Brown-Forman Corp (BF.B) 2013 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Brown-Forman third-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 today's conference over to Jay Koval, Director of Investor Relations.

Please go ahead.

Thanks, Holly, and good morning, everyone.

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

Joining me today are Paul Varga, our President and Chief Executive Officer; Don Berg, Executive Vice President and Chief Financial Officer; as well as welcome our new Chief Accounting officer, Brian Fitzgerald.

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 any 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 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.

And with that I will turn the call over to Don for his prepared remarks.

Thanks, Jay.

Good morning, everyone.

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

First, I will start with a review of our year-to-date results; then I will share a perspective on the three main factors that we believe have been fueling our outperformance; then finally, I will close with some thoughts on the fourth quarter and the updated fiscal 2013 outlook.

So let me start with my first topic, a review of our results over the first nine months of fiscal 2013.

We are pleased to report year-to-date underlying sales growth of 8%.

If you recall, our underlying sales growth in the first quarter came in at 10%, a bit strong as a result of some retail buy-ins in advance of price increases.

Then the second quarter's underlying growth was 6%, a little light as those inventories rebalanced.

So for the first six months we netted to an 8% underlying growth rate.

Results in the third quarter were right in line with this first half trajectory with underlying sales also up 8%.

Looking at our net sales performance in more detail, let me start with pricing.

The overall pricing environment has improved significantly compared to the past couple of years.

In our nine-month results, price mix contributed 3 points of revenue growth helping deliver strong growth in gross profits.

Sales through the holiday period were solid and we are pleased with the substantial improvement in price mix that we have seen year to date.

We continue to monitor industry trends as we plan for fiscal 2014 and are evaluating future price increases on a market-by-market basis.

Looking at our net sales results through a geographic lens all of our top 10 largest markets grew constant currency net sales year-to-date.

In the US underlying sales grew over 6% thus far in fiscal 2013.

Outside of the US underlying sales growth in the developed markets also grew at a 6% rate driven by Germany, Australia and the UK.

The emerging markets continued on their fast growth trajectory growing underlying sales 12%, twice the rate of our developed markets.

These results were propelled by several markets including Mexico, Russia, Turkey, Brazil, CIS, Thailand, India and Indonesia.

Shifting from geographies to brands, let's walk through some of our individual brands' net sales results all in constant currency.

Our Jack Daniel's trademark registered 10% net sales growth year-to-date.

Price increases have made their way through the trade and to consumers and so far we are pleased with the marketplace reaction.

While industry results have been dragged down by markets within Europe, Jack Daniel's was able to deliver strong and balanced growth there fueled by market share gains in many of the affected markets.

Jack Daniel's Tennessee Honey's net sales have nearly doubled year to date driven by a focused rollout in non-US markets as well as continued double-digit gains in the US.

We are particularly pleased by the increased velocity the brand experienced in the off premise in the US and we believe global growth opportunities remain for Tennessee Honey as the rollout continues and awareness builds.

In the vodka category Finlandia grew net sales by 5% driven by premiumisation trends in Russia, partially offset by a soft sales environment for premium vodka in Poland.

The Casa Herradura family of tequila brands delivered strong global results year-to-date with net sales growth of approximately 10%.

The Herradura brand grew 22% and the el Jimador family grew 7% driven by a 15% increase in New Mix and mid-teens growth for El Jimador in the US, offset somewhat by declines in Mexico.

Southern Comfort's rate of sales decline improved to a minus 4% year to date from a minus 7% last year.

Southern Comfort's parent brand's net sales in the US were up 1% year-to-date, driven by the new consumer engagement plan rolled out last summer.

International results remain a focus area for us as their declines have more than offset the US improvement.

The majority of Southern Comfort's revenues are derived from the brand's top five markets -- the US, the United Kingdom, Australia, Germany and South Africa.

So we are approaching these markets in a targeted manner.

We launched a new creative campaign in the United Kingdom last fall and with that, along with the line flavor extension, in the third quarter saw the trademark return to growth in that market.

We plan on rolling out the ad campaign to other key markets as we seek to return the brand to global growth.

Brown-Forman's super and ultra-premium brands grew net sales at a mid-teens rate.

In addition to Herradura noted above, Woodford Reserve was up 22%, Gentleman Jack up 18% and Sonoma-Cutrer up 15%.

Moving down the P&L, underlying gross profit grew 10% year to date as reported gross margins increased 2.4 percentage points.

Roughly half of the increase was due to the absence of the agency relationship for the lower margin Hopland-based wines.

The remainder came from improving price mix primarily through selling fewer value added packages into the market through the holiday period as well as higher retail shelf prices.

Underlying A&P spend increased 7% year to date and underlying SG&A grew 10%.

Year-to-date operating income grew 13% on both an underlying and a reported basis and earnings per share were up 18%.

So to summarize, we are executing well, delivering top-tier results in an industry that is performing well.

So this leads me to my second topic -- some thoughts on the three main factors that we believe have been helping our Company outperform the industry.

This includes the underpenetrated position of our brands in the emerging markets, our focus on fast-growing categories such as North American whiskeys, and our portfolio SKU to premium and abroad price points.

In February the US Distilled Spirits Council explored how the global fascination with American whiskey drove the third year of record spirits exports.

And Brown-Forman, with its terrific portfolio of North American whiskey brands led by Jack Daniel's, has benefited from this enormous penetration opportunity.

Given the global interest in western brands, few spirit brands embody Americana and the Western lifestyle quite as well as Jack Daniel's Tennessee Whiskey.

