would go forward with consideration of a variety of different models is to -- usually it would be predicated on a couple of potential rationale, but I think one of them would be to improve your business performance.

I think other times it is an opportunity to improve margins that would motivate it, but it is not just the United Kingdom.

The United Kingdom is a wonderful example of something that we have done in Europe.

But we've had really interesting and different experiences, all of them thankfully for us favorable in places like the South Africa, Korea, China, other markets around world where we have deployed somewhat different, but all of them having the goal of increasing our influence on the brand building model.

So I think you'll see us from time to time look at different ways of doing things but always the same goal.

Okay.

And finally, Paul, as you look at the Finlandia brand in the U.S., is there room for Brown-Forman to develop a superpremium vodka brand now that you have 100 percent ownership of Finlandia?

Sure there is.

There is always room to develop new entrants into a wide variety of segments.

As you know, Andrew, that particular segment I think you are referring to, the arena around Grey Goose and above is a particularly busy one.

We have been mostly focused on making the effort behind Finlandia a much more focused one and one that gets better results for the brand.

As time goes along, we're going to be looking at the premium segments, a variety of the categories that you traditionally wouldn't have thought Brown-Forman to be particularly strong in, and I mentioned one of them today, which was superpremium tequila and Don Eduardo.

But that is just exemplary that I think a lot of work that is -- that will have to do, but a lot of opportunities that are available to the Company.

Jeff Kanter with Prudential Equity Group.

Phoebe, just real quick, I thought the put agreement with Altia to you was for EUR39 million.

Did that change?

Or was it always 49?

It was plus interest.

Okay, that's the difference.

You've got the right number, but we just had to add interest.

Okay.

And what does that mean to earnings or contribution?

Does it mean really anything?

(multiple speakers) Very, very minimal.

Because basically the difference now is you have 100 percent of the production profit, is that correct?

Actually the way that the structured is that we will have 100 percent of Finlandia Vodka Worldwide.

We purchased the vodka on a long-term production contract from Altia.

So the production gains were not -- that is already determined.

It is just that we're going to get an additional 20 percent.

Okay.

Fair enough.

And Paul, just your sale of Glenmorangie.

Obviously LBMH gave you a pretty nice offer.

But were you considering actually trying to acquire it outright?

And my broader question is, you are looking to you said to potentially acquire brands or develop brands.

Was it that LBMH gave you an offer you couldn't refuse, or you didn't see the potential in Glenmorangie that you once thought that made you sell the stake rather than try to acquire it outright?

We very much gave really serious consideration to trying to buy the brand.

The bottom line is what you reference, which is that they just made an incredible offer.

We were essentially outbid in this process.

And at some point along the way we are looking at it was a very unique position to be in where we were looking as a potential buyer and as a potential seller.

And for I think obvious reasons, we chose in the end to not go as high as LBMH did in the bidding process.

It is -- what we will retain out of it is a nice consolation prize, but also I would call it -- we will continue to do what we think is really good work on behalf of Glenmorangie as is specifically laid out in the distribution arrangements we have for the U.S. and Europe.

So we have mixed emotions about losing the auction, but only time will tell if we really lost.

Do you feel now -- Phoebe mentioned that you're going to look for opportunities to -- for acquisitions.

Do you feel that that sale leaves you with a hole in your portfolio?

Not a gaping hole.

Remember we're going to -- I think you're making the presumption that we would not sell Glenmorangie in the future and where we have had the long experience with this in the United States and more recently in some European markets.

Until it is negotiated otherwise or the contracts expire, we will continue to sell Glenmorangie.

But in the event that we did not represent Glenmorangie at sometime in the future, as I said earlier, I think there's a wide variety of ways that we can compete in the superpremium segments.

And as far as I'm concerned, I mentioned in my early comments that the three superpremium whiskeys that we're building right now that just happen to be American whiskeys, not Scotch whiskeys, all at very superpremium price points offer a lot of development potential for the Company.

And Phoebe, that 12 percent increase in advertising spend, that includes obviously the incremental marketing from the low-carb Merlots, is that correct?

It does.

And what was the number for higher pension and the Glenmorangie fees?

Was it 4 million or 2 million in the quarter?

For the quarter, I think is 4 million year-to-date, about a penny each, a penny a cents each.

A penny a cents each.

Thank you very much.

For the quarter.

Okay.

Thank you very much.

David Hayes of Lehman Brothers.

Three questions if I can.

Just on the Jack Daniel's depletions, I think in the first quarter you were talking about double-digit levels.

Second quarter that comes down to high single-digits.

Can you confirm that the U.S. continues to be at double-digit levels based on the comments you just made?

And then is there any particular market where maybe you're seeing a slowdown quarter on quarter?

And the second question just came back to the Glenmorangie distribution agreement.

Can you give us any more details there in terms of the length of that agreement, whether there is penalty attached if they were to break that early?

And also give us any sort of indication in terms of the impacts on the business if and when that distribution agreement was to be terminated?

Thanks very much.

Thank you for your questions.

Let me take the second one first.

And then Paul will answer your first one around Jack Daniel's depletions.

With regard to Glenmorangie and the distribution arrangement, all of the terms of that are confidential.

