Brown-Forman Corp (BF.B) 2010 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Brown-Forman second quarter fiscal year 2010 conference call.

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

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

(Operator Instructions) Thank you.

Mr.

Marmor, you may begin your conference.

Thank you, Vernel.

Good morning everyone, and thank you for joining us for Brown-Forman's fiscal 2010 second quarter earnings call.

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

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

Paul will begin our call this morning with a few remarks about our performance, and Don will provide additional commentary on the quarter and our guidance.

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 under takes 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 the fiscal 2010 second quarter.

The results can be found -- or the release can be found on our website 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, 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 reason 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'll turn the call over to Paul.

Thanks, Ben, and good morning.

And happy holidays to everyone.

This morning we were very pleased to report first half results that we believe are excellent given the world's economic challenges.

Our people and our partners deserve great credit for producing a 15% growth in reported and underlying operating income at any time.

But they merit extra recognition for producing such strong results in the difficult environment of today.

Let me say thanks to each and every one of these professionals.

During the 12 months which ended October 31, we all witnessed a staggering, and for most of us, unprecedented decline in global economic conditions.

Since our second quarter's end marked roughly one year since the onset of the global economic crisis, I thought we should review our 12-month results ending October to see how we performed during such challenging times.

Of course, this was an unusual time in the modern era of business and accordingly, the manner in which Brown-Forman derived its results was somewhat unusual, as we relied more heavily on operating leverage to produce our strong results.

What was not unusual or unprecedented was that Brown-Forman's results, namely, our performance on key metrics such as underlying net sales, underlying operating income and return on invested capital, continued at or near the top of our industry competitive set.

For the 12 months ended October 2009, our performance reflected flat underlying sales, a 10% reduction in underlying operating expenses and a 10% growth in underlying operating income.

When paired up with tight management of both capital spending and working capital, this underlying growth helped drive an excellent 17% return on invested capital for the same period.

We believe this ROIC stands at the very top of our industry competitive set.

Our results were enhanced further by the quality of the balance sheet behind them.

At a time when financial stability could not be taken for granted, our conservative balance sheet and strong cash flows enabled us to increase the dividend by roughly 6% over the 12 month period ending October.

And during the same timeframe, we also repurchased $177 million of our shares at an average price of $45.71 per share.

Our consistent track record of providing liquidity to shareholders was acknowledged just yesterday when Standard and Poor's announced that Brown-Forman would be added to the S&P 500 Dividend Aristocrats Index, an index which recognizes S&P 500 companies which have increased their dividend for at least 25 consecutive years.

The external conditions of the last year required our company to be more adaptive, and I believe that our people responded well to this challenge.

Our performance over the last year benefited significantly from a heightened level of innovation and productivity as I believe we realized early the need to seek out greater efficiency from our operations while at the same time pursuing new sources of sales growth, particularly in the off-premise channel.

By more fully recognizing the potential of our assets, most notably our brands, our distribution networks, our production capabilities and of course, our people, I believe our company had its most resilient 12-month effort in a very long time.

Two of the most noteworthy examples of this is the performances of the Jack Daniels and el Jimador trademarks during the last year.

Over the last 12 months, the underlying net sales of the Jack Daniels trademark grew by 4%.

In addition to the modest growth of our flagship Jack Daniels Tennessee Whiskey, the growth of Jack Daniels RTDs and the super-premium Gentlemen Jack both played an important role in the trademark's underlying sales growth.

Given all that transpired this past year, we're proud of the progress we made around the world on our Company's most important brand trademark.

While quite a bit smaller than Jack Daniels, the el Jimador trademark is becoming increasingly more important to Brown-Forman's growth story.

Acquired as part of the Casa Herradura purchase back in early 2007, the el Jimador trademark encompasses both el Jimador tequila and the New Mix ready-to-drink brand.

In the last 12 months, the advance in underlying net sales of this trademark was attributable to the rapid growth of el Jimador tequila in the United States, a stabilization of the very large el Jimador business in Mexico, the expansion of el Jimador beyond the US and Mexico and a solid growth of the important New Mix business in Mexico.

Since we reformulated the el Jimador product to be 100% agave and improve the quality and global consistency of the el Jimador packaging, the brand has responded strongly, particularly in the United States where we believe it is one of the hottest premium distilled spirits in the country while continuing to have considerable upside.

I believe the Jack Daniels and el Jimador successes are great examples of how Brown-Forman is utilizing our valuable assets to improve sales performance and marketing efficiency.

Through their ready-to-drink line extensions, we believe both brands improved sales of the trademark while also sending important marketing messages about brand mixability and convenience at a time customers have been shifting more of their consumption to the off-premise.

