Brown-Forman Corp (BF.B) 2013 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the second quarter fiscal 2013 conference call.

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

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

(Operator Instructions)

I would now like to turn the conference over to Jay Koval.

Please go ahead, sir.

Thanks, Tiffany; and good morning, everyone.

I want to thank you for joining us today for Brown-Forman's 2013 second-quarter earnings call.

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

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 2013 second 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, 8-K, and 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 for his prepared remarks.

Thanks, Jay, and good morning.

On today's second-quarter earnings call, I plan on covering three topics.

I'll start with a review of our first-half results, followed by a quick update on the pricing environment, and I'll close with our revised outlook for fiscal 2013.

Let me start with my first topic, a review of first-half results.

We are pleased to report first-half underlying sales growth of 8%.

Remember that on our last quarterly call, we estimated that retail buy-ins likely contributed 1 point or 2 points to our rate of underlying sales growth of 10% in the first quarter.

The second quarter saw the expected reversal of some of these buy-ins, reducing underlying sales growth to 6%.

Putting the two quarters together, for the first half, underlying sales came in at 8%, in line with our high-single digit full-year outlook.

We believe our underlying sales result outperformed the spirits industry averages, in large part due to our skew to premium brands and our portfolio's focus on faster growing categories, such as North American whiskey.

Let's look at the performance of several of our brands.

From this point, any references to net sales will refer to constant currency net sales unless specified differently.

So starting with Jack Daniel's, the trademark continued to register solid net sales growth, up 9% through October.

To put this in a broader context, we estimate that over the last five years, the Jack family of brands has grown at 8% CAGR, which according to IWSR, is the fastest volume growth among the top 10 largest global spirit brands over that timeframe.

Accordingly, Jack Daniel's is broadly recognized as one of the valuable spirits trademarks in the world today and the major value driver for the Company.

Its global appeal as a premium imported western spirits brand has helped it progress from a US-centric brand 20 years ago, to a global icon today, recognized and sold in almost every country in the world.

Jack Daniel's Black Label has continued on its global growth story, while being the foundation for very successful line extensions further up the pricing ladder, with Gentleman Jack and Jack Daniel's Single Barrel in the super and ultra-premium price categories.

And, we believe the trademark is early in realizing the potential upside from our innovation agenda.

Jack Daniel's RTDs provide the brand with broader distribution in venues generally restricted to beer; and more recently, the introduction of Tennessee Honey created opportunities for us to bring in a new loyal cadre of consumers into the franchise.

More broadly, given North American whiskey's still relatively small 2% share of global distilled spirits, we believe there continues to be a long runway for future growth of the Jack Daniel's trademark.

Looking at our other brands, we are pleased to say that the rest of our brand portfolio has enjoyed a strong acceleration from year-ago trends.

For example, in the first half of last year, excluding Jack Daniel's, all other trademarks in our portfolio grew underlying sales by roughly 3%.

In the first half of this fiscal year, these brands grew approximately 6%, almost double the prior year's growth rate.

Let me run through some of these brands' individual performances.

In the vodka category, Finlandia grew net sales by 9%, driven by one of the largest vodka markets in the world, Russia.

While the overall vodka category in Russia isn't growing, premiumization trends have powered double-digit annual sales growth for Finlandia over the last decade.

The premium-plus segment is relatively small at approximately 1% of Russian volumes, so we believe this trend still has a long way to go.

While we are working hard on the strategy to better penetrate the US vodka business, we believe Russia, in addition to Central and Eastern Europe, remain some of the largest sources of potential growth for our family of vodka brands in the coming years.

Moving on to tequilas, we acquired the Casa Herradura family of brands in 2007.

El Jimador and Herradura are regarded as two of the best 100% agave tequilas in Mexico.

The downturn hit the premium-plus tequila category hard, aggravated by an extended period of agave oversupply, which brought new entrants into the market.

But, we have seen some stabilization in the category, including a return to growth for our brands.

In the US, an ever-growing Hispanic population should also be a tailwind for our tequila brands.

Through this acquisition, we also acquired the number-one position in RTDs with el Jimador's New Mix.

While building on that position, we were also able to launch Jack Daniel's RTDs, helping us grow that franchise at an even faster pace.

We also believe that tequila has tremendous opportunities for growth outside of the US and Mexico, and we are beginning to see consumer demand for markets as far reaching as Russia, Brazil, and Australia.

Tequila's share of global TDS is so small that, again, we believe we are well positioned to drive sustainable growth with our premium portfolio of brands.

Herradura, in particular, is positioned to become one of our large brands over time, as we believe we are just beginning to tap into its growth potential, with year-to-date net sales up 22%.

In liqueurs, Southern Comfort competes in a highly competitive category that has been under pressure over the last few years.

