Brown-Forman Corp (BF.B) 2010 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the first quarter fiscal year 2010 conference call.

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

After the speaker remarks there is 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 fiscal 2010 first-quarter earnings call.

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

Joining me are Paul Varga, our President and Chief Executive Officer, Don Berg, Executive Vice President and Chief Financial Officer, and Jane Morreau, Senior Vice President of Finance.

Paul will begin your call with a few brief remarks and Don will provide additional commentary on the quarter.

As always, this morning's conference call contains forward-looking statements based on our current expectations.

Numerous risks and uncertainties may cause the 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 results for fiscal 2010 first quarter.

The results can be found on our web site 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 our Form 10-K, Form 8-K and Form 10-Q reports filed with the Securities and Exchange Commission.

During this call, we also will discuss 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.

With that, I will turn the call over to Paul.

Thanks, Ben.

Good morning, everyone.

Since we are only three months into our fiscal year and given that we discussed our business at our annual shareholders meeting just a few weeks ago, we intend to be relatively belief in our opening commentary.

In general, I am pleased with the first-quarter results we announced this morning.

It is a good start to our year in what remains a tough environment.

We believe that the quarter's underlying net sales growth of 2% is near, if not at the top of our industry.

And as you saw in the results, that sales growth paired up with significant operating expense leverage to produce very strong underlying operating income growth for the quarter.

The quarter's underlying sales progress benefited from our efforts to promote our brands more actively in the off-premise environment.

Most notably to the expansion and/or introduction of ready-to-drink expressions from two of our most important brands, Jack Daniels and Southern Comfort.

Let me comment briefly.

We believe that RTD's can play an important role on two fronts in this challenging environment.

First, with the consumer's shift from on-premise to off premise, RTDs make it more convenient for the consumer to drink Spirits cocktails at home allowing our Spirit brands to be more competitive with both beer and wine.

Second, we have learned over the years that the sheer presence of branded single serve RTDs at retail, at home, and importantly, in the hands of consumers at the actual point of consumption create the large number of incremental, highly-efficient, branded impressions.

They also serve to educate consumers on new ways to consume our brands and in doing so, they promote brand mixability.

In short, we believe RTDs can be both a volume and sales generating vehicle for our brands and importantly, we believe they can serve as an efficient marketing tool for our trademarks as well.

As we have emphasized before, building sales and marketing efficiently are particularly high priorities for us in this challenging and competitive environment.

One additional point before I turn it over to Don.

In highlighting the RTDs, I don't want you to misinterpret that we have totally shifted our focus from the full strength Spirit brands to the RTD.

This isn't the case.

I want to discuss them because it is one example of how we are trying to be both adaptive and thoughtful with our sales and marketing activities in light of the changes in business conditions.

I hope you find it a useful example.

Now, I will turn things over to Don for some additional commentary.

Thanks, Paul.

Good morning, everyone.

As headlined in our earnings release this morning, we had an exceptional first quarter.

Exceptional in that we had a strong double-digit earnings increase over the prior year.

But also, a bit of an exception in terms of how we see our performance potentially unfolding over the rest of the fiscal year.

First and foremost, we believe we are continuing to see the benefits of the evolution of our diversification, both in term of brands and geographies.

There are a number of areas of our business that continue to perform extremely well in the first quarter.

Jack Daniels, as a family of brands, including all of its ready-to-drink products had an excellent quarter, showing growth of 8% in net sales on a constant currency basis.

Jack and Cola in Australia performed particularly well, partially due to easier comparatives versus last year but also as a result of continued strong performance on the brand there.

Jack Daniels Black Label also had a strong quarter in Australia, as it did in France, Germany, and Mexico, as well as in many eastern and central European markets, such as Poland, Russia, Hungary and Bulgaria.

Other areas that continue to do well include Finlandia, Russia and Hungary, as well as some of our premium developing brands such as Gentlemen Jack and Woodford Reserve.

El Jimador posted strong double-digit growth across the board and is one of the hottest premium brands today in the important US market.

In addition, we benefited during the quarter from the launch of some of our new innovative line extensions, especially Southern Comfort's ready-to-pour line in the US and its ready-to-drink extension in the UK.

On the other hand, the benefits from these favorable performances were partially offset by double-digit declines in our travel retail sales.

We also experienced some softness surrounding our brands in the US and UK markets, where volume growth generally slowed during the summer months for premium distilled spirits.

