Brown-Forman Corp (BF.B) 2012 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the third-quarter fiscal 2012 conference call.

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

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

(Operator Instructions)

Thank you.

I would now like to turn the call over to Mr.

Mark Stegeman, interim Director of Investor Relations.

Sir, you may begin.

Thank you, Kathy.

Good morning, everyone, and thank you for joining us for Brown-Forman's fiscal 2012 third-quarter earnings call.

This is Mark Stegeman, Brown-Forman's interim Director of Investor Relations.

Joining me today on the call are Paul Varga, our President and Chief Executive Officer; Don Berg, the Executive Vice President and Chief Financial Officer; and Jane Morreau, Senior Vice President and Director of Finance Management, Accounting and Technology.

Don will begin our call this morning with some thoughts on our performance and a few other topics of interest.

Paul will then provide some additional remarks and then we will open the call up for your questions.

This morning's conference call contains forward-looking statements based on our current expectations.

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

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

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

This morning we issued a press release containing our results for the fiscal 2012 third quarter.

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

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

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

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

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

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

Thanks, Mark.

Good morning, everyone.

With our third-quarter earnings release this morning, I thought I would spend some time addressing a number of topics.

Let me start with a 30,000-foot summary of our third-quarter and year-to-date results.

Then I will talk some about our gross margin and the pricing environment.

Following that, I will highlight some of our portfolio and geographic performances.

And then lastly, I will talk a bit about how we are thinking about the balance of our fiscal year.

So, starting with our third-quarter results, we are pleased with the quarter's continuation of year-to-date high-single-digit underlying growth in net sales and operating income and the acceleration compared to last year.

So far this fiscal year, underlying net sales has grown 8% compared to 4% last year, and underlying operating income has also grown 8% compared to 4% during the same time period in fiscal '11.

Furthermore, we are also pleased that our year-to-date performance has essentially met our expectations and has continued to play out as we had outlined with our guidance at the beginning of this fiscal year.

Now, let me talk for a bit about our gross margins and the slight erosion in the margin that we have experienced in the last couple of quarters.

Historically, our top-line growth has come from a balance of price increases and volume gains.

There have been times when price was the dominant driver of our net sales growth improving our gross margin.

But in the recent few years during and following the global recession, a number of factors skewed our top-line performance towards being essentially all volume-driven.

First, as you will recall, the consumers shifted their consumption to the off-premise, which is typically a more price-sensitive channel.

Further, we were concerned about our consumer's ability to buy premium brands.

Finally, price competition intensified.

Given the overall economic environment, we took very little price increase, absorbing higher input costs, and at times excise tax increases.

Today, the global economy, while a bit firmer, continues to experience a very fragmented recovery and some economies continue to struggle.

However, in some markets, the competitive pricing environment seems to have abated somewhat and we have seen some return to trading up to premium and super-premium brands.

So as we think about pricing, there are really three key components we are thinking about.

First, recapture a portion of the increase in the input costs of grain, glass and fuel costs.

Second, we believe for the positioning of a premium brand, price is a key component.

And lastly, there is the delicate act of using price to help balance supply and demand, particularly as it relates to aged products.

Considering all of these factors, last quarter, we mentioned that we think the time is becoming more favorable to reinstate price increases more in line with historical levels.

During the third quarter, we initiated a front-line price increase in France in conjunction with an excise tax increase.

We are in the process of taking a price increase in the important UK market on top of a tax increase there.

Looking forward, we will proactively look for opportunities to take price increases in most markets over the coming fiscal year and across most of our brands.

While we don't anticipate a lot of pricing improvement for the rest of this fiscal year, we are optimistic about the potential opportunity in fiscal '13.

We plan to talk about this more with our year-end conference call in early June, when we lay out in greater detail our expectations for fiscal '13.

Moving along to our portfolio and geographic performances, let me start with a few comments about our A&P spending.

As we have spoken about in the past, a few years ago we shifted some of our brand investments outside of what gets traditionally reported as A&P to things like packaging, promotional activities, value-added products, route-to-consumer changes, as well as product development expenses related to ready-to-pour products, RTDs, new line extensions and new product innovations, all to capture consumers with convenience and great-tasting products where they were buying, in the off-premise.

Our investment has continued to be reflected in other lines in the P&L besides A&P, but this fiscal year to date, we have also invested more in our brands, resulting in a higher increase in our underlying A&P as we reallocated some funds to more traditional media and to capitalize on trends with social media.

We also saw a significant increase in spend levels in support of a number of product introductions, including Tennessee Honey.

