Brown-Forman Corp (BF.B) 2009 Q2 法說會逐字稿

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

At this time I'd like to welcome everyone to the Brown-Forman second 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.

Good morning, everyone, and thank you for joining us for Brown-Forman's second quarter earnings call.

December 5th is a special day for us as it is the 75th anniversary of the repeal of prohibition.

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

With me here today are: Paul Varga, our Chairman and Chief Executive Officer, Don Berg, Executive Vice President, Chief Financial Officer, and Jane Morreau, Senior Vice President, Finance Management, Accounting and Technology.

Paul will begin our call this morning with a few brief comments and Don will follow with a review of our performance for the quarter.

We will reserve most of our strategic commentary for our investor presentation which begins at 1:00 PM today.

We will webcast that presentation for those not in attendance.

A link will be provided on our website under investor relations.

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 the 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 second quarter results for fiscal 2009.

The release can be found on our website under the section entitled Investor Relations.

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

Other significant risk factors are described in Form 10K, Form 8K, Form 10Q reports filed with the Securities and Exchange Commission.

During this call we 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 from operations are contained in the press release.

With that I will turn the call over to Paul.

Good morning, everyone.

Let me add to Ben's opening by wishing everybody a happy 75th anniversary.

Of course, celebrating a milestone anniversary of prohibition's repeal is a lot of fun for our company and our industry but at the same time there are serious points to be made when discussing this topic.

Foremost of these in my view is that the failed attempt to prohibition began the process of moving our country's approach to alcohol from one of failed restriction and regulation to one of successful self-regulation and responsibility.

I've always found it significant that at the time of prohibition's repeal in 1933, our industry formed the distilled spirits counsel of the United States, or DISCUS, as it is still called today.

Our company is immensely proud that the founding father and first president of DISCUS was our own company president at the time, Mr.

Alvrey Brown, the 1st.

So while the repeal is 75 years old today, so too is Brown-Forman's pursuit of our highest ambition related to society's use of alcohol.

That ambition is that we genuinely want society to enjoy the numerous benefits that can be derived from the responsible use of our product while avoiding the widely known harms that can occur from irresponsible use.

This is, of course, a delicate balancing act that will be with us forever but it's a balancing act that I believe we and our industry do very well today.

For this reason, and many others, we're celebrating the 75th anniversary.

Now let me say just a few words about the results announced this morning and some of our other activities of late.

Thinking about this comprehensively, against one of the most difficult and uncertain backdrops most of us can recall, Brown-Forman has reported 13% quarterly EPS growth, posted mid single-digit organic operating income growth, authorized a $250 million share repurchase, announced dividend increase of almost 6%, and sold a couple of nonstrategic wine brands for a nice gain while continuing to operate with enviable A-debt rating.

In an environment like this, it is hard for anyone to feel great but we do believe we're in a better position than most today.

Regarding our results, we're quite pleased with our company's progress in the first half of the fiscal year.

I particularly liked our execution in the second quarter as I believe it led to very good quarterly results, particularly on Jack Daniel's in the United States.

When looking at the US Nielsens over the last 90 days Jack Daniel's has outperformed other industry leading brands such as: Crown Royal, Captain Morgan, Absolute, Grey Goose, Kettle One, Stoli, Johnny Walker and Jim Beam on both a unit volume and dollar sales basis.

We find this very encouraging.

Over the last eight weeks as I have run into people socially, an extremely common perception posed often as a speculation has been something along the lines of; I'm sure you guys are doing fine because people have just as good a reason to have a drink in bad times as they do good times.

While of course I didn't comment at that time, I'm happy to confirm that with this morning's results that thus far we are doing fine.

We believe that our second quarter and first half results are a testament to the stability of our company, the strength and resiliency of our brands and people and the quality of our balance sheet and cash flows.

These results also reinforce our belief that premium wines and spirits are an affordable luxury in both good times and bad.

Like everyone else, we're concerned about how this shake in an uncertain economic environment will unfold, but at the same time as we look at both the short and long-term road ahead of us, we continue to like our prospects and our industry position.

I will now turn things over to Don to discuss our results more specifically.

Thank you, Paul.

Good morning, everyone.

Our performance this quarter was an extension of the primary theme from last quarter that despite a challenging economic environment we continue to grow our overall business and remain confident about long-term growth opportunity for our brands.

In addition to providing you more information around our performance, I will also touch briefly on the sale of our Bolla and Fontana Candida brands that we announced on December 1st as well as the share repurchase that we announced yesterday.

