Brown-Forman Corp (BF.B) 2011 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the first quarter fiscal 2011 conference call.

(Operator Instructions).

Thank you, Mr.

Ben Marmor, you may begin your conference.

Thank you.

Good morning, everyone, and thank you for joining us for Brown-Forman's fiscal 2011 first quarter earnings call.

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

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

John will -- Don will begin our call this morning with a few remarks about our quarter, our -- our guidance and recent trends.

Paul will provide additional commentary.

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

Numerous risks and uncertainties may cause actual results to differ materially from those anticipated, or projected in these statements.

Many of the factors that will determine future results are beyond the Company's ability to control or predict.

You should not place undue reliance on any forward-looking statements, and the Company undertakes no obligation to update any of these statements, whether due to new information, future events, or otherwise.

This morning, we issued a press release containing our results for the fiscal 2011 first quarter.

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, and Form 10-Q reports filed with the Securities and Exchange Commission.

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

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

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

Thanks, Ben.

Good morning, everyone.

This morning we issued our fiscal 2011 first quarter earnings release, and reaffirmed our expectations for the fiscal year.

In many ways, our first quarter is a continuation of the story we have been seeing over the previous six months or so.

Looking at the first quarter, we believe the key takeaways are the following.

First, we believe the year is off to a good start, particularly, as it relates to our net sales performance.

Once again, our geographic diversification played an important role in our results.

Our international sales performed quite well, with underlying sales up 8%, while our US business was a little softer than expected.

That netted to a 3% organic growth rate, again, not dissimilar to our recent trends.

If you look at the last four quarters, including this last one, on an underlying basis, our quarterly sales results showed a 1% decline, then 2% growth, then 3% growth, followed by this quarter's 3% growth.

So in total, considering this environment, we continue to be pleased with the direction in our sales trends.

A second key takeaway is that our operating expenses were about where we expected.

On an underlying basis, advertising expenses were up about 2%, underlying SG&A was up 12%, primarily due to planned strategic investments, concentrated in the first part of the year, and incremental pension expense that we noted in June, and that we will see throughout this fiscal year.

A third takeaway, is that foreign exchange hurt us during the quarter.

But having said that, exchange rates improved throughout the three month period.

So looking forward, based on recent rates, assuming they hold throughout the rest of the year, the overall impact is not as large as we originally expected.

If you remember during our conference call in June, we said at that time, that we expected our 2011 earnings per share to be negatively affected by $0.15, based on the exchange rates at that time, and that this effect was included in our guidance.

At recent rates, that impact to full-year EPS, compared to a year ago, is now projected at about a $0.05.

The last key takeaway, while we continue to be cautious with all of the uncertainty in the marketplace, we confirmed our full-year guidance of $2.98 to $3.38 per share.

This recognizes no change in our underlying operating income guidance of mid single digits.

And so, adjusting for the change in our foreign exchange assumption noted above, that puts us towards the upper half of the range, at this early stage of the game.

Let me spend a few minutes talking a little bit about the economic climate and the competitive environment, and talk in a little more detail about our SG&A expenses in the first quarter.

In June, when we did our year-end call, and spoke about expectations for fiscal 2011, we said at that time, that we were hoping for an improved economic and consumer climate, that we were beginning to see some stabilization in the on-premise, that trading down was abating some.

And that we were hopeful the environment would become conducive to increased pricing.

So far we have not seen the improvement we were looking for, and much uncertainty remains.

The economy continues to have a clear impact on the consumer environment.

Particularly in developed markets, consumer confidence is low, savings rates have increased, and unemployment remains high.

The on-premise channel continues to be a challenge in many markets.

Looking more closely at the US, spirits continues to grow at low single digit rate.

Using NABCA data, some trends we were seeing in the quarter include a weakening in both the on and off premise channels, popular price brands, those priced between $10 and $15 gained share, as did brands priced higher than $25.

Innovation or new products, contributed about half of the market's growth.

This innovation seems to be broad based, and a good part of this innovation is coming from some of the smaller, private companies.

And finally, performance seemed to swing with changes in consumer sentiment.

Outside the US, the performance of the spirits market is mixed.

Emerging markets, particularly in Latin America and the Asia Pacific region are the healthiest.

Europe had some relatively healthy markets, while other European countries continued to struggle.

Within this difficult global environment, we are pleased with our net sales growth of 1% on a reported basis, and 3% on an underlying basis.

As we said in our earnings release, our sales growth was broad based.

We made gains in several international markets, more than offsetting sales declines in the US.

These gains were in both developed and emerging markets, from Australia, Germany, the UK, Canada, and the travel retail channel, to Mexico, Turkey, Russia and India.

We continue to watch the consumer closely, and work to keep our brands top of mind in this uncertain environment.

Moving on to the competitive environment.

In June, when we provided our earnings guidance for fiscal 2011, we said, we are planning for fiscal 2011 to remain competitive, in terms of increasing prices, but are hopeful that discounting in the industry will be less pervasive.

We had also heard a lot of public commentary from some of our competitors, about how they were going to start raising prices, even at the expense of volume.

During our first quarter, from the syndicated data we reviewed, it appeared that the pricing environment remained competitive.

Still, we maintained a flat price mix overall during the quarter, as higher volumes drove our underlying net sales growth.

As we look forward, we'll continue to seek opportunities to raise our prices.

But we expect the pricing environment will remain very competitive.

Let me speak for a moment about innovation, a key theme in the competitive environment, particularly in the United States.

NABCA data reveals that new products are playing a key role in incremental volume to the spirits category, particularly over the most recent three and six month periods.

In fact, new products contributed more than half of the US spirit category growth during our last quarter.

Interestingly, over half of these new products are premium priced or above.

The NABCA data shows that most suppliers benefited from new products boosting their sales trends.

We expect this to continue.

We are also participating in the innovation trend, as we have introduced a number of new package changes in the quarter, as well as new line extensions, most notably, Southern Comfort lime and Chambord Vodka.

