Brown-Forman Corp (BF.B) 2008 Q2 法說會逐字稿

Good morning.

My name is LaTonya and I will be your conference Operator today.

At this time I would like to welcome everyone to the Second Quarter Fiscal 2008 Conference Call.

(OPERATOR INSTRUCTIONS) After the speakers remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Graven, you may begin the conference.

Thank you.

Good morning, everyone.

Thank you for joining us today.

This is T.J.

Graven, Vice President, Investor Relations at Brown-Forman, joining me today on the call are Paul Varga, our President and Chief Executive Officer, Phoebe Wood, Chief Financial Officer, and Jane Morreau, Senior Vice President and Controller.

This morning, Phoebe will lead off with a few highlights from the quarter, and then we'll provide updates on Casa Herradura, our capital structure and our earnings outlook for the remainder of this Fiscal Year.

Paul will then follow with some comments addressing recent performance and plans for our U.S.

business, and then we'll open up the lines for your questions.

Our 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 in these statements.

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

You should not place undue reliance on any of our forward-looking statements, and we undertake no obligation to update any of these statements, whether due to new information, future events or otherwise.

A Press Release containing our results can be found on our website, under the section titled " Investor Relations".

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

Other Risk Factors are described in our Form 10K, Form 8K, and Form 10Q reports.

During this call we'll also be discussing certain non-GAAP financial measures.

These measures, and the reasons Management believe they provide useful information to investors regarding the companies financial condition and results of operations, are contained in our press release.

With that, I'll turn the call over to Phoebe.

Thank you, T.J.

Good morning, everyone.

Thank you for joining us.

This morning, Brown-Forman reported another quarter of record earnings.

The results for the Second Quarter of Fiscal 2008 reflect exceptional growth in international demand for our global brand, the addition of last years acquisitions of Chambord and Casa Herradura, and a weaker U.S.

dollar, from which we benefit.

These positive factors were partially offset by weakness in the U.S.

market and higher cost of goods, reflecting rising raw material and energy costs.

Together, these factors increased our reported operating income an impressive 16%.

Instead of repeating the results you have read in the press release this morning, I'll note a few highlights.

Jack Daniels volumes grew 10% in international markets on a rolling 12 month basis through October.

Impressively, the brand grew in 46 of its top 50 international markets.

Finlandia Vodka volume, an increasingly important component of our company's overall growth, and specifically our international growth, continued to grow at a double digit rate.

In Poland, Finlandia's largest market, the brand exceeded 700,000 cases, on a 12 month rolling basis.

Because of the fine work done by many of the Company to grow our business outside the United States, we are a geographically diversified Company.

For the first time in our 137 year history, total revenues on a 12 month rolling basis exceeded $3 billion, and nearly half of these sales were in markets outside of the United States.

The growth prospects we see for our business internationally are enormous, and we continue to develop the infrastructure, through partnerships, acquisitions and organic investments, to position the Company to capitalize on these opportunities.

This strong and growing base of international business is evidence of the benefit of diversification, at a time when our U.S.

business is underperforming our expectations, and when the weak U.S.

dollar continues to boost our profits.

Offsetting some of these excellent results are cost pressures that are mounting.

Many of our competitors and consumer product companies in general, have seen higher costs begin to impact their results.

We are no exception.

In addition to the cumulative impact on the consumer of higher energy costs, which in recent years has been a concern, we're seeing cost pressures across virtually our entire basket of input costs, which when taken together have begun to have a meaningful impact on our rate of earnings growth.

For us, the effect of rising input costs is most visible for Jack Daniels.

For several years through Fiscal 2006, costs for Jack Daniels had been essentially flat year-over-year.

From Fiscal 2006 to 2007, rising grain prices and other factors caused mid single digit cost increases, excluding excise taxes, for our largest brand.

Despite solid cost management and our hedging of some component costs, we expect significant cost increases this year, again excluding excise taxes, which are reflected in our earnings outlook.

We have now owned Casa Herradura for 10 months.

Our outlook for Casa Herradura remains unchanged.