Additionally, we feel the presence of these branded drinks in store and in home provide a broader overall brand name presence in the marketplace that is available through the full strength spirit brands alone.

In addition to their ready-to-drink line extensions, both Jack Daniels and el Jimador benefited from Brown-Forman's growing distribution assets around the world.

Several of the headline performances for the Jack Daniels trademark over the last 12 months came from markets where our company has improved our in-market presence and influence in recent years, such as Australia, Poland, Germany and Mexico.

Similarly, el Jimador leveraged our distribution strength in the US, the UK, Australia, Germany and Poland to help drive its sales growth over the same period.

The primary purpose of providing these trademark and distribution examples is to better illustrate for you how our company has achieved greater efficiency and effectiveness from assets that already existed and from investments that had previously been made.

Because of this, at a time when it was more difficult to incrementally invest, we found more resourceful ways to spur our sales beyond a simple increase in advertising or a reduction in price.

Before I turn it over to Don, let me conclude by expanding the horizon a bit beyond the last 12 months.

Since we will complete this century's first decade in a few weeks, we recently took the opportunity to review our ten-year performance metrics.

While this is subject to change as the last few weeks unfold, Brown-Forman's ten year compound growth and total shareholder return at the end of business last Friday was right at 10%.

And this compared quite favorably to the S&P 500's decline of approximately 1% over the same time period.

We consider this a stellar long-term performance, and it would not have been possible without the commitment of our long-term shareholders over the last decade.

We are immensely appreciative of their ongoing support.

Thank you for listening and now, let me turn things over to Don.

Thanks, Paul.

Good morning, everyone, and happy holidays.

As Paul mentioned, we believe that Brown-Forman has continued to perform at or near the top of the industry for both the last six and 12 months, for both underlying net sales and underlying operating income growth.

Our growth and underlying operating income has come from reduced operating expenses as a result of cost reductions, cost efficiencies and productivity improvements.

Operating expenses also appear lower due to the reallocation of some investments from advertising promotions to packaging innovations and value added packs that is recorded cost as cost of sales and additional promotional discounting which is a reduction from gross sales.

Given that, I'm going to focus most of my comments in what we've seen more recently in terms of our top line results.

Thinking about our top tier underlying net sales performance, at times it seems that some who follow our business have a hard time understanding how we outperform the industry's growth when we're not the biggest player.

So let me delve a little more deeply into the quarter's results, because I think they speak to the resiliency of our brands and geographies and the benefits we get through the portfolio and geographic diversification that we have achieved.

It's easy to try and oversimplify Brown-Forman.

I believe that in the past we've mentioned that roughly half of our sales are from Jack Daniels Tennessee whiskey and that roughly half of our sales are in the United States.

Using those figures, it seems that many people will just watch Jack Daniels sales in the US and think they have the Brown-Forman story.

We're far more diversified than that, so let's look at it a different way.

Looking at sales the last 12 months, Jack Daniels Tennessee whiskey in the US only represented about 20% of the story.

This past year, roughly 80% of our sales came from a combination of the rest of our portfolio globally and through our sales of Jack Daniels internationally.

So let me start with what represents this 80% of our business.

Look first at our international sales of Jack Daniels Tennessee whiskey, we continue to benefit from our broad international diversification where the brand shows slight depletion growth in the quarter.

For the quarter, very strong depletion growth continued in France and Australia.

Germany, Russia and Mexico also showed double-digit growth as did Poland, which we anticipate will break through the 100,000-case milestone in the third quarter.

Additionally, Japan showed nice mid single digit growth and Spain and Italy showed some modest depletion growth for the first time in quite awhile, although it appears that they have benefited from some retail restocking as consumer trends there remain a concern.

The important UK market was also up, although we believe this quarter benefited by some shifts in retail buying patterns.

Not surprisingly, we also had some countries that showed depletion declines in the quarter, for example, South Africa, which continued to struggle.

But overall, with the broad geographic reach of Jack Daniels Tennessee whiskey, the brand grew outside of the United States.

Moving to the international sales of the rest of our portfolio, depletions grew mid single digits led by strong performances of our premixed products as well as our tequila portfolio.

On the premix front, we continue to benefit significantly from our investment in ready-to -drink products.

In Australia, Jack and Cola continued to grow in mid double digits.

Germany, where we annually sell almost 300,000 cases of Jack Daniels ready-to-drink products also continue to grow at solid double digit rates.

In Mexico, where Brown-Forman leads the ready-to-drink market with over 4.5 million cases of New Mix, that brand grew in the mid single digits during the quarter.

