Brown-Forman Corp (BF.B) 2009 Q3 法說會逐字稿

Good morning, my name is Shaday, and I will be your conference operator today.

At this time I would like to welcome everyone to the third quarter fiscal 2009 conference call.

(Operator instructions) Thank you.

I would now like to turn the call over to Ben Marmor, Director of Investor Relations.

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

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

Joining me today are Paul Varga, our President and Chief Executive Officer, Don Berg, Executive Vice President, Chief Financial Officer, and Jane Morreau, Senior Vice President, Financial Management, Accounting Technology.

Don will begin our call this morning with a review of our third-quarter results and Paul will follow with some strategic commentary.

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 third-quarter results for fiscal 2009.

The release can be found on our web site under the section titled 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 our form 10-K, form 8-K, and form 10-Q 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 of operations are contained in the press release.

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

Thank you, Ben.

Good morning, everyone.

While our second quarter certainly posted robust growth, like many of our competitors have announced recently, markets conditions during our fiscal third quarter were far more challenging and tested our resiliency.

I'm pleased to say, however, that despite these many challenges we continued to grow our underlying business at both the net sales and operating income lines.

For the quarter, underlying sales grew 1%, and underlying operating income grew 8%.

For the first nine months of fiscal 2009, we grew underlining sales 4% and underlying operating income 5%.

As you are all aware the global economy continued to slide throughout this period, affecting our business in a number of ways.

First, significant strengthening of the U.S.

dollar negatively impacted our results in the quarter, reducing net sales $84 million, and operating income $30 million.

Second, and one we've talked about a number of times before, the move consumers are making away from the on-premise to the off-premise.

Third, we also saw some acceleration of trading down in the United States, which we will talk more about in a bit.

And finally, this quarter, we saw retailers, wholesalers, and distributors around the world significantly reduce their inventories in what we believe is a quest for cash and an expectation of lower future consumer demand.

On this last point, let me give you an example of what we are seeing and the magnitude of the different trends.

If we take Jack Daniels in the United States, consumer takeaway using NABCA data as a proxy, was down about 3% for the third quarter.

This is approximately half of our depletion decline indicating that retailers did not fully replenish their inventory.

Similarly, our shipments to distributors were down about double the depletion rate, suggesting that distributors have not fully restocked their inventory levels, as well.

These four themes you will hear repeatedly in our comments this morning.

We also believe that all of these trends are continuing in our fourth quarter, which we will discuss more when we talk about our guidance in a few minutes.

While we believe we have adapted quickly in response to the fast-changing conditions around the world, our overall philosophy for managing our business has not changed.

We continue to focus on driving our current, underlying net sales and operating income performance with a view to positioning ourselves for continued long-term success.

I will now highlight some of our specific brand and market performances.

Globally, Jack Daniels depletions declined in the high singles digits in the third quarter and grew in the low single digits for the nine months.

For Jack Daniels in the United States, Q3 proved difficult with depletions declining in the high single digits.

However, for the first nine months, the brand's depletions were about equal to last year.

As noted above we believe these softer results can be attributed in large part to inventory reductions throughout the supply chain.

While take-away performance outpaced depletions, these trends were somewhat mixed during the quarter, depending on the source of information.

For the period ending February 7, 2009, Nielsen, which focuses on off-premise business, reported solid trends for Jack Daniels.

With 12-month volume growths of 5%, compared to 2% for total distilled spirits, three-month volume growth of 4% versus 1% for total distilled spirits, and a one-month result of plus-3% versus 1% for TDS.

On the other hand, NABCA trend through January 31, which includes results for both off and on-premise were not as strong for Jack Daniels.

For the 12-month period, Jack Daniels case sales grew 1.5% compared to twice that for a total of distilled spirits.

But posted a three-month trend and a one-month trend of minus 3% compared to a plus 1% for TDS.

We believe these statistics reflect how our focus at the off-premise level continues to work while we continue to see the effects of the declines in the on-premise channel.

While the 12-month NABCA growth trend of 1.5% is almost identical to a year ago, the more recent performance increases our caution in our rest-of-the-year outlook.

While the third quarter NABCA results for Jack Daniels were disappointing, we are encouraged by the fact that Jack Daniels outperformed most brands in its competitive set including Bacardi, Absolut, Crown Royal, Grey Goose, and Jose Cuervo.

Having said that, the NABCA results also show the trend of trading down to lower price brands, as brands such as Evan Williams, Old Crow and Ancient Age, all posted some nice growth rates in this difficult economic environment.

In international markets, Jack Daniels saw overall depletion gains increasing in the low single digits when compared to third quarter of last year.

During Q3, Jack Daniels depletions expanded at double digit rates in several markets including the UK, France, Poland, Romania, and Mexico, while softness continued in Spain, Italy, and Ireland.

In the eastern European region as a whole, Jack Daniels continued to post strong high, single digit depletion gains for the quarter.