Our revenues in the emerging markets have grown significantly faster than the developed markets for the last decade.

And with penetration rates as low as they are, we would expect the emerging markets to be an important source of future growth.

In the US bourbon is a hot category were almost twice as fast as total distilled spirits and vodka according to 12-month Nielsen data.

We believe these growth rates are largely being driven by the renewed interest in aged spirits and flavor innovation.

Our whiskey portfolio accounts for almost 60% of our cases sold globally, so this portfolio weighting has helped our US growth rates.

Value growth is a key metric at Brown-Forman and we are focused on optimizing the balance between price and volume to both maintain a brand's premium image in the eyes of consumers while also delivering profit growth.

So we have built a portfolio of eight spirit brands with a goal of achieving long-term pricing power.

This includes actively pushing our prices higher over the last year led by the Jack Daniel's trademark.

According to 12-month Nielsen data among all other categories bourbon enjoyed the largest year-over-year improvement in price mix gaining 2.2 percentage points.

This also outperformed total distilled spirits which only showed price mix gains of 0.6 points.

DISCUS also reported that premiumisation trends in the US were alive and well in 2012 with a clear correlation between higher prices and higher rates of growth.

The premium price segment grew faster than value and the super premium category outgrew premium with volume growth of 8.9%.

We see similar stats in the recent NABCA data where the higher the price segment the higher the growth rate.

With over 90% of our sales derived in the premium and above categories we believe our brands are well-positioned to benefit from consumer's willingness to pay a premium for brands with heritage and authenticity, not to mention great taste profiles.

In summary, we believe that our small but rapidly growing footprint in the emerging markets, our portfolio weighting to North American whiskey, and our premium brand SKU has helped us to deliver results towards the top of the industry.

And we believe these dynamics position us well for future growth.

This brings me to my third and final topic, some thoughts on the fourth quarter and our updated outlook for fiscal 2013.

The global economy remains fragile and it is too early to tell if markets such as Europe have bottomed.

But third-quarter's underlying top-line results were in line with our year-to-date results.

And we believe these rates of growth will continue into the fourth quarter, keeping us on track to deliver the high-single-digit underlying net sales growth we first shared with you at the beginning of fiscal 2013.

One key difference we expect in the fourth quarter is that reported gross margins will likely be down a bit.

However, we expect our full-year gross margins to approximate our current year-to-date results.

We believe the fourth quarter is impacted by a couple of factors.

First we enjoyed favorable cost variances in the prior year's fourth quarter that we will be lapping this quarter and we have now completely lapped the positive impact from the expiration of the agency relationship for Hopland-based wines.

Given the sales momentum we have been experiencing we are taking the opportunity to make some additional P&L investments including SG&A costs associated with some recent reorganizations in Europe and Asia.

Additionally, we plan to make some additional A&P investments in the fourth quarter that should translate to a mid-teens year-over-year growth rate in A&P.

For example, this includes what we view as an opportune time to drive Woodford Reserve's growth and awareness through additional spending on social media and retail activation.

We are also planning additional spend on Southern Comfort in the UK behind the Whatever is Comfortable ad campaign which has shown early signs of improvement.

These are just two examples of target investments that we believe can better position us for future growth.

Moving on, there are a couple of items below the operating income line worth mentioning.

This updated outlook includes a $9 million charge associated with the recent redemption of our 2014 notes that will be taken in the fourth quarter.

The decision to redeem these bonds in addition to some modest foreign-exchange headwinds will negatively impact our fourth-quarter earnings per share by about $0.05.

So between the timing of some stepped-up investments, the bond redemption and foreign exchange we anticipate that our fourth-quarter earnings per share will be down several cents compared to last year's reported results.

But the full-year outlook is very much in line with our prior expectations for underlying operating income to be up low-double-digits in fiscal 2013.

With that in mind we have also tightened our EPS range to $2.60 to $2.68 per share.

As we look to the rest of the fiscal year to help you model the potential impact from any future changes in foreign exchange compared to this outlook a 10% move in the dollar would impact EPS for the balance of the year by approximately $0.07 on the upside and $0.05 on the downside.

So in summary, we believe Brown-Forman has one of the best positioned brand portfolios in distilled spirits and this portfolio has been outperforming the industry.

This is driven by some of the finest whiskey trademarks in the world which position us to capitalize on the resurgence of the category in the US and a substantial penetration opportunity for North American whiskey in the emerging markets.

Additionally, we believe premium distilled spirit brands represent affordable luxuries for consumers around the globe and we are focused on bringing these new consumers into our family of brands.

Our top- and bottom-line performance positions us in the top tier of global spirits companies.

And given the efficiency of our business model, we are able to translate our operating cash flow into strong free cash available to fund future growth initiatives, make disciplined acquisitions and return cash to shareholders, as we have done in the past, to deliver market-leading returns for our stakeholders.

So 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, and good morning, everyone.

As you can tell from both our release and Don's comments, we feel like the Company is continuing to perform well.

I particularly like the balance observed in these results -- geographically where the breadth of our performance continued to be impressive; within the portfolio where we have seen improvement; and notably in the P&L where the volume/margin balance we had hoped for is coming to fruition.

Don highlighted all three of these in his comments and I would like to supplement his comments with a point or two about our Jack Daniel's brand and business management.

Simply put, we are really pleased with the marketplace reaction to our brand building efforts on Jack Daniel's over the last couple of years.

Obviously the successful introduction of Jack Daniel's Tennessee Honey is one of the major highlights and it has continued to be well received in the handful of countries where it is available.