So to the results, as the media has made clear, the global economic environment has rapidly deteriorated since we spoke with you during our first quarter call.

It's become very difficult to make sense of the financial markets.

Globally, unemployment is on the rise and consumer confidence is extraordinarily low.

Recessions have been declared for many economies across Europe, and as of this week it's official in the United States.

Throughout all of this, Brown-Forman's growth improved in the quarter.

For some time now, we have been discussing our efforts to manage through challenges such as these and our focus on spending where we believe the consumer is most responsive.

This means for example, more promotional activity off-premise, an increased number of value-added packs, and well targeted pricing programs.

We believe the results this quarter and for the first half of this fiscal year indicate that these efforts are paying off.

In the press release we focus a lot on the six-month results.

I will go into more detail here on the quarterly performance.

However, as you might recall we said last quarter we felt that business was actually performing better than those results indicated.

This quarter, we feel that the results may be a bit ahead.

We feel very good about our execution into the market, but are cautious about how the consumer will act during this important holiday period.

So let me highlight some of our specific brand and market performances.

As Paul mentioned we've seen marked improvement in several of our brand performances in the United States.

For example, Jack Daniel's completions were strong with the brand registering high single-digit growth in the quarter and mid single-digit growth for the first half of fiscal 2009.

We have seen improvement in the on-premise channel for Jack but the off-premise channel trends continue to outperform the on-premise.

Recent Nielsen trends continue to show Jack Daniel's significantly outperforming total distilled spirits in both volume and dollars.

For the 12-month, the three-month and the one-month periods ending November 15th, Nielsen reported improving trends for Jack Daniel's dollar sales with growth of 6.6%, 6.9%, and 8.2% respectively, compared to some softening trends for total distilled spirits, with growth of 4.1%, 3.1%, and 2.2% for the same periods.

Another member of the Jack Daniel's family, Gentleman Jack, continued its impressive depletion growth.

While rates continue to be robust above 25% for the quarter, the growth rate has moderated slightly.

The brand is also experiencing double-digit growth rates in every region around the world.

On a rolling 12-month basis, Gentleman Jack crossed the 250,000 case mark in the second quarter just 10 months after crossing the 200,000 case mark.

Outside the United States, Jack Daniel's posted strong depletion results in many developing geographies and improved its trends in the second quarter for several western European countries which continue to experience very difficult economies.

Growth in Eastern Europe was strong, posting double-digit depletion growth for the second quarter and the first half of fiscal 2009 although we have seen some recent softening in parts of Eastern Europe.

Depletion decline slowed during the quarter in our largest European markets, the UK and Germany, and Jack Daniel's continued to have solid growth in France.

We believe this is a sign of our more focused marketing efforts and we do believe our off-premise activities are paying off.

As we enter the holiday period we are increasing our activities.

For example, for the first time consumers in the UK have begun to see Jack Daniel's television advertising during the holidays, and in France we have begun an out of home advertising campaign.

Emerging regions of Latin America and Asia also posted strong second quarter depletion growth for Jack Daniel's.

While each individual country is somewhat small the regions as a whole are becoming increasingly more significant representing 10% of Jack Daniel's total depletions for the half.

In Australia, Jack Daniel's whiskey continued to show strong growth as a ready to drink taps increased in the spring caused some consumers to switch into the whiskey category.

Our Jack Daniel's and cola, ready to drink brand, improved trends in the quarter declining only in the low single digits following the double-digit declines we experienced in the first quarter.

We have rolled out a lower proof formulation which has allowed us to reposition the pricing of our RTD products and make them more affordable in Australia.

Finlandia's global depletion growth, once again, was led by double-digit growth in Eastern Europe for the quarter.

Globally the brand grew depletions in the high single digits for the quarter and is now approaching three million cases on a rolling 12-month basis.

Also, intangible business and independent brand valuation consultancy published its drinks business top 50 power brand list and recognized Finlandia for its success.

Southern Comfort depletion trends improved in the quarter.

In the United States the brand depletions declined in the low single digits over the six-month period.

However, as depletions grew in the low single digit for the second quarter.

The brand also saw improvements in its depletion trends in its two largest European countries, the UK and Germany for the quarter.

Our Casa Herradura portfolio posted an overall good performance.

As briefly discussed last quarter, the trade in consumers are continuing to show a lot of excitement about our reformulation of el Jimador to 100% agave.

September was our first full month of execution and activation for the reformulated brand in its two most important geographies.

However, we are still working through some [Misto] stock in the system at the trade tier, so it will be a little while yet before we see the true consumer response to what we believe is really an exciting change for the brand.