While we are pleased with this continued growth, the rate has slowed from the double digit level experienced earlier in the year.

Talking a bit more about the UK, the depletion gains were due in part to significant successful holiday promotion activity and from a retail buy-in prior to a February price increase.

We've talked in the past about the UK being one of our larger markets, seeing a shift from the on-premise to the off-premise.

That shift continued during this period, however for Jack Daniels, the momentum in the off-trade began to offset on-trade declines.

Looking for a moment at France, this, our fourth largest Jack Daniels market, has continued to perform well in the third quarter and the year-to-date periods.

France is a well-developed spirit market, and the largest whiskey market in the world.

In spite of the economic difficulties there, Nielsen data showed the whiskey category grew 3% for the 12 months ended January, 2009.

Jack Daniels during the same period grew over 15%.

For the first time Jack Daniels now comprises slightly over a 2% share of the whiskey market in France.

We believe this is a perfect illustration of Jack's continuing global potential and how there is plenty of share left to gain.

In Australia, according to data from the Liquor Merchants Association, Brown-Forman increased its market share.

Through the first nine months for fiscal year, our brands' total share of full-strength spirits in this market increased one point from 6% to 7%.

Our total share of all ready-to-drink products increased almost three points from 6% to 9% and our share of bourbon-based RTD's increased more than five points, from 11% to 16%.

Jack Daniels whiskey led our full-spirit share gains in Australia.

As the full-strength line continued to benefit from consumers switching from ready-to-drinks due to the dramatic tax increase on RTD products last April.

While we believe Jack Daniels benefited from the shift, our Jack Daniels and Cola ready-to-drink brand also improved its depletion trends in the quarter returning to double-digit growth following the declines experienced in the first half of our fiscal year.

We believe this is the result of actions we have taken including the proof reduction to keep pricing affordable for our consumers.

The improved volume trends have not offset the gross profit impact of these changes, but we believe we're n a better position today than after the excise tax took effect last April.

Turning to Gentleman Jack, this vibrant brand once again registered double digit depletion gains for the third quarter.

Although its overall growth rate moderated somewhat, Gentleman Jack attained these double digit gains both in the United States and internationally.

Moving on to Finlandia, we're very proud that the brand crossed the 3 million case depletion milestone during the quarter.

In only three short years, we've been able to add another million cases to the brand.

And Finlandia has continued to be a powerful eastern European growth story as the region's significant growth rates fueled the brand's double digit growth on a global basis.

In the third quarter, Finlandia became the number-one imported vodka and the number-one imported spirit in the Czech Republic.

This adds the Czech Republic to the growing list of markets where Finlandia is the number-one imported vodka including Poland, Russia, Romania, Bulgaria, Hungary, and a few other markets that in total represent over 50% of Finlandia's business.

Southern Comfort had a difficult quarter with global depletion trends down in the high single digits.

In the United States, a high single digit depletion decline for the quarter was due in part to continued weakness in the on-premise and to what we believe were inventory reductions.

This belief is supported by the fact that the brand's overall depletion trends lagged the Nielsen take-away results, which were up 1% for the rolling three months through February 7, compared to the high single-digit declines.

In the UK, Southern Comfort experienced similar issues as in the United States with depletions declining in the mid-single digits for the quarter.

In Germany, the brand grew in the low single-digits as the brand benefited from increased promotional activity.

Southern Comfort also performed well in Australia as consumers switched from ready-to-drink products to full strength spirits following the excise tax increase I mentioned before.

Casa Herradura tequilas experienced overall depletion declines in the quarter while the new mix, ready-to-drink product continued its growth.

Although our tequilas were down, Nielsen trends similar to several of our other brands indicate that El Himador and Herradura are experiencing inventory reductions as take-away trends exceeded depletion performance.

While Himador had a difficult quarter, the brand is outperforming its competitive set in each of its major markets.

We believe the traders responded well to our 100% agave reformulation and repackaging of Himador this past Fall.

And we are encouraged by the 12-month trends where the brand grew in the mid-single digits globally driven by growth in both of its major markets.

The Herradura brand, however, has been more affected more by the current global economic downturn given its ultra-premium price point and its heavy skew toward the on premise.

We're working to improve the brand's toolkit and are taking actions to improve the brand's trends such as pushing for further off-premise distribution gains and making packaging improvements.

We continue to be excited about El Himador's and Herradura's long-term prospects in the U.S.

and Mexico, and we also believe these brands have potential well beyond these two markets.

In fact, certain international markets such as Greece, Spain, the UK, and the Czech Republic, although on a fairly small base have already exceeded our expectations.

For our developing brands, performance was mixed in the third quarter.

Woodford Reserve grew depletions in the mid-single digits.

Tuaca was flat, and Chambourd, Sonoma-Cutrer, and Bonterra declined.

We believe that the underlying performance of these brands are stronger than the depletion results indicated for the quarter and similar to other brands in our portfolio, depletions generally lag Nielsen take-away trends indicating the occurrence of inventory productions.