During the summer months, we launched a new consumer engagement plan, including a new and more consistent media mix in the United States to drive unaided awareness.

And, it appears to be working, with US three-month volumes for the family now growing faster than TDS according to recent Nielsen data.

There is more work to do here to stabilize global sales, but we are encouraged by recent US results and believe that we are on the right track to return this highly profitable brand to growth mode.

The Company's super and ultra-premium brands have been performing well for quite some time.

That performance has continued with these brands delivering solid double-digit net sales growth in the first half.

Consumers are increasingly looking at our high-end brands as affordable luxuries worth the prices charged.

Among these brand performances, Woodford Reserve grew net sales 27% and Sonoma-Cutrer 18%.

The key takeaway that I'd like to leave with you is that our efforts have been working to accelerate the sales growth of our portfolio beyond Jack Daniel's, helping drive better-balanced revenue growth for the Company as a whole.

Our premium-brand portfolio is focused on categories that we expect to grow faster than the broader spirits market, so we believe that we are well positioned to continue to outperform the industry.

We will talk more about our market-by-market and brand-by-brand approach to drive long-term growth at our Investor Day next week.

In addition to achieving better-balanced top-line results by brand, our results were also driven by broad-based geographic strength.

Emerging markets, despite some slowdown in parts of Latin America and Asia, contributed over 40% of our incremental underlying sales growth in the first half.

These results were fueled by Russia, Brazil, Turkey, Mexico, and Poland.

Underlying sales were roughly flat in Western Europe, impacted by the combination of weaker economic conditions in the UK and France and the impact from price and excise-tax increases taken earlier this year, all partially offset by growth in Germany.

Among other developed markets, Australia also grew net sales high-single digits in the first half, and the US delivered underlying net sales growth of 8%, in line with our global rate of growth.

Comparing our underlying to our reported results, year-to-date top-line reported growth of 2% was negatively impacted by 3 points due to the strengthening of the dollar and 4 points due to the absence of the agency relationship for the Hopland-based wine business.

We estimate that inventory levels in the channel are still running slightly higher than last year, contributing 1 point to reported sales growth, as give back in the second quarter hasn't yet completely offset the first quarter buy-ins.

Underlying gross profit increased 10% year to date, as reported gross margins increased 2.6 points.

Half of that increase was due to the absence of the agency relationship for the lower margin Hopland-based wines and the other half coming mostly from improving price mix, with a smaller contribution from lower costs associated with value-added packaging.

Underlying A&P spend increased 6%, below what we expect for the full year as the timing of this year's A&P increases are spread more evenly throughout the year, resulting in more spending weighted to the second half compared to last year.

Underlying SG&A increased 10% through October, due in part to the timing of various expenses.

Operating income grew 12%, on both an underlying basis as well as reported, and earnings per share increased 18%.

All in all, we are pleased with our results in the first half and our continued industry out-performance.

Let me move on to my second topic, a pricing update.

We view price increases as crucial for our brands' premium positioning and as an opportunity to offset inflationary pressures and tax increases.

First-half sales trends came in close to where we thought they would be.

Price mix is up 2 points year to date, and over 3 points in the second quarter, a significant improvement from the minus 1% impact last year.

In addition to a healthier overall pricing environment for the industry, we believe competitive promotional activity has diminished over the last year.

Within this environment, we have significantly reduced the use of value-added packs over the last six months, which helped drive some margin expansion through reduced costs.

The combination of lower promotional spend, continued trade up from premiumization, and shelf-price increases implemented earlier this year, are all helping deliver better price mix and gross-margin expansion.

It remains to be seen what will transpire over the important holiday selling season, so we will closely watch competitors and monitor retail behavior over the coming weeks; but so far, we are encouraged by the trends we are seeing in the pricing environment, particularly in fast-growing categories such as North American whiskey.

This brings me to my third and final topic, our revised outlook for fiscal 2013.

The global environment remains uncertain, with macroeconomic concerns in parts of the world such as Western Europe and Asia, as well as in the US, with the fiscal cliff unresolved.

Foreign exchange remains volatile and the tax environment is a wildcard, but despite this back drop, we believe we are on track to deliver the high-single digit underlying sales growth we shared with you six months ago.

At this stage, we expect the momentum of the first half to continue, with the price increases we have taken driving improved price mix and leverage the gross profit line, which is then flowing through to operating income.

As a reminder, we do expect our reported gross margin improvement to be much more modest in the second half as we move past the positive impact from Hopland-based wines on December 31.

We are increasing our expectations for growth in underlying operating income by a couple of points to the double-digit level and increasing our EPS range to $2.58 to $2.70 per share.

This revised outlook includes approximately $0.02 of anticipated interest expense from the incremental debt we expect related to our recently announced $4 per share special dividend.