However, while we expect this innovation to contribute to our sales growth, the bulk of our first quarter growth is from our core portfolio.

Moving on, to adding a little more color around our SG&A expenses in the quarter, as I mentioned, our first quarter SG&A increased 12%, on an underlying basis.

On a reported basis, SG&A grew 13% when compared to the prior year.

There were several factors that contributed to these increases.

First, the year ago comparable period was unusually low, following our reduction in force, our early retirement program, and extremely tight management of discretionary spending.

Second, this year's SG&A was affected by some front-loaded expenses.

These expenses range from market and consumer research studies to set up costs for our own route-to-market operations in Germany and Brazil.

Also affecting the growth rate of our SG&A, was an incremental $5 million pension expense which will be with us for each of the next three quarters.

Our full-year plan anticipates that the SG&A growth rate will moderate, particularly in the back half of the year.

So net-net, I would not read too much into the quarterly figures, in estimating our full-year SG&A expense.

Excuse me.

I believe this fairly summarizes our first quarter results.

In closing, based on our underlying sales results, and our expectations for total spending over the balance of the year, we are reiterating our expectations for fiscal 2011, and affirm our guidance of $2.98 to $3.38 in earnings per share for the year.

Now let me turn the call over to Paul, for some additional comments.

Thanks, Don.

I'll talk just briefly here, supplementing what Don said.

And I want to reiterate that, the sense that we think we are off to a good start overall, as Don mentioned.

And I'm particularly pleased with the start in our international markets.

Let me mention just a few Company-wide highlights, I think, that caught my attention.

First, was that the Jack Daniels family, overall, was off to a nice start with plus 4% constant currency net sales.

As you might recall from either our June call, or if you tuned in to our annual shareholders meeting, the continued expansion of the Jack Daniels family, and our international business overall, are important pillars in our ten year strategy for the Company.

We are also pleased with the performance of our leading tequila brands most notably, el Jimador and Herradura, building nice momentum in recent quarters, both of these brands, and el Jimador continues to do very well in the United States.

Also super premium brands continue to do well, pretty much across-the-board at the Company, with Gentleman Jack, Jack Daniels Single Barrel, Woodford Reserve, Herradura, Chambord, Sonoma-Cutrer, and Bonterra, all showing positive trends through the quarter.

The development of our tequila brands, and these super premium brands are an example of another one of the important pillars in our ten year strategy, which is our ambition to grow the rest of our portfolio faster than Jack Daniels.

Now, largely due to the softness in Southern Comfort's recent performance, we are not currently achieving this ambition.

However, the development of these brands over the long-term is important to Brown-Forman's long-range strategic ambitions.

I would like to cite the performance of our ready-to-drink brands in the quarter, which continue to do well.

And are off to just a super start.

And, they of course, are helping the growth rates of the Jack Daniels and el Jimador families overall.

Our soft spots for the quarter are Southern Comfort and the US in general.

And we'll, obviously, be focusing on improving performance through the balance of the year.

Just to reiterate something Don said it is still very early in our fiscal year and while we remain concerned about the -- just like everybody else, about the global economic conditions, and some of the heightened competitiveness that is in the marketplace, we are really pleased with the good start to our fiscal year.

With that, we are happy to take any questions that you might have.

(Operator Instructions).

Your first question comes from the line of Judy Hong with Goldman Sachs.

Thanks, good morning.

I guess, my first question is just in terms of the US market, and the softness that you have alluded to -- maybe just get a little bit more perspective on that.

First from an industry perspective, it sounds like, you guys sound a little bit more cautious than some of your competitors, just we've heard anecdotes of on-premise actually getting a little bit better even in the recent months.

So I'm just wondering if there is a little bit of a disconnect, in terms of what you are seeing from an industry perspective, versus some of your competitors?

And then secondly from your share performance perspective, I wanted to just get a little bit more granularity on how much your share was up or down in the second quarter in the US, and what you are doing to improve that share trend going forward?

Yes, Judy, this is Don.

In terms of the on-premise environment, I think we said in June, that we were starting to see some signs of stabilization.

And we did start to see some early signs of that in the May and June period.

July kind of went in the other direction, and I think it just kind of shows a lot of the -- how quickly consumers are reacting to the environment that they are living in today.

And the quote that I referenced was coming out of the NABCA data for July, where you can actually get a read on what is happening between the on-premise and the off-premise environment.

So, what all may be going on there, it is hard to tell at this stage.

I mean it just seems like it continues to see some of the volatility we have seen in the past.

It is hard to tell how much weather might have impacted on how much consumers were going out.

Or if it is just more a matter of reaction to the economic climate that they are seeing.

But we do remain a little bit tentative about what we are seeing in that arena.

I might supplement it, just a little bit.

Some of the ways that I tend to organize it are, things that we have been seeing all along, which I think the consumer is continuing to seek out value, however they define that.

It is not always about trading down.

But I think there are all sorts of different expressions of that, whether it's people seeking larger size purchases for lower cost per ounce, for example.

But it can also reflect in pricing, as everyone would naturally expect.

But I think we're in an environment where consumers are consistently re-evaluating, and retailers in the on-premise environment are constantly trying to find ways to create value.

So it is hard to go under one thing, which would be typical to say -- how's pricing, but certainly trading down would be a component of it.

I actually noticed also, in the more recent months, something that I think is maybe more unique to a company like Brown-Forman, which is that we saw, particularly in July, but also maybe a little through the Summer months, a bit of an acceleration in the difference in performance between brown goods and white goods.

When we use that phrase, it is sort of a summary phrase, but clearly vodka continues to perform very, very well.

And the trends, as you move toward the more current months, have -- you can just notice that the whiskey category, the liquor category, are struggling a little bit more.

And that is where, I think Don actually made the reference, potentially who knows whether weather made a contributing factor -- was a contributing factor to that in July, we just don't know.