We consider it a wonderful accomplishment for it to be as successful as it has been with little to no cannibalization effect observed thus far.

If anything we think it has provided a positive halo impact on the trademark and reinforced the brand's [mixability].

This is about the best one can hope for when introducing a line extension particularly on a trademark like Jack Daniel's.

Just as important as Jack Daniel's Tennessee Honey however has been our intent to reinforce the [premiumness] and unique and special nature of Jack Daniel's as it grows and achieves ever higher levels of global consumer acceptance.

Recently we have aimed to do this with modestly higher prices as well as through marketing communications, improved primary packaging, the further development of Gentleman Jack and Jack Daniel's Single Barrel, and even through the recent introduction of our more limited ultra-premium Sinatra expression.

At the same time we have coupled these efforts with fewer discounts and value-added packs in the off premise while continuing to promote the brand's easy mixability in that channel via the growth of Jack Daniel's RTDs and RTPs around the world.

Our year-to-date results suggest that all of this is working as we have essentially maintained the acceptable and impressive rates of underlying sales growth and gross profit growth that we experienced in FY '12 while rebalancing the component parts of our underlying sales and gross profit growth.

To illustrate even further, consider that in last fiscal year, FY '12, the Jack Daniel's trademark grew constant currency net sales by 12% on an identical 12% growth in trademark depletions with no benefit from price mix.

In FY '13 to date the Jack Daniel's trademark constant currency net sales have advanced by 10% on 6% growth in trademark depletions suggesting 4 percentage points of sales contribution from price mix year to date.

We believe the slight 2% change between last year's 12% overall trademark net sales growth and this year's to date still very strong 10% growth can be accounted for by the following three factors.

The first is the reduction of value-added packs that Don mentioned primarily during the holiday period; a not expected marketplace reaction to higher prices, particularly in key markets such as the UK, France and Australia where the brand's price increases were taken in concert with excise tax increases implemented in those countries; and finally, lower levels of growth in the brand's RTD business.

Even with a small down-tick in the trademark's rate of sales growth the most encouraging results are observed as we move down to the gross profit line.

Here the benefit of the higher prices and the savings from fewer value-added packs have very efficiently contributed to a year-on-year acceleration of the Company's underlying gross profit growth.

Brown-Forman's FY '13 year-to-date underlying gross profit growth of 10% compares favorably to FY '12's 8% growth rate and FY '11's 7% growth rate.

In essence we've traded lower volume growth and even sacrificed a bit of net sales growth for the benefit of a higher rate of gross profit growth.

Our efforts to improve the Company's gross margin have been working.

And this higher level of gross profit generation is the source of the incremental investments we plan to make in Q4 to further our position -- to further position our Company for continued growth in FY '14 and beyond while still expecting to deliver excellent current year operating income growth.

We believe these favorable financial results paired with the reinforcement of Jack Daniel's super premium positioning and mixability are a superb outcome for the brand, our Company and of course for our shareholders.

That concludes our prepared remarks and we are now happy to take any questions that you might have.

(Operator Instructions).

Kaumil Gajrawala, UBS.

Hey guys, good afternoon.

A couple of questions, first on the advertising.

It looks like you stepped your advertising up a little bit.

Don, I think you alluded to some opportunities you saw in Woodford and on SoCo.

Was that the entirety of it or could you maybe give some context on what incremental opportunities you are seeing and where that -- where those advertising spend is going?

So through the third quarter, most of the changes that you have seen up until then were mostly timing differences between when we spent our A&P last year versus when we were spending our A&P this year.

We have been spending it probably on a more consistent basis throughout the year this year compared to last year.

The comments that I made were really on some investments that we plan on making in the fourth quarter.

There are several of them.

I just kind of cited two to give an example of the types of things that we were seeing out there.

But there is a handful of them that we are planning to make.

I might add that the ones that Don highlighted actually are sort of ones we have been working on over the past couple of years.

The Southern Comfort one is just trying to do the best work we can to continue to improve that brand's performance.

So there are some incremental investments behind that advertising campaign that Don referenced.

The other one I think you mentioned, Woodford.

But it is a general comment.

I mean it was the theme of really the last couple of years where our super premium spirits have been doing very, very well out there.

And they are getting to a point -- I probably mentioned Woodford, Herradura, even Gentleman Jack to some extent are all approaching levels of development where you start to rethink about how broadly you go with your awareness building.

And so, we are in the midst of that right now.

But some of those fourth-quarter investments relate to trying to get a little broader with the messaging on our super premium brands.

Okay, got it.

And then quickly on the value added product side, you know I think it has always been the strategy to move the consumer up the value chain.

But I am trying to just sense if incrementally there was less focus as you moved through the quarter.

Is that something we should expect to continue?

Or is it part of the strategy that has existed for some time that the value added packages largely would be flat to down and most of the focus will be elsewhere?

Well through this year we had consciously made the effort to reduce the value-added packs.

I mean I think if I go back three or four years we thought they were a really helpful tool for us.

When the economy suffered a lot of the traffic was increasing in the off premise and the focus was very much on market share and the value that you might bring to it.

And of course that is a technique you consider alongside everything from price reductions and everything else.

So it had been building over the last couple years and this was a year last year when we were looking at some of the -- we had actually been seeing our margins go down a bit.

And as you looked into it you found that that was one of the contributing factors.

So we have -- I've actually personally seen this over the last 20 several times where it ebbs and flows and you are a little short on them, so you put them back in the marketplace and then sometimes you tend over saturate them and you pull them back.