To help you model the potential impact from changes in foreign exchange, a 10% move in the dollar in either direction would impact EPS for the balance of the year by approximately $0.09.

To summarize, we believe the Business is performing well with better-balanced revenue growth across geographies, across brands, and with price mix an increasingly larger contributor.

Price increases and favorable mix are driving leverage to the gross-profit line, and ultimately, to operating income.

Our balance sheet, coupled with our growing cash flow, provides us with the flexibility to pay the special dividend; and at the same time, we retain ample capital capacity to continue to invest significantly in our future growth, including keeping our eyes open for brand acquisitions that we think would be complementary to our existing portfolio.

We have a proven track record as strong stewards of capital and believe our recent dividend announcements reinforces our position as a Company focused on delivering superior risk-adjusted returns for all of our shareholders.

With that, I would like to turn the call over to Paul for some brief comments before we open up the call to Q&A.

Thanks, Don.

We are pleased, obviously, with the first-half results and the overall health and prospects for the Company going forward, and I think this is particularly true when we consider some of the things that Don mentioned about the uncertainty that exists across the globe.

The one thing I would highlight from the first half is the balance of the performance across the Company, and I observe this really in the portfolio balance that Don was just discussing, as well as the geographic mix and geographic balance of performance that we're seeing, but also in some of the highlights he just provided related to our gross-profit delivery.

It is such a wonderful combination when you're able to have your volumes up, your prices up, and your costs even slightly down a bit.

I thought I might just give you one example on the effects, or the way we have been observing our margin, from the Jack Daniel's US business, which of course, Jack Daniel's is our most important brand and the US continues to be our most important country.

And, about one year ago, when we were observing the potential opportunity to raise prices, we thought the environment was improving in such a way one year ago versus what we had seen the prior two or three years that we wanted to explore that.

At that time, just using the Nielsen results from early November one year ago, the Jack Daniel's business on a 12-month basis was up just above 1%, and all of that was attributable to volume.

You fast forward to today, using the Nielsen results from -- that I think ended November 10, the Jack Daniel's Tennessee Whiskey business was up 4.2% in the prior 12 months, with 2.5% of that coming from volume and the remainder, of course, coming from pricing and mix, or 1.7 points.

So, we are really pleased with that as an example from a pretty clean market, where there hasn't been a lot of excise taxes and things like that, as an example of what we had hoped would be available to a brand like Jack Daniel's back when we started to explore that environment.

Actually, back at that time we felt like, in some ways, that others were out exploring it ahead of us, and we thought there would be opportunity; in fact, as we look at the last 12 months, we think we've been able to see some of it.

So, really pleased with that kind of pricing and volume balancing act as well.

All in all, we are very pleased with our first half, and most importantly, we want to thank our employees across the globe for their continuing efforts to help us produce these results.

It's enormously important to the Company, and we want to make sure we thank them as well.

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

(Operator Instructions)

Vivien Azer, Citi.

My first question has to do with your outlook for the bourbon category, or North American whiskey, specifically in the US.

Now that we've seen some of the changes in the promotional environment in pricing both from you and your competitors, can you give us a sense of what you think a good run rate is for the category for the back half of the year, and then maybe over the next three?

All we can do is maybe direct you to some of what we're observing in the institutional data because that's the most current stuff.

You'll get some end-of-year reports for 12 months, and some people will try to forecast that going ahead.

I was actually -- we were looking at it in preparation for today, so I'll give you an example.

The US spirits business 12 months ago was running at about a 3.7% run rate; and today -- this is all dollars, not cases, is running at 3.8%, so about the same, just below 4%.

The bourbon category in the United States was running at 6.5% 12 months ago and is running at just below 9% right now in dollars, so over the 12 months it's accelerated.

I don't know if that will keep up or not, but it certainly is exciting to have growth rates on a 12-month basis that are more than double the spirits industry.

And, for those of us who have a concentration in bourbon, that wasn't the case for a long time in the US distilled spirits market, so we welcome it.

I think that there's favorable premiumization going on within bourbon, just as there is a little bit in spirits, and we also think there's real price increases that have been getting through, not just by our company I think but by others as well, so we're pretty bullish about what's going on with bourbon and American whiskey right now.

Fair enough.

My next question has to do with Southern Comfort, certainly encouraging to see a continued improvement in the brand in the US, but there seems to be a real difference between what you are seeing in the US and the deterioration that presumably you've seen in Europe, given the results for the first half for the brand globally.

Can you speak to the trends that you're seeing specifically in the US, and what you have in store for Europe to hopefully turn the brand around there?

Sure, in the US, and we've talked about this quite a bit, going back a number of months ago where we were really looking at a lot of new communications to put out there, how much we were spending behind media, how we were spending it in terms of seasonality.

