Brown-Forman Corp (BF.B) 2009 Q1 法說會逐字稿

Good morning.

My name is Chris, and I will be your conference operator today.

At this time I would like to welcome everyone to the Brown-Forman first-quarter fiscal 2009 conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer session.

(Operator Instructions).

Thank you.

Mr.

Marmor, you may begin your conference.

Thank you, Chris.

Good morning, everyone, thank you for joining us today.

This is Ben Marmor, the Director of Investor Relations at Brown-Forman.

With me here today are Paul Varga, our President and Chief Executive Officer; Don Berg, Executive Vice President and Chief Financial Officer and Jane Morreau, Senior Vice President, finance management, accounting and technology.

Don will begin our call this morning with a review of our performance for the quarter, and Paul will follow some with some further insights and comments.

As always, this morning's conference call contains forward-looking statements based on our 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, and the Company undertakes no obligation to update any of these statements whether due to new information, future events or otherwise.

This morning we issued a press release containing our first-quarter results for fiscal 2009.

The 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 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 Securities and Exchange Commission.

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

These measures and the reasons management believes they provide useful information to investors regarding the Company's financial conditions and results of operations are contained in the press release.

And with that I will turn the call over to Don.

Thank you, Ben and good morning, everyone.

To start let me briefly summarize today's earnings release.

Brown-Forman's first-quarter earnings per share were $0.73, which represents a decline over last year of 5%.

During the quarter we took a $22 million pretax non-cash charge related to debt and dying agave plants, a raw material used for our tequila products.

Excluding this non-cash charge, earnings per share were up 12% to $0.86.

Reported operating income was down 10% over last year.

However, our underlying operating income was up 3%.

When you look at the Brown-Forman's earnings release for the quarter, three themes emerge.

First, the economic conditions worsened in several of our largest markets.

Despite these challenging environments, we continue to grow our overall business and remain confident about the long-term growth opportunity for our brands.

Second, we found that certain portions of our agave stock are unusable, for which we took a $22 million non-cash charge.

And third, looking forward to the remainder of the year, excluding the previously mentioned charge, we have not changed our guidance.

Let me speak to the agave issue first.

When we acquired Casa Herradura we recognized the increased volatility that comes with an agricultural business.

We also recognized that the industry had a glut of agave and that we were acquiring a business that was similarly in a long position with respect to agave.

With agave's typical seven-year growing cycle it is natural to have some plants that perish due to any number of factors including climate conditions, old age or disease.

However, during the quarter we experienced an abnormal loss rate and determined that about 25% of our agave plants were unusable.

We believe that this situation is not unique to Brown-Forman.

As a result of the current glut and relatively low prices for agave we believe that a number of fields have been left untended, creating an environment where normal disease fighting practices generally are more lax.

It is important to understand that each of the agave-growing regions is not experiencing the same difficulties.

Different levels of disease are being seen in different municipalities, even within the same region.

In sum, some regions are significantly affected, some appear moderately affected, and some are quite healthy.

To minimize the agricultural risk going forward, we are actively pursuing harvest strategies, field maintenance and agricultural practices that are targeted at addressing the damage in the identified problem areas and preventing further plant losses.

It is important to note that the majority of our plants are healthy.

As I mentioned, we've been in a long position with respect to our agave inventory and despite this agave loss we believe this situation will not constrain our ability to build our tequila brands to their fullest potential, and gives us no reason to change our expectations for the future growth of these brands.

Now let me turn to the primary theme I noted earlier and discuss this quarter's performance.

Net sales for the quarter increased 7% on a reported basis and underlying net sales advanced 4%.

The split between international and domestic markets approximates what we reported for fiscal 2008, with slightly more than half of our sales coming from outside the United States.

Global net sales for Jack Daniel's increased in the mid-single digits due to price increases and favorable currency movements.

However, depletions for the brand experienced a slight decline.

Impressive gains in Eastern Europe, Latin America and Southeast Asia partially offset declines in some of our most developed markets, particularly some markets in Western Europe which experienced deteriorating economic conditions and shifts in consumer purchasing patterns from the on premise to the off premise.

Looking at specific markets, let me start with United States.

A lot has been written about the difficult US economy, so I will not go over those macro trends.

Within the spirits industry the US market continued to experience a shift to the off trade and a shift between price categories.

We also continue to see some acceleration in volume growth for value priced brands in the US and weaker trends for many of the brands in the premium and superpremium category.