So through January, our underlying growth in A&P spend year-to-date is almost triple last year's.

Given the sizable upfront investment in A&P to launch Jack Daniel's Tennessee Honey, both at the end of last fiscal year and during the beginning of this fiscal year, we expect full-year underlying A&P to moderate significantly over the balance of the fiscal year, with the fourth quarter expected to be essentially flat compared to the same period last year.

Continuing the discussion of our portfolio, both Jack Daniel's family of brands and Finlandia's family experienced double-digit net sales increases on a constant currency basis for the nine months, while the Southern Comfort family declined in mid-single digits, a slight improvement compared to the first half.

In many ways, Southern Comfort was the first flavored American whiskey, and it remains a very important brand for us.

According to recent US Nielsen results, on a three-month basis through February 4, Southern Comfort commands about half of the value and volume when combining all of the top flavored whiskeys.

We are progressing and reinvigorating this brand with new communications, along with flavor extensions, including SoCo Lime and SoCo Fiery Pepper, and we are now introducing cherry in the UK in the fourth quarter.

The good news is that flavored whiskeys continue to explode in the US, fueled by Jack Daniel's Tennessee Honey.

We are firming up our plans to expand Tennessee Honey into several international markets in fiscal '13, including the UK, South Africa and Australia.

While we will be cycling against the US brand launch and pipeline fill in this year's fourth quarter and at the beginning of next fiscal year, we believe opportunities still remain to build Jack Daniel's Tennessee Honey velocity in both the off-premise and on-premise markets in the US.

Our super-premium brands also continued to perform very well globally, with Gentleman Jack, Herradura, Woodford Reserve and Jack Daniel's Single Barrel all increasing year-to-date constant currency net sales at double-digit rates.

In the US, our super-premium wine brand, Sonoma-Cutrer, also continued to expand.

New brand and marketing innovation investments continued this quarter as we launched a product line of Little Black Dress vodkas.

We retained the Little Black Dress trademark for spirits when we sold the Hopland-based wine brands last year.

Little Black Dress vodkas were developed by women for women, and deliver several flavorful products primarily targeted to calorie-conscious consumers.

A couple of other examples of recently-launched innovative brand extensions include, in Germany, Jack Daniel's introduced Winter Jack, a Tennessee apple whiskey punch, a seasonal ready-to-pour Jack Daniel's with a taste of apple, cinnamon and cloves.

In addition, building on the brand equity that Finlandia Vodka has built in Poland, we recently launched a new line extension, Finlandia Spice, to play in the spiced vodka arena, where we previously did not participate.

Shifting gears to our international markets, where we continue to make broad-based progress, looking at the nine-month constant currency net sales for our top 30 markets, once again, over half of them grew at double-digit rates.

The brands that have been resonating internationally and also grew constant currency net sales double digits for the nine months were Jack Daniel's Tennessee Whiskey, Finlandia, Herradura, Gentleman Jack, Jack Daniel's Single Barrel, Early Times and Woodford Reserve.

Let's spend a minute talking about Europe and our larger markets there in terms of fiscal year-to-date constant currency net sales.

Unlike many of our competitors, particularly with respect to Jack Daniel's, we have been seeing positive results in Northern Europe.

For both the quarter and year to date, the UK was up mid to high single digits, with Germany and France both up double digits.

Some of our super-premium brands also grew in these markets, although on a small base.

We have continued to invest in the European markets, which have remained a growth vehicle for our brands.

With respect to what we refer to as the emerging markets, which for us is a broad array of countries, we continue to record double-digit growth in year-to-date constant currency net sales through January in the majority of the emerging market countries where we do business.

This would include France, -- I'm sorry -- this would include Russia, Brazil, Turkey, Mexico, and the Ukraine, just to name a few.

All combined, emerging market countries grew year-to-date constant currency net sales 16%.

Lastly, in the US, net sales on a constant currency basis for the year through January increased mid-single digits, led by the Jack Daniel's family of brands.

Finally, looking at our guidance for the full year, we confirmed our guidance and narrowed our EPS range to $3.50 to $3.65.

As we look forward to our fourth quarter, we expect to see similar growth in the high single digits in our underlying net sales and operating income.

As a reminder, the fourth quarter reported numbers will be noticeably affected by the impact of last year's sale of Hopland-based wine brands.

Last June, we pointed out that the reduction in profit from this business in fiscal '12 would reduce our EPS about $0.16 for the full fiscal year.

We now expect this full-year impact to be closer to $0.18 due to less than expected agency income on these brands through the transition.