In addition, these brands at ultra-premium price points and skewed to the on-premise, have continued to see some pressure in the current market environment.

However, despite these difficulties in the marketplace, we believe our developing brands benefit from having built strong brand equities as demonstrated by various recognitions they continue to receive.

For example, Impact Magazine awarded our Bonterra and Gentleman Jack, hot brand status in its annual hot brands list.

Little Black Dress also received a hot brands prospect award.

Sonoma-Cutrer was once again recognized by the Annual Wine and Spirits restaurant poll.

The brand received the best overall Chardonnay award for this, the eighteenth time in the last 20 years.

And was also recognized as the best overall brand which marks the seventh of the last 11 years it received that accolade.

Turning now to margins.

Operating margins have remained fairly consistent, approximating 21% to 22% of net sales.

For the quarter, operating margins increased 190 basis points, due largely to the timing of adjustments related to lower expected performance related costs including incentive compensation.

At the gross margin level, we experienced a 200 basis point decline for the third quarter.

The biggest impact on gross margins during the quarter was the geographic mix shift from higher margin markets such as the UK, U.S., and Spain, to lower margin markets in eastern Europe, as well as the portfolio mix shift as Finlandia's growth outpaced Jack Daniels.

Higher input costs and the impact of the Australia RTD excise tax also affect the year-over-year and quarter-over-quarter gross margin comparisons, while the non-cash agave charge in the first quarter also affected the year-to-date margin.

As I said earlier, our management's primary focus is driving underlying net sales and operating income growth.

We plan to continue to manage the business in the manner we believe is appropriate for this environment while also keeping a view to the long run.

We're working to ensure the long-term health of our brands by seeking the proper mix of brand-building support whether it's through traditional advertising and promotions or incremental value-added packs or targeted discounting.

At the same time we continue to be very focused on the tight management of discretionary operating expenses.

Our goal is to maximize our shareholder returns in every economic environment no matter how uncertain it may be.

Before we move on to discuss our guidance for the year, let me touch on our balance sheet for a moment.

Traditionally we have a very conservative philosophy with respect to our balance sheet.

We believe this attitude has served us well, especially now in these extremely uncertain times.

During the third quarter, our strong credit ratings allowed us to complete the sale of a total of $250 million of 5% notes due in 2014.

We have also enjoyed continued access to the commercial paper markets and have not had to draw upon our credit facility.

Our solid balance sheet was supported through strong, positive operating cash flows which totaled $343 million for the first nine months of our fiscal year.

Our operating cash flow is less than last year due in part to the appreciation of the U.S.

dollar, the absence of a VAT tax refund received in fiscal 2008, related to our Herradura acquisition, and slightly higher inventory levels.

Because of our strong cash flow, in January our quarterly dividend to shareholders increased 6% over the prior period.

This represents the 25th year in a row we have been able to increase our dividend payout.

Now turning to our fiscal 2009 guidance.

Due to a significantly stronger U.S.

dollar, expectations of additional trade and distributor inventory reductions in the fourth quarter and some softening in consumer take-away trends around the world, we are lowering our diluted earnings per share guidance to a range of $2.70 to $2.90, representing a reported decline of 5% to a growth of 2% when compared to our fiscal 2008 earnings per share.

This outlook assumes a decline in earnings per share in the fourth quarter when compared to the same prior-year period as a result of the following factors.

We expect currency to negatively affect our quarter-over-quarter comparisons in the range of $0.08 to $0.10 per share.

Additionally, we had an unusually low tax rate in the fourth quarter last year, which we do not expect to repeat itself this year.

Finally, as we have highlighted throughout our earnings release and discussed during our call today, we expect a further reduction of global inventory levels and some modestly lower volumes reflecting some softening in consumer take-away.

However we expect the impact of these declines to be partially offset by continued tight management of discretionary expenses, including additional benefits from lower performance-related costs.

With that, I'll turn the call over to Paul for his further commentary.

Thank you, Don.

And good morning, everyone.

As you likely picked up from Don's commentary, we had what I term a solid performance in the third quarter.

But due in large part to foreign exchange, the expectation of an unfavorable fourth quarter tax rate relative to last year and impact of the deteriorating global economy, we have a more cautious outlook for our full-year reported earnings.

As foreign exchange and inventory reductions affected our third-quarter reported results negatively, a growth in underlying sales and tight management of expenses helped propel us to nice underlying growth for the quarter.

During these challenging times, our employees have demonstrated great resiliency in the allocation of both their time and the company's resources.

Additionally, our innovation around packaging, product, and line extensions has allowed us to efficiently enhance several of our valuable trademarks.

This is an example of what we refer to as leveraging existing assets.

We believe this is particularly important in a difficult environment, and it has made a real contribution to the company's underlying performance.

Because of our ability to leverage Brown-Forman's two greatest assets, our brands and our people, we have been able to post year-to-date underlying growth in net sales of 4% and operating income of 5%.