The tequila (inaudible) of brand continued to grow depletions in the quarter, but has been impacted by the consumer shift to the off premise during this difficult economic environment as consumption of the brand does skew more to the on-premise.

The growth for many of our developing brands moderated during the quarter but still registered strong gains showing some consumers are still trading up.

Sonoma-Cutrer, Bonterra and Woodford reserve posted high single digit depletion advances coupled with low single digit price increases during the quarter.

Looking forward to the holidays, we believe all of our brands are well primed for their season and are displayed well at retail and priced right.

The success of our brands throughout the season will depend on consumer buying patterns during this very uncertain economic period.

We are cautiously optimistic that consumers will continue to treat themselves this season to the simple indulgence of our brands.

I'd like to spend just a moment to discuss our gross margins for the quarter, which declined 270 basis points.

Some of our recent offerings to provide value to the consumer have had the near-term effect of reducing our gross margins.

The value-added packs are accounted for in the cost of sales and our increased placement of them have roughly a one percentage point impact on the margin for the quarter.

We believe this reallocation from advertising expense was an innovative way to stay relevant to the consumer and to effectively build our brands during this challenging and difficult economic environment.

Another driver of the gross margin pressure it was dramatic shift in foreign exchange rates over the quarter as the US dollar strengthened 20% to 30% against our largest foreign currencies.

Foreign exchange lowered our margins by approximately one percentage point for the quarter.

The remaining factors affecting the gross margin reduction in the quarter were increased fuel and input costs and the impact of the Australia RTD excise tax.

These factors were only partially offset by the benefit of price increases.

Continuing further down the P&L, our operating margin remained very healthy and essential unchanged for the quarter.

We achieved this through both the brand support reallocations I mentioned earlier and continued tight management of discretionary operating expenses.

Our first half operating margins were also impacted by the noncash value write-off recognized in the first quarter.

Touching on agave, our efforts continue to contain [inaudible] and to mitigate our losses.

We believe we have put the right programs in place to reduce our exposure to agave losses in the future and for the quarter there were no material losses.

I will move on now to our recent announcement regarding the sale of Bolla and Fontana Candida Italian wine brands, to the [Gruppo Italiano Vini], GIV, the Italian company with which Brown-Forman has worked with for many years.

The decision to sell these brands was part of our evolving portfolio strategy and a continuation of efforts to focus the time and the resources of the company on our best opportunities for growth and shareholder returns.

It was a difficult decision to sell brands that have been with us in some form since 1968 and have provided us with significant cash flow over that time.

We do wish GIV the very best as they take Bolla and Fontana Candida forward.

We believe our long-term value creation will be best served by focusing our brand-building efforts on our continuing portfolio which includes: Sonoma-Cutrer, Bonterra, Fetzer, and Korbel, in addition to the Jack Daniel's family of brands, Finlandia, Southern Comfort among others.

I'd like to take this opportunity for a moment to congratulate Korbel.

As you know, Korbel is a long-term agency partner of ours.

On November 10th, Korbel Champagne sellers was recognized by "Wine Enthusiast" magazine as the American winery of the year.

We are very pleased to have been part of Korbel's success over the many years we've partnered together.

Yesterday we announced our Board authorized a repurchase of up to $250 million of its outstanding class-A and class-B common shares over the next 12 months.

This repurchase is subject to market conditions and can be carried out in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws.

We expect the impact on our fiscal 2009 earnings per share to be insignificant from this.

Turning now to our fiscal 2009 guidance, we're increasing our diluted earnings per share guidance to a range of $3 to $3.20, representing growth of 6% to 13% over the fiscal 2008 earnings.

This update reflects the estimated $0.12 gain on the sale of Bolla and Fontana Candida brands.

Excluding this gain and the first quarter agave write-off, our guidance remains unchanged from what we provided at the start of the year.

The guidance includes the expectation of maintaining [year-to-date] trends for Jack Daniel's, Southern Comfort and Finlandia.

A weaker than anticipated consumer and trading environment due to the current global economic conditions could have significant impact on the company's ability to maintain these trends.

This outlook also incorporates expectations for continued tight management of discretionary offering expenses, a lower effective tax rate in the second half of the year as compared to the first half, and the assumption that today's stronger dollar relative to the company's major foreign currencies will continue for the balance of the year.

With that we'll now be happy to take any questions you might have.

(OPERATOR INSTRUCTIONS) We'll pause for a moment to compile the Q&A roster.

Your first question comes from the line of Dara Mohsenian with JPMorgan.