So we are not at liberty to disclose what those are.

Yes.

And as it relates to Jack Daniel's, I think the reported first-quarter depletions and how you may perceive them to be coming down slightly are due to the fact that in the first quarter we really had I think as reported depletions now quite a bit of sales going on in advance of price increases sometimes which is traditional for a lot of our price increases to occur during the midsummer.

And one of the statistics we look at very closely, particularly on the United States, is what is underlying consumer take-away.

And so our study of that would say that the brand continues along at really high single digit rates and not double-digit rates.

Bryan Spillane with Banc of America.

Just two questions.

First is, Paul, on media spending it is going up for you.

It is also increasing for the spirits industry in general.

And can you talk a little bit about how you are spending the market -- the dollars differently today versus the way you were spending even three years ago now that you have more places to spend the money whether it is a NASCAR sponsorship or the other opportunities that are available.

And also if you could talk a little bit about how you see your spending now versus the beer company because the beer industry looks like it is beginning to try to position itself more directly against spirits.

Sure.

I think your inference is a correct one that we are spending our mix of dollars a little bit differently.

It would be interesting to study the specifics of how much of our media expense, for example, has shifted from, say, print and out of home more toward television.

There has clearly been a kind of regular ongoing shift that we have seen as we have had access in the United States to more, particularly cable, but some local television channels.

I do think, though, that it hasn't all gone to media.

We have, as you referenced, there has been a tremendous amount of investment and work that we have done both in the on-premise environment, but I would also add the general area of lifestyle marketing, whether it be rodeos or events, sponsorships, etc..

So I think with most spirits companies you've probably seen a shift which would complement traditional good-sized media spenders where they are adding a component of heavier on-premise investment and more sponsorship.

I don't -- I couldn't comment on the impact of increased beer spending.

The way I look at it is that we went into this seriously disadvantaged on a dollar for dollar basis versus beer as it relates to media spending, and they have enjoyed that advantage for the better part of two decades.

And so as far as I'm concerned, we're going to stick to what we're doing that is helping to build our brands.

And I suspect they will get competitive in a lot of different ways, not just media spending.

But as far as it goes to will it raise the cost of doing business or things like that, it surely won't I don't think for us.

That's very helpful.

And, Phoebe, if I could just ask one follow-up.

Given how fast Jack Daniel's is growing now, are we at a point, is there a concern that we won't have enough inventory to meet demand?

Are we at a risk of having to put people on allocation?

We're planning that we will have adequate Jack Daniel's for very much growing increased consumer aberration and consumption of this brand.

I mean it is clearly something that we spend a great deal of time on, we are focused on it, and as we sit here today, we are confident that we've got the whiskey.

Thanks, guys.

Have a good Thanksgiving.

(OPERATOR INSTRUCTIONS).

Thomas Russo with Gardner, Russo & Gardner.

Good quarter.

A couple of quick questions.

On Southern Comfort, did you break out the shipments between U.S. and international that comprise the low single-digits worldwide?

The shipments actually -- it was very different between the shipments and the depletions, but the shipments are actually down in the European markets and are down a little bit in terms of days of inventory in the domestic market.

The depletions, however, are a different story.

They're both running positive and the U.S. slightly ahead of the international markets with both of them in or around the mid-single-digits.

So it is across the board.

It is synchronistic as you called it?

That is good.

Yes, and excellent -- those are excellent results compared to historical results for that brand.

So it's great.

Good, good.

Speak a moment about your developing efforts in China, which you do cite in the overview on the spirits operation?

It is growing going great.

I think we have had months where we have actually been running at about 100 percent growth rate.

It has been that robust over there.

We have been limited somewhat by just how many new cities and markets and accounts we can get to.

But there has been a great expansion.

We have stepped up -- it really has not been a media driven activity at all.

It's really a local promotional activity that we funded literally city by city, and as the popularity of Western-style accounts has grown, Jack Daniel's, who was one of the early brands into those accounts years ago, has continued to benefit from it.

Our team over there continues to do a great job, and it actually has come at a great time for us out in that region as it has picked up when the Korean market, as I mentioned, in my comments had gotten a little soft.

So we're really excited about not only what is going on in China today, but what we think can happen there in the future.

Is your competitive set for Jack Daniel's different there than in other more traditional markets?

Are you up against different brands that we wouldn't normally suspect?

Absolutely.

It is a -- right.

In that market it is the 12-year-old Scotches is the way I call it and, to a lesser extent, the Cognacs which have long been strong there.

But you're just going to see I think a lot of activity in China over the next five years with not just the traditional whiskeys going in, I think you'll see a lot of activity from a wide variety of the competitive companies.

Thank you.

Good quarter.

Jeff Kanter with Prudential Equity Group.

Phoebe, just a really quick follow-up question.

Your incremental pension expenses, were those planned, or was it just the quarter was still going so well that --?

They are planned.

I'm sorry?

They are planned.

They were planned?

Yes.

Thank you.

At this time, there are no further questions.

That concludes our second-quarter conference call.

Thank you for your time and attention and have a happy holiday.

Thank you.

Thank you all.

Thank you.

Thank you.

At this time, you may now disconnect.