So, there's been quite a few changes there with the recent advertising campaign that we think has had a big impact, how we're using social media around that advertising campaign, and it's nice to see that the brand is responding to all of that.

Outside the US, as we look at our numbers, we think we had a better second quarter than first quarter.

We recognize we still have a long way to go.

Some of it, too, is just kind of running up against the environment that you're seeing, particularly in Western Europe.

We're probably a little bit behind the United States in terms of where we are in putting some of these plans in place and starting to get them executed, but we're encouraged by what we've seen in the US to believe that we can get the rest of the world on track so that we can get the brand, overall, back on growth.

One thing that influences Southern Comfort's international performance quite a bit is it just doesn't have the breadth of geographic distribution as a brand like Jack Daniels does obviously, so the UK market being our second-largest market for Southern Comfort, with the excise tax that's hurting that market, I think Southern Comfort is probably more uniquely exposed to that in terms of the percentage of its business.

We have begun to put some of the initiatives and actions that have worked in the United States into play in the UK more recently.

They were factually behind in terms of the calendar and relative to the US, so we're hopeful that that will improve it.

We also think that Southern Comfort has to find a number of new ideas, just as we have been able to do in the last 12 months in the United States, everywhere where it competes because it really is in a competitive category with that LDA to 29-year old consumer that it targets.

So, there's a lot of competition in the United States, and we thought it would be more difficult to get it turned around in some ways in that real tough US market, and we're pleased by what we've seen.

So, I think getting focused on the same stuff in some of its key international markets could have some of the same benefit, but it is behind.

Terrific.

Thank you very much.

Judy Hong, Goldman Sachs.

I wanted to go back to probing on the pricing commentary, and I wanted to get your perspective on whether you think that most of the price increases that you've taken have now gone through the value chain all the way to the consumer level, and if you can help us understand what impact you're seeing as you've taken these price increases at the consumer level.

And then, if you look at some of the categories like vodka, obviously the pricing environment there is still very challenging, so how much attention do you really pay to that particular category?

And, if there's any risk that the Brown spirits do suffer if the vodka category continues to be very competitive from a pricing perspective?

Maybe we'll both take a stab at the couple of questions I think that were in there.

In some ways, our rate at the consumer level is just now beginning to improve because, as you suggested with your question, it takes awhile for all that pricing to get reflected.

Always the most readily available data to us is from the United States, unfortunately, but this pricing was going on all over the world.

So, if you'll permit us, it will probably take us a few more months to really read the consumers acceptance of it, reaction to it, and then starting to get into new patterns.

The other thing, too, that's so important to this is the context against which some of the price increases were taken.

Where they went up with excise taxes, that of course, is a different environment than, say in the United States, where they were just individual brand increases versus something that affected the whole industry.

But, just using the US data -- I'd direct you back to the comment I made in my opening remarks about how pleased we are with what we're seeing so far in Jack Daniel's.

I'll give you one example, that even goes to the three and one-month trends in the United States more near term, where that pricing starts to get reflected, is that the Jack Daniel's sales-growth rate is, as I've cited 12 months ago, was at about the 1% level, and it's pretty steady at the 3.5% to 4% level at the dollars -- in terms of dollars growth on a 12, 3, and 1 month.

So, you obviously start to see more contribution from pricing as you get toward the nearer months, but the fact the sales rate holds up at the 4% level, and that's a higher level than the 1% we had one year ago, I thought was really encouraging, so that's why we chose to highlight that.

It always varies brand by brand.

We think the higher you go up the pricing ladder, perhaps the more ability there is to take some price, so if you're talking about $35 and $40 a bottle tequilas or bourbons, we think a 2% or 3% price increase is something you can expect to get more readily than something that's priced at $10 a bottle.

That's just been our experience.

All of the data we look at in the United States today would tell us that the highest growth rates in the industry exists at the premium-plus level, so above even the Jack Daniel's price point, so all of that we think is encouraging for an improved pricing environment.

We are not going to get out of control with it.

We don't think that's appropriate.

But, you got to remember there was a very cautious pricing posture in the industry and at our Company from about '08 to '11, so we're encouraged by what we've seen in the last 12 months.

So far -- one of your questions was, are we rolling back all these price increases we've taken?

The answer to that is no.

Okay, and just in terms of the price elasticity with the vodka category, is that something that you pay attention to?

Or, if you think about just the Jack and kind of your Brown portfolio, that's really where you want to see the competitive dynamics stay rational?

Absolutely -- I'm taking your questions as a US-only question.

Outside the United States, reference point for Jack Daniel's is probably almost exclusively whiskey and very premium whiskeys.

We'll look at other brands as well that it might interact with, but it's largely a whiskey phenomenon.