Jack Daniel's depletions in the quarter were flat in the US as we continued to see declines in the on premise Channel, which represents approximately 30% of our business.

However, we are encouraged by recent Nielsen trends which have been above total distilled spirits trends since February and reports Jack Daniel's growth at 8% for the four weeks ended July 26 and 6% for the three-month period.

Recent NABCA data also shows Jack Daniel's outperforming total distilled spirits with the brand growing 13% in July, two points higher than TDS and 6% for the quarter.

Based on these trends, we will continue to focus a significant part of our efforts where the consumer is most responsive; with more promotional activity off premise, additional value packs and gift packs and well targeted discount programs.

In other key developing geographies for Jack, Eastern Europe turned in another stellar quarter, crossing the 500,000 case milestone.

Countries such as Romania, Poland, Bulgaria and Russia all saw significant double-digit growth in depletions.

In several markets in Western Europe the environment was much more difficult.

Economies in most of this region have softened, and the trading environment reflects these trends.

In the UK all spirit categories are currently struggling in the on premise channel, which many attribute to the economy as well as the recent smoking ban.

Consequently, pub closures are becoming much more common.

Jack Daniel's over indexes in this channel.

However, we've seen nice growth in off premise takeaway trends as consumers have shifted their purchasing behavior.

Recent Nielsen reports indicate that Jack Daniel's continues to gain market share and outpace the whiskey category.

Evidence that Jack Daniel's underlying brand health remains strong.

To improve our trends we are about to enter a more intensive marketing period and efforts to focus more of our promotional activities in the off premise.

Strategies that we believe should pay off as we believe they are beginning to in the United States.

We remain very positive about the long term prospects in the UK and continue to invest accordingly in the brand's second-largest market.

A more market specific challenge we faced was in Germany.

On top of the weak economy our business was impacted by significant trade resistance through a first-quarter price increase.

As a result, Jack Daniel's and other brands did not receive the same level of retail promotion support as they normally would have.

Over the longer term we continue to strongly believe that our pricing decisions will provide significant value to our shareholders.

We are working through these issues and we believe the trade's support will return to normal soon.

Our superpremium Jack Daniel's line extensions, Gentleman Jack and Jack Daniel's Single Barrel both experienced strong growth for the quarter.

In particular, Gentleman Jack continued its impressive trends with more than a 40% increase in net sales.

One milestone of note in the US on a rolling 12-month basis Gentleman Jack's depletions crossed the 200,000 case mark.

For Single Barrel we are launching a new bottle design later this fiscal year that we believe will contribute to our growth rate.

Finlandia remains one of our fastest-growing brands and is a great complement to Jack Daniel's in growing our business outside the United States.

Global net sales were up double digits for the quarter.

Eastern Europe continues to fuel the brand's growth with over 1.5 million of Finlandia's 2.9 million cases.

This region grew depletions 25% in the quarter with strong performances in Poland, the Czech Republic, Romania, Hungary, Russia and numerous other countries in the region.

Today Finlandia is the largest imported premium vodka in 10 countries including the 5 I just mentioned.

Southern Comfort had a challenging first quarter.

In the US Southern Comfort's depletions were down in the mid-single digits, and seems to be affected disproportionately with the consumers shift away from the on premise.

In Western Europe and the brand is experiencing the same difficult economic and trade environment as Jack Daniel's.

As we enter the fall and holiday season we have additional promotional activities planned to reinvigorate the growth in this brand.

Moving to Casa Herradura, after just 19 months of ownership we are pleased with our progress on these brands.

We have been working hard to determine how to best improve the positioning of these brands with the consumer.

For el Jimador, after over seven years as a [mixture], we have decided to return to the original 100% agave formulation that made it so popular.

We believe this will strengthen the consumer proposition, build greater growth opportunities and support more premium pricing.

There has been a lot of trade excitement in Mexico and the United States surrounding this change, and we've already begun the execution in the marketplace.

As I noted a few minutes ago, consumers generally in the US are not trading up at some of the rates we have seen the last several years.

However, our superpremium developing brands continue to buck this trend and deliver strong performance.

Sonoma-Cutrer, Bonterra, Chambord, Tuaca and Woodford Reserve all grew net sales at strong double-digit rates in both reported and constant currency.

Although these five brands -- I'm sorry -- altogether these five brands are now approaching one million cases.