We continue to expect earnings dilution in the range of $0.13 to $0.18 for the full Fiscal Year.

We've made great progress on our implementation of new business processes, and have been very successful in reducing inventories throughout the retail and wholesale channel in Mexico, the largest market for these Tequila brands.

However competitive activity is intense in this market, in part driven by the industry wide oversupply of agave, which has resulted in the introduction of many new competitive brands, and has created a challenging pricing environment.

Our ability to achieve our full year goal in that market depends on the performance of our brands in the holiday period, which is under way.

Outside the United States and Mexico, we've been a bit slow to get going, largely as a result of some timing related issues transitioning the brand into our distribution network.

We remain optimistic about the prospects for these brands and their international growth potential.

In the United States, we've made excellent progress increasing points of distribution for El Jimador and Herradura, by more than 70%, which equates to more than 7,000 on and off premise accounts.

Of course increasing points of distribution is only part of the equation.

Our brand teams continued their work during the quarter to improve our understanding of the consumer and to insure that our advertising, promotional activities, pricing and packaging, are appealing and compelling.

From what we've seen thus far, we're very pleased with this acquisition.

I'll leave a discussion of the U.S.

market to Paul Varga, who will speak directly about it in a few minutes.

I'll turn to cash and capital structure.

For the first half of this Fiscal Year, cash from operations was approximately $196 million, versus $107 million in the same prior year period.

Higher earnings and a reduction in working capital, contributed to this excellent cash generation.

You'll recall that we also made a $204 million distribution to shareholders, of proceeds from the sale of our consumer durables business in May, and two weeks ago announced a healthy 12% increase in our dividend.

Yesterday, we announced that our Board of Directors has authorized a $200 million share repurchase over the next 12 months.

This action is consistent with the long held philosophy of the Company to use its cash wisely.

Our philosophy has been to invest in the business as needed, to make acquisitions as they are available and deliver good value, and to return cash to shareholders.

This is what we have been doing to deliver value to shareholders over the past years.

This new share repurchase authorization is another tool that allows us to do this well.

This reflects our confidence in this business and the strength of our cash flows.

This should not signal that we seek diminished growth opportunities.

At this $200 million level, we continue to have substantial debt capacity to pursue growth opportunities.

This should not signal that we have changed our philosophy on capital structure.

We do not have a target debt level or a target debt ratio in mind, and we do not expect this to change our credit rating.

What this does signal is that we have an excellent investment opportunity for us to purchase A and B shares, our borrowing rates and our stock price are attractive.

We will be able to maintain excellent financial flexibility and take advantage of an efficient, cost effective and flexible means of enhancing shareholder value.

Now, turning to our outlook for earnings, from continuing operations for this Fiscal Year.

You'll recall that our previously communicated full year earnings outlook was $3.35 to $3.55 per diluted share.

We are now narrowing our full year outlook to $3.42-$3.54 per diluted share, which represents growth of 9% to 13% over comparable prior year earnings of $3.14.

This outlook includes expected earnings dilution of $0.13 to $0.18, associated with the acquisition of Casa Herradura, which is unchanged from prior guidance, and it excludes any potential benefit from share repurchases during the remainder of this Fiscal Year.

Despite a more challenging environment in the U.S.

and the company's expectation for higher energy and raw material costs, this revised outlook anticipates additional foreign exchange benefits, solid underlying gross profit growth, particularly outside the United States, moderating increases in operating expenses, and a lower tax rate in the second half of the Fiscal Year.

With that, I'll turn the call over to Paul Varga.

Thank you, Phoebe and good morning, everyone.

For the first half of the Fiscal Year, our reported operating income growth was a strong 13%, driven primarily by a solid 7% underlying growth rate and significant help from favorable currency trends.

This 7% underlying rate, while approximating the longer term underlying growth in operating income for Brown-Forman, is down from the double digit underlying growth we've seen over the last three years.

The reason for this is our U.S.

performance.

As Phoebe mentioned, we continue to make excellent progress outside of the U.S., and we believe we have enormous short-term and long-term growth potential.

Most of you are aware of our international expansion story and potential, so I won't focus on that so much today.