I believe these are excellent results in an environment that is not yielding growth of any kind easily.

A worldwide business like ours where we sell globally, but typically produce our brands at a single location can at times be either helped or hurt by fluctuations in foreign exchange and inventory levels.

In recent months we have been hurt more than helped by these two factors.

And looking ahead to the remainder of FY '09 we expect this to continue.

Beneath the currency and inventory impact, we are still seeing some growth at the consumer level in many markets.

But there has been some softening in consumer take-away in a number of markets around the world in recent months, which does put pressure on underlying net sales growth.

As a result of these three specific factors and the general state of the global economy, we are taking a more cautious view toward the fourth quarter of FY '09, and that is reflected in the downward adjustment to our full-year range for reported earnings.

Importantly, we expect our underlying profit performance, which we believe better represents the health of our brands and the manner in which we are running the company, to significantly outpace reported profit performance during both the fourth quarter and for full-year FY '09.

Now some of you may recall that on the same day as our second-quarter earnings release in early December, a number of our management team spoke with many of you in the analysts and investment community about the long-term potential for our brand and our company.

We enjoyed that discussion very much as it is one of the topics that enthuses us most as we look out into the future.

The condition of the global economy today and the mood of people over the last fifteen months, particularly in the last six months, are obvious causes for concern.

And while these may temper short-term growth rates for everyone including Brown-Forman, we do not believe they diminish the wonderful long-term opportunities to build our brands over time for the immense benefit of our shareholders.

The creation of enduring shareholder value remains our highest priority in both good times and bad, and while different times dictate the need for different actions, what doesn't vary is our commitment to excellence and brand-building, our strong financial discipline and our very long-term prospective on the business and the Company.

Thank you for listening to our comments and now we will be happy to answer any questions you might have.

(Operator instructions) Your first question comes from Kaumil Gajrawala of UBS.

Thank you.

Hey, guys.

Good morning.

As to recent distributor inventory levels, do you have any line of sight on how long it might take to get these levels to an appropriate run rate?

And how much of this is the growth rates in some of the emerging markets coming down in the near term versus a need to just free up some short-term cash?

It's a good question.

I mean, when you look at the distributor tier, it really depends a lot on the market that you look at.

If you look, for example, here in the United States, you'll generally see on average anywhere between 40 and 50 days of inventory.

When you look outside the United States, a lot of it depends upon the individual market and what our distribution model looks in that market.

In those markets where we own our own distribution, of course, you don't have any effect whatsoever, in those markets where we have third-party agencies, you tend to have far higher inventory levels generally.

They can range anywhere from 60 up to 120 days.

And so as we look out, hopefully we will see whatever changes that they plan on making in their inventory levels come through the system, by the end of our fiscal year, next fiscal year.

But at this stage, there's really no way to know for sure what to expect on that.

I see.

If I could ask about the U.S., the distributors over the years have gotten a lot more sophisticated.

If they did decide to try to go, for example, from 40 days to 20 days, is the supply chain efficient enough that there's -- they still wouldn't risk any -- or have any risk of out of stocks given the turns of the business?

That's a pretty significant -- say we're thinking about a reduction from 40 to 20 being extremely significant for our U.S.

distribution system.

For years, I think people in this business have speculated that the capacity to operate, particularly as they consolidated down and become more efficient with investments in their warehousing and their delivery, that people could get below 40.

But 20, I've just never looked at it to see it that dramatic.

And I think if you went across today you would see variations by specific distributors.

So there's been probably evidence of people operating at lower than 40.

So when we give you an average number, it varies, of course, by market.

But we'd have to look into that further to see if it could go that far.

Got it.

And then last question, on advertising.

Looks like there was a fair decline in the Absolut dollars of advertising.

How much of that is just lower rates versus maybe a shift in spending from one place to another?

Well, I think there's a bunch of factors in there.

Some of it when you look at it on a global basis, its foreign exchange influence.

When you strip that out, I think there's also the impact of where our investments are landing within our P&L.

We've had a lot of shifting in this environment, really over the last year or so where we've been allocating more investment to things like value-added packaging, which would show up more in your cost of sales.

So unless you strip that out, it can actually distort the picture, as well.

We are seeing some efficiency in investing in some places.

And we also are being more conservative with some of our investment posture as well around the world just because we feel like in many, many markets the receptivity of consumers is lower than it would have been a year or two ago.

I think those are the main factors driving what you'll see in year-on-year comparisons in the A&P.

Okay.

Great.

Thank you.

Thank you.

Your next question comes from Lauren Torres of HSBC.

Good morning.

Good morning.

First just a quick clarification on the quarter.

The $0.81 you reported includes the gain from the wine asset sales?

Yes.

Yes

And where is that reflected in the P&L or how much?

It's in other income and expense.

It's roughly $20 million, Lauren.

Okay.

Okay.

Thanks.

And also, too, I was curious, as we're about two months from closing out fiscal '09, I don't know if you have any initial comments for fiscal '10, being a few months away.