This new mix growth led the mid single digit growth in our overall tequila performance outside the United States, along with significant growth of el Jimador and a number of international markets, including the UK, Spain, Poland, Canada and Australia.

These strong results were tempered by Southern Comfort in Finlandia, which continued to struggle with mid single digit depletion declines.

Turning to the United States and our broad portfolio beyond Jack Daniels Tennessee whiskey, results were somewhat mixed.

A number of our brands did well in the second quarter.

Finlandia Vodka, Early Times, Old Forester, Pepe Lopez, Little Black Dress, Gentlemen Jack, Jack Daniels Single Barrel, Woodford Reserve and especially el Jimador all showed depletion growth in the quarter.

While there is no doubt that there is continued concern about the level of trading down that we are seeing generally throughout the US, we remain encouraged about the future of premium and super-premium brands as depletions for Gentleman Jack, Single Barrel and Woodford Reserve all grew in the mid single to low double digits in the quarter.

In addition, a number of other premium and super-premium brands in our US portfolio, Sonoma Cutrer, Bonterra, Herradura and Chambord, while all still declining somewhat, showed improving depletion trends compared to the first quarter.

One milestone particularly worth mentioning, el Jimador in the US, which sells for about $20 for a 750, during the quarter surpassed 200,000 cases on a 12-month basis.

We're particularly pleased with the performance of this brand, as it continues to grow at significant double digit rates.

On the other hand, a number of brands continued to struggle in this period, particularly brands that are more dependant on a strong on-premise environment, which has especially affected Southern Comfort.

Finally, let's talk about that roughly 20% of our business that is Jack Daniels Tennessee whiskey in the United States.

Second quarter depletions showed a small decline and a slight improvement over the first quarter.

Encouragingly, roughly half of the 50 states showed improvement in their depletion trends, which included our four largest markets of California, Texas, New York and Florida.

The last three, Texas, New York and Florida, all showed growth in the low to mid single digits, while California showed a slight decline.

A couple of reasons why this is particularly encouraging, both Florida and California were early markets to suffer in the economic downturn and suffered disproportionately.

In addition, all four of these markets are where we have implemented our distribution alliance with Bacardi.

Nielsen and NABCA consumer takeaway data also confirmed these improving trends.

If you look at the broader Nielsen data that includes liquor stores en masse and club stores and beyond just food and drug and you combine that with NABCA sales data which brings in both on premise and off-premise in the control states, all of this information together represents about 55% of the total US spirits business.

Here, for the last three months, Jack Daniels Tennessee whiskey shows value growth as increased pricing more than offset slight depletion declines and some negative size mix.

Besides the benefits that accrued at Brown-Forman as a result of its brand and geographic diversification, a number of innovative brand extensions and a host of other creative activities contributed to our top tier industry performance in underlying the sales growth.

Throughout the first half of this fiscal year, our sales line benefited from the new distribution of Southern Comfort ready-to-pour offerings in the US and new ready-to-drinks in the UK, flavor extensions on Finlandia, new flavors of New Mix in Mexico, the launch of Jack Daniels and Cola ready-to-drink in Mexico and in the UK and the recent launch of Antiguo tequila in the United States.

While these introductions have contributed to our topline growth, it is still quite early to assess their ability to contribute to ongoing future growth.

Having said that, particularly with the ready-to-drink and the ready-to-pour products, we are pleased with the additional benefit from the increased consumer impressions all of this activity is bringing to the parent brands.

Besides the innovation around line extensions, as the businesses move more to the off-premise where the consumer directly interacts with the package, we have also been investing significantly in new packaging.

Besides the package upgrade on Gentlemen Jack, where we've been seeing the benefits for almost two years now, we have recently introduced package and label changes on Jack Daniels Single Barrel, el Jimador, Herradura and New Mix.

We also have a number of packaging projects underway for several other brands in our portfolio that we anticipate to have in the market by the end of this fiscal year or early next fiscal year.

We believe youth activities, in particular, can be very effective in creating added awareness, especially in the off-premise channel.

Finally, as we think about Brown-Forman's top tier performance within the industry, it's important to focus a bit on our ability to compete in today's environment.

During the past several months, we have seen dramatic shifts in consumer behavior, particularly, as it relates to the move from on-premise to the off-premise.

This, coupled with the increased sensitivity consumers appear to be having to pricing and the related trading down we have been seeing, we believe we have moved quickly to adapt to these trends.

We have already discussed some of the innovative moves we have made as it relates to line extensions and package changes.

But we have also made a number of other competitive moves as well.