But it is one hypothesis, that might be out there.

And I think the other thing Don mentioned a couple of times, which is just there is a whole bunch of new activity in the US market around line extensions, new products, the way people are promoting the products.

And we are particularly in tune to that, because of, we have Jack Daniels, first and foremost, but also Southern Comfort.

And particularly on Jack Daniels, it is such a big brand that you have many, many occasions from which you derive your business.

So you can get competition for all those occasions.

And so we are really trying to pay attention to whether it is the super premium sipping occasion, or an on-premise mixed drink or shooting occasion, or any wide variety of sorts of business that Jack Daniels derives.

And I think when you have innovation, a lot of these line extensions, you can get, even if it is small in the grand scheme of things, it can have an impact in a particular month or a quarter.

So, we are looking at it closely.

And actually, I'm sure as we go through the course of the year, will be trying to understand it better, and promote our brands in accordance with where we are seeing some of that competitive activity.

Okay, and then just in terms of your share performance, because it sounds like the first quarter your share was down, and maybe just go through what drove the softness in terms of the market share performance?

And what you have in place to drive better share performance for your brand?

I mean, I think it depends on where we think, that last comment, I think was what I was trying to reference.

More just the US, I guess, the US market?

Yes, I think that that is the point.

I think if your comments are on the US, I think it varies by, are you asking that from a corporate-wide standpoint?

You have talked about Southern Comfort seeing softness.

Was Jack Daniels up from a share perspective?

Jack Daniels -- it depends on which Jack Daniels probably has -- from the way we look at the Jack Daniels business, as many as a half dozen competitive sets.

Yes, whatever you think is maybe the most appropriate way of looking at it I guess?

Well, I think probably the best way for you maybe to make sense of it is, the reference I was just making that Jack Daniels and Southern Comfort relative in the first quarter, relative to the performance of distilled spirits overall, would have seen share erosion.

And that actually, a lot of the leading brands over the last two years, during this tough economy, have been losing share to either a wide variety of brands, it can be higher priced brands from small basis, but also the value conscious consumer trading down.

We have talked about that a number of times.

So, one of the biggest influences for our corporation though is, we are skewed, as a company, more toward the whiskey and liquor side of the business.

And if you just look at the figures closely, a lot of the activity in spirits, particularly over the last year or so, has been very much concentrated in Vodka and white goods.

And so it's a question that we are continually working on.

It's one of the things we mentioned in our last call, as to why our work on Finlandia, and the tequilas, and some of the areas where the actual -- there is better winds at the back of the categories, are really important to the Company.

Judy, I wanted to add one thing, and you are focusing primarily on the US.

But as Paul alluded to, one of our strategic pillars is to grow internationally faster than the US.

And that continues to be one of our biggest focus.

And more than half of our business comes from outside the US.

And our international market share has grown in nearly all of our markets overseas.

So we don't want to lose sight of that very important fact, too, as you think about our performance and our business, how big our international business is to us.

Yes, I would venture to guess, Judy, that if we were doing a global market share for the quarter, we won't have data -- and we don't typically don't get it on a quarterly basis.

I would venture to guess that Jack Daniels, it has been its history on a 12-month basis to grow share of the whisky segment globally.

And we would anticipate that unless we see data that shows a change in the trajectory of some of the other leading global brands, that on a global basis we would continue to see share gain.

Okay.

And then, just quickly Don, just in terms of the operating expenses, is there a way to quantify how much some of these up-front kind of temporary investments really impacted the first quarter?

Just so that we have a better gauge in how the operating expenses really flow through for the balance of the year?

And from a timing perspective, if I look at your quarterly progression last year, it was really the fourth quarter where you saw a big jump in terms of the SG&A expenses?

So is a lot of the year-over-year comparisons getting more favorable mostly in the fourth quarter, that we'll end up finding?

Yes, that is what's driving a lot of the comments that I made earlier.

If you remember, towards the end of last year, we ended up having some compensation related items, that really increase over the course of the last half of the year, that at this juncture, we wouldn't expect to see this year.

And so the comps get a lot easier as we go forward.

There were, as I mentioned, there were some -- certain things like some market research studies that we have been doing on a strategic basis that ended up in the first quarter.

There is a host of things that have kind of ended up being in the first quarter of this year we didn't have last year, in terms of some meetings that we were having, these other kinds of things, was related to travel and entertainment, that are all kind of front end loaded.

And so, between the abatement of those kinds of expenses, and going against the kind of comps that you were talking about, that's why we feel pretty comfortable where we are right now, in terms of the overall operating income guidance that we gave, why we feel we can stay there.

Because right now, pretty much everything is where we expected it to be.

Okay.

Thank you very much.

Thank you.

Your next question comes from the line of Dara Mohsenian with Morgan Stanley.

Hi, guys.

Paul, advertising as a percent of sales has come down pretty significantly in the last couple of years during the downturn, and even in the few years before that.

So, I am just wondering, do you view this new level as the right base going forward, or do you anticipate a need to reboost marketing spending as you look out over the next couple of years?

I don't see the need to boost marketing spending, as it's defined by the ratio that you are using.

I think it is -- the brand building models we have, brand by brand, tap into everything from packaging, to cost of sales, to the discount line, all the way through to SG&A.

So, we really have redefined over the last -- this goes back several years now, how we really view investments.

And so I think it's not something we focus on with great precision, trying to manage to an advertising as a percentage of sales ratio.

And as we sit right now in the environment we are in, I don't think any of -- we are really sort of pleased with the progression of our underlying sales growth rate that Don mentioned, over the last say, four quarters or so.

So, a lot of what we are doing, we think is working at the top line.

And we want to just try to continue it.

I don't think that there is any competitive disadvantage we've heard for our Company around the world right now that deals with level of advertising spending.

Okay.

And just in terms of the mix of investment behind your business, I guess as the consumer recovers over the next couple of years, wouldn't you think you would see a shift back to the marketing line from some of those other areas that have been a focus over the last couple of years?