In eastern and central Europe, Finlandia depletions declined in the low double digits, as the strong performances I noted for Russia and Hungary were more than offset by declines elsewhere in the regions.

In Poland, the brand's most important market, depletions declined in the low double digits, as we believe it suffered from retail inventory reductions, given the consumer take away, according to Nielsen, remains strong.

Before talking about our specific financial performance in the quarter, let me address some of the key trends that we have been talking about for some time now.

I already mentioned the decline in travel retail.

So I will concentrate on what we saw in the first quarter related to retail inventory reductions, on-premise weakness, and trading down.

In terms of retail inventory reductions, pressures seem to have eased in the US during the quarter.

It also appears that retail inventory reductions have subsided in southern Europe as well.

On the other hand, we have seen some acceleration of this trend in central and eastern Europe.

Looking at the on-premise, we believe the industry experienced continued weakness in this channel throughout the world.

We saw accelerating declines in the UK and Spain, declines in many markets throughout eastern and central Europe, as well as some softness in some important markets in Asia, such as China.

In the US, the decline in the on-premise also accelerated.

According to NABCA data through July, on-premise volumes for total distilled spirits worsened as the three-month decline of 6.5% outpaced the 12-month decline of 4.6%.

Finally, trading down and trading out continued to be a trend during the first quarter.

First, in the US, trading down to lower priced brands appear to have accelerated.

Trading down trends were also apparent in eastern and central Europe, including switching to smaller sizes, switching from more expensive flavor extensions to classic vodka expressions, as well as trading down to less expensive brands.

For Brown-Forman, retail and distributed inventory reductions continue to be a potential concern.

But we are happy to have seen the overall impact stabilize this last quarter.

On the on-premise front, we have talked a lot over the last number of quarters about how we have been working hard and shifting our focus to the off premise, where the consumer has moved.

For example, our off premise brand building activities have increased particularly in the US and the UK.

In addition, as Paul just mentioned, we were introducing a number of innovative line extensions around ready-to-drink and ready-to-pour products as a means to move with these consumer trends.

In term of trading down.

During the quarter, we did the see some competitors try to counteract these trends by intensifying their discount activities in some markets.

Our discounting activity also increased somewhat to keep our brands attractive to both the trade and to consumers.

Having said that, we still benefited from increased pricing globally.

In fact, our underlying net sales growth of 2% for the quarter was driven by price and mix as underlying volumes were flat.

Looking forward, beyond targeted consumer pricing activities, we are continuing to look for ways to add value to our packs, as a means to keep price high and our brand equity strong.

Having said that, we anticipate some of the aggressive deep discount programs we saw from competitors in the first quarter may return or even accelerate through this holiday period.

And we plan to be somewhat flexible in this competitive landscape.

Before closing and taking questions, let me add some color to the significant reductions in our underlying operating expenses for the quarter, and then make a few comments on our full-year guidance.

Our underlying operating income benefited not only from underlying top-line growth but also from lower advertising promotion, and selling, general and administrative costs during the period.

Specifically, on advertising and promotion expenses, we believe the reductions were primarily a result of three factors.

First, the quarter benefited from seasonal shifts of advertising and promotion investments.

This year, we plan to allocate a higher proportion of our brand spending through the September, October, November and December periods.

Secondly, as I mentioned before, we continue to reallocate expenses among activities within advertising.

For example, savings from lower spend on media, on-premise promotions, PR, and special events such as Nascar, were partially reallocated to lower-cost, off-premise activities to drive top-line growth.

Finally, we continue to shift our mix of spending to other areas of the P&L, such as consumer price promotions, which is captured in net sales.

We are also continuing to work on improving our primary packaging, which is accounted for within cost of sales.

We believe these improvements can have a strong and effective impact with the consumer, as we have seen recently with our el Jimador and Gentlemen Jack package upgrades.

We are also planning to continue to reallocate more spending towards value-added packs, which also shows up in cost of sales.

Looking at our selling, general and administrative expenses, they were lower due in part to the timing of spending and to the early retirement plan and work force reduction we implemented in the first quarter of fiscal 2009.

Additionally we benefited from further discretionary cost management, such as reduced travel and entertainment, lower consulting expense and fewer charitable contributions.

While we anticipate that year-over-year comparisons will continue to be positive, we expect a portion of the reduction in spending may be offset by such things as filling certain open positions as the year progresses.