As you talk about adjusting your promotional mix and also reallocating spend and selectively discounting, I was curious to find out as we think into fiscal '10 your ability to continue with these types of activities.

How comfortable are you doing that, how should we think about those types of activities for next year?

Yes.

We're not going to provide a set of specific guidance or anything for F '10.

I would say in the environment we're in today, you almost have to go back eighteen months ago where we were actually beginning to change some of our advertising and promotional mix in the United States as far back as then.

And I would say that the international markets weren't experiencing some of the same conditions at the time.

And so they were probably several months behind it.

I think in the latter half of this year, we've seen a more global application of people altering their mix to compete more effectively in this environment.

And I mentioned a handful of things such as leveraging the trademarks through line extensions or packaging our product improvements.

And I think all of those are the types of techniques and valuable additions to any brand marketing toolkits that will serve us well not just in F '09 but probably in F '10 and beyond, as well.

And can you just comment as you mentioned selective discount programs.

I don't know if there's any detail you could give us behind that of what you've been engaging in and our plans on that front.

Yes.

I think one thing for sure on the United States is we were -- I think we did a lot of effective changes in -- we were testing throughout the first half of the year a number of changes that would influence both the frequency and deaths of discounting.

And so as we've been actually started to do the planning for next year, of course, as you'd expect.

We've really been studying that data.

And I think we've found some sweet spots for our brand where they're really -- you never know with great specificity where the right level of discounting is and what the right frequency is.

But we do know that they vary by brand.

Also they'll vary within a brand by size.

And so you have to get down to sort of that granular a study, and of course they'll vary by market in order to understand the right sorts of practices.

And so I feel like the good results that we've been able to achieve that really are evident, you'll see them in the U.S.

Nielsens that Don referenced, part of that -- I call it ongoing work that we're doing on the discounting.

Southern Comfort has had similar good results.

They've started a little later than Jack Daniels in the United States.

But I think it shows up in their take-away being better, as well, versus their depletion trends.

So I think the thing that we're advising our employees who are working on this all the time to do is to keep testing it, practicing, stay on top of it, and then adjust where you need to to make it the most effective discounting program.

Okay.

Great.

Thanks.

Sure.

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

Davidson.

Good morning.

Just trying to get greater granularity on how the impact of currency hedging impacted the quarter and where those impacts would have been booked in the P&L.

Tim, this is Jane.

Can you be a little bit more specific?

I can tell you where hedges is booked, but I'm not sure.

Yes.

I mean, I wasn't sure whether the benefit of the hedges, is that showing up at the other income line, as well, or does it show up in the cost of goods.

Yes, the hedges themselves show up in net sales.

Okay.

So it is netted out through the sales line.

It is.

Okay.

We do have obviously P&L up and down your P&L there's FX impacts, however.

Okay.

The number we give you, Tim, is a net number for the entire P&L.

That's correct.

As Paul said.

That $30 million that Don referred to during his script includes the underlying losses, if you will, offset by hedges.

Okay.

And is that expected to get a little worse in the fourth quarter?

Is that the comment that I gleaned from you earlier?

Yes.

I think the way I look at it, Tim, is what we were trying to specify is why we think our fourth-quarter results are going to be softer this year versus last year.

And looking at FX rates this year versus last year, you've got to understand what we had our fourth-quarter effective rate last year at.

Versus what we have our effective rate this year at.

Let's take an example like the Polish Ladi.

The Polish Ladi, I think if you see, it happens to be one of our major currencies now.

You see the Ladi up to I think $3.60, $3.61, somewhere in that range.

Last year's fourth quarter I think the average was about $2.18.

So, you can see when we talk about our fourth quarter comparisons why we're pointing out that, yes, we do think that our results when you compare them this year versus last year will be impacted by the stronger U.S.

dollar.

Okay.

I didn't really hear you talk about some of your more popular priced, or popular I guess is the wrong term, but the mid-premium price brands.

Were you seeing benefits there from trade-down?

Actually, one thing that I was looking at as we were getting prepared for this was almost every brand in our portfolio, you can tell from the themes that Don was commenting on, may have suffered in its depletion growth rate from inventory reductions.

But one of the things we were seeing at the consumer take-away level, and this I'll just cite you some data from the NABCA, is the 12-month run rate ending January of '08 is an example for Early Times was about minus 5%.

The 12-month run rate ending January of this year is about minus 2%.

So we've seen a three-point improvement in its run rate over the 12 months.

I think some of that would be indicative of the benefits of trading down that's going on.

I mean, you can really -- when you tear apart these Nielsens in NABCA, you can really see the benefits that are accruing at some of the very low-end brands in some cases.

Almost a new segment of brand that are at the very value level.

And brands that in prior years we would refer to as popular price, may not even be benefiting as much as those priced below that.

Okay.

And one quick last one.

Paul.