We are also proud to note that Woodford Reserve crossed the 100,000 case milestone in the US on a 12-month basis.

We are extremely pleased with the progress of our developing brands as they continue to be an important growth engine and add to the premium nature of our portfolio.

So to summarize all of this, we see modest improvement conditions in the US.

We are working through the economic softness in Western Europe.

We see continued strong growth for Eastern Europe, Latin America and Southeast Asia.

We see continued strong growth for our developing brands, and we will continue to expand the distribution of Herradura and el Jimador on a global basis.

Turning now to cost of goods, our margins have felt some pressure as price increases have not outpaced recent cost inflation.

Grain and fuel, while showing some signs of moderating recently are still substantially higher than they were in the first quarter of fiscal 2008.

To help mitigate these rising input costs we have several cost savings initiatives that we are implementing.

For ANP we reported a 3% increase in advertising investments for the quarter but flat spend on an underlying basis.

We continue to balance what we believe to be the right combination of long-term brand equity building and near-term consumer response programs.

We do expect to increase promotional activity and spend in the coming quarters particularly during the upcoming important October, November and December holiday months.

Finally, moving to our third theme, our guidance for the year.

Due to the impact of the non-cash agave charge, we have reduced our diluted earnings per share guidance to a range of $3.60 to $3.85, representing growth of 1% to 8% over prior year earnings.

As we noted in the earnings release this morning, except for this non-cash charge our fiscal year '09 outlook remains unchanged.

With that, let me turn it over to Paul for some additional comments.

Thanks, Don and good morning, everyone.

I'd like to supplement Don's commentary with a few brief points.

This was an unusual quarter for us on a reported basis primarily due to the agave charge.

While the agave issue was a very real event for us, I would encourage you to set this aside for a moment in thinking about Brown-Forman and Casa Herradura's prospects for future growth; particularly long-term growth.

Regarding the tequila brands, we continue to uncover superb opportunities for developing both Herradura and el Jimador.

We are expanding distribution of the brands outside of Mexico, investing significantly behind the tequila portfolio and repositioning the brands in terms of product, price and brand identity.

As Don just referenced the most current example of this is the rollout of el Jimador as a 100% agave product during this late summer and early fall period.

Our initial work on the Casa Herradura brand as can be typical with recent acquisitions, has been focused on transitional issues, learning and solidifying the foundation from which we can build the brands more aggressively.

Our transition is effectively over now and we believe that we are just beginning an exciting period of brand development and growth that can be sustained for some time to come.

I also want to highlight the continued impressive growth of premium and super premium brand such as Finlandia, Gentleman Jack, Woodford Reserve, Sonoma-Cutrer, Chambord and Bonterra are testaments to both the opportunity that exists for well-positioned brands in this industry and our Company's ability to build brands over an extended period of time.

As time passes, we believe that these brands both collectively and individually will become more important to Brown-Forman's profit picture.

And moving to Jack Daniel's, I believe that over the remainder of FY '09 we will see improved depletion performance for the brand for three primary reasons.

First, we believe that the first quarter had a fair amount of what I call noise in it, which depressed reported quarterly depletion in several key markets around the world.

Every quarter has some of this noise in it, but this one seemed unusually high to me.

Second, because of the shift in our investing and programming activities, I believe the US is building momentum and we would expect to see stronger performance in the ensuing quarters out of our largest market.

Looking at the brands Nielsen and NABCA data, we see an improving consumer takeaway performance that is superior to recent depletion trends.

This bodes well for the brands' future performance in the United States.

And third, outside of the US we are also forecasting improved depletions over the balance of the fiscal year as we enact many of the same shifts in investing in programming which have helped our more recent consumer takeaway trends.

Finally, looking even further into the future, as economic conditions improve we expect that Jack Daniel's global volume growth will return to its long-term historical rate of growth in the mid-single digits.

We don't expect this to be solely due to recovery in our developed markets.

The difficult environments in many major established markets today are partially masking the incredible growth and future potential in places like Poland, Romania, Russia, India, Argentina, Mexico, China and throughout Southeast Asia.

Thank you for your time, and we will now be happy to answer any questions you have.

(Operator Instructions) Kaumil Gajrawala, UBS.

Thank you.

Good morning, everybody.

First question on Jack Daniel's.

It looks like the July trends are better, but I believe it was this time last year where trends really started to turn negative.

So can you help with what you think might be behind the turnaround in the scanner data and the NABCA data or if this is just a comparisons issue?