$0.14 of that $0.18 was in the first three quarters, and we anticipate there is around a $0.04 impact remaining to go for the balance of the fiscal year.

In addition to this, last year's reported fourth-quarter benefited from a gain on the sale of that business of about $0.26 per share.

In terms of our foreign exchange exposure, considering our hedged positions and recent spot rates, we estimate that a 10% strengthening of the US dollar would penalize the EPS by about $0.01.

On the other hand, if the dollar weakens by 10%, we expect it would benefit EPS also by about the same $0.01.

Turning to some uses of cash, we intend to use some of our available cash balances to fully pay off the 5.2% $250 million bond when it matures on April 1.

In addition, we still anticipate capital expenditures to come in between $60 million to [$70 million] on the year, slightly lower than we thought last quarter due to some timing differences.

So to summarize, we are pleased with our consistent story of accelerating underlying sales, led by Jack Daniel's.

We have invested in new products and line extensions, made investments in A&P across the portfolio of brands and made progress in growing our international distribution.

All of these factors are expected to help drive continued high-single-digit underlying operating income growth in line with our plan or guidance for this fiscal year.

So, with that, let me turn the call over to Paul.

Hi, everyone.

And I will just add a couple of comments to what Don has already said it.

The first point relates to the significance of the Jack Daniel's Tennessee Honey performance.

It is of course exciting to have a brand extension accomplish what it has in the marketplace in less than one year.

In addition to that, however, it has played the very important role of being the impetus to Brown-Forman's improved performance in the United States, which is our most important country, and today, the industry's most valuable distilled spirits market.

Just one year ago, Brown-Forman and its two most important trademarks, Jack Daniel's and Southern Comfort, were all losing share and struggling to grow in the United States.

Today, the Company and the Jack Daniel's trademark are both growing nicely and gaining share in their relevant competitive segments.

These gains have been driven by the Jack Daniel's Tennessee Honey introduction and success.

But importantly, the Tennessee Honey success has not come at the expense of either Jack Daniel's or Southern Comfort.

In fact, from what we have observed thus far, the parent Jack Daniel's brand has performed slightly better in the United States since the introduction of Honey, as we believe this line extension has provided what we sometimes call a positive halo effect for the trademark.

While Southern Comfort has not yet returned to growth, we believe this trademark's performance has also improved in the US since the introduction of the Jack Daniel's Tennessee Honey brand.

This is noteworthy, as we were naturally anxious to see if Honey's success would come at the direct expense of Southern Comfort, which has long been one of the leading brands in this category, referred to as either flavored brown spirits or flavored whiskey.

To date, this has not been the case, as the parent Southern Comfort performance in the US has been essentially unchanged since Honey's introduction and the trademark's overall performance has in fact improved due to the introductions of Lime and Fiery Pepper.

As a result of all of this, our Company has grown and gained share in the US over the last year, and today, we have a strong leadership position, with two trademarks in one of the most exciting growth segments of the world's most valuable distilled spirits market.

This is important progress and I would like to publicly congratulate the many people at Brown-Forman who have led and contributed to it.

In addition to the successful launch of Tennessee Honey in the US, the accelerated and impressive global growth of Jack Daniel's in both developed and emerging international markets has been the driver of this year's accelerated growth in underlying net sales, gross profit and operating income versus what we experienced for the full fiscal year 2011.

Importantly, our Company's year-to-date growth in underlying operating income of 8% approximates our historical high-single-digit, long-term growth rate on this same measure.

We find the return of the Company's underlying growth rate to this level to be very encouraging for the future.

Looking ahead a bit, we will remain focused on further improving Southern Comfort's performance and continuing the Company momentum we have created this fiscal year, which includes the continued growth of our super-premium brands and the recent improved trajectory of Finlandia's performance.

As Don mentioned, the planned further expansion of Jack Daniel's Tennessee Honey, both within the US and into new international markets, and the improving pricing posture across our Company are additional encouraging signs as we finish up fiscal year '12 and finalize our plans for FY '13 and beyond.

Thanks.

That's all for our prepared commentary and now we are happy to take any questions.

(Operator Instructions) Kaumil Gajrawala, UBS.

Just on the splits for advertising, Don, that you spoke about, should we then assume that you are -- with how you report the numbers on advertising as a percent of sales, that number going from 13 to about 11 over the last few years, is 11 the right number given the reclassifications that we should be thinking about over the long run?

You know, one of the things -- when we talk about -- quite a bit over the last couple of years is just how much we really wanted to stay flexible and how we used our A&P to make sure that we are being responsive to what is going on in the environment.