Hi, guys.

Good morning.

You mentioned your guidance assumes that the first half trends on key brands continue in the back half of the year.

That seems optimistic given the macro trends are deteriorating.

So what's driving your comfort there?

And maybe as a part of that answer can you give us an update on November or even early December depletion trends?

Part of what we're seeing in the marketplace, we mentioned a little bit about the Nielsen numbers that we've been watching.

This is particularly in the US.

As well as some of the [napca] information we've been seeing that tells us that consumers are continuing to take our brands.

In the UK, we have continued to see some continuing improvement in the Nielsens, in the off-premise arena.

We feel like we've got the right programs in place.

It's really just a matter of whether or not the consumers are going to show up.

I think we feel pretty comfortable in what we've been seeing.

If there are changes in consumer purchasing behavior over the course of the rest of the year it will certainly affect us, but we haven't actually seen that yet.

As it relates to November, it's really too early yet, too early to be able to talk much about that.

Our (inaudible) numbers are really just coming in.

We do expect November to be a little softer because there are a couple of days left, business days for (inaudible) -- at the retail level for this November.

We make that up in the month of December, so when those times come it's going to be really important for us to take November and December together to really get a good view on how the business is really working.

One other impact that could be there in addition to some of the consumer take-away trends, which will be what they be, is particularly with this important month of November and December coming through, is also how the trade postures not just in the United States, but around the world, in terms of how they lack at their inventories.

Of course, those are things that we can't really estimate until we start to do business in those months.

So I think, just like everybody else, we are looking out at the future with a lot of uncertainty.

We just don't know how the consumer and trade are going to behave.

So we're doing what we can based on what we know so far through the first six months, which means, the way we're looking at our data, we're holding up pretty good.

Thanks, that's helpful.

Then on the currency side is I wanted to flesh out a bit more detail.

Do you guys have any currency hedging in place, both in terms of translation and transaction impact on fiscal 2009?

And can you help give us a sense if rates stay where they are today what type of impact we should see in fiscal 2010?

Sure.

This is Jane.

We do have hedges in place for this fiscal year.

We have about 70%, 75% of our exposure hedged for the balance of 2009.

So included in our current outlook is the assumption that we stay at the current rate, the current spot rates that you see out there.

To the extent that these rates for the balance of the year were to move plus or minus 1%, it could impact our earnings somewhere around 5 -- about $.5 million, $600,000.

With regard to next year we have some hedges in place already for that as well.

It's just too early, given all the volatility to estimate how much that might impact us.

Okay.

Can you give us a sense for what percent of your currency exposure is hedged at this point for 2010?

Yes.

It's about 40%.

40%.

Okay.

And was that put into place fairly recently, or is that more something that was done a couple quarters back?

We do our hedging program is done over time, as you know.

We don't just get in the market one day.

But it was done earlier, in the summer, so before the rates fell as dramatically as they did in September and October.

Okay.

Great.

And then last, obvious stock commodity prices have dropped pretty much across the board here, although you do have some higher costs tied up in your inventories.

So I'm just wondering if you can help give us a sense for your cost outlook, looking out to fiscal 2010 and maybe the key cogs components, and what you are thinking as we look out to 2010?

As we look out, as anybody, (inaudible) based upon what we're seeing today we are seeing some more positive trends.

Corn prices have come down, which is one of our key components of our costs.

Energy prices, of course, you've seen that come down, too.

So where we sit today we certainly feel more optimistic, feel less pressures as we look at our numbers versus where we were in the first quarter.

However, with that being said, we still have some hedges in place, things like that.

You may not see the benefit of that immediately, and it may not -- you may not see it fully in 2010 immediately, either.

So I think when we think about, instead of the high single-digit growth that we were seeing in costs, we would expect somewhere in the low single-digit growth as we go forward.

Okay.

Great.

And just quick last one.

Tax rate.

What are you assuming for '09 guidance for your tax rate?

We're assuming, for your purposes, I would assume between 32% and 33%.

Great.

Thanks a lot, guys.

Thanks, Dara.

Your next question comes from the line of Kaumil Gajrawala, UBS.

Thanks, good morning, guys.

As we think about Eastern Europe your trends are stronger there than I think we've seen out of a lot of other companies in a variety of different staples categories.

Can you maybe talk about how much of the growth is coming from incremental distribution and how much of the growth is coming from just core secular trends?

I'll comment on that.

It's really be hard for us to quantify that for you.