This includes shifting appropriate advertising and promotion activities from the on-premise to the off-premise and focusing these activities more towards encouraging consumer purchase behavior.

We have also considered consumer behavior changes and targeting the timing of our media investments to try to talk to consumers when they are most receptive while at the same time taking advantage of recent opportunities to gain media buying efficiencies.

For example, comparing our second quarter media impressions for Jack Daniels to the same period last year, impressions increased by double digit rates in markets such as the US, Germany, China and Australia while the overall media spend in these markets was down.

We have also invested more in value added packs as a way to provide the consumer more rather than just reducing price.

And as we have mentioned before, we continue to be price competitive in very targeted strategic ways on a market-by-market basis, all with an eye towards increasing sales value rather than sales volume.

We believe all of this flexibility has served us well, and expect to continue to change our mix and investment levels if the conditions warrant.

At Brown-Forman, we tend to take a longer term view and rarely obsess on any one quarter's results.

That has not changed, even during these difficult times.

But with the rapid pace of consumer behavioral change our industry has seen for more than one year, we look to these shorter term results to help inform us on how to think about the future and what the longer term trends may be.

We do believe that the on-premise business will eventually stabilize and growth will return, although that certainly is not in sight yet.

We also believe that the consumer's interest in flavorful drinks and multiple drink choices will continue and that this trend towards mixability will continue to be an advantage for spirits.

And we believe that the long-term trend towards premiumization will also continue.

And we are encouraged by the trends we see on some of our high-end brands.

But in the meantime, we continue to be watchful about some of the other trends we're seeing, particularly in the United States where the on-premise continues to weaken, consumers seem to be trading down at a faster rate and the marketplace seems to have become more competitive with more price discounting.

No doubt there continues to be a lot of uncertainty about consumer behavior, particularly as it relates to this holiday season.

But even with these shorter term concerns, our results show that not only does the broad diversification of brands and geography bring a lot of resiliency, but we believe our results also show that we are well equipped to meet these challenges just as we have consistently met the challenges of the past.

And while we have no clear crystal ball on how consumers will respond over the next few months, we continue to have confidence in our belief that with he have the wherewithal to continue to perform overall in the top tier of the industry.

So with those comments on our business generally and on the quarter specifically, let me turn the attention to the outlook and how we are thinking about the rest of the fiscal year.

This has probably been one of the more complicated years in a long time in which to compare results.

Stepping back for a moment, last year's first half had relatively strong underlying net sales growth and flat operating expenses leading to a relatively strong underlying operating income growth.

In the second half of last year, where the impact of the global economic downturn went into full swing, we had soft underlying sales growth but significant decreases in operating expenses led by cost reductions and productivity gains, but also a significant reduction in performance-based compensation expenses in the third quarter of last year.

This all resulted in lower, but relatively strong, and we believe top tier performance and underlying operating income growth for fiscal year 2009.

So coming into this year, for the first half, we had more difficult top line comps and easier operating expense comps.

For the last half, we anticipate the reverse.

Easier top line comps, but much more difficult operating expense comps.

Add to that the fairly dramatic swings we have seen in currency exchange rates, which further complicate the comps on a reported basis.

With that said, we increased and narrowed our fiscal 2010 earnings guidance today to a range of $2.95 to $3.15 per share.

This updated guidance reflects our better than expected sales performance in the first half of the year, our excellent management of operating expenses and our confidence about our ability to operate effectively in what remains a competitive and uncertain environment.

As mentioned before, we expect to continue to perform the top tier of our industry this year.

This guidance reflects some modest improvement and second half underlying net sales trends with full year underlying net sales trends -- I'm sorry.

With full year underlying net sales performance that is expected to represent flat to modest growth.

It also assumes that underlying operating income will be down in the end of the second half of the fiscal year as we cycle against the adjustment and performance based expenses last year as well as the significant operating expense reductions recognized in the last half of last fiscal year.

Net-net, we inspect a slight improvement underlying operating income growth when compared to the company's original guidance in early June.

Our current expectation is for underlying operating income to grow in the low to mid single digits for fiscal 2010.

Recall that the original guidance of $2.60 to $3 included a $0.12 unfavorable exchange rate variance.

Based on the recent exchange rates, the current guidance assumes our results will have a slight year-over-year benefit from foreign currency.

In terms of our tax rate, we expect our effective rate for the full fiscal year will be in the range of 32.5% to 33%.

Our guidance also assumes approximately $0.04 per share benefit from the share repurchase program authorized last year, which expired last week on December 3.

A quick summary of that program.

Over the past 12 months, we repurchased approximately $196 million worth of class A and class B shares.