I do not think it is a comp issue.

I think you are referring to the US here, and.

Yes, I'm sorry, US.

I don't think it is a comp issue.

I think that about -- I would call it more in the fall versus this time last year -- we really began to shift some of the programming activity where we had predominantly been making large investments in the on premise over to the off premise and really started some of the work that we both Don and I referenced, about trying to deal with what we consider to be the conditions in this environment.

And almost since that time we've seen a steady increase in the Jack Daniel's off premise performance.

And so I think it reflects more of that activity than it does any sort of comps of weak performance last year.

Okay, and then I guess it was around this time last year also that you were taking a price increase.

Is there any -- on Jack Daniel's in the US -- is there any plan to take another increase this year?

We actually take price increases on Jack Daniel's with tremendous regularity.

There are some that occur, of course, in the summer months.

But we have them actually spread out market by market throughout the course of the year.

And some of the noise actually referenced here in my comments deals sometimes with these changing timing of price increases or buying patterns associated with them.

So the thing I can say about our pricing is that we have been -- I mean I think continuing on with a pretty consistent and moderate program pricing.

And the thing that is upon us today really is thinking through sometimes in a more challenging economic environment, particularly at a time when you got rising costs, how to thread the needle to come up with the right timing and amounts of price increases.

So one way we are handling it now and it's part of this programming that I've referenced, is looking much more closely at the frontline pricing and the ad and promotional pricing and it is one of the contributors I think to the improved performance.

And just the last question, the shift from on premise to off premise, are your shares materially different by channel?

We are seeing a little bit of that shift, yes.

I actually haven't studied it close enough to know if our share of market in each channel is the same.

I know on the off premise side that Jack Daniel's has gained market share in the United States in the off premise channel; but I haven't studied it close enough to know if our share has held up in the on premise.

I know a lot of the premium brands are dealing with the same situation we are on the on premise.

Okay, thank you.

Lauren Torres, HSBC.

Good morning.

I guess as a follow-up on the cost and pricing side for this year, you did mention in this quarter your green and energy costs pressures outpaced your rate of price increases.

I was just thinking about that balance for the remainder of the year.

How is your cost outlook?

How are you positioned for the remainder of this year?

And I guess to build upon your previous comment on the price environment in light of a tough consumer environment, and clearly talking here in the US, your ability to take these moderate price increases you are still comfortable doing that in light of what you've seen so far this year?

Looking first on the cost side, as I mentioned, we do expect to see on a year-over-year basis continued increases in the cost.

We've talked about this a bit in the past.

Most of the cost increases that we are seeing at this juncture is more in the grain and the fuel side.

While things have moderated recently, we still see significant increases over the course of the year.

On the pricing side, as Paul mentioned and related to this topic as well, we continue to look at the inflationary pressures that we are under and to what extent we can pass those along.

And we will continue to evaluate that over the course of the rest of the year.

And where we have those opportunities we will pass along the increased costs that we are seeing.

And again, we will do it in a way where in some cases we may take up the frontline but then look at targeted ways that we can make sure that we are getting the pricing to the consumer that is necessary to continue to shore up the volume on our brands.

And if I could also ask a question on the Herradura portfolio; obviously you talked about the supply issue and the charge that we saw in the first quarter.

But maybe on a more broader sense how are you thinking about this brand integrating for the distribution, building it out, because I know that was a big issue or comments that you made about a lot of opportunity there.

How is that going so far?

If you could just give us a progress report particularly in light of what we heard at the end of the quarter.

Starting first with the United States, we have quite an effort going on during the course of the year.

There is huge distribution opportunities in this country, and we are working hard to go after them.

There is a lot of excitement particularly around el Jimador, particularly with it going to 100% agave.

And so we've got some high expectations.

But we think we have the programs in place in order to be able to get the kind of distribution that we are looking for this year.

Outside the United States last year there were a number of markets where we had to work through a number of inventory issues that we inherited with the acquisition.

We think we have most of those behind us now, and so we think we will be able to get at a lot of the distribution opportunities outside the US, as well.

It is on a much smaller base.

Tequila is not as strong a category outside the US, but there are a few markets out there where Herradura and el Jimador had really starting to get some nice traction and we'll continue to build on it.

I might just add something else.

The thing that has been really interesting to us on the tequila brands and the expansion of distribution in the United States has been how receptive the trade has been to it.

And outside the traditional big tequila markets in the United States.