With all of these changes, we believe we have a strong organization in place to build our business in these tough and challenging times.

In summary, as Paul commented in the earnings release, we will continue to strive for an appropriate balance in supporting our brands' growth and equity, while also delivering operating expense efficiencies in this challenging economic environment.

Additionally, we believe we have retained flexibility to continue to be able to change our mix and investment levels as conditions warrant.

Moving to our fiscal 2010 full-year guidance, we are leaving our full-year guidance unchanged at $2.60 to $3.00 per share.

Although, we saw improvement in our underlying trends versus the third and fourth quarter of fiscal 2009, we remain concerned about the economic, consumer and competitive environments, including the consumer channel shift, trading down, overall softening consumption trends, potential distributor and retail inventory level fluctuations and depletion trends for our three largest brands.

As we enter what we expect to be an extremely competitive holiday period and lap tough comparables last year, we continue to believe that we will be able to deliver on our previously-guided expectation for modest underlying operating income growth for fiscal 2010.

Thank you.

At that, I will be happy to take any questions.

(Operator Instructions).

Your first question comes from Lauren Torres with HSBC.

Good morning, everyone.

Morning, Lauren.

It seems you are quite more negative or gave instances where you are seeing on-premise trends get tougher and trading down continuing.

So I guess I was just hoping to hear maybe some more specific numbers either by brand or by channel, comparing this quarter to the last quarter or two.

Are you seeing any hints of improvement?

Is everything just getting progressively worse?

I don't know if there is any need to give number-wise to support of what you are seeing but I was just curious on a quarter over quarter basis how much tougher things are actually getting out there.

Maybe both of us can answer this Lauren.

I think on the one thing that I thought was better versus when we last spoke, was some of the stabilization in the inventory reductions was something we noted in Don's comments.

So that would have been something versus what we were experiencing in the particularly the last half of fiscal year '09 that we saw some stabilization or slowing.

We noted where there were differences.

We saw some acceleration actually over in eastern Europe.

And then, I think in addition to that you can make your way through the supply chains, the more you get out toward the channels, we do think that there's still a lot of pressure on the on-premise.

It is hard to provide a number that would capture that globally but a combination of the data that we have looked at, and there's always some lag, would tell us that shift between on- and off-premise is continuing.

And it continues to be not just in the United States, I think in countries all over the world.

But remember, because you were expressing that as really negative.

It is for on-premise but you get more of the traffic in the off-premise, which we feel is -- so it is an offsetting mechanism.

So, but I don't think we would have any news that would tell you that we have seen an acceleration in any way -n the on-premise.

It seems to be pretty tough out there for the on-premise environment.

That's why we are trying to adjust some of our programs and activities accordingly to capture some of that business that isn't actually shifting over to the off-premise.

Don, did you want to comment further on that?

Most of the data that we have got, particularly in the US, comes from the NABCA information.

I mentioned that on the three-month basis, it accelerated to 6.5%; from a 12-month, it had been 4.6%.

In the off-premise, you are seeing some of the opposite trends; the three month was up 2.3% and the 12-month was up 3.8%.

So we do continue to see the shift.

In the UK which is a really important market for us, we are pretty heavily skewed to the on-premise.

When you look at the seasonality there, historically the on-premise has had greater seasonality during the summer months and you see it skewing more to the off-premise during the holiday period.

As we have seen this thing kind of moving again, over the course of the first quarter, it has moved some of our results.

So we are just keeping an eye on it.

Lauren you had also asked about trading down.

We think at least the anecdotally, what we have heard and some of the numbers we have seen outside of the United States, we are starting to see more of that.

In the US, in the quarter, we definitely observed that the numbers we have through the two syndicated sources, Nielsen and NABCA, would indicate some trading down between categories.

A lot of it depends on where you segregate the price points.

But I think, in general, we are seeing better trends down at the popular and value price level in Spirits versus up at the very high levels that we would have been experiencing a lot of the growth two or three years ago.

If I could also just clarify, it seems like your advertising expense, you are just reallocating.

I am just trying to get a hold of the fact that you are not really pulling back on that front.

It is just how we think about timing through the year.

Is that correct?

Let me comment on that.

We do expect that a lot will depend on how the year unfolds that we may not spend in the A&P, just as we did not at an organic level, I think, in the first quarter, you would have seen three major factors.