The average price for the shares was $46.06, more than $5 less than the most recent closing prices.

Finally, there are a number of distribution contracts, primarily in Europe, that expire at the end of our fiscal year.

We continue to evaluate alternatives and are in the midst of various discussions and considerations and so do not yet know what, if any, potential one-time impact any changes might have.

So at this juncture, we have not included any estimate in this guidance.

In summary, for those of you that like to reconcile things, this guidance has been updated for foreign exchange at recent spot rates in order to reflect less uncertainty for the year as a result of completing the first half.

It reflects top line results above our initial expectations, but still acknowledges the uncertainty that continues, especially related to the important holiday selling period.

And, finally, this guidance recognizes our expectation to continue to perform in the top tier of the industry.

At this point, we welcome any questions.

Thank you.

(Operator Instructions) We will pause for just a moment to compile the Q&A roster.

Thank you.

Our first question is from the line of Lauren Torres from HSBC.

Good morning, everyone.

Good morning.

Don, just to clarify, as far as the guidance, you mentioned the FX impact now is a slight benefit.

Is that what you said for the year?

That's correct.

Okay, and that's actually better.

I think last quarter you said that was 6 to 8, correct?

So you went from 12 to 6 to 8 to now, slightly a positive?

Yes, that's correct.

Okay, just a clarification.

And secondly, I guess broadly speaking on your expense outlook for the second half of the year, obviously, that has been a benefit for you in the first half, and you were aggressive also in the second half of last year.

Any guidance how we could think about what you'll be doing, both on the advertising line and the SG&A line in the second half?

How aggressive do you expect to be more with respect to advertising?

And also, on the SG&A line, is there room here for reductions, or because the comp is so tough that we shouldn't expect to see any improvement on that line?

Yes, on the advertising expenses, and I think we mentioned this a little bit in the first quarter as well, there has been some timing shifts on all of that.

We are expecting that we'll be seeing more A&P activity toward the last half of the year, particularly during the course of the holiday period.

On the the SG&A front, we will probably be seeing something in the way of increases in SG&A over the last half of the year, because those comps are so difficult.

And so when you think about in total -- and when you look at the total operating expense line, that is what is kind of bringing us to the conclusions that I talked about in terms of low to mid single digits and operating income growth for the whole fiscal year.

And if I could ask just one more question, trend-wise, I guess I'm a bit surprised to hear about further trading down and further sensitivity to pricing.

I guess within the consumer world we're hearing about maybe modest improvements and sentiment.

Is this something that you think is more reflective of the categories that you're in or the channels that you're skewed to?

Because I guess I'm just trying to get a sense of how much worse these trends over the last couple months have gotten, or what you've seen over the last several months.

Yes, I think part of it is the time that we're in right now.

The holiday period is always a very competitive period.

And so you hear a lot about different additional discount programs that might be out there.

And so that gives us a little bit of pause for concern, although it's early yet.

We'll have to see how the holidays end up when it's all said and done.

I think on the trading down front, it is particularly being seen in the US, although we see it in a couple other countries outside the US as well.

And within the US, when you follow kind of the napkin and the Nielsen data, it continues to show stronger growth at the lower price points in our business.

You're starting to see a little bit of improvement at the higher end as well.

It's kind of in the middle where there seems to be a little bit of pressure.

And so hopefully, we'll be through that soon.

But that is pretty much the data that we're looking at, that is giving us some pause for concern.

The way I might answer that Lauren, is versus those folks who you might be referencing that are seeing a reversal of prior trends, we're seeing more stabilization, I would say, of the trading down phenomenon.

But it hasn't yet turned the corner and started to go back towards better trends for the most premium price brands versus the value and popular price.

Okay.

Great.

Thank you.

Thank you.

Sure .

Our next question is from the line of Tim Ramey with DA Davidson & Co..

Good morning.

Congratulations.

Thanks, Tim.

Just thinking back, you mentioned el Jimador just passed the 200-case level in the, I think you said in the US.

Can you remind us with that was at the time of the acquisition?

That must have doubled, I think, is that right?

Or close to double?

I tell you, it depends.

There is a lot of transition that was going on with the brands and all of it is in the two primarily countries, even outside the US and Mexico.

But we would estimate sort of at the consumer level that the brand was somewhere in the 125,000-case range back a couple years ago.

Okay.

And just, you've done a great job growing the ready-to-drink business, but there is something that just continues to concern me, that that business isn't as good a business as your high end spirits business.

Do you view that as a defensive adaptation for the times, or is in the shape of the spirits business to come?

I would go so far as your last statement, that it's the shape of the spirits business to come.