Rather let me talk about what we think is happening in the U.S.

and what we're doing about it.

The executive summary is that the spirits industry growth rate is down a little from where it was just 12 months ago.

And within the spirits industry, Brown-Forman is disproportionately down, due to a combination of consumer dynamics, competitive efforts and company specific factors.

That's the headline but let me elaborate a little further.

At the spirits industry level, we're estimating the growth rate of spirits to be down about 1.5 to 2 percentage points versus last year.

Many of you study the data for wine, beer and spirits quite closely, so you'll already know that wine and beer are growing at the same or improved rates, thereby recapturing some shareback from spirits.

We speculate that the typically higher out of pocket cost for the standard sizes purchase, hurts spirits relative to beer and wine in an environment where many consumers are feeling short on cash.

In this regard, the consumer can be thought of as actually trading down from spirits to wine or beer.

The slower level of growth in disposable income is also a key consumer influence within the spirits industry.

There are a couple of implications that I would note.

One is the consumer shifts some of their occasions from the on premise to the off premise, thereby making price a more important variable in their purchasing decision.

Secondly, and partially as a result of this channel shift, the pace at which consumers trade up to more premium brands slows somewhat.

Our data supports this thesis, and these trends can compromise the growth rates for premium priced on premise brands, most notably Jack Daniels.

In this more challenging consumer environment, our largest competitors are increasingly focused on gaining market share.

Occasionally, with little regard for short-term cost or longer-term brand equity.

At a time when the consumer is somewhat cash challenged and our competition is discounting at deeper levels, we have been continuing on with our regular price increase and discount activity.

And in some cases, because of our longer-term ambitions for value creation, we've been even more aggressive with price increases in pursuit of higher margin premium price positions.

These factors related to competitive pricing has contributed to lower, short-term growth rates for several of our brands in the United States.

An additional factor is that our end market effort hasn't been as strong as many of our competitors, due to the distractions we've had had in working through our own reorganization.

For the last year and a half, our U.S.

team has been more focused on internal organizational matters, such as roles, responsibilities and training.

This has come at some sacrifice in focus on our distributors ,the trade and our consumers, and we've been working to address this over the last many weeks.

Finally, let me turn to Jack Daniels U.S.

performance.

In the six months of this Fiscal Year, the brand's volume growth percentage is down roughly four percentage points, versus the same period last year.

We're encouraged that during the same time period, the growth percentage in the brand sales dollars are down less than two percentage points, illustrating the contribution of higher prices.

When thinking about the four percentage point volume drop over the first six months, we estimate that half, approximately half of this, or two percentage points, is attributable to the drop in the spirits industry growth rate, with the other two points more specific to Jack Daniels and Brown-Forman.

We believe these latter two points have occurred due to a combination of trading down, trading over, and trading up.

A contributing factor to consumers trading off of Jack Daniels in any direction, is the fact that the brand has recently crossed through the $20 and $40 price points in most markets on its key sizes.

We've seen temporary volume dips when crossing through key price points before, and we believe we'll recover in a similar fashion this time.

More specifically to the trading down, we believe this is due in part to the fact that Jack Daniels derives its high volume, premium price business from a consumer franchise representing a broad distribution of household incomes.

When times are challenging as we're seeing today, it's more difficult for some of our consumers to pay the premium price for Jack Daniels, with a regularity that they normally do.

The trading across has more to do with the competitive activity of other large premium brands, and some of our own internal focus that I referenced earlier.

Again, we believe this is fixable and the work is under way.

The trading up has a silver lining.

As we estimate that the majority of this is going to Gentleman Jack, one of the Jack Daniels super premium line extensions, which was recently repackaged and is showing remarkable growth in the first half of this Fiscal Year.

We believe we've diagnosed what's going on in the U.S.

We see much of it as fixable and we've begun the process of getting back on track.

We're encouraged by our consumer tracking studies, which tell us that our brands remain very healthy in terms of brand image and appeal.

We simply need to make them more relevant and competitive by promoting them in a manner consistent with the current trade and consumer environment.