One is timing, so we do think that the large percentage change in the first quarter on an underlying basis in part is due to spending that we will do in quarters two, three, and fourth.

So there is that shift within the seasonality.

I think that also, Don was very explicit about this as well.

That we are trying to shift from what I will call investments within A&P that maybe have longer term impact, things like media, and on-premise is clearly one of those areas, event marketing, life style marketing we sometimes call it.

Shifts from there to things that can generate more immediate sales impact, which is today a lot of the primary medium today, truly is the off-premise retail environment.

And you are seeing not just from Brown-Forman.

We expect that area to be very competitive and there are a lot more effort going into the retail environment.

So, when we do that, we consider that to be less costly outlays as well.

That does bring down your A&P overall.

The third is something that has been highlighted throughout the course of last year and it's continuing through this year which is some reallocation out of A&P and into other areas of the P&L.

Such as, Don mentioned too, which would be some into price promotions which would be captured in net sales as an offset to net sales and then the other one would actually be in cost of sales associated with things such as packaging improvements or special packs.

So we are trying to give you enough information so you can understand why it shifts around.

But I think year on year, we would expect A&P to be down slightly.

All right.

Thank you.

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

Davidson.

Good morning and congratulations.

Thank you.

Thank you.

I just did a quick scan back for a few years, if I did the numbers right, 26.2% operating margin was you know the best I have ever seen it for the Company.

If I try and take that apart a little bit, I see about 280 basis points coming from advertising, maybe 90 or so coming from gross margin.

Was there anything else in there, Don?

Was there a currency hedging benefit; you didn't mention that but you guys use options.

So is there a gain on that?

Yes.

One of the things you didn't mention that was in there was within the SG&A we are starting to see some of the benefits coming through of the reduction in force that we did before.

On the foreign exchange front, I think if you went back to last quarter when we were talking about our guidance for this year, we had indicated that we expected a full year impact at the EPS line on foreign exchange at that point of around $0.12.

And there have been some improvement there and now, as we look towards the full year, we are expecting there to be a full-year impact of somewhere around $0.06 to $0.08 at this juncture.

So $0.06 to $0.08 negative.

Right.

I assume then that $0.04 to $0.06 was in the 1Q.

That would be about right, yes.

I thought it was really interesting that you cited price mix improving with more emphasis on pack and price promotion and so on.

Am I thinking about those things -- I would normally think about them being at odds.

But is it possible that price mix improved and you also did more consumer promotion?

On the value added pack side of it, there was not a lot of value added pack activity in the first quarter but we are anticipating that there will be more value-added activity coming through the holiday period than what we saw last year.

Okay.

So more shot glasses or.

Yes.

Number of T-shirts.

There's a number of different ways you can do it.

We tend to do more in the, in the way, at least here in the US, and a number of places outside the US, we tend to do it more in terms of not giving away additional products but doing something in the way of some type of POS materials.

Got it.

As we think about you know your opening comments for ready-to-drink which, you know makes a strong statement, should we be thinking about that as a gross margin degradation over the period of the year if that accelerates, or how should we think about the emphasis on RTD?

You have to look at it in two different ways.

There's a way to look at it from the P&L but then there's also the way to look at it from the consumer standpoint.

And from the consumer standpoint, what I mean by that is, if you look at the gross margin per drink, a number of these ready-to-drink products actually have more attractive margins to them.

When you look at what the overall impact is on the P&L, you will see some, some margin degradation there.

Okay.

Terrific.

Thanks, guys.

Often depends on the size of the business, and one of the reasons --

Depends on the products and depends on the market.

yes, and one of the reasons we highlighted that was more of an example of some of the techniques and activities we are pursuing so we can prepare our brands to have their best chances at retail.

And RTDs, particularly for Spirit brands are so important because oftentimes, the consumption that occurs in the on-premise isn't as easily replicated in the off-premise.

So the RTDs really play a role there.

I wanted to use that as more of an example and it was a little more prominent than it has been in the first quarter results, so I think it helped to provide that example.

Thank you, Paul.

Thank you.

Your next question comes from the line of Lindsay [Druckerman] with Goldman Sachs.

Hey everyone.

I guess I was hoping for just a little clarification on some of the promotional activity we have seen in the whiskey segment, premium and super-premium and the Nielsen data for grocery stores.