I think as we move towards taking more price increases, one of the things that we think about in all of that is, as we think about our A&P and supporting our brands and supporting those price increases, often times you will look at shifting your mix more towards pull-type marketing efforts, rather than push.

And the more you get into the pull type, the more you are driving more expense through kind of what goes through that traditional A&P line.

And so, yes, I would expect that we will probably be seeing some more increases going in that way.

But all in all, I think we feel pretty comfortable about the balance that we have got right now in terms of the investment behind our brands generally.

What you might just see is a little bit more mix shifting going on more towards kind of the pull versus the push.

Paul, do you want to add --?

Yes, and I think we are still firming up a lot of our F13 spending priorities, which will have an influence on that.

But I think Don is directionally correct on it, that we frequently will move, depending upon where we see the best opportunities, between -- monies between things that reside in cost of sales or in discounts to A&P and back, if we think it can be impactful.

So probably the prevailing theme that Don mentioned in his comments about the pricing environment, we could see the advertising and percentage of sales fluctuate a little bit based on where we allocate our investment.

Got it.

And then also on pricing, you have now taken pricing in a variety of markets.

In some markets, you have -- I guess the price to consumers gone up significantly more than you and your price increases because of excise taxes.

Could you give us a read on how well it is sticking, what the consumer response has been so far?

And I guess you may need to go region by region on that; but overall, maybe for the United States and then maybe for western Europe?

Yes, well, in the US, pricing for the most part has been fairly flat in the US.

We've seen -- we have seen some occasional mix improvements here and there, but for the most part, on average, our pricing has been pretty flat.

And the two markets that I had identified today, both with France and the UK, it is really just too early to tell yet.

You know, with the buy-ins and everything, it usually takes about a month or two for everything to kind of make its way through the marketplace, before you can really get a good, strong read on kind of what is happening.

I would say generally, to the extent that we have seen excise tax increases, which we have been seeing in a number of markets for the last couple of years, in some markets like Australia, for example, they automatically take excise tax increases every year.

In fact, there, they take it twice a year.

We have generally seen not that large of an impact in terms of the health of our industry and our business overall.

And so to that extent, it would appear that consumers have been able to absorb it.

There have been some markets where we haven't been able to pass them on because it would not stick.

It ends up being kind of a market -- a market situation.

But overall, when you kind of look at how the industry is doing generally, it continues to grow and do pretty well on a global basis.

There is a real difference, too, between tax-related increases and prices where the whole market goes up and it has a real different effect, we observe.

I think that will vary from market to market.

Which is different a little bit than just the conscious decision to take your prices up based on a desire for a premium price position or the input costs that you have been absorbing.

So they are very different in those circumstances in terms of the impact.

I would say -- well, with the caveat that it varies brand by brand and market by market, our experience as a Company is that it has been typically, on a historic -- looking at our history, a very positive financial decision when Brown-Forman has implemented price increases in an appropriate manner.

I mean, implemented well, thought through in terms of all of the components of size by size and market by market, and then typically supported well, as well.

So we don't anticipate it being any different this time.

Although you are still going to -- I think we're going to need to be even more sharp than we historically have, because of all the changing global economic conditions that exist out there and how they are prone to varying pretty quickly.

So does that help you?

Yes, that's helpful.

And then just a last very quick one.

You gave us some guidance on distributor inventories and the expectations into this quarter.

Are you happy with where they are now, or is there a potentially some further drawdown in 4Q?

Yes, I mean, if you look in the earnings release that we put out there, we provided a Schedule A, which kind of gives a reconciliation between the reported and the underlying.

And when you look there on a year-to-date basis, it basically shows that our distributor inventories are today pretty much in line with where we started out the fiscal year, which we are comfortable with at this juncture.

When you look forward, these things have the tendency to vary a little bit up or down.

A lot of it just depends upon what is happening in individual marketplaces.

And it is always kind of hard to sit here and to guess in advance what might happen.

So there could be some fluctuations on this as we get into the fourth quarter.

But at this juncture, we think that our inventories are pretty much in balance with where we started the year.

So you have worked off the pre-buy-in from last quarter.

It sounds like it has generally been worked off, correct?

Yes.

Yes.

I mean, there is nothing we can see at the end here at Q3 like we did see at Q2 that we have talked about.

So they're certainly better in balance.

But that remains to be seen, of course, right?

Yes, yes, got it.

Thank you, guys.

Judy Hong, Goldman Sachs.

So, just in terms of the Tennessee Honey, obviously, you guys had a pretty successful launch.

So you are sort of lapping that into next year.