In the last several weeks we've significantly stepped up our competitive efforts and end market execution, paying particular attention to distributor programming, pricing execution, in store merchandising, and consumer value-added programs.

As one example, this holiday season, the Jack Daniels brand has significantly increased its offering of special gift packages, which include collectible glassware.

Let me close by saying that we've had these short challenging periods before in the U.S.

And each time we bounce back by placing our attention, our resources and our imaginative people and partners against those challenges that we're facing us.

We believe the U.S.

market continues to hold tremendous growth potential for Brown-Forman brands and we plan to seize every bit of that potential.

Now we'll open the call up for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Bryan Spillane with Banc of America Securities.

Hi, good morning.

Good morning, Bryan.

Paul, just to follow-up on your comments on the U.S.

First, I just want to make sure that I was clear, that your industry, comments on the industry growth rate being down 1 to 2 , it's actually that the industry is declining 1 to 2%, or that its growth rate is 1 to 2 percentage points off of where it was a year

The latter.

Okay.

And then in terms of restoring growth, I guess especially at Jack Daniels, will it require maybe moderating price increases for awhile or changing your promotional behavior, or do you think it's really more a matter of just getting back some of your sales and execution focus?

I think it's a combination of the executional focus--some of the things I mentioned toward the end of my comments ,the in store merchandising and, what you and I might call, blocking and tackling in some regards.

I do think as it relates to the pricing, we're going to need to be, step up what I call our pricing execution, making sure that we're looking at really, really closely at individual price points market by market making sure, because I do think we should and we plan to continue our moderate price increases that have been very successful for us, and will continue to be important in an environment where the consumer is continuing to trade up.

I just think it's, in some of these more challenging times, you've really got to be on top of the promotional price points, making sure you're getting retail adds, a lot of the traditional sort of in-store promotional pricing and I'd call it intense focus on the point of purchase, and so I think that it's a combination of those, but it doesn't really make us feel like we can't go forward with the moderate price increases that we've been experiencing on Jack Daniels for so long.

Just one last if I could.

It seems like the deceleration in spirits has happened more recently or more quickly.

Are you surprised at how fast consumers seem to be changing behavior, and looking back at past economic cycles, is there anything different about how consumers are behaving now, relative to less purchasing power, let's say, than has been the case in other points in history?

You know, some of it I'd be speculating, to be honest with you, a couple of views though on it, just personally are that a lot happens, I've seen these numbers jump around and go as much as a point or point and a half, and then in six months you're back up, so I don't know what kind of cycle or how to determine whether this is something that's sort of cyclical but will last some specific period of time.

But I do think that one of the things that's happening is the shift that goes on when there's the purchasing power reduction as you say, when people move from the on premise to the off premise, and not only does price become more sensitive but there's other little practical things that I think happen.

For example, I think spirits actually, when people move their consumption from on to off, suffer a little bit because they are not as easy to prepare.

I mean if you just think about it from a consumers perspective that beer and wine are, it's easier for people to actually prepare their, the way they drink the brands in their home.

It's more difficult for somebody to make a Cosmopolitan or a mixed drink in their home, and it's a little practical consumer behavior things occur, and I do think though, a lot of what's been going on in the spirit s industry, between spirits, wine and beer, and then within spirits, is related to sort of I call it a cash crunch that some consumers are experiencing.

They just aren't able to trade up in some of the ways they've been able to historically.

Thanks.

Sure.

Your next question comes from the line of Lauren Torres of HSBC.

Good morning.

Hi, Lauren.

You obviously talked about, we're hearing a lot about the challenging cost environment, but can you just give us a sense of the offsets for you?

We've talked a little bit about pricing so far, but with respect to cost savings, what you have offsets that you feel comfortable that you'll be able to manage through this environment?

Well the traditional offset, we've always had, as we look at it more broadly on a margin standpoint was the price increases that were so regular in some cases, mix as well, would always more than offset some of the costs that occur in input costs.