It just depends.

I mean, it depends on how much of the growth story for a particular brand, or the growth plans deal with things such as packaging or product formulation.

I mean the hottest brand we have in the United States right now, I mean the primary impetus for its acceleration and growth was a product formulation coincided with a packaging, really a modest packaging change.

And that is El Jimador, which created momentum, from which we then have continued to put some resources behind it, because we thought that particular brand was very much underinvested.

We were underinvesting behind it because its base of distribution was small, et cetera.

So I think it varies by brand.

So it is just a hard one to give you a blanket answer that says, yes, as the consumer returns, you should expect to see big media budgets.

I mean -- it just -- it depends on what we are trying to accomplish with each brand in each market around the world.

Okay, that is helpful.

And then, Don, can you give us an update on your agricultural costs, and your grain strategy, if you have hedging in place -- what level of pressure you are expecting this fiscal year, and if you expect incremental pressure next fiscal year also?

Yes.

Most of the lion's share, in terms of, when you look at the value in terms of our cost of goods, when it comes to grains, it is mostly around corn.

We do have a hedging program in place.

I believe we are about, somewhere a little bit over 60% hedged at this juncture.

And so we aren't as exposed to the variability of the corn prices.

So, and relatively speaking, it's not a large component when you think about the overall magnitude of our cost of goods.

I know if you went back a couple of years ago, when corn prices just really spiked up to like $6 and $7 a bushel, I think the overall impact to us was somewhere around $10 million in that year.

And so -- as much corn as we buy, it is a relatively small component in our overall cost of goods sold.

Okay, that's helpful.

Thank you.

Thanks.

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

Good morning, everyone.

My question is relating to your inventory levels.

If you could talk about what you are seeing with respect to distributors and retailers.

I know there has been reductions historically.

I'm not sure if we are at comfortable levels now, or if the environment's getting softer, if you are seeing some changes there once again?

Lauren, this is Jane.

We continue to see volatility, really, around distributor inventory levels that you saw in the quarter, largely in this particular quarter was in southern Europe that we saw some fluctuations in inventory levels.

But we continue to see fluctuations in different pockets of the world.

I think we said at the end of last year, we thought we were about back in line with where we expected to be.

But again, I think you are going to see from quarter to quarter, just fluctuations happening.

But I would say compared to what had us all concerned, it may be 15 months to 16 months ago, in terms of some of those more dramatic reductions that were occurring post the Fall of 2008.

We haven't seen anything like that kind of -- particularly as you go beyond a quarter.

We think that some of those inventories were rebuilt through the course of FY 2010.

And so we think we are at probably a little more stable overall inventory level.

But it is going to jump around, based on everything from price increases, and the timing of those, to distributor changes, to a wide variety of things.

But I think -- those are different, and you kind of expect those versus things where people are just ratcheting down their inventories.

And so we haven't seen as much of that, just conscious reductions of inventories.

Right, and if I could also ask on pricing, you keep mentioning that you'll remain competitive.

And just curious, versus some of your larger competitors here in the states, what you are seeing.

I know you are not going to reveal your pricing strategy at this point, but just kind of your reaction to what they are doing, how you are going to manage that, as you think about this year?

Yes, Lauren, it's Don.

Certainly the competitive activity that we feel like we are seeing at the field level, continues to be very competitive.

And we have talked about this quite a bit.

The way that we think about pricing is really more along the lines of keeping our consumers in our franchise, and really being very specific and targeted around our pricing strategy.

And so it will vary from state to state in the United States, depending upon what's happening in the individual markets, and what kind of competition that we are seeing, and kind of the environment within that state, and how much we need to be doing in order to keep our consumers at least in our franchise.

The way we have kind of talked about it in the past is, particularly in those states which were particularly hurt in the downturn, and for those in our franchise that continue to be hurt, giving them an opportunity to be able to stay in and to buy in at various times.

And as much as we talk about how the economic recovery has been very inconsistent outside the United States, there is some inconsistencies within the US, too.

And so, keeping this focus on looking at it on a market by market basis has served us well.

I know when you look back at last year's holiday timeframe, I don't think we went as deep as some of our competitors went.

And when you ended up looking at the syndicated data at that time, it pretty much bore out that we stayed pretty strong in the kind of price mix category, and ended up being one of the best performers, in terms of net sales.

And we're going to continue -- we were very happy with the performance during that time, and we are going to continue looking at pricing, kind of along the same lines as we have historically.

Lauren, I might add one thing.

That's just -- I think one of the ongoing influences that we should all -- I mean if you were going to pay attention to something, it would be this, on versus off -- the proportion of business that's occurring in the on-premise relative to the off-premise.

And one of the things in our industry I think that has -- has a big influence on how pricing unfolds in the entire industry is, when you have a softer on-premise environment, you generally see as an industry, less pricing capabilities.

Because, I mean, just the one thing we know, as consumers move from on-premise to off-premise, they just generally become more price sensitive.

And so, I think that distribution of business actually has as big an impact on our industry as it does relative to other packaged goods, which don't have that heavy on-premise component.

And so they have 100% of their pricing considerations concentrated in a retail environment.

And for us, I think subtle shifts as we've had, in this on, off premise environment play a major role in the ability to get pricing.

I mean, my take on looking at it over more of a two- or three-year level, is that people are still getting moderate price increases.

And to the degree to which they have to maybe give it back in terms of promotional pricing, is the open question.

And the strongest brands, you think should be able to hold in there the best.

And we certainly have a few of those.

So in any event, I don't think it means the end of pricing.

It is just how you treat the combination of front line pricing with promotional pricing.

And I think some of that, at a corporate level gets influenced by the ability to get higher priced items typically through the on-premise.

I know it is probably hard to gauge this, but do you think that the competitive activity heading into this holiday season could potentially be worse than last year?