And what we are finding is tequila has had a steady and impressive growth for the better part of the last decade but it is not just really the California and Texas strongholds.

We are doing well there, and we think there is great opportunity there but it is also in many, many other US states where there is a tremendous amount of opportunity, as well.

And if I could just ask one last question just on the advertising investment front.

It seems that you pulled back a bit in the quarter.

I was just curious too for the year how you are thinking about spend.

I guess we would like to continue to investment behind your brands, but in light of a difficult environment is that something that could be sacrificed here?

Or should we see a little bit more push forward with respect to putting more dollars behind your brands for the year?

I think part of what you are seeing here is the seasonality effects.

As you move from the on premise to the off premise your October, November, December time frame becomes increasingly more important.

And so in shifting our spending and taking all that in mind you will see some shifting in terms of seasonality of our spend more on that time frame.

I think that is part of what you are seeing here.

And I think as long as we are able to meet the requirements we have of ourselves and our own expectations about the top line growth, you will see higher rates of organic, for sure investment in the remainder of the year across the balance of the year.

So it is not less spend, it is maybe just different allocation or timing?

Some of it is timing, but I will say if you go back -- for those of you who recall Brown-Forman's performance over many prior years -- there is no doubt that our investment levels today are lower than what we would have been investing back two years ago or three years ago.

And I think some of that is environmentally related, just softer conditions and what you would expect in terms of the receptiveness of the consumer.

The most important piece, though, is not what the aggregate increase is in my view as much as it is what you are doing with the money itself.

And I think last year we were just over $1 billion of aggregate operating investment behind our brands and people.

And there is always opportunities, great opportunities I think there to shift within your mix and go to where we think the consumer will be most responsive.

But and trust that we are not doing it in any sort of way that would compromise our long-term brand building or equity or potential for growth in years ahead.

If you look at our philosophy historically we have been very consistent about the spending behind the brands, but we also work very hard at kind of matching our spending levels with our improvements in gross profit and I think you can expect to see that going forward.

I would like to add just one thing, too.

As Paul said, you really can't look at it in aggregate, as well.

You really need to understand where we are spending and where we are spending behind it.

So when you look at the numbers on the surface it does appear we are flat but we are spending heavily.

We continue to invest where we believe it is effective such as places in Eastern Europe where we are growing nicely.

(multiple speakers) In the tequila brands and places like that, Jack Daniel's in the US, we are spending behind, as well.

So when you look at an aggregate number it is sometimes misleading to you.

You need to dig behind and understand we are investing where we believe things are effective.

All right.

Thank you.

Tim Ramey, D.A.

Davidson & Co.

Good morning.

I would like to learn a little bit more about the agave situation.

You are responsible for farming those plants as I recall.

I think you bought them from the previous owner.

Is that right?

And if so, how could it be that just one quarter we discover 25% of what we are farming is no longer viable?

There are a number of different ways that we acquire or supply our agave.

We do own a few fields of our own, but the largest share are situations where the land may be owned by somebody else, but we own the plants and are responsible for the farming of the plants.

If you look at it, we are constantly looking at the plants that we have, judging the health of planets that we have.

Prior to this quarter we were seeing some aspects of some disease in the plants, but it really wasn't beyond what we would consider to be kind of a normal rate.

It really has only been in the last three months or so where going out there and doing our cycle counting that we've seen a much more alarming rate of and what we would consider to be an abnormal rate of the disease rate that we've seen in the plants.

We have plantings in predominantly five regions within Mexico.

Two of those regions are very healthy.

Two seem to be partially affected.

One region in particular has been pretty hard hit.

And can you attribute that to climatic conditions or just farming practices in that region?

I would say it is a combination of the two.

There has been a lot of press on what has been going on with agave and the glut of agave and there has been some press in there about how farmers have been burning their fields and moving to corn.

We do think that there, as the glut conditions have come about and as the particular areas the pricing on agave has gone down, that farmers have kind of abandoned agave and their fields without necessarily taking the agave out.

And as a result of kind of a reduced amount or a lack of disease control it kind of created -- it has increased the risk across the board in those areas where that is happening.

And just back on James' comment a couple minutes ago on consumer or spending behind the brands, as you shift more from kind of retail promotion versus on premise promotion, wouldn't that tend to favor advertising spending versus your ad to sales spending was actually down just a skosh.

And I would have thought that would have been the opposite.

Can you repeat that, Tim?