Those are countries of Eastern Europe, of course, are really strong vodka consumption countries, and Finlandia is still building distribution in many of those countries, but it also has a leadership position in terms of velocity, I'd say, as well.

I couldn't give you the specificity on the [percent], on the portion of the growth rate that's attributable to the two.

The other larger brand that we've got that's continuing to for sure build distribution but also is doing well at the velocity side is Jack Daniel's.

It's been one of our great growth regions here over the last couple years but we don't think that it's totally immune to what's going on around the globe as well.

In the second quarter it was really strong, and only time will tell to see what happens in not only that region but other regions around the world.

Okay.

Are you seeing -- as you look at the quarter, maybe on a month to month basis, were you seeing any changes in terms of trading down?

No, not -- I think that it would -- are you talking about in Eastern Europe or across the globe?

In Eastern Europe.

In Eastern Europe, no, not really.

Finlandia would be at the very high end of the vodka category in a lot of those countries, and Jack Daniel's for sure would be at the higher end of the whiskey business there.

So, so far -- you've got to remember one thing, that while we've been doing really well there, both of those brands in some respect relative to the size of the business are still pretty small.

There's just very large categories, particularly the on the vodka side, and on the premium whiskey side, it's very early stage of development.

So we still think there's a lot of long-term opportunity, but we do think, look, if the economy gets really, really soft, not only in Eastern Europe, but anywhere, there will be the potential for some trade-down for sure.

As we think about your portfolio in the US, you do have a lot of volume coming from lower end, then obviously a massive premium portfolio.

Can you maybe talk about what you are seeing in terms of trading down in the US?

And then maybe if you could just add (multiple speakers) -- if I could maybe just ask you to add to that, what this might mean for margins if it does become a bigger deal?

Yes.

We have been seeing some trading down, and we've seen it in a couple different ways.

We have seen a little bit of improvement for some of our more value-added brands, like Canadian Mist, for example.

As I mentioned earlier, we've also been seeing some softening in the trends at the super premium level, although they're still at fairly healthy rates.

Those rates have been coming down, not only for our own portfolio but when you look across the entire super premium segment across the industry.

So having said that, and as we've kind of talked about before, at least as it relates with Jack Daniel's, in the premium priced area, it does seem to be holding up fairly well at this juncture.

As it relates to margins, as I talked a little about before, we have done some reallocation of our advertising funds, more towards the value pack side as well as to some pretty targeted discounting programs, in order to continue to remain competitive during this period, and that does affect our margins at the gross margin line but it all starts to net out when you get to the operating margin line.

I might add one thing to Don's comments on the trading down.

It's really interesting, this is a comment about the United States which is the business has been built so well over the last couple decades to create this segment, these segments, there may be as many as three to four to five price segments.

So in the past when you had economic difficulty, a lot of people thought about it going from just premium to popular, and now you've got brands that have done extremely well that sell above $40 a bottle, and then you've got a group that sells really well above $30 a bottle, and there's a whole bunch of volume above $20.

You almost have to think about when you talk about trading down, trading down from where to where?

And we're definitely seeing some very value conscious brands and consumers out there even playing below the $10 level.

And when you really study the data the most interesting thing we've observed is how much the trading down is occurring in the premium vodka over the last six to nine to 12 months.

It's really occurring, actually from the standpoint of where our business is concentrated, we're seeing a little more stability on the whiskey side.

It's one of those -- one of the strengths is also a weakness for some of these categories.

They can go up really fast but are probably more trendy categories, so when the economy gets soft they really maybe feel it more.

We've really been seeing that, particularly on the vodka area as a lot of the lower end vodka brands are doing well and a lot of the more premium and super premium vodka brands are having a more difficult time.

Okay.

And a really quick one.

Are you still seeing net dilution from Herradura?

No.

We don't think so.

Not anymore.

Are you talking about EPS dilution?

Yes

No.

All in, yes, I'm just trying to think.

No.

Okay.

That's all.

Thank you.

Great, thanks for the question.

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

Good morning.

Hey, Lauren.

Just to clarify, Don, you said the revised guidance includes or excludes the agave charge?

Includes.

Includes the charge.

Okay.

So when you said that guidance is unchanged, you are referring to which comparable guidance that you provided?

When we came out at the very beginning of the fiscal year, the guidance that we gave then, which was also pre split, if you affect it for the share split that we did, as well as you affect it for Bolla, and you affect it for the agave write off, then that is a reflection of the guidance we just gave you again today.

And so in terms of the underlying it hasn't changed from what we originally gave you.

So includes the agave charge but it excludes the gain, or it includes the gain?