Can you give us some perspective on the opportunities within US in terms of the increase in velocity that you are planning to have, both on the on-premise and off-premise?

And then maybe you can give us a little bit more color just internationally how you size up the opportunity for a product like Honey.

And then over time, do you have a sense of how big sort of the flavor portion of the whiskey could get?

Is it something that we could see getting as big as some of the other categories, like vodka or rum, where just the flavor portion is pretty sizable?

Let's see, I'll start with -- maybe --.

Opportunities in the US.

Yes, the first one was sort of opportunities in the United States.

And I think the main comment there is while it has been a wonderful success, we believe, particularly because of things like the distribution in the marketplace doesn't occur overnight, it takes a while to phase that in.

Typically, you have to get authorization with -- whether it is chains or with control states, some of that.

It doesn't just happen overnight.

So we think that there was a more phased pipeline that we have built going in at the early stages of the fiscal year.

And then when we observe in terms of really the most dramatic difference in performance for our particular brand relative to what we are seeing from some of our competitors is that we are skewed more to the off-premise and really have only scratched the surface thus far in the on-premise.

So we think there is an opportunity both on on-premise distribution and velocity, and we think that there continues to be interest.

I mean, the one thing I would observe about not only our introduction -- I commented a little bit about the impact it is having on other Brown-Forman brands -- but we observe that the segment in addition to what -- the volume we are contributing continues to grow.

That a number of the competitors who were enjoying success before our entry are continuing to grow nicely.

And I just think those are indicative of a real significant growing interest by the trade in consumers for these offerings, of which we happen to be in a wonderful leadership position with our two trademarks.

So, that also tips a little bit to your last question, which is where could this go.

We frankly don't know.

It is one of those things that we know that the interest in distilled spirits, very much so in the United States, but increasingly globally, whether it is on vodka, and here, more recently, in this example, with whiskies, is skewing very much to the variety that comes from flavors.

People like them for their -- just very interesting flavors and different flavors, but also the convenience often times that comes in preparation of their drinks.

So we think there is a lot of growth here.

And if you just look at the long-running success of flavors as related to most notably vodka, if it reflects any of the opportunity that might be there for the whiskey trademarks, it would be a real exciting thing for the industry.

And, Don, do you want to talk about the international piece, I think, that she referenced?

Sure.

On the international side, we identified some of the markets that we are looking at for next year.

We are continuing to look at where we think the best opportunities lie.

Part of what you look to is where -- kind of to what Paul was alluding to -- those markets where consumers seem to be interested in flavors, and where you have been able to establish the brand fairly well.

And so we have seen some interest in markets like Australia and Germany and South Africa.

And a lot of pieces places where you see the RTD market working tends to give you some sense as to where flavors are kind of hitting a sweet spot with consumers.

And so that is pretty much how we are looking at it.

And we will continue to look to see where we think opportunities -- where there might be opportunities along those lines because then you look for ways to go after them.

Judy, I would add to that that one real fact since the introduction of Tennessee Honey in the United States, the global demand for it or call for it has been ahead of our willingness and actual desire, to be honest, to fulfill that, simply because it is a Jack Daniel's trademark expression.

And we really wanted to understand and learn how it was performing in the United States, as you can imagine, before we thought about any expansion plans.

And as we sit here and prepare for FY '13, we're in a better position to sit and consolidate those ideas and plans.

But it has been our experience throughout the course of this year that many international markets have had a demand for this ahead of our willingness to supply.

So as you think about fiscal '13, obviously, you still have one more quarter to go.

But given even the improving trends that you see in Finlandia and maybe even SoCo and potential for pricing to accelerate in 2012, can we see sort of this high-single-digit underlying sales growth accelerate even further?

Or is sort of the Tennessee Honey launch in fiscal '12 somewhat of a hurdle just in terms of the lapping?

We will confirm all of the guidance that related to -- you called it -- I think you were referring to calendar year '12 with some of your comments there.

But we will be updating our FY '13 forecast and look when we speak with you all, I think in early June, when we report our Q4 and full-year results.

But what you mentioned there and what we have mentioned here this morning certainly are influences to us confirming our guidance and narrowing it here this morning.

And so we are pretty much focused on that right now, the development of plans into the next fiscal year.

And we are aware of the reality of introductory pipeline associated with Tennessee Honey, and we will be -- that will very much be considered as we develop our plans for F13.

And it just premature to for us to be, I think, commenting on any of that, because of the fact we haven't finished up all our plans yet.

Okay, great.

Thank you very much.

Lauren Torres, HSBC.

Just a follow-up on some of your pricing comments.

I am just curious about timing, why is next year the right time?