In the United States, yes, we'll look at it; but mostly, up at those premium price points where Jack Daniel's plays -- so, you are going to look at brands like Absolut and Ketel One and Grey Goose and Chirac and brands like that, and probably a little less so at the pricing dynamics of the Smirnoffs and Svedkas and brands like that.

Now, that is important for our Finlandia business, but less so for our Jack Daniel's business.

I would say we are not preoccupied with weekly or monthly vodka pricing dynamics, as it relates to our pricing and thinking, as it relates to Jack Daniel's.

Okay.

If I could ask about the Tennessee Honey, in the US, obviously it's been some time that you've launched the brand, so what are the lessons that you've learned?

And, are you making any changes in terms of how you're approaching expansion of that brand in the US, and what you're seeing now on a same-store sales basis on that brand?

Then internationally, can you update us on how the expansion is going for that brand, and if there are any markets that you've found to be particularly successful, and what you're seeing in the international expansion for that brand?

Judy, I'll take the US piece of it.

In the number that we cited where Tennessee Honey is up 50% through the first half, when you look just at the US, the US performance is up about 20%, which continues to do exceptionally well.

We've talked quite a bit about some of the different learnings that we've had through this in terms of the lack of cannibalization that we think we've seen on Black Label compared to what you could have been concerned about, and the fact that to a certain degree, we think there's almost been a little bit of a halo effect, where it's just brought more attraction of the categories, brought more noise, it's reminded more people about the brand and the brand attributes and what have you.

We certainly believe, and we've talked about this quite a bit, that it's brought new consumers into the franchise, and people who love the whole idea and the whole franchise around Jack Daniel's, but didn't necessarily like the taste of Black Label, now have found a way to participate and enjoy and be part of that overall franchise, so that's all been very positive.

I know there was some concern, at least on a reported basis, how the numbers might come in given we are in the second year of the launch and going up against some of the pipeline fill and everything, so we continue to just be really pleased by its performance and are just encouraged about it overall.

Paul, if you want to talk about outside the US?

Because it's Jack Daniels, and it was in, what I call a new territory for the brand in terms of line extension, which is flavored full-strength products, I think it's why we've been necessarily cautious with not going out and trying to introduce a flavor every quarter or something.

We're obviously thrilled with what's happened within the last two years on Jack Daniel's Tennessee Honey.

We knew we could sell Jack Daniel's Tennessee whiskey pre-packaged in a mixable format through our experience with RTDs, but we didn't do that overnight either, so we took our time with that and wanted to make sure that when we do introduce it in various places around the world that it can be as successful as we might hope.

We're taking that exact same approach with the Tennessee Honey, and it's sort of a staged rollout, and the frame of reference for Tennessee Honey's introduction into a number of these markets is a bit different in the United States, so we're trying to learn in the first half of this year with these launches, what's working and what's not.

I'd say so far with the international launch, things are performing pretty well in line with our expectations, and we're trying to adjust as we go in.

One thing that is interesting about these international launches is that there was no surprise to them because we had already been successful out in the United States market.

So I know that, whether it was retail preparation or competitive preparation or reaction, there was -- they would have had the benefit of one year's worth of wait and observing what was going on in the US.

But so far, so good.

I still -- I've said this before, I think if someone was anticipating that Jack Daniel's would start getting into, which you observe sometimes in the flavored-vodka arena, with our flavored whiskeys, I just don't think we're at that level of aggressiveness with the portfolio expansion into flavor right now.

We really want to take our time and make sure we build really good branded businesses with these flavors, and we think there's still a lot of opportunity around the world.

But so far, so good.

Okay, so no whipped cream Jack any time soon, basically?

Well, you can go buy whipped cream at the grocery store and put it in there if you'd like, but you're probably not going to see it from us (laughter).

Got it.

Thank you very much.

Bill Chappell, SunTrust.

Can you talk, I guess first on the gross margin, trying to understand, now that you have a good idea of the grain complex and some of your near-term input costs, what the outlook is and how that kind of played into your guidance over the next six months?

In terms of our outlook on input costs?

Well, yes, with the way you account, certainly, you see it sooner than most, so just trying to understand how you'd now expect that to affect the full year in terms of overall commodity pressure.

It's certainly incorporated in the guidance that we've put out there.

When you think about commodities, the biggest commodity that we look at would be corn, and from that standpoint, it's probably gotten a little bit better than where it was as we were looking at the full year in the first quarter, so we've seen some slight improvement there.

But, when you think about commodity costs, as it relates to our business overall, generally when you think about -- if you take Jack Daniel's, for example, and the cost of what goes into making Jack Daniel's, it's actually the cost of glass and the cost of wood that probably drives more of our cost factors than what you would see in the corn costs that go in.