Includes the gain.

Includes So includes both.

Got you.

(multiple speakers) They do, right.

One is (multiple speakers), [another] one is 12, so going against each other.

I see.

Okay.

Also going back to trends in the quarter, with respect to Jack Daniel's, I think I may have missed it, as far as the second quarter volume trends for Jack Daniel's, what were they?

[For the] US?

In the US.

Sorry, yes.

They were up in the high single digits.

High single digits?

Yes.

Okay.

And if you could just talk about that brand's strength?

I guess just trying to isolate second quarter trends, now that you're maybe pushing through more discounting or value packs or promotional activity, maybe discounting is not the right word, but promotions and what not.

Just curious if you could give us a sense of how much of this more is coming from this new activity you're putting through versus just core brand strength.

I'll comment, then Don as well.

I think the reminder, when Jack Daniel's responds to the sort of activities that we're seeing in the US and increasingly globally to the activity, just reminds what you a strong brand it is.

That was the reminder to me.

I'll say something about it.

There are varying ways that you can invest in these brands.

And we feel like providing our consumers and we've got a very loyal consumer franchise with value added, and contrasting that against other investments we could be making or were making even a year ago, whether it would be in media or lifestyle marketing or other areas, which tend to work very nicely for you, but tend to have their benefits spread out over time, these have a more immediate impact.

We just think we're in that kind of environment right now.

I also think that one observation that I would have about the quarter -- even though there's a shift going on from on-premise to off-premise, and it does have the impact of making price more important, the other thing that it does, though, is that when people are in uncertain times I think they go to trusted brands.

They go to brands because they are going to be putting their money into the purchase of a bottle, not just a drink, and one thing about the on-premise is the superb sampling arena.

You can go and spend money on a single drink, but when you move into the off-premise arena and you start buying by the bottle, you're making a commitment to not just one drink, you're making a commitment to a series, a multi-drink purchase.

When you are faced with that, particularly in difficult times, I think people are going to gravitate to brands they know and trust.

I would put Jack Daniel's virtually at the top of that list.

I think there's a consumer dynamic and a channel dynamic that's also helping, but there's no doubt that we have helped ourselves by making the Jack Daniel's more present in the off-premise and gave the value added the consumer was looking for.

So as far as the activity you have put in place, you feel you can continue to do similar activities in the second half of the year, on that brand in the US?

(multiple speakers)

Yes, I think there will be just because of the holiday business is such a good gift giving business, we'll have (inaudible) less reliance on value added, but in terms of making sure that the brands -- not just Jack Daniel's, but all of them, get the right sort of merchandising, retail advertising frequency, promotional frequency, display activity, we're very focused on that sort of work right now and we would expect to continue it.

If I could also ask on the expense line too, it seems like your goal or your strategy to manage the operating expense line better, we saw that.

But I was just curious, too, looking into the second half about your ability to do more of the same or do you feel there's a point where you tightened the belt too tight, then there's not that opportunity any more?

I'll comment on that.

I don't feel like we've tightened it too tight at all.

There are two elements [of it] here.

One is the A&P and as I just mentioned, I think one of the things influencing the A&P investment is we've -- fundamentally being captured in some respects in the cost of sales because we're investing in things like value-added packs and maybe holding media constant, that kind of thing.

On the SG&A, we really feel like the prior four or five years of investments that we've been making in SG&A, particularly in our route to market around the world, have given us the capacity to leverage some of that now.

Where we don't -- it's not -- it doesn't require us to make as significant an increase in sort of the global infrastructure and in people where we've really been tightening it.

As we call them discretionary investments, but it's an area in things like travel and meetings, and we even had more moderate increases this year in merit for our company.

We call that sort of hunker down mode.

We really are being cost conscious.

We're constantly looking for efficiencies in savings, not only at the SG&A line but also at the cost line.

So we just think we're in that kind of environment right now.

It's also the kind of thing where the effects of those programs will continue through the second half in terms of what you'll see versus prior year.

And into '10 I think, too, FY '10.

We really do.

All right, thank you.

Thank you for the question.

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

Davidson.

Good morning.

Paul, one of my favorite quotes of yours is, we take a price increase somewhere in the world every day.

I'm wondering if that's still true in this environment, you're clearly some of the multipacks are oriented towards value or price.

If we excluded the change in mix, would we be seeing a recovery of your increase in costs in the gross margin right now, I guess is the question.

I'm trying to process this question here.

If we exclude the -- what portion of mix are you referring to here?