Is it because some of your cost pressures are getting tougher or is it because your competitors are taking pricing?

And then with that said, just thinking about how consumers may react, just curious if you think some behavior is firming up that you do think it is the right time, just based on how the consumer is doing.

Sure.

That's really good question and one I suspect a lot of people are thinking about.

You know, I think there are three areas that we might think about.

There are some general environmental things.

There are some influences and considerations that I think are more specific to the industry in which we operate.

And then a few others, of course, that are more specific to our Company and the brands that we own.

On the general side, just using the US as one surrogate for the environment, we think there is just a little bit better environment, whether it is the consumer confidence numbers you look at or the job reports that come out.

You know, there is always something that is a counter to that, whether it is higher fuel prices.

But you are constantly looking at the macro environment to try to observe what is its changing nature and how does that prepare you.

So we study that.

We would, I think in general, even though it varies all over the world, we would generally say it is a little better today than it would have been the prior couple years.

Probably more importantly are these things that are specific to our industry and our Company.

Last call, we talked a lot about the improving momentum in the United States and increasingly worldwide for bourbon and the whiskey segment generally.

And given that we have a strong and leadership position in that, I think that bodes well for the industry or the Company's, frankly, in this case, ability to think about improved pricing.

Because the momentum happens to be there in a segment or category that is very important to us.

We have observed over the course of time here that the growth rates for premium and super-premium price segments have continued to improve, versus a couple of years ago, where they were much reduced growth rates compared to what we are seeing today, particularly in this US market, where the super-premium segment is doing extremely well.

And then something I think you noted, that you always are looking at the competitive behavior to see if they're pricing down or up in some directional way, and how that might influence you.

And I think Don mentioned we basically feel that that environment is a little bit better today as well.

And then I think probably the most important thing is those factors related to Brown-Forman.

We noted in here the strong momentum for Jack Daniel's and our super-premium brands, the momentum the Company has today versus a year ago.

We have noted the higher costs, which are grain-driven.

But also, thinking something helps us is that those also incorporate higher investments in packaging, which actually help support some of the pricing plans you might have out in the marketplace.

And then I think Don mentioned this, and it is just so important for a Company like us, which is that you are always thinking with these products that are aged, the balance of your -- the value generation between volume and margin.

And when you are laying down inventories for many years into the future, a dollar of revenue generated from pricing is more valuable than that of volume.

So you are always looking at the recipe for delivering value.

And when it gets skewed one way or the other, you should take note; and sometimes that is appropriate.

But in this case, we think that because of the environment, because of some of the margin pinch we have observed, we just think we're in a much better position today and the opportunity is there to go out and get improved pricing.

So that is probably the summary of all of it.

Yes.

So taking all of that in, I guess we should assume that looking into fiscal '13, we should see margin improvement as a result of this falling through.

We will be guiding that when we come out with F13.

But just as we said last quarter and we will say it now, it certainly is our aim to shore up and improve our margins.

Okay, great.

And just one follow-up too.

You mentioned where we are with the inventories.

Where are you with respect to promotional activity?

Has that pretty much played through or we will see more of that in the next quarter?

Do you mean as it relates to -- give me a little more information, so I can help you with the answer to that.

Yes, I mean in the quarter -- the third quarter, you mentioned the impact of the distributor level and also the promotional activity that was flowing through, the timing of promotional activity.

I was curious if that's still flowing through your business or that was something that was more in your maybe second and third quarters of this year.

Yes, those comments, Lauren, were really more directed towards the promotional -- the timing of promotional activities that we were seeing through the holiday period.

Okay, so that is done.

Yes.

Okay, great.

Thanks.

Tim Ramey, D.A.

Davidson.

As we think about the whiskey category -- I'm winging it, but maybe it was growing 2%, 3%, 4% over the last couple of decades, and then seeing this tremendous acceleration.

I guess the obvious question is supply, and how well prepared do you believe you are, as well as the category.

I know Beam takes the point of view that, well, if we start running out, pricing will be the break.

Do you have a comment on that?

I mean that was a comment you referenced from Beam is anybody who has been in the aged businesses that are aged over any prolonged period of time have always had both that challenge but also that tool of trying to balance the pricing and volume.

I think most companies, I can't speak for them specifically, but it has been my experience that if you are operating in a good industry and particularly with the brands that we have positioned at the premium price points, the economics of selling more of your product are so attractive that you always try to plan for that success.

And so we always try to build that in as it relates.

Of course, the only thing we know about this forecasting process is that it is always wrong.