And so, I think that is a bit of the contributing factor here too.

And a lot of those value-added packs hit in the sort of last three to four months of the calendar year often around the holiday selling period.

Okay got it.

That's it for me.

Thanks, guys.

Vivien Azer, Citi Research.

Hi, good morning.

The commentary around the pricing environment in the US, to be sure, is encouraging.

I am curious though if you could offer some thoughts on whether the consumer receptiveness to bourbon pricing in your minds has changed at all after Beam kind of made some announced changes around Makers Mark and then ended up being backing off on those?

On that particular question I haven't -- I mean I just wouldn't have any comment whatsoever in terms of any specific reactions to that.

I mean I think -- one of the things I was looking at this morning was kind of how the bourbon pricing is holding up.

Don cited I think a couple of price mix observations as it related to it.

But one thing I was noticing on it is that if you just look at -- using bourbon as the example -- a year ago the -- and using Nielsen 12-month data -- the distilled spirits business in the US was up, in terms of dollar value, up just short of 4 points of growth, so it's 3.8%, and bourbon was up 6.8%.

So even a year ago there was a 3 point spread between bourbon and TDS in the US on value.

And you fast forward to today, so here this would be capturing -- I think what you are asking here is how those prices are holding up.

Total distilled spirits is still holding in there at 3.5% growth in terms of value and bourbon finished the last 12 months at 8.4%.

So the spread between bourbon and distilled spirits has grown from 3 points to 5 points.

And as Don mentioned in his comments, the price mix component on Bourbon has been I think more aggressive than TDS overall.

So we think you can always respond to sort of one-month and two-month things, but I mean I always find the best way is to do a rolling 12 months and just see how overall price mix evolves.

And so we are encouraged by what we are seeing.

We've got great category momentum.

I mean a year ago we weren't participating as much as a company and the encouraging thing for us is we are now participating in it a bit more.

Fair enough.

My other question has to do with your commentary around the on premise, which is encouraging to be sure, but it differs a little bit from what we have heard from other alcoholic beverage companies about holiday.

And I am curious broadly speaking, has there been a change since you guys closed the fiscal quarter as the payroll tax goes up, as kind of chatter around sequestration has ramped up have you changed the on premise since you closed the quarter?

I will be honest, Vivien, I haven't really looked at it since we closed the quarter.

I mean you're really only talking like within the last four months.

The data that we look to probably the most for that is the NABCA data and the February NABCA data isn't even out yet and when you look at it in January -- actually when you look at it through November, December, January it looks as though the on premise had softened a little bit, but then in January it just ticked up slightly.

And based upon what we are seeing it looks like it is growing at something like around a 2.5 percentage point growth rate, but certainly lower than what you are seeing in terms of the off premise growth rate.

Yes, I noticed that on an as-reported basis the NABCA dollar sales for the spirits and the whiskey category, bourbon category hold up pretty well in a three-month versus a 12-month.

And there you would have to split out -- I don't have that data in front of me to split out the on versus off premise to get at what you're talking about.

But otherwise we would be commenting more anecdotally I think.

Fair enough.

Thank you very much.

Dara Mohsenian, Morgan Stanley.

Good morning.

You detailed the strong pricing environment in the bourbon segment.

Can you talk a little bit about pricing outside of bourbon and what you are seeing?

And then just in general on an overall basis do you think we are back now to a normal cadence of price increases in the spirits industry going forward?

More similar to the environment prior to the downturn?

And what your long-term expectations are on the pricing front?

Yes, so generally speaking I do think that you are seeing differences in strength on pricing.

The aged spirits generally have stronger pricing power than the unaged spirits.

I think vodka continues to be a category in particular where the pricing environment continues to be more difficult.

Outside the United States I would say it is a little bit of a mixed bag; you have got a number of different factors that are going on where in different countries you see different excise taxes going up and that type of pricing sometimes can get in the way of what you're doing in terms of your own individual brand pricing.

So as we have been going through this fiscal year and as we start to think about it for next fiscal year I think we are definitely thinking about it on a market-by-market basis and looking at where we think that the reception for these price increases have been the strongest versus a little bit tougher.

But generally overall we are pretty pleased by what we have seen in the pricing environment.

In terms of is it back to where it was before the downturn -- I think it is probably too early to say that yet.

I think you are still having to put these things out in the marketplace, see what the reception is like, and just kind of be flexible and be able to move based upon what you're seeing in the individual markets.

I might supplement it by saying a year ago when we talked about why we were interested in this, we were observing some of our competition being able to move their prices.

And as I said I think several times, I felt like we were a bit behind on that.

But in the environment the thing we were looking to was how was the general momentum in spirits anywhere we were contemplating a price increase?

How was the momentum for the categories that we were competing in and then how was the environment for the price segments in which we were competing?

All of course with a reference point to what your competition is doing.

Don mentioned the excise taxes which are always a concern out there in terms of how they push prices.

And then of course you look to cost inputs.

But on those positive factors I mentioned in terms of category momentum, industry momentum, price segment momentum -- I mean we continue to see those holding up very, very well.

So that is encouraging, but we will continue to look at all the other factors that can be offsets to that.

But I feel like if you were asking me how do I feel a year later after having done it just in terms of some of the macro and stuff around us, I feel about the same.

Okay, that's helpful.

And then on the gross margin front, I wanted to get more detail on why you're not expecting year-over-year expansion in Q4 given the strong pricing you are experiencing?