First, just a few points, is that degree of price promotion broadly reflective of what you are seeing in other channels or is that worse, better, sort of in the middle?

When you say that you expect as we move into holiday for the promotional activities perhaps get more intense.

Is that from the current degree of promotions we saw in sort of June, July period?

And when you talk about being more flexibility, we broadly have not seen the same depth of promotion as we've seen from Diageo and Pernod on your brands.

So do you expect to be participating more deeply?

Well, I think, to answer your first question or observation.

I actually think that when you look at the syndicated data, that it tends to highlight some of the most, I think, aggressive programming, pretty big price programming oftentimes, you know contrasting say Nielsen versus NABCA data, or independent channel, which doesn't get picked up through some of these.

So I think you are probably out in the I think the -- it is probably emblematic of the most aggressive stuff, is the way I would say it.

As it relates to us, we are going to, we are obviously going to pay attention to what all our competition is doing out there, It is not just the -- really, I think the larger players say a Diageo, but it's also for every brand.

We have brands that compete with a multitude of companies.

And so we will be observant of that activity but we always also try to look at what's right for our business and for our brands at that time.

And it is always, I mean one of the great challenges is how do you balance out the need for competitiveness and relevance in the environment you are in, and do it in a way that is thoughtful enough that it actually builds equity or helps you with your long-term pursuit of building loyalty within a consumer franchise.

And I actually think we work harder at that than many.

I really do.

That's why we go to the lengths of explaining some of the techniques or tools or activities that we are pursuing.

We don't just blindly follow any single competitor on price.

Frankly, I just can't recall a time when we have.

But that does not give us absolution on being competitive.

We have to find ways for our products to be really competitive in that retail environment.

And it really is a brand by brand exercise.

We don't just say okay at Brown-Forman, everybody reduce prices and go follow the competition.

So we are -- I mean it is an ongoing process.

So things we were thinking a year ago, even six months ago or even six weeks ago change and our brands leaders and our regional leaders, not just in the United States but around the world, go through that balancing act and we look at it market by market and size by size.

I actually think it shows up over time, in quality results, I think if you work really, really hard at it.

So I feel pretty good about the results we posted here this mornings because of some of the work we have been doing on that.

But I also wouldn't go so far as to tell you every idea or plan we have for the next six or 12 months because it could get in the hands or become apparent to the competition.

We wouldn't want that to happen.

Okay.

And Paul maybe you can just comment on how you anticipate the tactical shift from investing in A&P that builds this longer-term brand equity, in media and sponsorships toward some of the nearer-term defensive strategy of investing off premise and some of the increased promotions.

As we come off of this cyclical bottom how you anticipate your sustainable sales growth for the portfolio will be impacted based on that.

I mean, that still remains to be seen, but -- so it is hard for me to forecast how it will unfold.

But let me give you one example that I think certainly helps me.

I'll give you an example on Southern Comfort, and this is the United States geography example.

If you think about here is a brand that is a very good on-premise brand, and where its occasions don't necessarily move as easily between the on-premise and the off-premise.

And we have known that and we've been working on programs and ideas to try to help Southern Comfort consumers remember Southern Comfort when they move from a bar or a restaurant to consumption in their home.

And let me just give you the alternative of two possibilities we might put forward.

One would be to put up a major media campaign to promote the mixability of Southern Comfort in the off-premise.

So think billboards or media, newspaper, something that would be very informative, create top-of-mind awareness but then also let me know about how to drink Southern Comfort in their homes.

That would be one alternative.

A second alternative would be to prepackage Southern Comfort in a prepared cocktail or a mixed format, place it in the retail environment, try to get it merchandised and promoted in a prominent way and really try to build that awareness at the point of purchase.

In the one hand, you have an up front media investment with the hope that it stimulates the awareness and trial and then the consumer response and then, they go into the store.

The other one, you are actually generating sales dollars creating the mixability and drink awareness and competing directly in the environment where the consumer tends to be the most.

So I give you that example as a conscious shift for example that one could make between media and off-premise promoting or RTDs.

In fact, that's exactly what we have done in the United States here in the first quarter with the introduction of the RTD line.

I give you that example as a helpful way to think that a shift from media to something else isn't necessarily low quality.

Actually we consider it to be higher quality, more efficient and more impactful.

Does that help?

Yes.

That's very helpful.

I mean that would be -- and there's many other such examples but that is one we particularly worked hard on in the last six to nine months.