If you talk about your captive distribution outside the U.S., are you making any changes in inventory levels in captive distribution, or is that sort of steady state?

I think that's pretty steady state.

We do have, of course, as Don referred to, still a number of agents around the world, whether it be in western and eastern Europe and other parts, for sure Latin America.

So you are susceptible to fluctuations in these inventories.

And of course, the U.S.

you can see it, as well.

But a place like the UK or a place like Korea, for example, or a place like Poland, where we have more captive distribution, you don't see the fluctuations.

Thanks.

On, that just to be clear on that, those inventory levels show up on our balance sheet as opposed to where we have agency brands where we get the benefit of the sale at the point in time that we move the inventory over to them.

That's where we've been seeing the bigger impacts on the inventory levels.

Great.

Thanks.

Your next question comes from Lindsay Mann of Goldman Sachs.

Hi, everyone.

Good morning.

Hello.

I wanted to dig in on your implied fourth-quarter guidance based on your full-year range.

So if I take out that $0.08 to $0.09 of currency and then if I actually use the inventory, the distributor inventory impact you reported in the third quarter as being a six-point drag on your EBIT growth, actually strip away those two things, it seems like you're still implying a down 15% sort of, currency-neutral, distributor-neutral fourth quarter even trend.

So can you kind of tell me if my math makes sense and what the drivers would be behind that.

I think your math does partially make sense.

Partially.

Let's try to get you there.

I think there's a couple of other things to consider.

And this is something that Don also alluded to during his calls.

Our tax rates last year in the fourth quarter was extremely low.

Unusually low.

Due to some expiration of statute of limitations and effective settlements that occurred in the quarter.

We don't expect that to repeat itself.

That in and of itself is going to affect our year-over-year comparisons in a negative way.

So we're expecting somewhere in the $0.05, $0.06, somewhere in that range from tax rates to be affected, okay.

In terms of what you're doing on distributor inventory levels, we're expecting to see even more reductions in the fourth quarter.

I think that combined with, offset by some operating expense that we continue to think will come in favorable, those are how you get to your numbers.

I don't know if that helps, but I don't think the number you're using on the year-to-date, or for the quarter on reductions and inventory we're expecting even more in the fourth quarter.

Could you clarify about how much more you're looking for and what the driver would be in the step-up versus sequentially?

Well, let me say it this way because I was working through this recently.

A lot of it depends on where, of course, we land within the range that we've provided.

But let me just, for an example, pick a mid-point of it.

At a mid-point, you have more than accounted for, the change versus last year with three items.

Foreign exchange, the higher tax right, and then I'd call it broadly the term volumes of a good portion of which would have inventory reductions in it.

And we're just, from what we're seeing, you've heard it several times here this morning, we think there are some reason to be cautious about the underlying consumer demand in many markets around the world.

So the combination of underlying consumer demand and then system inventory reductions would account for the volumes.

And all three of those would more than account for the difference between last year's reported growth and if you just picked the mid-point of the range.

Okay.

Thanks.

That's helpful.

For the third quarter, could you talk about how you talked about a 1% underlying sales growth number, what the splits between volume and pricing sort of was.

Let me think about that.

We might have to -- could somebody look at that and see if there's a -- what the different spread would be between depletions and -- I know we would have picked up benefit from underlying net sales price, I think.

And then it would have been offset some by, yes, maybe slightly lower on the depletions.

Let us get a specific answer point.

If we have it here by the end of the call, we can give it to you, okay?

Okay.

Great.

And then you mentioned the reduction in performance initiatives in the third quarter.

Can you talk about -- I guess just could you quantify that and then are there any other items, could you quantify what it was in the third quarter, how you think it will be in the fourth quarter, and what some of the other cost savings you're drawing from here.

A lot of it in the third quarter, it really was we call them a bunch of different things, but I think the biggest driver was when we expensed our expectations of incentive compensation and it hit in the third quarter.

We actually expect there to be probably additional savings associated with that in the fourth quarter.

The reality of it is that if the impact of the foreign exchange has a direct impact on that.

And so that changed dramatically during Q3.

So we wouldn't have had the knowledge of the foreign currency impact on incentive comp in the first half of the year so we wouldn't have expensed it so we expensed it during Q3 and we expect a little more of it in Q4.

I think beyond that we are just really in this environment being conservative with our expenses and operating investments, whether it's everything from discretionary spending like travel and some of these other things that I think will flow through and is an offset to any inventory reductions or volumes in the fourth quarter.

Does that help you?

Yes, that was helpful.

I guess I was trying to get at absent the timing of expensing and incentive comp which is one time, how much benefit, if you quantify, if your underlying SG&A was down 15%, if you exclude that incentive compensation how much of your underlying SG&A you've been able to pull back.

Let us calculate that for you.

I know it's --

I've seen you do a lot of math here.

In the aggregate, I know it's what we provided in the earnings release.

We have to back out the incentive comp piece.

Let us do the calculation and let you know.

Great.

All right.