I understand the Hopland halo is going away, but I think the underlying business would still see some expansion given the strong pricing.

So is that just more some individual quarterly variance versus abnormal items last year?

Or is it more related to cost pressure that could linger going forward?

And any general thoughts around gross margin expansion potential for next year?

The fourth quarter is really mostly in addition to the Hopland.

We have got -- last year we ended up having some favorable production variances that came through the fourth quarter that we don't anticipate seeing this year.

So we are lapping kind of a tough comp on that.

And so, when you take those two out we will continue to see benefit from the price mix that we have taken, but we are also taking that up against kind of the normal inflationary cost increases that you have seen.

And so when you kind of net it all out you don't see the kind of benefit that we have been seeing.

There has to be a little less benefit, too, from value-added packs contributing to gross margin, too, because it is just not a heavy quarter for that type of activity after you've made your way through the holidays.

We are also anticipating in the fourth quarter to see a little bit of a mix change where I think some of our premix items will probably be a little bit stronger.

And when you end up with those kinds of swings it can impact on what you see in your gross margin percentage.

Okay.

So it sounds like it's more kind of a quarterly variance as opposed to something that is sustainable in nature?

Yes, that is how I would look at it.

No like permanent increase in costs or any roll back of prices or anything like that.

Okay, thank you.

Judy Hong, Goldman Sachs.

Thanks, good morning.

On the Jack Daniel's brand, so first question is on the Honey expansion.

It sounds like that continues to go really well and I am just curious to hear kind of how that is performing versus your expectation in markets like the UK and whether you are thinking about perhaps accelerating the expansion into some of the other markets internationally?

And then secondly, as I think about Jack's performance broadly speaking, obviously Honey is continuing to drive bulk of the growth at least on the volume side.

So just curious to kind of understand your perspective on the core Jack's performance.

Obviously there have been price increases so that has some impact on volume.

But just broadly speaking how you're thinking about Jack's underlying performance outside of Honey.

On the Jack Daniel's Tennessee Honey portion of your question, the first part, I mean I think we are happy.

I mean I think you would have heard Don's comments of roughly 100% or doubling year to date which I think is about what you can expect.

So I feel really good about it.

I mean we are, as you can imagine, being measured with how we take that out.

We want it to be a very, very successful long-term brand.

And we were worried a year ago, just because it was successful in the United States and there was demand for it internationally, how might we think about that.

And every country's reference point for how that brand might succeed is going to be potentially subtly different.

So we want to be thoughtful about that.

That is why we did a limited rollout this year and we are pleased to date on what we are seeing.

And we are about to go into the heaviest part of our planning and evaluation for next year.

So some of the questions you asked about what we are thinking about for next year and some of the depths of the things we will probably comment more and as we get out into our Q4 reporting and providing a look at next year.

So I will pause on doing anything as it relates to that right now.

But so far we are very encouraged by it.

I mean it was sort of in my comments how happy we are with the results.

And this piece that is so important when you look at these, particularly for brand like Jack Daniel's, to ensure that this type of line extension is incremental, which we largely think it is, and, if anything, provide a nice additional sort of halo effect.

I will let Don comment a little bit two on Jack Daniel's.

I am pleased with Jack Daniel's performance.

It is -- in my comments I talked about how we basically reconfigured the components of the growth of that brand this year.

And of course the value packs we referred to are a contributing part to that too because you are taking some of your volumes out.

I do think these excise taxes though in major markets -- I mean these are sizable markets for Jack Daniel's when you reference France, UK and Australia.

So the fact that all the prices for the entire industry as well as ours went up in those markets, I almost feel like it had to have an impact to volume a bit on Jack Daniel's.

But overall, I mean I continue to think the Jack Daniel's Black Label brand is very, very healthy.

And everything we read in terms of consumer indices and some of the tracking study work that we do around the world will continue to point to excellent health on it.

So we are very encouraged by I mean really the entire Jack Daniel's portfolio's performance in an environment where we are trying to balance a lot of things.

I mentioned making sure we reinforce the premiumness of Jack Daniel's.

And we think over the last couple of years we have made some contributions to that.

The only thing I would add -- I mean for the most part I would say that Jack Daniel's, as we sit here today, is pretty much where we hoped and expected it to be at this juncture.

The one thing that I think we are particularly pleased with is seeing the strength of the brand in the US and how it has done there.

But otherwise, yes, I think when you think about the whole family and how it has performed and where we are, we are feeling pretty good about it.

It continues -- I think Don mentioned that through a few metrics on our top 10 markets, I talked about our geographic breadth -- it continues to be very impressive in terms of how many places around the world it has appeal.

And that is one of the rare things for a single trademark, and a single expression in this case, to be able to accomplish.

It is very, very rare to be able to derive business from over 100 countries like Jack Daniel's does and for it to be able to do it very consistently.

And so, that is why we are so enthusiastic about its ongoing opportunity.

Okay.

And then just following up on the pricing commentary, so as you think about the whiskey portfolio, do you think that there is further pricing opportunity more at the high-end of the price segment or kind of in the mainstream segment?

I would say at the high-end.

I think the higher the price position of a particular brand, you tend to find there is on a relative basis a little less price sensitivity, particularly if those rates of growth at those high ends as we have been seeing in bourbon and American whiskey are what they are, I mean I think the ability to get price there is quite a bit easier than it is down at the popular price and standard price levels.

Okay, great.

Thank you very much.

Bill Chappell, SunTrust.

Good morning.

Just want to follow up on that question on gross margin and maybe I missed it.