You can't with precision predict it, so you have to develop forecasting and cushion tools and all kinds of other things that help you as a manufacturer and a brand builder plan this.

Yes, ultimately pricing is one of the tools that can be deployed to help you with that.

But if your question was about whether or not we anticipate the industry to be challenged on this front or our company, our plans right now don't anticipate it being a problem for Brown-Forman.

We are sitting -- more than anything, particularly with this report, we're excited about the kind of progress we are seeing.

The additional actual sort of recent success through innovation has been a real help for the Company.

And then the other thing that we have got, which I think is a real help as being a company that has a portfolio of brands, is to be able to go and where you have products that aren't in the aged business, which we always oftentimes refer to as our sort of rest of portfolio at Brown-Forman beyond Jack Daniel's.

It is really exciting to go have the opportunity to develop the vodkas and the liqueurs and try to accelerate those growth rates in tandem with the whiskeys.

So -- but I think we're -- at least in our planning, we feel pretty good about where we are.

And I just more than anything consider it one of the most exciting developments for the Company and the industry, just to see what's happening with this category overall.

And if I could just ask a granular question about the fourth quarter.

Should we assume any discontinuity on -- you know, executive compensation or bonus accruals in the fourth quarter, given a flattish kind of year?

Or sort of hold the course on that?

Yes, Tim, the way I think about that, based upon our performance through this third quarter, all those accruals had been made.

It depends on how the fourth quarter ends up coming out that will determine kind of what the final accruals end up being.

We hope we have to surprise you positively with that.

To the upside, you are saying?

Yes, sure.

Okay.

And then -- if you said this and I missed it, I apologize.

But are you seeing a halo effect from Tennessee on the core business?

I assume you are to some degree, but it would be nice to know kind of if the growth is more broad-based than --

Yes, I mean, that is what I tried to reference in a couple of my comments.

Of course, the first thing you look for are the signs of cannibalization, and you study that close.

And in fact, then you see that it is the opposite of that, that you actually get little boosts of momentum.

And of course, you can never attribute this stuff so directly to one brand's introduction, how much of a halo effect is contributing to any improvement you might note in the parent brand.

There is a fair amount of guesswork in that.

But at a minimum, you start with the prospect that these always have the potential to cannibalize or to actually take something away from the brand.

And I can say with confidence that Tennessee Honey has largely, not only on its own merits, but also very much helped the trademark.

And if anything, we see an improved position in the Jack Daniel's brand, parent brand in the US market today.

And I also mentioned that we were concerned that it would directly impact Southern Comfort, just given the size and position Southern Comfort has in the US market.

And to date, that is holding up really well too.

Thanks.

Ann Gurkin, Davenport.

Good morning.

Wanted to start with your comments about expanding overseas, and how you see expanding that distribution.

Is it through joint ventures, internally developed networks?

Can you just give me an update as to where we are with that distribution plan?

Are you talking about in the expansion overseas just generally, not necessarily for (multiple speakers)?

In general, yes.

Yes, okay.

Thanks.

I mean, we are in the process this year -- it is a little bit in our results, but most of the major route-to-consumer and distribution changes in recent years here, we had a handful of them that occurred last year.

And because they were staged at different times of the year and the transitions take a little bit longer, they will affect your year-over-year comps.

Russia is one that comes to mind in that regard this year.

But in terms of activity, there are a few, but we would call them more ongoing, regular things that are just good improvements.

Probably the most significant one was the January launch of our own company in Turkey that we talked about, I think, a couple of times prior.

That was probably the biggest singular change this year.

But last year we had Germany and Russia, Brazil.

I think Canada phased at a certain point.

So there is less activity this year on that front.

But they've continued a long-term trend, Ann, that we think is important, where we just can be appropriately influential over our business for the plans we have developed.

Sometimes that is in partnerships; sometimes we have the opportunity to go out and work on our own and capture some of the full margins and actually the costs associated with that.

But it continues to be a hybrid model all over the world, and we are always looking at that.

Great.

And then, Paul, be interested in your comments or opinion on, do you think the global spirits industry is ready for another round of consolidation?

What do you think could happen there?

Well, I just -- (inaudible) I don't know what the last sort of round was.

It is often times -- but there is periodically acquisitions and mergers in this industry.

It's a very attractive industry.

But I don't see it as buoyant in our industry as when you compare it to a bunch of other industries, where this stuff is very, very frequent.

But it would be hard for me to predict where the industry on that particular front is going to head.

To be quite honest, we've pretty much got our heads down, building the business organically, and have the benefit of an ownership structure that really has a long-term view on this business.