The other thing that comes with it is efficiency is usually when you have a media campaign behind it, are typically up front production costs of the media, ad agency fees, sometimes research behind the media.

You get tons of efficiency if you are acting in a more direct way.

So I mean what that example is showing you is not only a shift toward impact but also ways you can be more efficient with your investment.

I guess my concern or my question related more towards the just pure, price promotional increases.

There's some of that as well.

But that would be an example that I just gave.

That wouldn't apply as much to that.

That would apply more to finding the right channels and the right frequency and the right depth to make sure that Southern Comfort is promoted by the retail.

In fact, frankly, I feel like on Southern Comfort, because it is a liqueur brand and has no what I'll call direct replacement, which many category brands do have.

Oftentimes its issues relate to a lack of trade support, that it isn't getting the kind of support, and we haven't provided the merchandising or incentive to one of our trade partners to promote it on an end cap or to give it a secondary display.

So, like I said each of these brands are very different.

When I move over to Jack Daniels, it has a lot of competition and does get promoted quite frequently by the off -premise channel.

But we also need to make sure that those more price conscious consumers on the Jack Daniels franchise periodically have an opportunity to buy the brand at what they consider to be an affordable price.

I mean I will end with just saying that we are not going to drop Jack Daniels, Southern Comfort or any of our brands' prices so deep as to want to go just arbitrarily build volumetric market share.

We are just going to be a lot more thoughtful than that.

Lastly, it is encouraging to hear that US inventory behavior has stabilized at the distributor and the retail level.

So as we get closer to lapping the big declines in inventory towards year end, should we expect for your shipments to grow faster than consumer sell through?

Well I think that will all depend on what the underlying consumer take-away trends because they all ultimately relate to that.

Or you know, particularly right on April 30, I guess they will deal somewhat not only with what the current trends are but what the forecasted trends are.

So, I think that remains an unknown.

Clearly, when you start to cycle it, it won't have -- if they remain stable, you won't have the reduction.

The degree to which they rebuild I think is an uncertain to us.

And I would say there's two different questions there.

I think the distributors act differently than the retailers.

I think as we get into the holiday season, it won't be surprising to see both of them stock their inventories along more normal levels.

And the question becomes what happens after the holiday season and do they go back to more rigorous financial discipline or not.

That just still remains to be seen.

Okay.

Thanks.

Thank you, Lindsay.

Your next question comes from the line of Ann Gurkin with Davenport and Company.

Good morning.

Hi, Ann.

As we look out to the second half of your fiscal year, I have a couple questions.

One, what are you looking for on-premise performance in the second half of fiscal 2010?

And then secondly, again, on this timing of promotion and advertising spending, the shift in that spending to the September, December time frame.

How do you look at that increase in spending versus top-line growth, are you going be able to accelerate growth enough to offset the step-up in spending?

Can you help me with that a little bit?

As we look forward and provide information as it relates to guidance, we have pretty much stayed right at the operating income line, the underlying operating income line.

And one of the reasons for that, obviously, is because of a lot of the uncertainty that we are seeing.

But more importantly, we really do want to keep the flexibility so we can continue to react as we see things unfold.

Part of it is to be able to react to competitive activities but also part of it is to continue to watch what the consumer is doing and where he is going.

So that if he becomes more responsive going forward, we can stay right there with him.

So in terms of the on-premise, it's hard to say where that's going to go.

We would like to see it solidify.

There is obviously a lot more brand building opportunities and activities that you can do to the on-premise than you can the off-premise, but it is just hard to say at this point.

At this point, you look for it to remain relatively challenging in the second half, the on-premise?

We don't see anything that would suggest that the trends we are seeing are going to change much.

Okay.

Then the step-up in spending versus top-line growth in the back half?

The what?

The higher advertising and promotional spending, the shift in that spending in the second half.

Right.

How does that compare to top-line growth?

How are you going to manage the two parameters?

Well, I think, just trying to do a little bit of the math from the first quarter and thinking about the second.

We certainly hope that what we invest behind, whether it is in the A&P or SG&A or in cost of sales, or in promotional pricing has the impact.

A lot of it will depend on how competitive it is in terms of the activities or actions of our competition and how the environment goes.

I think the bottom line on it if you are trying to forecast out is that we would expect, you know a lot less operating leverage in Q2 through Q4.

If you are trying to mathematically reconcile our guidance with the first quarter.