Was gross margin up for the quarter excluding the Hopland benefit?

Yes, it was.

And then looking forward, I mean looking past kind of the fourth-quarter issues, is this something where you think gross margin can continue to improve?

Because I am just trying to balance with the rate of mix or the premixed products bringing that down versus the premiumisation bringing it up and how you see the long-term trends.

It's a complicated question.

As Paul mentioned, we are really just getting started or we are in the midst of our planning for next year.

And there are so many things that impact on the gross margin -- when you look at the inflationary costs, when you look at your pricing, when you look at geographic mix, when you look at portfolio mix -- there is just a whole host of factors that can move that gross margin number around a little bit.

So I would anticipate we are going to be able to give more color around that when we do the fourth-quarter call and start talking a little bit more about fiscal 2014 and we have had the chance to kind of get through all of our planning [against that stuff], how we expect different brands to perform in different markets.

Yes, the only thing for sure that you can -- just because it's beginning in the Q4 I think is we won't have this circumstance where you are having these comps to the Hopland.

I think that we have already -- I think we cycled that all the way through in these results, and so going forward we will have a much cleaner (multiple speakers).

(Multiple speakers) cleaner comparison going forward.

But we will update you all on everything as it relates to all those critical P&L elements when we get out into the next year thinking about how our pricing will be and we are just amidst all that right now.

I will tell you we are really pleased though with where we are today versus a year ago.

And we were happy with our results a year ago, but we didn't particularly like in the -- because it is component parts, that none of the contribution to our sales growth was coming from pricing.

And so, that was -- and we saw that the marketplace was a little more conducive to it.

So I mean, if you are asking generally do we like a better balanced contribution to sales growth between pricing and volume I think generally I would say I do prefer that versus it being all price or all volume.

I like it being balanced.

That will vary a bit by brand and stage of development.

But as a general sense I do prefer that.

Okay, thanks for that color.

And looking to the smaller brands just two questions.

On SoCo you had talked about international being weak.

Was it any particular country or was it kind of widespread that is offsetting the US growth?

And then on Finlandia and your commentary on the vodkas, I mean is that -- I know it is very, very small, but how is Maximus, which I think was a big Polish brand to start with, how is that faring in kind of the increased competition?

I will answer Maximus.

Do you want to take Southern Comfort?

Maximus is doing okay.

I mean I think it is amidst it's sort of re-launch plan still.

It's a small branded business for Brown-Forman overall, but a little more relevant to the Polish market.

But we've revamped it.

I think it has grown slightly for the year at the volumetric level and is out there in a tough vodka market.

I mean, that is the most critical component.

But I think it has grown this year and we will be looking probably to have a chance to at least check in on that brand a bit here over the next few weeks when we think about the plans for F '14.

But I think it is doing okay.

And then Southern Comfort, do you want to talk about (multiple speakers)?

On Southern Comfort, I mean the weakness outside the United States, it is lumpy but it is fairly weak across the board.

We have seen some real progress in the UK in strengthening it and we have got it moving in the right direction.

In Germany and South Africa, which are our two large markets for Southern Comfort outside the US, it has struggled, but probably not as much as we have seen in some of the other markets.

And so there are different amounts of work that is going to be required in turning the brand around in different countries.

We are encouraged by what we have seen in the UK and look to take some of those learnings into some of these other markets.

I would say the one thing unfortunately for us, I mean Southern Comfort is not in, like Jack Daniel's, 100 countries with a strong base of business.

And two of its big international markets, Australia and the UK, had excise tax increases in this last year.

So in terms of the concentration of the business internationally in just a few markets and the fact that they had sort of shocks to their distilled spirits system in the last 12 months was not a helpful thing for Southern Comfort.

But we are working it hard, you all.

I mean I think it has been something we have been talking about for several years.

It is a very competitive arena where Southern Comfort is competing right now.

And we are encouraged by certainly what has been happening in the United States and we are seeing which components of the US recipe for recovery will apply in these international markets and we will keep our fingers crossed.

Thanks so much.

Tim Remy, DA Davidson.

Good morning.

Thanks for the question.

Paul, you have often had good perspective on the whole alcoholic beverages category and it strikes me that, as you have outlined in spirits, aged products and kind of full flavor things like whiskey and tequila, crafted things are doing extremely well.

The same in beer imported and craft is doing well and the same in wine with kind of full flavor varietal things doing well.

Does this say anything to you about kind of the next five years in the category for -- I mean to me I think it is bullish, but I would love to hear your thoughts on it?

Yes, I do.

We are bullish on it and I think some of what you're hinting there we've commented on before.

I do think that these pendulums swing some between -- I think out in the consumer world between absence of flavor and taste and then full flavor.

You really do -- it's really interesting to observe and it changes.

It takes -- and it doesn't happen overnight, but it will swing back and forth.

And I think I've commented before, I think the bolder more full flavored products that you are referencing, some of the stuff that is happening and you can see it in some food categories as well.

But with craft beer and the more flavorful categories, particularly at the high-end within our industry, have been steadily growing.

I think there is something underneath here where in some markets where -- we haven't studied it closely where -- maybe it is demographic -- where people get through a phase in their life where more mixed drinks that are fruity and things like that they tire of and they want products that they can taste the core product of and enjoy it.

And people, we know as they age they tend to moderate their consumption.

So they spend more on spirits typically and have fewer drinks, so they want to enjoy them more versus the patterns of consumption you see at sometimes earlier stages of their drinking life.