The most significant thing that's occurring beneficially for Brown-Forman right now is foreign exchange of course, which is adding to our margin, but it is a more difficult thing, because these costs have come up rather quickly, particularly on some of the grains, and so we are intensely looking at ways to offset them in other areas of the supply chain, but nothing that we would be ready to talk about right now.

And also, as you mentioned, Paul, you didn't touch too much about international on this call but we've heard a lot about it and the growth potential that you have there, so now we're seeing some challenges here in the U.S.

How are you thinking about managing growth and focusing more on building a global business rather than just a U.S.

spirits business?

Yes, it's actually, really the key point and it's actually the real beauty in what's happened at Brown-Forman over the last many years is that this U.S.

business, I mean, it used to be at Brown-Forman if the U.S.

business had some softness, you felt it throughout the entire Company in a very dramatic way, and you think about it today, this international business is very significant for our Company, and it's not just on Jack Daniels.

It's on Jack Daniels line extensions, it's in Finlandia, it's in Southern Comfort, and we are so so optimistic about what's going on with Jack Daniels internationally and for our other brands, and it shows up in some of the results we reported today, but Jack Daniels continues to do extremely well in places like the United Kingdom, Germany, France, really strong European results.

But even beyond Europe, it's in places like Australia and Africa, even in the last 12 to 18 months we're seeing more exciting growth rates in places like Latin America, so we're very excited about what's going on outside the United States, and it serves as a great offset when the U.S.

market is a little soft like it is now.

And I guess that's where the confidence going to the high end for your EPS range is coming from?

Excuse me, I couldn't pick up the question?

As far as you raised, you took the top end of the range for your EPS guidance for this year, mostly because of the encouragement that you're seeing I guess from the international business?

It's really, we narrowed it and moved toward a higher point at the top end, but I think that most of that is to reflect the foreign exchange that we've seen so far, and then also thinking about, as Phoebe said in her remarks.

We continue to expect great contributions to the international business on the second half and we're also hopeful for improvements in the United States in the second half too.

Okay, thank you.

Thank you, Lauren.

Your next question comes from the line of Tim Ramey of D.A.

Davidson.

Good morning.

Phoebe, a couple questions for you.

Would you mind detailing if you could, the currency impact on the quarter isolated from the other impacts?

You kind of lumped it all together.

Okay, sure, I'd be happy to do that.

Just a good reminder, foreign exchange effects in the First Quarter, $0.05, Second Quarter $0.06, so the first half total of $0.11.

So that's what the foreign exchange impact year-to-date has been.

We tried to detail it on Schedule A of the Earnings Release so we could draw your attention to that.

We try to isolate the effects of foreign exchange specifically for you so you can see it's a very net and positive effect on us.

And I know you have some sort of a color on that.

Is it likely that you're going to see diminished positive impact in the second half?

I think if we were to, if you took today's rates, I'd estimate that it would be about maybe a nickel more in the second half, but that's at today's rates and they can also come down.

The dollar can strengthen as much as it can weaken, but if you took today's rates, it's about a nickel or so in the second half.

Thanks, and then a couple more, the tax rate was obviously up strongly.

Did you mention why that was?

Was that anything in particular?

I did not mention but I will tell you why.

In fact it is a very high, 35.4%, and last year was 31, and it's really a couple things.

First of all it was that last year, we had a gain on the sale of our Italian winery, Bolla, and that was taxed at a very low rate.

Second thing is that throughout the course of any Fiscal Year, you're going to have timing related events, which are going to impact the actual rate in any quarter, and we are expecting that the by the end of Fiscal Year '08, we'll be back to a 33% estimated tax rate for the year, and that's the best way to think about that.

Okay, and just finally, Herradura, were there any non- cash items in the quarter?

In the quarter we had $0.02 of dilution in the quarter, about half of that was base business and the half is just the transition and the non-cash piece.

It's about half and half for the quarter, but if you want to think about the full year, the full year is that $0.13 to $0.18, and just to be clear, about a third comes from transition costs, a third comes from the non-cash charges and the U.S.

distributor, and a third from the dilution operating income interest expense net.

That's the way to think about that.

A third, a third, a third.

Thanks so much.

You bet.