Thank guys.

Okay.

Thank you.

Your next question comes from Bill Leach of TIAA-CREF.

Good morning.

There seems to be some confusion as to what the operating EPS were in the quarter, excluding the wine gain.

Could you just go through that in a little bit more detail for the quarter and the 9 months?

The wine gain, is that what you're referring to?

Yes.

JP Morgan put out a note saying that you earned $0.69 rather than $0.81 for example.

The impact on the quarter from an EPS perspective was roughly $0.13.

$0.13 and that's included in the other income.

Included in the other income.

You've got some other things going on there, again as I referred I think to Tim earlier.

Fx is up and down the P&L.

You'll see some FX impacts going the other way with regard to cash evaluations, etc.

and the other income line partially offsetting that gain.

It was $0.13 in the quarter and for the 9 months?

$0.13 for the quarter and year to date.

Okay.

Well, one thing that is, earlier in the year I think it was Q1 we had Agave write-offs and one of the things that these two approximately offset each other the gain on the sale of Bolla and the earlier writeoff associated with Agave.

Those two things we felt when you look at the overall year to date in any single quarter, you'll see the larger variance.

Now as we look at nine months of data, they largely offset each other.

Okay.

And then what are you guiding to for the tax rates for the full year in the fourth quarter?

We're guiding to a slightly lower effective tax rate than where we are today.

So you see our tax rate I think is around 31%.

It's going to be right at that approximately for the year.

Maybe $0.01 or $0.02 below.

So the fourth-quarter rate would be 31%, too?

The fourth quarter will be slightly lower than, yew, it will be approximately what it is there, yes, you're right.

Okay.

Great.

Thanks a lot.

You're welcome.

Let me while I'm at it go back to Lindsay's question with regard to stripping out the incentive compensation.

The lower pay for performance adjustment that Paul was referring to in the quarter.

If you strip that out, our underlying SG&A was still down 5%.

Your next question comes from Ann Gurkin of Davenport.

Good morning.

Good morning, Ann.

Hello, Ann.

Just want to follow up on the discussion about reducing inventories with distributors.

Do you have any situations where you're concerned about the financial health of the distributors and you're pulling back inventory either in the U.S.

or overseas?

No.

No, we're not seeing any of that at this juncture at all.

We've seen a little bit in a couple markets where we own distribution where we are exposed to the retail environment.

Where we've had a couple of very small credit issues.

But at the distributor level, with any of our major customers, they're all in pretty good financial health at this juncture.

Okay.

Then may I get an update on your alliance with Bacardi and Remi and several states here in the U.S., how is that going?

We're still going through the RFP process, we're at a point where we pretty much concluded our decisions.

And over the course of the next couple of weeks we'll be having conversations with the individual distributors in those markets and starting to share some of our plans with the way forward.

Okay.

That's all I have left.

Thank you.

Thank you.

Your next question comes from Kevin Dreyer of Gabelli and Company.

Good morning.

Just on the range, what would you say is the biggest delta between the high and low end?

Is it how much more in terms of inventory reductions?

Is it consumer demand?

Is it FX?

Yes.

I think my view on it is and the reason for such a large range at the end of the year is the general economic environment and uncertainty around, I would call it volumes.

Which can be in two forms really here.

It can be inventories both at wholesale and retail.

But it also can be consumer takeaways.

So I think we're just being cautious, and rightfully conservative in thinking about what might actually unfold over the next few months here.

So I would write it up to volumes because as we've said we have a pretty good feel for the tax rate and the foreign exchange within a certain range.

So I think the biggest reason for the variability is related to volumes.

Okay.

And in eastern Europe, you point out that you've done very well in a lot of these markets especially with Finlandia.

Are there any of these markets that you're particularly concerned about with them slowing down?

Well, sure.

I'm personally concerned about the whole global economy.

We are still seeing nice growth as Don talked about in a whole bunch of these markets for both Jack Daniels and Finlandia primarily.

A lot of it may depend on how far up the development curve or life cycle we are.

Sometimes you can -- the total macro economic changes, you may not be totally immune from them.

They may not impact you in some places as much others because you're kind of small.

And we do have some nice businesses, but they may be some small bases.

So maybe we'll see maybe less of an impact there in a few of those markets.

I mean, the growth of Jack Daniels in Finlandia and in many markets is still a relative recent phenomenon.

It's not like their experience there goes back 30 or 40 years where they've become part of the culture or something like that.

So I do feel like we'll have to just wait and see.

And that would be very different than sort of the experience one might have with, say, Jack Daniels in the United States where it's been around a long time and it's a prevalent brand and known to many people.

It's been along its own development and growth cycle for quite some time.

I think it will vary.

But I think we're just, we're concerned about everywhere, simply because of the deterioration that we've seen in the global economy.

And, you know, we'll cross our fingers and hope it gets better.

But we think it's smart to be concerned and be cautious about it.

And have you acted yet at all on your share repurchase plan, and do you plan to or has that changed because of the environment?