So I think all these things can be contributing factors to it and that is why -- I think Don was highlighting it quite well in his comments -- why we think we are positioned so nicely to do it.

I mean actually the thing we felt about particularly the American whiskey component for us, of course expressed primarily mostly through Jack Daniel's, is that it kind of has the best of both worlds.

It has a lot of the components, mixability and [flavorability], things like that that you can do with more white spirits like vodka, but also has a lot of the great components that come from the global reference point for whiskey which is Scotch.

So we feel like we hit sort of the sweet spot.

And for those who'd like to mix us they mix us, and for those who want to enjoy us in a more straight or on the rocks type thing where you can really enjoy the flavor in an unmixed or undiluted way we are a great product for that too.

So I think we are positioned well from that standpoint.

And just -- you mentioned something that I wrote down I thought was powerful, but you said the margin -- the volume margin balance is coming to fruition.

And you've discussed some of this in more detail, but that implies that -- I think it implies that there could still continue to be good volume growth for several years.

And several of us are concerned about you kind of running out of whiskey.

And I know you are building lots of aging warehouses and so on.

Can you speak to kind of the bigger picture curve on supply?

Yes, we estimate we are going to have sufficient supplies to meet our plans.

I mean I think we have said that in the past.

And this balancing act I've talked about as it relates to price volume is a bit financial.

We just know that if we can get dollar value in pricing that for people who [long numbness] in the aged spirit business it is very efficient to your business.

Because you are -- for every volumetric contribution you are getting you're building warehouses and doing it -- and there all kinds of other consumer aspects that are wonderful about that too, so these are both wonderful.

It was just, Tim, that a couple years ago, as we saw, the dominant component of contributions to sales growth was almost exclusively volume.

We just said that is not the healthiest way we felt for us, particularly on Jack Daniel's, to grow the business.

And those of us who have been around trying to manage the brand well for a long period of time always look at very, very large trademarks when brands become iconic and try to think about how do you do this to make them very large and successful but also keep them very special.

How do you keep them unique and special in the eyes of the people who consume them?

And so, the entire brand management exercise on a brand like Jack Daniel's has to incorporate things beyond just volumetric growth.

You have to think about some of the things I mentioned like continuing to reinforce your premium price position particularly when there has been an explosion of interest at price points above the Jack Daniel's Black Label price point.

So the last thing we would ever want to happen is for the marketplace to render Jack Daniel's as appearing standard.

So again, there is some serious alcohol price positioning and the desire to position Jack Daniel's super premium across the world so that it can be successful for a very, very, very long period of time that is behind this as well.

So it sounds like you won't have the volume problem that causes some to water down their whiskey.

I will let you do the comment on our composition.

Thank you.

But you know, that balancing act is a known balancing act.

Anybody who is in the aged spirits, we always joke that we know our forecasts from the minute we make them are wrong because they are so far in the future.

But you figure out how to balance your business in a really, really well -- a thoughtful way and a well-grounded way as you go along.

As it relates to Jack Daniel's, we have got a lot of experience with that so we think we do it pretty well.

Thanks a lot.

Ann Gurkin, Davenport & Company.

Thank you for the question.

To continue a little bit on that conversation, to support growth outside of the US to penetrate all these markets, do you have the needed distribution either with -- either internally or through joint ventures?

Or is there going to be a need to step up investment to support expansion into these markets?

I think we are pretty happy with the distribution network that we have.

I think when you think about it over the long-term we have been pretty smart and thoughtful about how that has evolved and how it has developed over time and looking at markets on a market-by-market basis and determining what kind of partners there might be in a local market versus how a market is structured and are we getting the kind of focus that we are looking for in our brands and what have you.

When you look at all the major markets, we have announced we are going to make an RTC change in France in fiscal 2014 and take that one on ourselves in terms of putting together a distribution model there that was similar to what we did in Germany a couple years ago.

But when you look at it across that lens in terms of the largest markets we have made, I think we probably made just about all of those moves at this juncture.

When you look at the emerging market world there continues to be a lot of different alternatives out there in terms of how you go to market and how you balanced where you want to -- get yourself into a position where you have a fixed cost base versus a variable cost base.

We have got quite a nice partnership with Coca-Cola and Hellenic in a number of markets and that has worked really well.

So we continue to talk to them about where they are going and how we are heading.

And as you look at it on a market-by-market basis, we will continue to do the same type of assessment as we have been doing over the course of the last 10, 15 years or so.

It is a -- we largely think it is part of just what we do as a Company now.

It is a very organic development.

We just -- I think some of these references we've make to reorganization is a bit -- that have some costs associated with them.

I'll give you an example.

One of the implications of some of the things we have thought about the last 90 days or so is to try to step up our effort in a group we are calling IMEA, which is India, Middle East, Africa.

And it is an area we have been having much success in over the last few years, but wasn't the number one focus in terms of our pursuing the emerging world.

And so, as you go along you look at it, you see all this opportunity out there, so it does require resources.

It requires people and you have to go in and figure out the best way to approach those marketplaces.

So I do think versus having what I would say a fully established sort of fixed SG&A cost that you can now go leverage, I don't think we are near that.

I think we have got a lot of incremental investing still to do to do what we have been doing over the last 10 years or so which is organically building out.

We have made a lot of organic process on a long way down, but this Jack Daniel's business has opportunity we find in so many places that you might have one person living in a place that is covering five or six countries and as the business gets bigger sometimes you need two people to cover those six countries and it is the kind of thing that we have been doing as we go along.

So you do incrementally reinvest behind the opportunity you see.