I mean, any sense of comparing this year versus last year?

I wouldn't -- I would be guessing -- I would say probably an increasing component of competing for retail merchandising attention and space and priority is going to be, not only dealing with pricing, but a lot of this innovation as well.

There will just be -- I think there is so much that a lot of the companies are attempting to do in terms of line extension, et cetera.

That will be another form of competitiveness at retail, beyond just the normal pricing.

Okay, great.

Thanks.

Sure.

Your next question comes from the line of Tim Ramey with DA Davidson.

Hi, good morning.

This is [Mia Lanor] stepping in for Tim today.

I was just wondering, so the ready-to-drink segment is -- it's relatively new, and especially this good growth you guys have seen.

One of the questions I had is, what do you guys expect out of that have for the holiday season?

Well, I mean, for us, it's the ready to drink is really a global category.

So it goes well beyond the perceptions that a lot of people who cover our Company, from a US perspective would have.

So, it may be a wide variety of comments, actually one of our largest, I guess it is our largest RTD market is Australia.

So that is actually, while it's the holiday season, it is also the beginning of their Summer selling season.

So their influences are quite different than the kind of holiday season we would have in this hemisphere.

All I can really say about it, it would be hard to forecast any sort of competitive dynamics there.

All I can say is that we have been benefiting over recent quarters from the development of ready-to-drink expressions under the Jack Daniels, El Jimador, Southern Comfort trademarks.

And we are really pleased with those brands.

And those forms contribute not only economically to the Company, but also from a consumer standpoint, and our ability to -- for people to try mixed drinks from our trademarks.

And also some of the branding that comes from a single-serve expression of Jack Daniels, Southern Comfort, or El Jimador.

So it's -- the numbers are in our release.

They are actually a very, very good start as I mentioned to the fiscal year related to the ready to drinks, we think they are an important marketing component, and we are pleased with the way that they have been actually contributing to the financial performance as well the last couple of years.

Okay, thank you, that is helpful.

Also, so you reiterated the guidance, even though it was a -- EPS this quarter was a bit little low than the street expectations.

In terms of timing, or growth, or cost reductions or FX, how -- what is going to change this year to -- in order to reach your guidance?

Well, to be honest about it, I think that -- we don't give quarterly guidance.

And so part of it is, as we said in both Don's and mine, I mean we think we are off to a good start, performing within the expectations we had for ourselves at this stage.

We talked earlier, in response to one of the questions about the seasonality of our spending.

Some of the changes that we saw just in the first 90 days related to foreign exchange rate.

So a couple of those things, if I'm trying to read your question as to how do you make up from where you all have us, I think part of it deals with a continuing, our expectation of a continuing nice top line progress.

And then, a moderation of the expenses that we saw in the first quarter, which we would fully expect, and we sort of explained a little while ago.

And then, also then you start to bring in, when you do an EPS range, of course, the things such as foreign exchange and other factors.

So we reiterated our guidance this morning.

Okay.

Thank you very much.

You are welcome.

Your next question comes from the line of Thomas Russo, Gardner Russo.

Hi, good morning, Paul.

Hi, Tom, how are you?

I'm just fine.

Good morning, a couple of quick questions.

India, where you mentioned that you saw good growth, what is your route to market there now?

And sort of partner and main products in the market?

Just some color on India?

Yes, in India, we have a sales force on the ground there.

Their primary role is to create demand.

And so they are more like brand ambassadors and market promoters and calling on accounts, and particularly in the on-premise arena, in order to continue to introduce Jack Daniels, in particular, to the consumer base there.

Outside of that, I mean, the route to market basically, and we have some wholesalers there that we do business with, that we import the product into.

Yes.

And just kind of makes its way through the traditional channels.

And Tom, in that market, we are really, it is very Jack Daniels focused at this stage.

There is a lot of our competition that are in the local Indian whiskey market.

They have JVs.

And as you well know, it is a very good brown spirit market, with the (inaudible) whiskey category.

And so far, we are playing mostly in the imported side with the Jack Daniels brand.

Thank you.

Don, you also mentioned the investment set-up cost for the route to market in Germany and in Brazil.

Can you give some color on that, and then what type of benefit that you think you'll get from that current investment spending burdening income?

Sure.

I mean, starting with Germany, you might remember in Germany we had a commissionaire arrangement with Bacardi.

And so through that, we still had -- at the time we went to the Commissioner about five years ago, is when we first had basically all of the sales coming into our sales line, but still paying some form of a commission for their sales expenses.

So we have taken the sales side across to us now, as well, along with all the logistics and distribution of the products there.

We are in the process of hiring a number of folks.

A lot of that happened in kind of the May, June timeframe.

We are gearing up for kind of an early October start.

We are shooting for October 1.

But certainly sometime in early October to have the thing up and running.

And we'll have the thing fully transitioned over to us.

So that, at that juncture, we'll be like any traditional spirits company that has their own distribution in that market.

In terms of the benefits we expect to have, there is a couple.

One, we definitely believe that Jack Daniels in Germany is a must-stock type brand.

And that status gives you a lot of opportunity to have access to the trade, and to kind of use that access to your benefit, as opposed to allowing your agency partner to use it to his benefit.

Okay.

So we see benefits coming that way.

The other benefit, Tom, in that particular market is that it will allow us to put even greater focus on the rest of our portfolio, beyond Jack Daniels.

One of the things that we have found traditionally in these agency relationships is that everybody's excited about Jack.

It's a very easy sale.

It is something that you can get your own sales force very efficiently excited about, Southern Comfort to a certain extent.

But when you go beyond Jack and Southern Comfort, and you get into a lot of the missionary work that is required, in terms of building brands from scratch, it gets a little bit more difficult to get an agency partner to be willing to put that kind of sweat equity into something they don't own.

And so, as Paul mentioned in the BF 150, where one of the things that we are looking at is both expanding our international presence, as well as growing the rest of our portfolio faster than Jack Daniels.