Thanks, Tim.

Your next question comes from the line of Andrew Sawyer of Goldman Sachs.

Good morning, guys.

I was wondering on the Jack Daniel cost of goods, you said mid single digits in '07.

Are you saying it's quite a bit above that this year?

Can you repeat that?

You said, I think you said that there was no Jack Daniels cost of goods inflation through Fiscal '06 and then you said Fiscal '07 was up mid singles.

Is Fiscal '08 tracking quite a bit above that?

It's single digits.

Oh, it's still in the mid singles?

Yeah.

And you're not seeing competition really follow on price, despite the drain inflation?

Is that a correct way to interpret what you're saying?

No, actually not.

I think some people are continuing to take prices up.

We've historically been maybe just a touch more aggressive than the market as a whole, going back many years, and most of the premium brands particularly have been able to take up price relatively consistently.

I think where the larger difference comes in is how deeply some competitors will promotionally price their brands, but on a shelf basis, we continue to see people go up.

We monitor it closely, particularly in a tougher environment, but we continue to see people go up moderately, but I think the biggest distinction is how deeply they'll deal the brands.

Is some of this reflecting, and Fortune's talked quite a bit about spending a lot more back into business, and this is their year of the whiskey.

Is that something you think is playing a role in this?

I think there's a lot of influences.

It ranges and there are just a wide range of what those influences can be.

People can be working specifically within their own consumer franchise, trying to do it.

I think there's also often times distributor and trade dynamics, whether it be people who are focused on, like for example, out here in the last year, Diagio has been working on their distributor contract renegotiations, which offer a source of influence and leverage with the distribution channel, which can result in people really getting aggressive with price, and I think there's been other influences as it relates to Fortune.

I suspect probably the largest one for Fortune these days has to be the possibility of the sale of VNS, and people really knuckling down trying to make numbers on that brand, so those would be just a couple of the types of influences that actually get into the marketplace and there's a wide variety of other ones.

And then just kind of shifting gears, Soko was also a bit weak in the U.S.

in the quarter.

Is the dynamic there, is this a similar execution issue as Jack Daniels, or is there anything different going on there versus JD?

Well, Southern Comfort has actually been one, in terms of, for just some background, for many many, many years going back seven or eight years, it has been taking prices up at a higher rate than distilled spirits, and it's been pretty noticeable because we've been trying to fundamentally reposition the brand over a decade or more, just to try to make it a more premium price brand.

It's been very successful, so it has continued to go up quite aggressively as part of that program, and so that along with I think some timing related things as well as some of the things I mentioned related to blocking, tackling ,and just getting back on track in terms of promotion, are some of the explanations on Southern Comfort.

And just following up on that, now that you are seeing some, I think previously you had been taking the Soko price up and seeing relatively stable or low single digit volume growth.

Do you read anything into it all that there's, now you're seeing price elasticity it, maybe you are hitting a ceiling on the price point there?

We're going to watch it, just like I said on Jack Daniels, we'll really going to watch the promotional price points.

It's not as promoted a brand as Jack Daniels at the retail level, so it's a little bit of a different composition there, but I think the key thing on Southern Comfort for the long term is to really get it into the, I mean firmly entrenched in the premium set, and so we're going to continue on with the pricing there.

And what we're going to need to do in those environments where we've got some consumer challenges, where there's some price sensitivity, is find new sources of business, and that's what we've done probably in three different waves for Southern Comfort over the last 10 years.

And then finally closing up, on the agave surplus, how are you guys thinking about pricing in Mexico as you move into the holidays?

Do you intend to be more promotional to respond to some of this excess supply or how should we think about managing through that over the next couple of months?

I think it varies by the particular brands down there.

The Herradura brand is very premium priced down there, but also during the holiday season is one we're trying to make sure it's priced while still very premium at attractive points, so that the consumer will find it quite attractive during the holiday season.

Now Jimador is in a more competitive arena in terms of the number of participants at that price point, but we're doing a lot of work on el Jimador right now to keep it competitive, and we won't know for another four or five weeks until we get all of the results and see how that's going, but we think both brands are priced in the right area and have the promotional effort behind them in the Mexico market and we're just going to have to see what happens.