I just think we -- we will expect to have less operating leverage.

So I don't know if that from an efficiency standpoint, declares something that in the force out.

I was trying to read through your question a little bit.

But we don't expect to have near the degree of operating leverage in Q2 through Q4 that we had in Q1.

The overall US Spirits market, what is your outlook for volume for 2010, calendar 2010?

Well, we went in, the first quarter showed some moderation of the growth that had been, you know consistent for many years now.

So it has us, you know, at least cautious about what might happen in the holiday season and then for us through Q2 from Q2 all the way through to our fourth quarter.

I actually feel like, because of the profitability of the Spirits segment, and particularly the attractiveness of the premium segments, that I continue to be a believer that there's too many constituents, whether they are suppliers, distributors, retailers in the industry who are going to want to promote premiumization and should benefit from that promotion.

Now the consumer has to be there.

I will say that; the consumer has to be there for it and we will just have to see as the consumer's perspective on what they do with their discretionary dollar changes as they get out into the fall and into calendar year '10.

But I am still a believer that premiumization in time, in the right environment will be motivating not only to consumers but particularly, also, all the participants in the industry have good reason to promote more premium items.

Do you still think modest growth is a fair assumption, modest volume growth?

Yes, I think so.

We were low single-digit anyway and there's varying sources.

But a lot of it will depend more importantly even if you got 1%, 2% or 3% global growth, a lot of the devil is in the detail as to where is that growth coming from, and are people trading down, staying where they are, trading up.

So that I think that will play a larger role than whether Spirits globally grow at 1.5% or 2%.

Great.

And then for your 2010 outlook, do you have any price increases in that outlook?

Are you using that lever at all?

Consistently.

I mean, number one, you always get the benefit from price increases you may have taken in a prior period, as you lap the months where you didn't have it.

We have consistently looked for opportunities all over the world, brand by brand to take pricing.

What we are finding is that it's evident in the results is that at various times on particular brands at particular times, you also have to make sure that you may price promote some of it back, but net-net I think you saw in our results the first quarter, pricing was a contributor to net sales above volume.

So we are encouraged by that, and we will try to keep that trend going.

But we are also going to have to be responsive out in the marketplace depending upon what else is going on from our competition.

Okay.

That's great.

Thank you very much.

Thank you.

Your next question comes from the line of Kevin Dreyer with Gabelli & Co.

Good morning.

Good morning.

Just wanted to ask a little bit about el Jimador, it looks like the numbers were very good for that brand.

What was the source of that?

Was that pipeline fill?

Share gains?

Just reaction to the new packaging.

We have been talking about el Jimador for a little while now, just in terms of some of the changes we made going to 100% agaves and the package changes we made there, and it is getting traction.

It had started out very strong.

We have been seeing it improving over the course of the last several months.

We are seeing some nice improvement on it in Mexico as well, which is a very challenging market right now, generally, and particularly for tequila.

We do think we have got a nice tool kit in place.

We have got a lot of activities going on behind it.

And our belief is, is that it is resonating with the consumer.

It really is on fire in the US.

It is doing very, very well.

I think it is associated in part with the product and package change.

It is also one of those things when brand gets momentum, I think the system all the way through from Brown-Forman sales people all the way through to retailers like that and they will support it.

So, we are very happy to see it.

And it is like I think Don mentioned, we believe it to be one of the best performing premium spirit brands that size in the US right now.

It is also, while it is a very premium product, it's one of the best values out there in terms of 100% agave.

Great.

Great.

Maybe you could talk a little bit more about how Herradura is going and also just overall how do you view these brands since the acquisition?

Have they performed as expected?

Below?

Above?

Herradura is about -- this is actually a really important stage for Herradura.

It is launching some new packaging in the United States sort of as we speak, and we think that's a really important attribute.

Our lessons over the years have taught us that packaging can have a major impact on trajectory.

Now, having said that, for Herradura, it being one of the leading sort of super premium brands, and branded very much has an on-premise following.

The environment, I wouldn't say is as conducive for growing that brand right now as say el Jimador.

So I think that Herradura has some of its challenges associated with these business conditions that have unfolded in front of it over the last 18 months or two years.

We do have a number of initiatives that we think could help it and all of them have a very consistent theme of trying to make sure the brand can travel between the on-premise and the off-premise, a number of packaging type initiatives, some special packs.