It is going to be moves like this that's going to help us to accomplish that objective.

Brazil is similar.

There is not much more to add, versus -- when you compare it to Germany.

And we have been in a traditional agency arrangement down there for quite some time.

Brazil is a very difficult, complicated market.

And we have just come to the conclusion that if we are going to make some strong inroads in that market going forward in the future, it is going to take the focus of a Brown-Forman group down there in order to get that job done.

Tom, I know you assume this.

But I just want to reiterate, so people don't miss it.

That while we are having some of those up-front costs now, one of the ways you pay for those as you go along, also, is when we make a shift, such as we do in Germany, we actually, we see the margins go up.

Yes.

In the gross margins, in order to help pay for those costs of having your own route to market.

And so that is one of the ways we have typically been able to afford it, so you don't just -- you don't actually go in and just start having up-front costs without any kind of benefit.

So we do recoup these costs as the year goes on, by having a higher selling price -- higher profits for Brown-Forman, because those were shared with Bacardi in the past.

Thank you very much.

Then the same theme, one more country.

Russia, and the proposal that you go to market with a bottler, a soft drink bottler.

How does that stand?

Where do you stand on that one?

Yes, are you talking about in terms of--?

I think there is a measure with Coca-Cola possibly partnering with you in Russia?

There is.

And I'm just not sure.

We have had that relationship with them in a number of markets.

We started that relationship a couple of years ago, in a couple of smaller markets.

I think we started in Croatia, and we have added the Ukraine, and a couple of other places that went very well.

And so we made the decision to make the change over to Coca-Cola in Russia this year.

I know there was something in the press earlier that talked about some difficulties that Coke had in getting-- to getting a license there to do business.

They have that license.

All of that is beyond an issue at this stage.

Oh, great.

We are in the process of finalizing our discussions and conversations with them.

And we are looking to have that also up and running sometime in the October timeframe.

And just to clarify that, Tom, it is the Coca-Cola Hellenic Bottling Company as opposed to Coca Cola in Atlanta.

Thank you.

Thanks, Tom.

Your next question from the line of Kaumil Gajrawala with UBS.

Hi, guys.

Good morning.

Good morning.

Can you talk a little bit about on-premise trends?

It seemed like sequentially they had stabilized, and maybe were getting better, and my sense from the commentary is that maybe they are now trending negative, or sequentially maybe it is looking like they are getting worse?

My view is, it's under some data in the more recent months in the United States market for which we have some data, that showed while we thought there were some stabilization maybe occurring in a prior quarter or two, that it actually showed more shift toward the off-premise versus the on, in terms of the distribution of the business overall in the latest data.

But I just -- my advice on it is not to try to forecast what will happen over the next 12 months, on what happened in the latest 60 days.

Because the data itself, can vary wildly on a one month or even three month basis.

So we are trying not to read too much into it.

I think the issue with it is there continues to be a consumer out there that is looking for value.

And that one part, of course, I think take them to the off-premise.

And when they do go out, I mean, we were speculating earlier on the call, that maybe some of this could be weather related, particularly in parts of the world where it was very hot during the more recent weeks.

But it is all speculation.

So if that was part of the contributing factor, you'd expect for that to reverse when things weren't so hot.

So, we really don't have a definitive view on the direction of what's going to happen with on-premise and off-premise, as it relates to the next quarter, particularly the next eight weeks or 12 weeks.

Got it.

And then on the promotional activity that we have been seeing, especially what we saw during the holiday period, would you say that yourselves and competitors in the industry in general, (inaudible) to lift that they had hoped for, when they stepped up some of the activity?

Or did volumes come in a bit below despite how heavy the promos were?

I don't, I just wouldn't know how to even answer that question.

I didn't have a lot of expectations about competitive promos.

So, I think you would have to look at each individual brand, and the region where they were giving the promotion.

So I just, I really wouldn't be able to comment on it, in a broad way.

I just don't feel comfortable doing it.

There might be some data you are looking at that would illuminate it better, but I just don't have a real view on that.

It's hard to know how the competitors feel about their own promotions, but I know -- kind of what I said earlier, as we came out of last year's holiday period, we were pretty happy with the effect that the promotions that we had out there had.

And our ability to kind of find a sweet spot between giving the consumer value, and how to translate it into volume and value for us at the end of the day.

Yes.

I think just again, there will be a temptation to look at the latest data, and then forecast it out.

I think you are going to see, dependent whether it is syndicated data in Spain or Mexico or the US, I think you are going to see many of the players in the industry regularly dabbling with their price volume mix, in order to try to find the right recipe for value in an environment where it is not perfectly clear.

And so, I think it is going to be really hard for anybody to make blanket statements about an era of this type of behavior, that type of behavior.

I find it personally really difficult.

So, I think it requires a review of the data at a much more granular level than we are able to make with sort of an overwhelming observation, particularly as it relates to doing business all over the world.

I think you talked about there is a -- looks like there is going to be quite a bit of innovation in the back half of this year.

Is it almost all focused on, or are they -- is it merely a value based innovation, or are we seeing some launches of premium products, and some things that could get the net revenue case numbers up from a mix perspective?

You were breaking up a little bit, but I think I got most of it.

I'll say some of it, and Don you can chime in.

I mean, Don actually cited, at least in the US innovation arena, that a lot of the innovation was at the premium price level and above.

I think there is some value based innovation.

We've seen quite a bit of introductions in the popular price arena, particularly for unaged products.

But I think it is all over the place.

In fact, what I think people are-- I think if it is good innovation, really genuine innovation, and it comes from consumer insight, it may be dealing with some of the trends that we have been talking about, such as the shift that's been going on the last couple of years from on- to off-premise.

So RTDs, or ready-to-pours, end up being expressions for a period of time where people are consuming more in the off-premise, and are seeking the same convenience that they get by having a bartender in the on-premise.