So, it's -- particularly, when you look at the impact of the overall Company's operating income, it's relatively small.

Okay.

And, when you look at -- I think you had said half of the improvement on gross margin was price mix, is there any way to dig into that of -- was it like 80% mix and 20% price, or any way we should be thinking?

We generally don't break that out.

Okay.

Then, just switching real quickly to tequila, you've made more favorable comments about the category of it stabilizing than we've heard in awhile.

Is this we are entering easier comparisons, or is there something with the agave market where you're seeing less new entrants, or how should we look at that market over the next few quarters?

You're talking about from the supply side, right?

Yes, just the competitive environment and pricing and what have you.

You are immediately going to focus on two countries there, which are Mexico and the US, and I think it will depend a bit on what price segment you're in.

We know that the, both in the United States and down in Mexico, at the standard, even approaching the lower end of the premium-price segments, those categories remain really competitive.

There's a lot of entrants in there, some at 100% agave, particularly in the United States.

And, I was looking at the more recent category trends in the United States in preparation for this, and the tequila business at the dollar level has been a little sluggish, relative to total spirits, in the last half a year or so, so we'll see how those competitive dynamics -- how much of them are related to supply.

Usually, the factor we look for is how many new entrants are coming in because a lot of times people start to introduce new brands or new extensions; and if those slow down, you might get an indication as to how people are thinking about their own individual supply-demand balancing acts.

Against that, where we're positioned, particularly in the United States, is up at the higher end, and as Don talked about in his, we're pretty small, to be honest with you, as a percentage of total tequila in the United States volumetrically, that's why we think there's so much potential for us.

So, off of that small base, right now, particularly on Herradura, we think we've got some real momentum going.

It sort of started when we introduced the new bottle and package and started put a little bit more support behind it, so that's been growing.

Last year, we had a very competitive year as a new entrant came in against el Jimador in the United States, and actually, I think the brand's weathered it pretty well and is, this year, off to a pretty decent start and continuing to do fairly well in the US.

The Mexico el Jimador business is a real competitive volumetric slugfest, but overall -- and in the other business that's tequila based, which we've been pleased with, generally, over the last few years has been the New Mix business down in Mexico, which is an RTD business.

Sometimes looking at the categoric trends, when you have a small market share, aren't as indicative of what you're doing as individual brands, and I would say that's the case, particularly in the United States, for Brown-Forman's tequila brands.

Okay, thanks for the color.

Ian Shackleton, Nomura.

Paul, I wanted to come back on the Tennessee international rollout, and obviously, it's been very visible in the UK in the last few months.

It strikes me as a slightly different approach to the US.

The US you did the off-trade then it was on-trade next, it strikes me that the UK is more of an on-trade focus.

I just wonder is the UK the typical model for how you take the international rollout, or is this a slightly different marketplace?

Or, are you still learning as you go along, and every market ends up being slightly different?

The latter.

The UK was actually unique with its, almost single end stage rollout at first in the on premise, and there were some benefits to that, but also it probably slowed our momentum a bit because you are selling it drink by drink versus letting people buy it by the bottle.

Down in Australia, it was different, so there's no -- we're letting the individual marketplaces help inform us as to how to launch it.

Since we have expanded in the UK, since you brought it up, there's been great excitement about the reception we're getting there.

We are really encouraged by the UK reception, and you would be aware of how strong the Jack Daniel's brand is, so you move cautiously.

Sometimes one of the reasons to go into the on premise, for example, is to be a bit conservative and make sure that the bartending tray and the consumers who are experiencing there actually like the product, and then you can go a little more broad.

That wasn't necessarily why we chose it that way; but in retrospect, it helps us to learn a little bit, as is always the case when you go into the on premise first, and then you can reflect some of what you're understanding is from that channel and take it to the broader market.

But, the UK market, we are pretty excited about for Tennessee Honey at this stage.

Perhaps just a follow-up question, thinking about the distribution on distribution, I think you have talked about France coming up for renewal, which is currently Bacardi.

Have you made a decision on what's going to happen there yet?

No, we haven't.

We're continuing to look at it, though.

I think that contract comes up, I think it is next September, so we've got some time there, but we're having some conversations with Bacardi, and we are proceeding through our analysis.

But that's the most likely, in terms of the markets where you might be thinking about own distribution, that's probably the most likely next decision is it across the piece?

It would certainly be the largest one.

Yes, I think it's the largest market.

There's a lot of smaller markets sometimes, where you think you've got a lot long-term opportunity, you find a way to change your model.

But, I think France, of the countries there, that would probably be the biggest.

Excellent.

Thanks a lot.

Tim Ramey, DA Davidson.