Actually, if you had that expectation, then I could see why you might be concerned, because I think it's -- probably bringing a balanced view to it would help.

I actually think there is a perception that because these brands are in a more -- are in a single serve format, that they therefore are trendy.

And our experience, if we just peg the primary markets where we have ready-to-drink entrance, we have been in existence successfully in those markets for probably on average in excess of a decade.

The Australia business goes back now roughly around 15 years, I think, Don?

And the US business, where we've got a decent presence, is a 20-year-old business.

The Germany business now is probably more like a six to seven year-old business.

Mexico, the ready-to-drink brand down there, New Mix, has been around for quite some time.

I know because we've seen a lot of volatility in the trends that you see, particularly those that break out and get to very high levels then they drop, it gets that perception.

But we tend to think of them more -- if you market them more as extensions of your parent brand versus free standing trendy drinks, I think they have a better chance of endurance.

On the profitability side of it, you have to remember that we tend to convert these to their -- how useful they are in the assets that we have such as whiskey or vodka or tequila, whatever happens to be the expression.

And you do -- when you convert the overall business, you can use conversion rates depending on the project, from anywhere from 8 to 10 to 1.

And when you do that and then multiply that also times the gross profit per case, they become very attractive alternatives and hold up very well versus spirit brands.

So in addition, there is not typically as much aged inventory in warehouses behind them.

So I think there is a lot of benefits to them.

You have to be managed carefully and thoughtfully like almost any business.

But I think on some level because of the fluctuation in trends for some of the leading brands at various times, they've gotten a bad reputation for being too trendy.

And I would just add a little bit to that, Tim, in terms of how to think about it.

In most of the markets where we're actively involved in this, the offerings that we're giving tend to be the way that the brand gets consumed generally.

So for example, in Australia, most of that business, predominantly Jack and Cola, which is very, very prevalent throughout there, and so what happens is it's a convenient form of drinking the beverage in a way a consumer likes to drink it, and it gets us into new drinking occasions, and particularly, more beer drinking occasions we don't necessarily get into otherwise.

So while some have gone after this market more in the trendy way that Paul is talking about, ours has really been more concentrated in taking the parent brand and the usage it has today and giving it to consumers in a convenient way.

Perfect.

Thank you.

Thank you.

Our next question is from the line of Lindsay Mann with Goldman Sachs.

Good morning, everyone.

Hello, Lindsay.

So you guys mentioned some of the strategic shifts that you have taken on in order to help bolster the bottom line during the recession, during the downturn and clearly, you've had some nice benefits in terms of you underlying profit growth.

But whereas so much of the very, very robust growth that you saw in the early part of the decade came from things like premiumization, the badge of the brand, on-premise and all that sort of stuff, can you talk about how things like investing in promotional activity, value packaging and even the RTD expansion, whether that dampens your ability to recover when we come off the bottom, whether the growth outlook -- whether the equation for growth would be the same as it was when we started that very robust period.

Well, my view on that Lindsay, is that will depend more on how the environment recovers more so than what we've been doing in the interim.

I actually think what we've been doing will prepare us even better for any recovery, because of the fact we've kept our brands relevant during a time when -- in the absence of things like ready-to-drinks and special packages, that our brand trademarks could have become less relevant.

It's really just a shift in course that I think we've made to try to be where the consumer is.

And in this case, the large, sort of within the industry trend we refer to is the shift from on-premise to off-premise.

As Don mentioned, with the media spending, particularly here in the last several months is, while down, the impressions are up.

So I feel like from a total marketing program in trying to meet the needs of our consumers today, we're doing the right job for today but also positioning the business for any kind of recovery.

And depending upon how that recovery unfolds, we'll make what we hope are the right adjustments to continue to stay with the consumer.

So I don't have even a minute concern that we're doing something today that would hurt our chances in the future or would hurt our ability to participate in the future recovery.

Okay, great.

And you mentioned some of the promotional activity, and we see it in the measured channel data really heating up into holiday.

Could you give us just a bit more color on whether it would be geography or segments or parts of the market and the way in which that is playing out?

Do you want to take that, Don, or do you want me to?

Sure.

There is no doubt that we have been seeing more and more pressure coming in from, particularly on the pricing side.

We just looked at some of the Nielsen data that came in as of November the 14, and it's interesting.

If you look at the top five suppliers, two of the largest have really taken down their price mix, anywhere around 2%.

And that would be with Diageo and Pernod, whereas the other three, Us, Fortune and Bacardi have continued to try to find ways to create additional value through the pricing mechanism.