Right.

And then if you think about fiscal '14, I know you are in the early stages of planning, but is there -- what will be the biggest challenges or risks to meeting consistent performance as you think about 2014?

Risks -- some we have referenced which are some of these macro influences or the industry macro influences too which are like these excise taxes and things which we're going to have to navigate.

I think they're always sort of on our radar screen.

You're always thinking about the competition, I mean any kind of competitive efforts that are going on whether it is innovation from them or new action in the marketplace.

But there is nothing that jumps out at me right now that says this is the key factor you have to be thinking about as it relates to FY '14.

And if there is something that comes out of our planning here in the next few months we'll certainly tell you about it when we get into the Q4 report.

That's great.

Thank you very much.

Edward Mundy, Nomura.

Good morning, gents.

A question on Honey.

When you look at the brand I would be interested in your perspective as to how long you think the brand has to run in the US before it reaches maturity.

And secondly, how do you think about the time frame for further innovation for bourbon?

Could you repeat the second part.

I just want to make sure I heard it right.

Yes, how do you think about the time frame for further innovation in flavored bourbon?

Oh, in flavored bourbon, okay.

Well, I will answer the first one just to try to take a stab at it.

Don, if you've got some thoughts to add -- I think Tennessee Honey, I mean it all depends on how the brand continues to develop.

I mean as I said in the United States -- who knows what maturity is.

This category is doing very well.

I mean flavored brown spirits and flavored whiskeys are doing very well and so too is bourbon and American whiskey.

So there is certainly some category momentum there.

And you know, we are at such an early stage of this, I mean it is almost really difficult to forecast how far any particular brand or the segment might go.

On one hand somebody could argue that you are at the very beginnings of what happened with flavored vodkas and that individual brands could be flavored expressions in very much the same way that --.

I would make the reference back to rum even where years ago Bacardi was very much the leader in the US market and this challenger came along called Captain Morgan which had a flavor variant to it and then was very successful, as you well know, over the last couple of decades in building a really powerful brand in the United States.

So these things can go a lot of different ways and we are going to be studying them of course.

And with almost the leadership position we have got now, right now I think a lot of people will be looking to us.

So far so good is what I would say on the United States.

As it relates to the innovation cycles, I mean I think that is highly dependent on what the product is you are offering.

There has been a lot of innovation; you probably have noticed where people are getting into the market as they see flavored bourbons and whiskeys having success.

So some of those innovation cycles appear to be very short; they are just putting flavor into their core whiskey and putting it out on the market.

I know our cycle took a little longer because it was on Jack Daniel's and we were of course thoughtful in our preparations for that.

And our rollout would probably take longer than most people because we are going to be very thoughtful about how we enter the global marketplace as well.

But it is certainly easier than just the addition of flavors; it is certainly easier than doing something like totally changing the core whiskey to a new product introduction because that of course requires years -- meaning it has to go into a barrel and be aged.

So you have a much more rapid cycle in this flavored arena than you do if so, for example, the one that has been doing well in the United States is the rye category.

Anyone who has wanted to enter that rye category would have to make it and age it for several years.

You can't just put some flavoring in there.

Does that help?

Yes, that was very helpful.

And just going back to some of your earlier comments of some of the benefits of -- or some of the attractions of American whiskey in that it is mixable like vodka, but it also has the premiumisation opportunity of a Scotch for instance.

I mean if I look back to the 1970s where vodka and bourbon had about an 18% share of US spirits, I mean vodka is currently 35% and I think bourbon is about 9% or 10%.

I mean how much more headroom do you think there is for American whiskey to gain overall share of total US spirits?

We hope a lot.

We haven't tried to forecast that.

The thing I do know is this US distilled spirits market has now for a while continued to grow.

And you may not, and you probably don't recall, there was a period of time where the first and core consumption of spirits was not growing.

I mean it was very much losing share to beer and wine.

And now for many, many years has been gaining share.

And then now to be within that, to be gaining share of spirits -- I don't know, maybe we have got so much enthusiasm for the current circumstances because a lot of us lived with the fact that bourbon was not growing as fast as spirits and spirits were declining as a percentage of beverage alcohol.

But we welcome it so much we are just enjoying the now versus forecasting it.

But we certainly hope it goes for a long time.

(Multiple speakers) there are certainly some demographic things that might point to some interesting demography as it relates to US population change I think would be very interesting, as it relates to growing Hispanic populations and the way they consume flavored products in a place when Mexico for example bodes well and then just the aging US population and you start to think about how they might consume.

So there could be some positive attributes to that that would support the continued growth of bourbon.

Great, thanks.

And just going back to Vivien's earlier question in a very short term.

You called out a pretty good holiday season in the US, but some of your competitors within beer are pointing to a slightly slow start to calendar Q1 this year given some short-term pressures on consumer disposable income, slightly higher payroll taxes, delayed tax refunds and high gas prices.

I mean, are you able to comment on whether you are seeing any of that in the limited time frame since the end of your Q3?

We've read the same stuff that you are referring to, but we wouldn't have -- our data won't be in until we report our Q4.

So I think the smartest thing for us to do is to see what actually really happens as it relates to our industry and business and then we will update you all.

Okay, thank you.

We have reached the end of the allotted time for questions and answers.

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

Thank you, Holly, and thanks all of you for joining us today for our third-quarter earnings call.

Please feel free to reach out to us if you have any additional questions and we hope you have a great week.

Thank you all.

Thank you for your participation on today's conference call.

You may now disconnect.