If someone told you that it was a given that the whiskey category would grow 4% in volume for the next five years, how would your -- we know you're building barrel warehouses, but would that be a rate of growth that your current plans would be able to handle?

Tim, as far as any hypotheticals go, the best we can tell you is we have laid our plans out for the future.

We've got the whiskey that we need available to us in order to make those plans come to fruition.

As in any time that you've got aged product that's sitting in warehouses, trying to find that whole balance between volume and price always becomes an important factor.

As we weigh all these factors together at this stage, we feel very comfortable about where we are.

The thing we would have -- this is what we did one year ago was, if you were to give us that hypothetical given that there was a constant level of expected sales, I'll use your 4%, the one thing that occurred to us one year ago was that we think we benefit very long term, and so do our brands, if it's not all coming from volume.

That was one of the most important subtle changes we made in the last year was to ensure that we were getting, particularly if the environments permit it, which we thought they were getting better, was to get a little bit of pricing in there.

And, that's why we're highlighting it here, today, and why we went after it.

We just think there's a multitude of benefits from sales growth coming in a balanced way.

You want the volume growth, of course too, you need both of them.

But, we had about a 36-month period where it was either dominantly, or almost exclusively, being driven by volume, and we just felt like we could do a better job at that.

And just switching gears, we talked about the Southern Comfort, Whatever's Comfortable campaign, you mentioned LDA to 29 -- how does that -- I mean, those are some disturbing images (laughter).

As a person that relates perhaps more to protagonist than I should (laughter), how does that brand test with, say, that LDA-to-29 age category?

Tim, you'll excuse me, you've put an image in my head that I may not be able to answer your question (laughter).

Let me just -- I'll give you a little background on it.

Actually, the reaction we are getting has been wonderful, actually.

It's really been surprising because you see the advertising, and it's not just from LDA to 29, you're getting -- there's almost a mindset of a way that people approach communications that -- can it be polarizing?

Of course it can be.

But, it's largely been well received, and you can almost look in our Nielsen results and start to see on the parent brand, Southern Comfort, improvement from the time when we started to run that particular advertising execution.

Now, there's a lot of other factors that contribute to it as well, but you try to point everything in a particular direction.

But that one, we think, has had a pretty immediate impact.

It's not always that way.

Given the world we're in today with the social media, we actually think there's tremendous benefit from the social commentary, just along the lines of what you just did, that people discussing the communications in social media, whether they loathe the ad or not, is something that Southern Comfort had not been a part of.

It had not been part of consumer communication with one another, and this social media piece is really important to executions like that.

And it actually -- I don't know if you know the history, but it was launched with a 90 second, like almost small film, something you wouldn't do on a network television ad, but it was a 90-second video that got the thing started a few weeks before we did the network media buy.

So it was, I think, a really good launch by the team, and so far, so good.

Good luck with that.

Thanks a lot (laughter).

Kaumil Gajrawala, UBS.

If I could ask two macro questions first.

The first being is, if you could talk about what you've seen in terms of any changes in the on-trade versus off-trade over the course of the first half of your year, and then the same thing on if you're seeing anything incrementally change on travel retail?

On the on-trade and off-trade, I assume that you're thinking mostly about the US on that --?

US would be the most helpful, but if there's anything material outside of the US, we would be interested to hear about it.

The best data that we have on that is really coming through the NABCA stage, and if you look at those trends, particularly over the course of the last six months, the on-premise has continued to improve and is certainly back in growth mode.

We don't see it, yet, as growing at a faster rate than the off-premise, but it's certainly a much healthier climate environment today, than what we would have seen in the worst of the downturn, so that's all very helpful and very encouraging.

Outside the US, the UK continues to struggle quite a bit.

A lot of that is, I think, more environmental and economically driven than anything else.

It tends to be, probably in terms of size, one of our, if not the, most important market outside the US that's heavily skewed towards the on-premise trade.

One thing we learned, going all the way back to '08 and anywhere where the global we observed the economy of a country or the globe or a region softening, there is a tendency for the patterns of consumption to shift from the higher price on-premise environment to the lower price off-premise environment, and so that's something -- but we haven't studied those correlations here of late, but that was just a general learning we had.

We would have to see if it's continuing to holdup in these more recent times.

Travel retail has been a really helpful part of Brown-Forman's growth story here the last few years.

We know that we were pretty significantly underdeveloped in that channel going back six years or so, so it's been growing very nicely for us.

Not only Jack Daniel's, beyond Jack Daniel's as well, we think our super-premium brands continue to have a great opportunity there.

I mentioned in the Woodfords and Herraduras and Chambords of the world, I think those are helpful to think about that channel as being particularly conducive to super-premium brand building.

I haven't looked at any of the published statistics of late related to how travel retail is doing as an industry.

I'd have to look at that before I could give you a better answer.