So, I think some of the innovation is actually directed at some of the behavior that people are observing.

I know that that is part of it in our case.

And I think some of the things that I see going on from our competition are trying to capitalize on the same trends.

So, I'm sure, when you get innovation going, there is always going to be some instances of stuff just thrown out there.

But I suspect the stuff that makes it, will actually be directed at true consumer or trade needs, and help the consumer, and meet the consumer's needs as well, through a period of time that has changed from the way it was three or four years ago.

Got it.

Thank you.

Sure.

Your next question comes from the line of Vivien Azer with Citi Investment Research.

Vivien?

It's the best question we have had all day.

Just kidding.

Any other questions?

Your next question comes from the line of Ian Shackleton with Nomura.

Good morning.

Good morning, Paul and Don, hi.

Two questions, really.

When we have talked a bit around the holiday season coming up in the US, and obviously you are giving a reasonably cautious message into that.

And I just wondered is there anything more substantial that you are seeing in terms of wholesaler ordering patterns that are causing to be a little bit cautious?

Or is it really just a worry that the industry pricing dynamic may not renew, and the consumer remains weak.

So that is the first question.

I think it is the latter.

I mean, in terms of the consumer environment, which is referenced there to just using the US data as an example.

You have a 12 month and three month trend.

And in the -- at the consumer take away level, as of at least the NABCA data, it is about the same, it's about a point and half, something like that, at the volumetric level.

So, we haven't seen any big uptick that would cause us to say that there is some acceleration on the way.

So I think it is really more looking at that kind of data, than it is something to deal with orders or shipments, or anything like that.

And I would just comment, too.

The whole thing around wholesaler inventories and what have you, we have been, when we do this, going from reported sales to underlying sales, one of the factors that we take into consideration on that is the distributor wholesaler inventories that we see.

And we have been doing it for a very long time.

And when you look at it, prior to when we had the economic crisis, it was not unusual to see that varying up or down a point or two on a quarter by quarter basis.

And so, in anything -- sometimes it could be the US, sometimes it could be outside the US, there could be different factors at different times that would be driving it.

And so, as I have seen that, as I've seen that number now kind of slowly come back into kind of a 1% to 2% range every quarter, to me it feels like we are getting closer to a normalcy situation than anything else.

And so I don't think there is anything that we are necessarily seeing any kind of wholesale patterns that's affecting how we are thinking about the holiday season at this juncture.

Okay, and I had the same question really around -- there was a comment about some further destocking in southern Europe.

I'm just keen to know whether that was mainly focused on Greece, where clearly there was a real downturn, or is it more common across quite a few of those southern European markets?

It was actually just a handful of markets, largely -- there was some in Greece, there was some in France and Spain, so it was a handful of markets in southern Europe.

It sounds from what you said earlier, when you see this is, perhaps just a small one-off adjustment, rather than an ongoing trend that we should see in the next few quarters as well in southern Europe?

Absolutely.

As we talked about, I think it is just fluctuations that are going to continue to happen.

I don't think it is sustainable or ongoing.

It's just -- you are going to see fluctuations from quarter to quarter.

Okay, thanks very much.

Thanks, Ian.

Your next question comes from the line of Graeme Eadie with UniCredit.

Good morning, everybody.

Just really following up on the high levels of promotional activity in the states.

It is quite difficult for us on the outside to really to get our heads around this to understand to some extent why this is happening, given that we've seen historically all that has done is to destroy brand equity, and to delay the sort of recovery in the industry.

So I would be interested in your thoughts, given the consolidation we've seen in the industry, one would have thought the response might be different this time around.

Why do you think the industry has become so -- a lot more aggressive on pricing?

And secondly, who's driving that?

Is it the retailer?

Is it the distributor?

Or is it within the manufacturers themselves?

Thanks.

The first thing, we'd -- I would have to conclude is that people are being ultra aggressive in the first place.

I think it all depends upon your view of it.

If I look at -- if we had a situation where volumes were up 5%, and sales dollars were down 10%, that is a very different story than percentages in shifts and price mix, that are far more subtle than that.

And as we said, we have been pretty comfortable with the types of adjustments we make.

So I really can only comment on our own Company's behavior.

And that has been evolving over the last really several years.

I mean it goes all the way back to when, in the US market, the gasoline prices started to rise so much.

So we have seen all the way back to that period -- subtle adjustments that have been made in terms of front line pricing, and then the ability to promote it at varying levels.

And you try to be very targeted.

I think one of the keys is to be very targeted, versus just making a sweeping change to pricing.

You will notice periodic patterns in certain companies or certain brands, whether it happens to be around a heavy promotional period, or certain time of the year that people get a little more aggressive.

I would really like, based on what your question was, to go back and look at the last sort of two or three years, to see how dramatic, because implied in your comment is a deterioration of price position by name brands in the United States.

And I really just -- I know of some activity.

Several of it I think is probably, some of the ones I know of, are combinations of probably manufacturer, distributor, and retailer participating.

You always have to -- I mean it is just the way pricing is set in this environment, it is a collective exercise of it, because you have a three tier network.

So there is a lot of parties that get involved in setting pricing.

But I don't maybe share the same observation, that we have had this dramatic erosion of pricing in the United States, as much as maybe everyone's expectations, where that during the difficult economy, prices were going to continue to rise at 4% a year or something like that.

And when you look at aggregate data, remember that you are looking at a lot of mix, too.

So its -- you really have to get in and look at where specific price points are in the marketplace.

It is hard to read from afar, I agree with you.

That is why it is best done, market by market or brand by brand.

Great.

Thanks very much.

Sure.

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

Good morning.

Hi, Ann.

Hi, Ann.

Hi.

Two questions, one, if you could just review use of cash flow, if there are any changes?

And two, as you look out to the second half of your fiscal year, are you moderating expectations for consumer behavior?

Or have you made any changes to kind of the consumer outlook portion of your fiscal year results?

I'll take the cash flow part, Ann.