I'm sorry.

I was thinking James' comments about how you continue to spend aggressively behind the brands but it looked like the ad spending trailed the sales growth or the growth in ad spending trailed the growth in sales growth.

And I would have thought advertising as a piece of the mix versus other promotion would be bigger if you are focusing more on the retail side versus the on premise side.

Actually it has been at least my experience that the types of investments you will put into media, it goes beyond media.

It also costs things like event marketing and lifestyle marketing, we sometimes call it an on premise.

These things, the advertising can work in a variety of different ways but we tend to categorize that as more mid to long-term style investments.

Whereas investments that we might place between trying to stimulate more short-term sales, purchases in the accounts, we might categorize as skewed towards shorter term.

They are all great investments, but I have always, at least in my view felt that the type of investment behind advertising was intended to create more pull, which you will definitely see is one of the most important factors in on premise consumption.

So it is not scientific.

I will admit that but I would say there is a greater correlation between at least your intent between media investment and on premise to fuel the kind of on premise consumption.

There is a lot of activities you can use in the retail environment whether it is special targeting or advertising or display activity and merchandising that is intended to be more immediate in its impact.

Got it.

Thank you.

Todd Duvick, Banc of America.

Good morning.

I had a quick question for you on the fixed income side.

It looks like you've got, as always, a very clean balance sheet and your leverage is certainly in great shape.

I haven't heard any mention of your share buyback activity or plans for this year, and you may have mentioned it earlier in the call.

I had to get on late but could you just update us on what your plans are for share buybacks this year?

You didn't miss anything.

We hadn't talked about it before now.

As usual, we are always looking at our capital structure and in share buybacks are certainly one of the avenues that we look at in terms of what the best uses of our cash are.

And we will continue to do that in the future; but at this point nothing has been announced on anything.

Although one thing just to note we will have just because of the timing of last year's we will receive some benefit at the EPS line from last year's share repurchase.

Okay, and then I guess with respect to, as you mentioned the capital structure I seem to recall I think it was about five years ago you did a small leveraged recapitalization.

And my impression is that at that time your leverage was very low, but there really were no acquisition opportunities.

Can you tell us how you are thinking about share repurchase relative versus potential acquisition opportunities, which you would prefer?

Again, we look at that all the time, and the biggest barometer for us is how we think we can create the biggest shareholder value.

In looking at acquisitions today we constantly are looking at what we think might be out there, what might come up for sale, where our interests might be.

We look at our debt capacity in terms of making sure that we would be able to cover any kind of future opportunities that might come our way that we think can create value.

And then we look at what additional cash might be available and look at what we might do with it, whether it is through share buybacks or dividend increases or all the different factors that you take into account as you think about your capital structure.

But there is no doubt in these last couple of years since the Herradura acquisition, we've been obviously we are very focused on integrating that business.

But we've also been really focused on the organic opportunities available to our portfolio.

We still think there is tremendous opportunity for expansion on particularly oriented around our premium and superpremium brands.

So we've been focused on that but that is not a mutually exclusive exercise, if we see a great opportunity in the acquisition world and particularly for brands that would do well in our hands or fit really well with us.

We will definitely take a look at it.

Okay, and then just one final question.

With respect to your short-term debt you've got just under $600 million of short-term debt and it is actually lower than it has been over the last year.

Any plans to turn that out into debt capital markets or are you comfortable keeping it in short-term debt?

Commercial paper, for instance?

Again, we are always looking at that.

We had a bond that was outstanding that came due in March, and at that point in time there was a bit of a shift between kind of our fixed versus floating as we look at our debt.

And again, given the kind of environment that we are in today we are constantly looking at that and evaluating where we are and where we need to be.

And again, taking into account a lot of the other things that we talked about earlier.

Okay.

Thank you very much.

(Operator Instructions) Bryan Spillane, Banc of America.

Good morning, guys.

A couple of housekeeping items first.

In the quarter underlying sales growth 4%; could you split how that broke down between price mix and volume?

Hang on just a second, and let me think about it.

We do it so many different ways when we cut these between organic and reported, of course incorporating the FX and let me just ask -- Jane is here.

Let me ask her to break it to see if she can look at it.

If you want to go and ask your second --

Yes, while you are doing that, and then the guidance now, you had a currency benefit that flowed through to the EPS line in the quarter, so does the guidance, the annual guidance now include the benefit from currency in the first quarter?