So I don't think there is any doubt that coming into this holiday season, pricing was going to be more of an issue, particularly here in the United States.

But having said that, I also think we'll be able to find the right ways to compete.

Everyone is kind of out there with their coupons, we're out there with our FSIs.

It's a typically competitive period anyway.

I think we'll end up finding ways that everybody will all get through it.

But there is no doubt that we're starting to see some pricing pressure out there.

And then last year, there was some issues around third and fourth quarter, inventory destocking hurt you.

And as we approach lapping that, is there a chance that your shipments will actually get a boost as we lap that sort of destocking that happened, or have people permanently taking inventories down to even below those levels.

There is potential there for us to see a boost coming into the early part of next calendar year as we lap against those -- against that same period last year.

There is no doubt.

And there was both through that period that we saw from, really from last year's end of Q2 all the way through the end of the year, we saw examples, and they were in our numbers in the last half of not only distributor, what we call distributor inventory reductions, but it was also the most prominent period for retail inventory reductions as people dealt with the financial crisis.

So I think there is a potential on both ends that we could be a beneficiary against those soft comps.

Okay.

Thanks very much.

Sure.

Thank you.

Our next question is from the line of Ann Gurkin with Davenport & Company.

Good morning.

Hey, Ann.

In your comments, you -- if I heard it correctly, you believe we'll see a return to premiumization in the category.

Do you think we'll reach levels we saw before the economic downturn, or do you think it will be a change in the mix or the level reached?

Well hopefully, over time, we'll get back to that point.

I think it will probably be pretty gradual.

I mean, I think part of what is boosting our confidence -- when we've looked at some of the data that that we've seen recently, two of the categories that seem to be doing particularly well at the higher end is whiskey and tequila.

So it serves us particularly well as those trends to continue.

But I do think in terms of some of the premiumization that we saw in the past, to get back to those levels, it's going to take some time.

And I'll add to that that I think that Don's comments, I think are right on the money as it relates to most of the developing world.

I actually think that in the emerging world, often where people use the brick acronym or whatever, that the degree of premiumization may be even stronger than what we would have experienced in places such as the United States or Europe over the prior ten or 20 years.

As those economies grow and the middle classes emerge and they have more access to disposable income, I actually think premiumization, as you refer to it, or trading up should become a stronger phenomenon in those countries.

And in terms of where the demographics are and population growth, those should be very attractive markets as the global economy continues to recover.

And they can come back faster in some cases in say, the references we often make to the US market or maybe western Europe.

Okay.

And do you have the confidence you can raise prices on your portfolio in the US over the next 12 to 18 months?

Sure, on various brands and various places.

As we always say, I think in the aggregate, we sure are going to look for those opportunities.

It will depend somewhat on the degree of competitiveness in each market from price discounting and things like that.

But I think the last 12 months, as Don referenced, we've been able, in one of the more difficult environments that I can ever recall, to be able to take front line prices up and then hold on to most of the increase, so -- on our key brands where we do have real pricing potential.

So if things improve, we would hope to be able to do that or do better.

So is positive price mix incorporated in your 2010 outlook?

For the remainder of the year, it should be.

Yes, just a continuation of it, yes.

That's right.

And then you mentioned you have distributor contracts coming up for renewal in Europe.

Are you looking at changing your strategy on how you go to market in those countries?

Or can you give us any other detail on that?

It's just too early.

We're still in really an evaluation and consideration stage.

But wanted people to be aware that it could have the potential by third quarter fiscal year end to have an influence on our reported earnings.

But it's just too early right now to know what impact that might have.

You may make some changes?

We don't know.

Don't know.

Okay.

We truly are in the evaluation and can give a consideration to what we're going to do over there.

And it goes a little bit beyond Europe, but it's mostly Europe.

Okay.

And then Don, can you give us a little bit of update on what we should use for the tax rate and capital spending for fiscal 2011?

For 2011, let me take that.

I'll take 2011.

I would use a similar rate as 2010.

So 32.5 to 33 is fine there.

And capital spending, I don't see it increasing significantly from this year's level.

So I believe the $40 million to $50 million is appropriate to assume for next year as well.

That's great.

Thank you all.

Thank you.

Thank you.

(Operator Instructions) Your next question is from the line of Thomas Russo from Gardner, Russo & Gardner.

Hello, all.

Hi, Tom.

Hi, hi.

First, just a quick question on the ready-to-drink for you, is any of that still malt based, or are you going back to the original spirits in these offerings?

The vast majority of it is spirits around the world.

The one exception has been in the United States where the Country Cocktails brand, which is actually one of our first, if not our first ready-to-drink expression, changed several years back to malt.