Yes.

We did implement and started repurchasing our shares back in December.

Looking for the --

We're authorized by our Board to go ahead and purchase for the remainder of the calendar year.

But Don and I know that as a company we've been taking a cautious look in this environment.

I mean, again, we're being conservative.

We've bought, I think Don you have the data here.

Yes.

We bought -- so far we bought 3.75 million shares.

And it's been an average price of around $53.

Don, I think one thing, we've actually bought a little over 700,000 shares.

700,000?

I think.

Yes.

Okay.

Yes.

You're right.

As of March 9, 718,000 shares, and the average price was $47.40.

We bought a little over $30 million so far.

Okay.

But you do -- there's no change in plans to continue to execute on that $250 million plan?

It's a broad authorization.

We have our own Board and internal requirements related to it.

But we're going it play it by ear and see how to implement it as I think the world and the markets unfold in front of us.

Okay.

And then final question, so I'm clear on the tax rate, maybe I'm missing something.

You said you were 31% for the quarter.

Seems like you're at 27%.

I said that's where we are approximately year- to-date.

Oh, year-to-date.

Okay.

Thank you.

That's all I have.

Thank you.

Your next question comes from Ian Shackleton of Nemora.

Good afternoon, gentlemen.

I don't know whether either of you were at the Impact Conference last week and I didn't see anybody from Brown-Forman there.

There were two issues, I guess, that got a lot of air space and I was quite key to get your views on them.

First to the outlook of the U.S.

(inaudible) market from the volume and price opportunity in 2009.

And secondly, around the destocking issues you flagged, there was definitely a sense of the impact that the U.S.

destocking impact by wholesalers that sort of finished in Q4 calendar last year.

When you were talking about further destocking issues, is it very much a comment on some of the situations you have around the world or is it still to go for?

Okay, Ian.

Let me address a couple of those.

And just to be clear, the head of our U.S., Mike Keys, was over at Impact last week.

You probably didn't have the chance to meet him.

But he was there.

And the first question you had related to the pricing and volume environment.

And I think our expectations there flow directly as a result of the commentary Don was making.

That all we can really do is look at what we're seeing from a consumer takeaway standpoint and try to make that flow back through to what we actual de from a shipment standpoint.

I'll just say this for everybody's standpoint.

I think you know this.

When it gets into the business of inventories for a company that has multitiers of distribution, you end up in the forecasting business quite a bit, which is very different than somebody, say, who's at retail or somebody who is very much in the direct sales business as we are in many markets.

Now having said that we -- I'll just reiterate what Don said.

We've seen the spirits market in the United States continue to grow, but at slightly lower levels than we have been experiencing a year or two ago.

And at the dollar level, we expect that the impact may be a touch stronger because of some of the trading down we've referenced here.

As it relates to pricing, I still think there are possibilities for modest price increases, but I also feel like you'll see accompanying that probably more activity related to competitive discounting.

I don't know that it necessarily means more overall net sales dollars, but I do think that people will be doing what we've been doing over the last couple of years.

Really looking at frequency and depth of promotions and discounts.

And we're just going to look at it a month and a quarter at a time to see what's appropriate for that environment as it relates to volume and price mix.

The one thing I will say is we -- even if the market gets incredibly aggressive, we do not anticipate being some leader of heavily reduced prices.

And in fact, we have not done that to date.

So we found that we can be effective with our leading brands by really trying to study what the sweet spots are in terms of frequency and depth of discounting.

As it relates to the inventory situation in the United States, and I think you were basically implying that maybe a lot of this deals with international agency.

We do think that inventories in the United States have some room at any given time.

They fluctuate all the time between quarters.

But as we look at the U.S., I think maybe in part response to some pressures that the U.S.

distributors are feeling as retailers pull down their inventories, maybe U.S.

distributors will react accordingly and can pull theirs down.

You know, always the challenge on inventories looking at a point in time, or are you looking forward.

And the hardest part for us is trying to ascertain which of the fluctuations in inventory are a rebalancing verse us some prior period, and those which are someone's forecast about future demand.

And so we don't have clear visibility to everyone's forecasts.

So it's harder for us to comment on the latter one.

When you look out to the next fiscal 2010, do you get a sense that you could still see some destocking in certain markets as the effect becomes more efficient?

Yes.

I suspect particularly more on the international side where we have higher days of inventory.

I guess it's possible that we could.

But what our plan here so you can have a clear expectation of it is we've got another couple of months here, obviously, to go in this fiscal year.

We'll look at our inventory situation at that point, around the world, try to compare it to our estimates for consumer takeaway, and then we'll give you a view on how we think inventories might shake out during FY '10.

Great.

Thanks for that.

Okay.

You have no further questions at this time.

Mr.

Marmor, do you have any closing remarks?

Thank you, Shaday.

We do not have any closing remarks today.

We'd like to thank everyone for joining us and have a great day.

This concludes today's conference call.