When you're talking about the mix driving gross margin down, mix to the value packs or mix to perhaps the lower margin brands like Herradura.

I see.

Would we be seeing benefits from pricing are you saying?

Would you be preserving your gross margin with the pricing you're taking?

I don't know.

Actually, I think costs would still be hurting us on a year-on-year basis, so I actually don't think so.

Because I think all of us, in the past years when we were taking -- we had -- just to respond to the one comment you made, we have continued to take pricing.

Actually, that's one of the things I think is so important during this, is that the pricing that we're taking continues really across the globe.

The thing about it though, is we're being much more sensitive to how we get value back to the consumer from a higher front line, a higher shelf price.

So we are looking at -- it's a combination of both the frequency of promoting and depth.

And when you go to do that, it doesn't mean you can't -- we do, of course, use discounts and promotions to help us do that, but we also found, like in the Jack Daniel's instance, that the value-added pack, really, if you think about what your options are there, you could go give the consumers $5 or $6 off on the price of a bottle.

Or you could give them glassware they could drink Jack Daniel's with and share it with their friends or give it as a gift, and maybe even introduce a new person to Jack Daniel's.

I like that in the mix more than not having it in there.

If you give them $5 or 6 off, they're apt to take the extra money and go buy a six-pack of beer or something.

We'd rather have that money going into Jack Daniels or Brown-Forman related activities.

So it's something we think we'll have in the mix and continue to do.

I do think costs are the key component to -- in addition to some of these other things we outlined, that have continued to be a challenge to the margin.

If we look at Southern Comfort, I assume the biggest issue there is on-premise, the on-premise nature of that brand.

Are there things that you are working on to kind of turn around that decline that we've seen for the last couple quarters?

It improved in the quarter but didn't fully get to the point where we would like it, and there's a lot of stuff going on, Tim, to improve their tool kit.

It won't surprise you, a lot if it mirrors some of the stuff we've been doing on Jack Daniel's.

The brand is a wonderful brand, and it has challenges because of its on-premise, as you referenced.

It's -- some of the occasions that you get in the on-premise with Southern Comfort, whether it's as an ingredient in a drink or in the shot occasion, just aren't as easily replicated in the off-premise.

So our folks at Brown-Forman who work most directly with Southern Comfort are working on ways to increase the -- not only the visibility at retail, but also some of the consumption patterns that we can get with Southern Comfort on the off-premise.

It just doesn't move as readily from on to off as Jack Daniel's does so it's taken us a little more time.

Your next question comes from the line of Lindsay Mann with Goldman Sachs.

Hey, guys.

How are you?

Fine.

I had first just a quick question on your guidance, I wanted to clarify.

So your underlying EPS guidance is pretty unchanged, from what you said at the beginning of the year, but you had also issued EBIT forecast of I think up three to up 10 at the end of your fourth quarter.

How does your new guidance compare to that?

(inaudible) Can you ask if -- ?

Are you looking for an EBIT-specific component of our

Yes, you had originally issued an EBIT-specific component of your guidance.

That shouldn't have changed.

The guidance didn't change so the EBIT shouldn't.

EBIT didn't change despite the fact of adding in the agave and [the gain].

(multiple speakers) [It's] a wash.

Yes.

It's a wash.

[Or close to it.]

So currency, agave, tax rate, all that stuff kind of washes out, and it's still up three to up ten?

Yes, I guess -- (multiple speakers).

On a reported basis.

Reported basis, yes.

What we provided you at the end of the fourth quarter would have been a reported year-over-year range, and so, yes, it's unchanged.

Okay.

And then sticking with this theme of pricing, could you talk a little bit about, first of all, how the pricing environment is fairing in the US, as you see more people competing for the consumer in the more value sensitive off-premise channel?

And then in Europe, how you are fairing with taking -- managing pricing with the retailers there?

So far it's been all over the board.

We've seen some very hot discount activity over the last 12 weeks or so.

As people are dealing with the environment they're in, and everybody does it slightly differently.

Virtually everywhere we're seeing some subtle and some instances dramatic shifts from on to off, and I think it all comes down to the strength of your brand in each of the individual instances as to how much you go, how frequently you get the support and what the consumer response is.

But I think particularly we'll see quite a bit of activity here over the next four weeks or so because it's an important holiday season for the business globally.

But what we've tried to do, I'll just let you in on this, we have just tried to really be practical about it.

With Jack Daniel's we get tremendous benefit, and we've found in many instances that the -- we'll go and try to stimulate some merchandising and promotional activity in the off-premise, and so far we're finding a lot of the accounts across the world are very responsive to it, to the point where they will even use it as a loss leader at times.