Got it.

The renaissance of North American whiskeys, and the additional flavors, and now we've got some craft distilleries out, it looks like shelf space at retail has expanded for the category.

Where would you say the shelf space is coming from?

And, the way the retailers look at it, does it put pressure on your other brands -- in the brands that you have in other categories, or does the entire category grow and they don't ask for the incremental shelf space back from you from somewhere else in the store?

I'm sure it's a mixture.

You'd probably be best off to ask some of our retail salespeople in the United States to get a better answer.

Just off the top of my head, the thing that I would anticipate to continue to occur is a shift generally from lower-priced spirits, whether they're bourbons or vodkas or anything toward higher priced because of the significant growth that's going on at the premium plus.

So, there may be a trend that's as much related to the price position as it is the category; and if that's the case, then you'd look at the categories that have more premium development, like the bourbons and tequilas and categories like that, that actually are up at $30 and $35 and $40 a bottle.

It's in the best interest of the retailer if they can move their products from that space at a higher margin relative to something in the lower margin, I think they are going to, generally, probably displace lower-margin products with higher-margin products, is what I'm guessing.

Okay, got it.

So, it's not a story where Jack Daniel's success could potentially put pressure on Southern Comfort or anything like that?

I don't think so.

We have actually -- I'd have to go look at it statistically through a survey, but because we've been expanding the Southern Comfort line through flavor extension and we've actually repackaged various aspects of, like our Southern Comfort 100 Proof and other things along the way, those are helpful tools to being able to keep your shelf presence and even expand it.

Brands that aren't innovating and brands that aren't having size expansion, and things like that, are probably going to be a little susceptible to those that are, if retailers are prone to wanting to give some of those innovative products a chance.

Got it.

Thanks guys.

Tom Mullarkey, Morningstar.

I have a question about how you plan to fund the $4 special dividend?

Any details you have on your future borrowings, other than the $0.02 incremental interest expense this year?

Also, going forward, do you plan to eventually pay down the incremental leverage, or will you carry that added debt on your balance sheet?

Yes, the current plan is that we would fund it with a combination of cash and debt.

We've got an $800 million revolver that's available to us, and then we'll look at what other opportunities there might be out there within the overall debt markets.

We'll be able to talk more about that on the next quarter because we are continuing to look at it, but generally, it is going to be between cash and debt.

How long we go out and how we keep it, we're still looking at all of that.

Okay, great.

Thanks guys.

Ann Gurkin, Davenport.

Just want to ask you about how you're positioning your business to capture growth in Brazil and to maybe adjust for the change in the culture of consumers moving up the scale looking for more premium products, I was just curious how you're positioning your business?

The biggest thing we did was two years ago we, after a number of different distribution ventures down there, made the leap to put our own personnel in country to take more responsibility for our own local brand building and selling.

That was probably the biggest thing that came as some investment two years ago.

The primary focus down there for us is at the more premium level because it's behind Jack Daniel's, and we may have commented on this before, but it's an excellent whiskey market, where we know that some of our competition in whiskey, global whiskey, have very sizeable businesses, so we think there's real opportunity there.

At the sales line, so far, thinking about the size of our business just two years ago versus today, we have been pretty happy with the progress.

I think the biggest thing we would have done -- and when you put people down there, of course, you put more resources behind them, so there's been probably a combination of an SG&A and A&P incremental effort down in the Brazil market that, so far, is doing a nice job on the top line.

I wouldn't say that we went into expecting that within two years it would be a bonanza at the bottom line.

You try to develop these and reinvest behind the business with the hopes you can build something pretty significant over a period of time.

Okay.

Then related to tequila, do you think tequila, as a category, has growth potential outside of Mexico and the US?

It's already showing it, yes.

It's a pretty small base, of course, and we've talked about this a couple of times, but yes, there's some nascent interest.

Because it tends to be up at the premium level, that's one of the limiting factors, where we play is up at the more premium level, but yes, we're pretty excited about it.

It's been one of the surprises, if I go back to the acquisition of Herradura a bit, that el Jimador and Herradura, we would hope that there would have been some potential out there for it.

And, I think our experience so far is there might be a little bit more than we had originally thought.

That's great.

That's helpful.

Thank you so much.

Thank you.

That was our final question.

I would now like to turn the conference back over to the presenters for any closing remarks.

Thank you, Tiffany.

Thanks for joining us today for our second-quarter earnings call.

We look forward to seeing many of you next Wednesday at our Investor Day in New York.

Just wanted to point out because NASDAQ requires an attendee list in advance, we encourage you to RSVP this week, if you haven't already.

In the meantime, feel free to reach out to us if you have any additional questions.

Goodbye.

Thank you.

This concludes today's conference call.

You may now disconnect.