So we are working it hard.

But relative to what we would have expected, we didn't anticipate the environment that has unfolded in front of Herradura.

But on the flip side, we didn't anticipate the kind of performance that is going on with el Jimador.

Similarly one of our RTDs down in New Mexico has done -- or down in Mexico has done very well, which is the new mix RTD over the last couple of years.

So as with these acquisitions, the environment changes on you and you get some both positives and negative surprises, and this acquisition is no different.

Okay.

And just in terms of use of cash flow for the Company, I mean debt continues to come down; I see you are still repurchasing shares.

Any thoughts on future uses of that?

Would you expect to continue to buy back shares, maybe increase that?

And in the current environment how would acquisitions play?

Yes.

I mean, I think best way to think about that, we have been very, very consistent about how we think about our cash flow and the uses for the cash flow.

We tend to be very shareholder first and foremost.

As we think about acquisitions, you know finding ways where our brands in our hands can create value for the shareholder versus when we look at the opportunity for either buying back stock or looking at our dividend or others ways of getting value to the shareholder.

That really hasn't changed.

So, as we continue to look forward, we will continue to look for those opportunities.

And where we don't see those things immediately, we will just continue to use the cash to continue to pay down our debt.

Great.

Thank you.

Thank you.

(Operator Instructions).

Your next question is from Thomas Russo Junior with Gardner Russo and Gardner.

Thank you very much for taking the call.

Two questions for Paul.

First one, Paul, how do you protect against the -- with the passage of time, the consumer price promotion that's being used tactically, flipping the unintended net lower price sort of permanently for brands whose equities you've built up over such a long period of time.

It is a broad question.

The second one Paul, and Paul, Australia where it seems like you moved in on the aftermath of the excise tax and seemed to have invested well and taken some share in that RTD there, just a little bit about the competitive dynamics in Australia.

And I guess that's it.

I mean I think the answer to your first question, Tom, is trying to avoid the pitfalls or the traps of -- which are well-known -- about price promoting.

I mean I think the basic answer is, don't do it too deep and don't do it too frequently.

Okay.

Do it in a way by making sure that you're continuing also to promote the premiumness of the brand in ways beyond pricing.

And so I mean we have our -- I think we have our hands very much on this.

We periodically, I recall at times, in particularly Jack Daniels' history, where you go through major price points.

And it's really interesting; that's a very different circumstance from the kind of competitive or consumer environment we are in today.

But it's not all that different in terms of the techniques.

You are going through the price point to raise the perceived and actual value of the brand but from time to time you need to be able to give price promotions so the people can buy it at what they would consider to be an attractive price point.

It is particularly true for I think Jack Daniels, this balancing act because of the broad franchise that is very loyal to Jack Daniels.

But some of that loyalty gets questioned when discretionary income is lower.

So we don't think people really leave Jack Daniels for good.

They just have fewer occasions where they can afford to buy Jack Daniels.

So you simultaneously build value in other ways beyond pricing.

You make sure your front line pricing continues to go up.

And then you find very effective ways to create the value, whether it is through periodic price promotions, value added packaging, and other vehicles in the marketing tool kit to create value.

So I think those are the responses to it.

Regarding Australia, I would say part of why we are doing very well down there goes back a few years.

I actually think since [Matt] took over (technical difficulty) had a huge impact on our ability to react and respond to last year's tax increase.

I mean our knowledge of the RTD business, our knowledge of that marketplace helped us to make the right decisions we believe a year ago, and position Jack Daniel's and cola down there to have the kind of year it did last year, which was a tough year on the profit side but we think we minimized the impact in the way we maneuvered in that market.

Then I think as we start to cycle some of that, we should have some benefit and a lot of that came through with these particularly soft comps.

We were going against pretty soft comps in the first quarter, but the business down there is very healthy for Jack Daniels.

I think a large part of it is the fact we have our own distribution down there and are alert to the marketplace and know what's going on, and made some good calls.

Great.

Thank you.

Thank you, Tom.

There are no further questions at this time.

Are there any closing remarks?

Thank you, Tasha.

For those of you planning your Labor Day weekend barbecues be sure to pick up our new ready-to-pour Southern Comfort Hurricanes or Southern Comfort Sweet Tea to give them a try.

We thank everyone for joining us and have a great weekend.

Thank you, all.

Thank you.

This concludes today's conference call.

You may now disconnect your line.