That's what happens sometimes when you have a very strong brand equity.

And one of the things -- sometimes they can do it too much (inaudible).

But what it does do is it does help that transition from the brand, from the on-premise arena to the off-premise arena.

But it is going to be competitive in this environment, there's no doubt.

I think the key thing for us is to keep our head about it.

Not go -- really keep a focus on gross profit per case after discounts, or after investments, which is what our people tend to do and actually think this quarter it shows up.

We've been out there doing a lot of work and really pleased with the manner in which we carried it out because it has resulted in higher dollar sales, not just unit sales.

Okay, thanks.

And then can you talk about whether outside of the sort of brand building dynamic, this shift from on to off-premise matters to you from maybe a profitability perspective?

It does matter some.

We typically -- particularly if you look at the United States.

By far and away the liter size is the most popular size on premise, and it tends to be one of the ones where we have our higher margins.

When you move to the off-premise, consumers often will move to the 1.75 size, which tends to be a lower margin.

We bend that price a little bit to give some value to the consumer to trade up to a larger size, so you will see some shifts in that arena when it goes from on to off.

One thing though that helps, that does compliment that is there's really two factors.

One, the investment we make in the on-premise typically doesn't usually pan out on the evening that you are making that investment.

It's an investment you're making for the longer term.

Where as the investment sometimes that you make in that off-premise, because people are buying by the bottle and buying larger sizes, you get a quicker return for your investment in the off-premise.

I also think you take the consumer out of the market more rapidly in the off-premise when they go and buy a 1.75 they've made a commitment to going and having as many as 40 or 50 drinks committed to your brand versus one or two which occurs in the on-premise.

So there is some defensive nature to the off-premise which occurs when they buy the larger sizes.

Coming back, it means basically if you are looking at it strictly from the margin percentage, you have some shifts, but then you pick it up on the volume side.

You pick it up on the volume side.

In Europe is the dynamic a little bit different because you are closer to -- you own the distributor, you share the costs anyway?

I don't understand the question.

In Europe -- here you have the three tier that maybe helps mitigate some of the impact there.

In Europe where you own more of the distribution mechanism is the margin impact more different in any way?

It works right through the system whether you are looking at the US or outside the US.

It doesn't really --

It's just a matter of whether you are sharing it or not.

That's right, yes.

So in the US, you are saying that your wholesalers don't mitigate that impact?

No, no, no, we actually, our -- over the last 15 years or so we've found that we have comparable gross profits on a per unit basis in the US to our international business.

There's some places it varies, that we're --.

Some countries will have the more forwardly integrated you are in, you can have higher pick up of gross profit, but often times it's related to just a higher price position in the market in some of these places.

But, yes, sure, if you're making a little bit more in one country than you are in another country, and you are dealing with the shift, sure, you can spot a difference.

But in the aggregate, I would say the US business versus the overall international business is about comparable.

Okay.

And lastly, Jane, could you actually quantify what, assuming if spot rates stay where they are, what the currency impact on your EPS would be, what's embedded in your guidance?

If the spot rates stay where they are, there's no impact.

We've got that built into the guidance (inaudible) spot.

Okay?

So spot rates stay where they are, then you have neutral currency impact for the full year?

Versus what we have given to you in our guidance, that's correct.

There is no more -- that's embedded in our outlook already.

What's the per share amount of impact to your EPS number, though?

You're saying -- I'm not sure.

(multiple speakers)

How much is currency a drag on your EPS this year in --?

The first half.

No, for the full year, embedded in your guidance.

Why don't you look at it, Jane and get back.

Why don't we let her look at it real quick, and then we'll address it, so you can make sure we got the right number for you.

Okay.

Thanks very much.

Okay.

Thank you for the questions.

At this time there are no further questions.

Do you have any closing remarks?

Well, hang on, Jane, do you want to try to answer that?

Let me ask, are you worried about our year -- ?

She's not on the line.

I tell you what, we'll pass on answering that right now.

We just want to make sure we give an accurate answer to it.

And, yes, we want to be more definitive with it.

So we'll turn it over to Ben.

I just want to remind everyone to please join us for our investor presentation today at 1:00 PM.

The link to the webcast can be found on our website under Investor Relations.

And whether you join us or not, please raise a glass of your favorite Brown-Forman product in celebration of the 75th anniversary of the repeal of prohibition.

Whenever you do so, do it responsibly.

Thank you all.

This concludes today's conference call.

You may now disconnect.