Yes, it has the benefit of the currency in the first quarter as well as it represents the current spot rates.

So there is now some expectation for currency benefit in that guidance, or no?

There is currency benefit in the guidance in terms of what we've experienced already, but in the first quarter.

But as you look out, Bryan, where the spot rates are today they stay there.

We don't anticipate any additional currency improvement.

Okay, so you would have -- you would bank the first quarter but then there would be no additional benefit in the balance of the year?

If the spot rates stay where they are.

If the spot rates stay where they -- so just kind of trying to compare the guidance now versus the guidance at year end, it does now include a currency benefit and it didn't before?

I'm just trying to see if we are now -- if there is an additional benefit from currency that didn't exist before.

Bryan, this is Jane.

I do not expect any additional benefit from FX for the rest of the year, and at our current outlook we've assumed a spot rate and it does not have any additional benefits.

But when you initially set the guidance for the year were you expecting a currency benefit?

We were not.

Okay, okay, so the guidance does now include some benefit from currency and it didn't before?

Bryan, one thing to note.

The currency when you isolate it, I think it is correct the way you are talking about it, particularly from a first-quarter contribution.

But there are always a myriad of items that are moving as you go throughout the course of the year and this quarter is no exception.

There is a bunch of things that go in that you look at that raise your earnings within our range from a few pennies here and a few pennies there.

Okay, all right.

And then on the -- if you could talk to, first of all capital spending expectation for the year?

Capital spending expectations for the year remain unchanged really from what we disclosed previously.

They remain in the $65 million to $75 million range.

$65 million to $75 million, okay.

And then any guidance on either operating cash flow or free cash flow this year?

Even if it -- will it grow versus last year?

I am just trying to get a sense for whether or not -- it seems to me that free cash flow ought to actually improve this year versus last year.

On a free cash flow, yes, we would expect to see higher.

Okay, and then that kind of goes back to Todd's question, if free cash flow is improving one possibility is to take down some of that commercial paper balance.

Would that be an option on the table?

It is always one of the possibilities.

Okay, all right.

And then Paul, just we get a lot of questions about the spirits category in the US, and how it has performed in previous recessions and what the risks are to the category, assuming that we are going to continue to have an economic downturn.

If you could just talk to how the category has performed on average in past downturns; what you are seeing now in terms of is the industry acting predictably at this point?

Are there things that are different?

The industry now are far more consolidated.

You've been through an era where there has been a lot more emphasis on marketing spend, the brand profiles.

So just trying to figure is this sort of an average type response in the downturn, or is there something different?

I don't consider it -- this is a personal view -- I don't consider it unusual in terms of some of the reaction that you see.

I think the difference when people go back and do the historic -- my view is when people go back and study the historical recession and then try to forecast it forward to today, one of the things that I think people miss is just the dramatic change in, particularly in the United States, in the environment of the on premise and how much the premium and superpremium side of the business has grown versus what would have been represented more by standard and popular priced dominant brands back 20 or 30 years ago because people will go very far back in studying recessions.

And so I think all the benefits that have accrued to the industry and the companies by building these wonderful premium and superpremium brands, much of their attraction and some of the initial brand building occurred in the on premise.

And so when you have these channel shifts you really have a different environment for purchasing, shopping and consumption than exists in the on premise.

So I think we don't just report the numbers solely to say on premise is softened and off premise seems to be getting stronger; it is really that you have a different competitive environment.

You have different price references.

You have different consumption dynamics particularly in spirits in terms of mix ability and convenience and some of those items.

And so I think that is one of the things that probably just gets shortcutted when people view prior recessions versus this one.

But it hasn't particularly surprised us.

I think with a lot of these situations as always you need to understand all of the factors throughout the consumption behavior and the trade behavior that influences this.

And I will say even though there has been some shift, if you really look at it closely people are still purchasing premium brands and superpremium brands in the off premise, as well.

So it is not like there has been a total and fundamental change.

It is just really sort of on the margins and it is in the performance of a lot of the premium and superpremium branded companies.

Okay, great.

And I can follow up later to get the topline breakdown if that is helpful.

Yes, Jane was looking at it.

And we would be sort of -- we don't have the exact information here in front of us, so I would rather --.

I can call in later.

All right.

Thanks, guys.

At this time you have no further questions.

Thank you for joining us today, and we do not have any closing comments.

Thank you all.

Thank you.

This concludes today's conference call.

You may now disconnect.