There really isn't any significant change to our cash flow.

The only item that's kind of new for us this year is we are having to make some contributions to the pension fund.

And in the first quarter, it was around $20 million, $21 million that we ended up.

And that's about the biggest effect.

Otherwise, everything is pretty much in line with what we've said in the past, in terms of what our cash flow plans have been.

And related to maybe the consumer environment.

I think the only subtlety as we entered this fiscal year, and just as you all noted, you have probably seen this in commentary from the market as a whole.

People, I think, based on trends we were -- the whole world was seeing back in the sort of January through April or May period, we would have had a hope for a slightly improving consumer environment through the course of fiscal year 2011 for us.

And I would say what we have seen in the first quarter is sort of mixed signals at best.

So, I don't know that we'd say it has rapidly deteriorated or anything.

We think it is still a sluggish environment out there.

It's tough, it is causing a lot of I think competitiveness.

And so, versus our original expectations, maybe a little softer environment than we were hoping for.

Nonetheless, we think we are off to a good start.

We are going to adjust accordingly as we go through the year, based on what we see and observe.

But I don't think it is a dramatic difference.

We were very cautious going into the year.

We thought it was going to be difficult and competitive.

But we were hoping I'd say, just like a lot of people who were in business back in March or April, who would have been forecasting the next six or 12 months, were hopeful that trends we were seeing in that -- those Winter and Spring months, may continue on.

And of course, there has been a lot of difficult economic news out there in the media over the last 60 or 90 days.

That is helpful.

Thank you.

Sure.

Your next question comes from the line of Andrew Kieley with Deutsche Bank.

Hi, good morning, Paul and Don.

Good morning.

So the first question, I just wanted to go back to the promotional pressure.

I know you talked about the channel impact.

But was there any major difference in the competitive impact, either by product category or any specific geographies that stood out?

No, not really.

Just the one thing we observe from time to time, and have conversations, but I don't have a lot of data in front of me, is a real value oriented consumer.

But just again, using US example, but I suspect that this would be true.

I think this is probably more over the last couple of years versus anything I can cite in the last 60 days or anything, is we are seeing a pick-up in some of the club store, the large club store businesses because they tend to offer the lowest -- some of the lowest prices in the marketplace.

So again, that might be a marketplace trend for the consumer that can have an impact on the dynamics in the marketplace.

But what it means is the consumer continues to shop for the best value they can find on maybe the brands they like.

And so, that might be one thing that we have observed over the last couple of years.

And of course, I'm not sure, I want to validate this with Don and Jane, that data doesn't get picked up in a lot of the syndicated data, does it?

Or is it picked up?

Yes, so it is not picked up in a lot of the US syndicated data, so whatever that impact is, can have an influence on overall performance.

But versus everything else that we have sort of cited here, unless you have something a little more specific, it is hard for me to answer that.

No, that is good.

And then just in terms of the price mix and the margins, is there much impact from the faster growth of the ready-to-drink products, and the faster growth of international versus the US?

Does that exert much pressure on the margins?

Actually, on the margin, Andrew, I would like to point out, while margins on a reported basis were down 60 basis points, they actually were up, once you pull out FX.

So that is the way we look at our results.

And so it is not having pressure at this point in time.

And we also, there is one of the tables we put in our release, that gives you the ready-to-drinks on an equivalent basis.

That is why we give it in sort of two formats, nine liter and equivalent, so people can actually see it in different forms.

And so, on an equivalent basis, we find that the ready-to-drinks actually can help on the higher gross profits per case, because you converted it down to an equivalent, and you are selling it by the drink.

So those actually can have a positive contribution.

The other thing, too, I would just add on the whole margin question, when you look at the size of our RTD business today, there is also a big mix effect now that is included in there, between the margin that you get on Jack Daniels versus the margin that you get on something like New Mix.

It is different.

And you also will end up with different margins on a country by country basis.

And so, it is hard to answer that question directly, because there is such a mixed component in RTDs, as well as when you look at it on the full strength spirit side.

Okay.

And then, Don, just finally, could you talk about any other further route to market realignment costs for the balance of the year?

Will those be material, or is it basically, was this quarter the bulk of it?

We may have just a little bit more, Andrew, in the months of August and September, as we get ready and get started for these (inaudible) markets that Don was referring to in Germany and Brazil.

But in the grand scheme of things, it would be more in line with what you saw in the first quarter, which was fairly immaterial to the grand scheme of SG&A spending.

And at this stage, in terms of, I think you asked if there were any different markets or new markets, nothing that we wouldn't have already forecasted.

Okay, thank you.

You're welcome.

Your last question comes from the line of Dara Mohsenian with Morgan Stanley.

Hi.

Can you give us a sense of, if you saw any changes in consumer demand either in the US or in western Europe, as you move sequentially through the quarter?

Meaning sort of like month by month?

Correct.

Okay.

I don't know if there will be any overall (inaudible), it varies so much from month to month.

I really -- I think maybe the best thing if you are trying to look at that you could probably, if you're looking at US syndicated data, and you could probably spread the months out, we just haven't done that.

We look at it more -- we have a hard time sometimes even looking at it on a short-term basis, like three months.

So you can imagine, we don't focus that much on one month.

But if I was going to look at it and analyze it, what I would do is just, I would like at how -- you can get four-week data from Nielson and stuff like that.

But we just don't tend to focus on that short a timeframe.

Okay, and the organic sales number in the US in the quarter, do you guys have that, and can you give us a sense of depletions in the US versus price mix?

Organic sales numbers were down in the low single digits, just modestly.

The depletion numbers were about the same.

Okay.

All right.

Thank you very much.

Thanks, Dara.

And there are no further questions.

Alright.

Well, thank you, Kimberly.

We do not have any closing remarks today.

And thanks, everyone, for joining us.

Yes.

Thank you all.

Thank you.

That does conclude today's conference call.

You may now disconnect.