Well thank you very much, guys.

Thank you.

Sure.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Thomas Russo, with Gardner Russo.

Yes, hi, good morning.

Paul, I hope this reception is clear.

On the Herradura, could you bring us up-to-date with any of your ongoing, maybe still early learnings, about the brands equity in the U.S., and positions that you might be seeking to stake out and what your feedback is at the early stage?

That's the first question, and the second one, well go ahead and answer that.

Well, Tom it's still a simple answer which is, we haven't caught up yet in our own efforts with the brand equity that exists in the United States.

Phoebe mentioned in hers, the new points of distribution that we've been able to get out and seize, and it's really only a small percentage of the universe that's available.

It's nice early success but it's still only a small percentage of the universe available, and particularly in the target geography in accounts where this brand already has equity and will have resonance, we've still got a lot of work to do and it's not just on the really selling and distribution front.

It's really trying to get consumer messaging out and tapping into what is, what we consider to be still very strong latent consumer and trade equity associated with Herradura.

Yeah, and did you not, did you win a recent award on your Tequila offering, one layer of it?

I think I read somewhere that you received some Tequila industry prize?

There is, coming up and apparently, it's a broader one than just the Herradura brand, we were going to be recognized as Distillery of the Year, by I think it's Wine Enthusiast Magazine, who is getting-- awarded that to the full Casa Herradura Distillery, so we're quite excited about that and we're going to make some noise about that.

Well done, I thought you might.

In terms of the shift to the off premise from on premise, one of the things is the on premise in general remains the highest margin channel I gather, because the consumer pays a much higher price for the product, but you mentioned when you went off premise, the trouble with the mixability of spirits versus the ease-of-use for beer and wine, leads to the question of packaging pre-mixed products that might travel more easily to the home and what your thoughts are on that?

Yes.

Well, sure, actually for a lot of the Brown Spirits, what's actually wonderful about it, because that was a broad comment about the whole portfolio, what's wonderful about the Brown Spirits is that they are not typically made up in concoctions requiring seven ingredients.

You tend to get a lot of consumption on the rocks or neat, but you also get easy mixability with, for example, the largest way Jack Daniels is consumed is with Coca-Cola.

Yes.

So that makes it a little easier for Jack and some of our whiskey brands, and so I think that we, from time to time, cross merchandise.

They're great ways for us to get our focus back on the, to tie in two of these things, which is to cross-promote with mixers and to try to get floor space and that hits actually the point of blocking and tackling and providing it in a way that allows people to consume it readily in the home.

I see and then last question, across the channels in the U.S., what's your outlook, what's your sense of the health of the premium American whiskey segment, and bourbon segment in general, thinking about your competitors at the high end.

Anything going on there that either reconfirms the parts from your experience of service low to the high end?

Well, yes, the numbers there are so small and the people who consume those products tend to be less influenced by some of the economic stuff that's going on, so I've seen maybe a few examples of small percentage point changes, but that business is continuing to really do well in the United States and in a wide variety, and we've now been at that business for about I guess 17 years with first Gentleman Jack, which is just doing outstanding, but also Woodford Reserve which I think we've talked about before has crossed a 100,000 cases globally for us.

Yes.

And it is really a hot brand right now in the United States, doing very well, and the other one we have which is even up higher, which is Jack Daniels Single Barrel which has been very successful for us, so those brands are doing well.

There's a lot of new entries there and there's expansions into new categories, and I just think that it's a pretty hot arena and while I suspect there will be maybe a slight amount of activity that could be an offset during these tougher times, I just think that business is still at a real small base and the people who purchase it are less price sensitive.

Thank you.

Sorry for the background noise.

Thanks for your answers.

Thanks, Tom.

(OPERATOR INSTRUCTIONS) At this time, we have no further questions.

Thank you very much for joining us today and have a great day.

Thanks, everybody.

Thank you.

Thank you.

This concludes today's Second Quarter Fiscal 2008 Conference Call.

You may now disconnect.