But the vast majority of it is spirit based.

Okay, good.

Don referred to a price point on Jimenez, I think it was, of something like $25, and it raises a question in general.

In North America, how are you positioning Jimador and Herradura, and what is your sense of how the brand DNA is evolving?

What is the message that consumers see either on-premise or off when they reflect across the tequila categories as to why to buy both -- either of those brands?

Anything in particular you're succeeding at?

I might talk a little bit.

Don, you might fill in here.

I think that we genuinely have a tiered pricing portfolio strategy for our entrance in the United States, and it goes everywhere from one of our products actually below the el Jimador price that's been with us for a long time, which we think has a little bit better price fighting capability, which is Pepe Lopez.

And then el Jimador hit the sweet spot for us at around that $20 price point, so it's being very premium priced.

And at 100% agave meeting one of the needs of the US marketplace but also capturing what we think is a wonderful opportunity for the US hispanic audience to consume el Jimador in America whereas previously, it was less available as Mexican-Americans sought it out.

And then two of the other large -- of course you mentioned Herradura, which is the most premium priced.

But even in between there is a brand that we're beginning to test in the United States, which is Antigua, which is a pretty large sized brand down in Mexico, which is between the el Jimador and Herradura price points.

We have got quite a bit of excitement about it fulfilling the same role that el Jimador is right now in terms of meeting the needs of Mexicans in America who are seeking that brand out.

And of course, Herradura has been in the country for a long time.

Has been under distributed, in our view.

And right now, it's got the same conditions and issues that are confronting a lot of brands up above $40 a bottle.

They're skewed to the on-premise.

But we're doing a pretty good job, I would say, with the new label launch, which went out in the United States in September, of getting added points to distribution.

And we're starting to see a little bit of pickup in the brand, which is really good, despite the fact that the conditions aren't great.

So we sort of run the gamut from $10 to $15 at the low end, all the way up to above $40.

And it was part of a tequila strategy we had when we purchased the company.

Thank you very much.

And then the Herradura, of course, has the three or four price points under its own label?

It actually does, depending on the expression.

Actually, they all will have slightly different prices based on whether it's the Blanco, the Reposado or the Añejo expression.

Good.

And then the incentive comp comparison that affected the second half of last year, how it will express this second half?

Is it that you're going to invest more incentive comps this year because of year-to-date?

Tom, can you clarify that?

We went out on it for just a minute.

Sorry.

I thought that the -- just a reference to the incentive comp comparisons in the second half.

Last year, I gather they were lower and hence, provided you with operating income lift.

This year, will they be higher?

Is that what we should expect?

Yes.

This year you would expect them to be back closer to normal.

Let me just reiterate too or explain just a little bit, Tom, just to remind you.

Last year, through the first half, our performance was very good, as Don alluded to in his script.

In the last half, particularly after the holiday season when the economy went -- began to go down, that's when our business began to suffer too.

And we adjusted our incentive comp in that quarter.

And recall that our incentive comp is based on performance, how we're performing and what our expectations were for the year.

I see.

So that adjustment we made last year was to take that into consideration.

How we're performing this year, as Don alluded to, is based upon, again, on our performance and it's reflective in our guidance that it will be a higher number than it was a year ago.

Perfect.

Thank you.

Tom, one of the reasons it was so strong last year is that third quarter, and to a lesser extent, the fourth had to bear the entire brunt of the seasonalization of that expensing because the first half, we wouldn't have envisioned it in the first half.

And then whereas this year, we've been able to plan for it a little more through each quarter.

So the delta is going to look pretty significant as we get into the third quarter.

Thank you.

Last fall, it sounded like Finlandia well in North America.

We have heard about other vodka brands are really competitively priced and doing extremely well.

So how were you able to get Finlandia to grow, perform well against some very sharp price discounting?

Tom, we're in the -- we're actually in the process of repositioning Finlandia in the United States right now.

And so we have taken the price down on a permanent basis, but we've taken it to a spot that we think is, probably represents kind of where the consumer sees the greatest price value relationship.

And as a result of that, that's where we're seeing some of this nice growth coming through the United States right now.

Thanks, guys.

Thank you.

Thank you.

And I'm showing there are no further questions at this time.

I will now like to turn the call back over to Mr.

Marmor.

Thank you, Vernel.

We don't have any closing remarks today.

But as you complete your holiday shopping, remember your loved ones would be thrilled to receive Herradura or Jack Daniels Single Barrel or any of our other fine products .

So thank you, everyone for joining us, and happy

Thank you all.

Thank you.

Thank you for participating in today's conference call.

You may now disconnect.