And we try to put that to use each and every day in the marketplace.

Great.

And then finally, maybe if you can update on your outlook for the tequila category and your plans there for this year, calendar year.

Yes, it's a bit of a mixed picture through the first nine months.

Actually, the Herradura brand has seen some nice sales improvement going back almost a year now or so.

Well, and el Jimador is a bit mixed by country, because it has been much more competitive in the US market.

There has been a lot of competitive activity at that 100% agape level at lower price points, so it has made it competitive.

And that has impacted some of our deflation trends.

el Jimador continues to be in, I think, I good position in the United States and they have a lot of growth opportunity, but there has just been a lot of competition here.

The Mexico el Jimador business is always in a competitive arena, and it is sort of flattish.

Particularly we've stabilized over the last couple of years, I would say, some of the takeaway trends that we were observing, which were a little more negative, going back toward the 2008/2009 period.

So we have been enthused about that.

But the news in Mexico as it relates to our tequilas are really Herradura's improvement over the last year or so and the continuing progress of our New Mix ready-to-drink brand down there.

That's very helpful.

Thank you very much.

Edward Mundy, Nomura.

A couple of questions from me.

Back to A&P, as you move back towards traditional forms of advertising, could you remind us what proportion of your marketing spend is in digital?

And do you see digital becoming a greater piece -- a greater part of the piece?

I don't have offhand what percentage is in that.

Like almost every company, I am sure it is a growing -- it certainly is a growing percentage.

What I have been impressed with on our work in the digital arena, particularly around the Jack Daniel's brand, is not so much that the -- it has required massive amounts of investment, as much as it has leveraged the ability to directly communicate with consumers through things such as Facebook.

And the launch of Tennessee Honey in the United States would be example number one in the way that it brought new friendships to the Jack Daniel's brand where you could communicate with them in far more efficient and direct ways then oftentimes is available to mass communicators.

And I think that is the gold in this.

It is not only that you are communicating directly through the new technological formats; it is you are so efficient in your ability to talk to people who are predisposed to you.

So we are fortunate that Jack Daniel's is the type of brand that people really want to interact with, and that is an advantage in the world that we call social media.

Great, thanks.

Second, on China, I know it is a small part of the overall group.

But can you just provide some color on the decline of net sales in the quarter and how you look at the longer-term opportunity for American whiskey in the Chinese market in particular and in training consumers up to more premium variants of it?

Yes, we have talked about China for a little bit now, where we have actually struggled there a bit of late.

We continue to see China as being a very big opportunity.

They certainly have an interest in whiskey.

We are taking a real look at that market in terms of what we have got there as far as an organization and how we are approaching it.

We have been seeing -- I would say when you look at kind of our emerging-market world, we have been seeing a lot earlier opportunities for Jack Daniel's in a number of other places than what we have seen for China up to this point in time.

But it is certainly one that continues to be on our radar screen and one that we are trying to figure out.

We still think we are -- even though we are struggling there, we do think we are one of the -- there is not a lot of brands at the volume levels at Jack Daniel's and above.

So we sometimes refer to that as acceptable brands in that still relatively small international spirit market here.

But we are definitely in a transition period right now, where we're -- everything from strategy to implementation to organization, we are having a fresh look at it to make sure that we can approach that market so that it can be growing in the way we experienced through most of the 2000s.

But it is a competitive market, and getting all aspects of it lined up well, the strategy, everything, all the way down to your pricing and promotional spending plans and implementation, the media support you put behind it, we'd have to think our way through it, and maybe in some different ways than we have the last couple of years.

Got it.

And just a final question from me.

We are hearing quite a lot about innovation in US beer this year, for new flavors, new pack size, et cetera.

Do you see this threatening the current trend of spirits gaining share away from beer in the US?

We certainly understand the response.

To date, we haven't seen anything.

And I didn't actually check some of the more recent figures in advance of this call.

But no, you totally expect people to fight for share of the beverage alcohol market.

And same from wine at various price points.

But none of it will surprise me in terms of -- particularly in the formats that beer are typically served.

And they have, I think, obviously observed the appeal of the variety that comes from spirits consumption and are trying to tap into that in some way.

But also, I think the innovation -- the beer companies have long been innovative in pack size and in many of those.

I think innovation to the spirits industry these last five or six years is relatively new.

And consumers seem to enjoy it.

They seem to be responding to it.

And a measure we keep an eye on is what percentage of the incremental growth is coming from new products in the industry, and it remains at a very high level.

Thanks very much.

Thank you.

At this time, there are no questions.

Okay.

Well, thank you, everybody.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect your line.