Earnings Call: Q1 2011

Sep 1, 2010

Good morning. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Fiscal 2011 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Mr. Ben Marmore, you may begin your conference. Thank you. Good morning, everyone, and thank you for joining us for Brown Forman's fiscal 2011 Q1 earnings call. This is Ben Marmer, the Director of Investor Relations at Brown Forman. Joining me today are Paul Varga, our President and Chief Executive Officer Don Berg, Executive Vice President, Chief Financial Officer and Jane Moreau, Senior Vice President, Finance. Don will begin our call this morning with a few remarks about our quarter, our guidance and our recent trends. Paul will provide additional commentary. As always, this morning's call contains forward looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward looking statements and the company undertakes no obligation to update any of these statements whether due to new information, future events or otherwise. This morning, we issued a press release containing our results for the fiscal 20 11 1st quarter. The release can be found on our website under the section titled Investor Relations. We have listed in the press release a number of risk factors that you should consider in conjunction with our forward looking statements. Other significant risk factors are described in our Form 10 ks, Form 8 ks and Form 10 Q reports filed with the Securities and Exchange Commission. During this call, we also will be discussing certain non GAAP financial measures. These measures and the reasons management 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. Thanks, Ben. Good morning, everyone. This morning, we issued our fiscal 2011 Q1 earnings release and reaffirmed our expectations for the fiscal year. In many ways, our Q1 is a continuation of a story we've been seeing over the previous 6 months or so. Looking at the Q1, we believe the key takeaways are the following. 1st, we believe the year is off to a good start, particularly as it relates to our net sales performance. Once again, our geographic diversification played an important role in our results. Our international sales performed quite well with underlying sales up 8%, while our U. S. Business was a little softer than expected. That netted to a 3% organic growth rate, again, not dissimilar to our recent trends. If you look at the last four quarters, including this last one on an underlying basis, our quarterly sales results showed a 1% decline, then 2% growth, then 3% growth, followed by this quarter's 3% growth. So in total, considering this environment, we continue to be pleased with the direction in our sales trends. A second key takeaway is our operating expenses were about where we expected. On an underlying basis, advertising expenses were up about 2%, Underlying SG and A was up 12%, primarily due to planned strategic investments concentrated in the 1st part of the year and incremental pension expense that we noted in June and that we will see throughout this fiscal year. A third takeaway is that foreign exchange hurt us during the quarter. But having said that, exchange rates improved throughout the 3 month period. So looking forward, based on recent rates assuming they hold throughout the rest of the year, the overall impact is not as large as we originally expected. If you remember during our conference call in June, we said at that time that we expected our 20 11 earnings per share to be negatively affected by $0.15 based on the exchange rates at that time and that this effect was included in our guidance. At recent rates, that impact of full year EPS compared to a year ago is now projected at about a $0.01 The last key takeaway, while we continue to be cautious with all of the uncertainty in the marketplace, we confirmed our full year guidance of 2 point $9.8 to 3 point 3 $8 per share. This recognizes no change in our underlying operating income guidance of mid single digits. And so adjusting for the change in our foreign exchange assumption noted above, that puts us towards the upper half of the range at this early stage of the game. Let me spend a few minutes talking a little bit about the economic climate and the competitive environment and talk in a little more detail about our SG and A expenses in the Q1. In June, when we did our year end call and spoke about expectations for fiscal 2011, we said at that time that we were hoping for an improved economic and consumer climate, that we were beginning to see some stabilization in the on premise, the trading down was abating some and that we are hopeful the environment would become conducive to increased pricing. So far, we have not seen the improvement we were looking for and much uncertainty remains. The economy continues to have a clear impact on the consumer environment. Particularly in developed markets, consumer confidence is low, savings rates have increased and unemployment remains high. The on premise channel continues to be a challenge in many markets. Looking more closely at the U. S, spirits continues to grow at low single digit rate. Using NAPCA data, some trends we are seeing in the quarter include a weakening in both the on and off premise channels, popular price brands, those priced between $10 $15 gained share as did brands priced higher than $25 Innovation or new products contributed about half of the market's growth. This innovation seems to be broad based and a good This innovation seems to be broad based and a good part of this innovation is coming from some of the smaller private companies. And finally, performance seemed to swing with changes in consumer sentiment. Outside the U. S, the performance of the spirits market is mixed. Emerging markets, particularly in Latin America and the Asia Pacific region are the healthiest. Europe had some relatively healthy markets, while other European countries continue to struggle. Within this difficult global environment, we are pleased with our net sales growth of 1% on a reported basis and 3% on an underlying basis. As we said in our earnings release, our sales growth was broad based. We made gains in several international markets more than offsetting sales declines in the U. S. These gains were in both developed and emerging markets from Australia, Germany, Canada and the travel retail channel to Mexico, Turkey, Russia and India. We continue to watch the consumer closely and work to keep our brands top of mind in this uncertain environment. Moving on to the competitive environment. In June, when we provided our earnings guidance for 2011, we said we are planning for fiscal 2011 to remain competitive in terms of increasing prices, but are hopeful that discounting in the industry will be less pervasive. We had also heard a lot of public commentary from some of our competitors about how they were going to start raising prices even at the expense of volume. During our Q1, from the syndicated data we reviewed, it appeared that the pricing environment remained competitive. Still, we maintained a flat price mix overall during the quarter as higher volumes drove our underlying net sales growth. As we look forward, we'll continue to seek opportunities to raise our prices, but we expect the pricing environment will remain very competitive. Now let me speak for a moment about innovation, a key theme in the competitive environment, particularly in the United States. NAVCO data reveals that new products are playing a key role in incremental volume to spirits category, particularly over the most recent 3 6 month periods. In fact, new products contributed more than half of the U. S. Spirit category growth during our last quarter. Interestingly, over half of these new products are premium priced or above. The NAVCO data shows that most suppliers benefited from new products boosting their sales trends. We expect this to continue. We are also participating in the innovation trends as we have introduced a number of new package changes in the quarter as well as new line extensions, most notably Southern Comfort Lime and Shambhora Vodka. However, while we expect this innovation to contribute to our sales growth, the bulk of our Q1 growth is from our core portfolio. Moving on to adding a little more color around our SG and A expenses in the quarter. As I mentioned, our first quarter SG and A increased 12% On a reported basis, SG and A grew 13% when compared to the prior year. There were several factors that contributed to these increases. First, the year ago comparable period was unusually low following our reduction in force, our early retirement program and extremely tight management and discretionary spending. 2nd, this year's SG and A was affected by some front loaded expenses. These expenses range from market and consumer research studies to set up costs for our own route to market operations in Germany and Brazil. Also affecting the growth rate of our SG and A was an incremental $5,000,000 pension expense, which will be with us for each of the next three quarters. Our full year plan anticipates that the SG and A growth rate will moderate, particularly in the back half of the year. So net net, I would not read too much into the quarterly figures and estimating our year SG and A expense. I believe this fairly summarizes our Q1 results and closing based on our underlying sales results and our expectations for total spending over the balance of the year, we are reiterating our expectations for fiscal 2011 and affirm our guidance of $2.98 to $3.38 in earnings per share for the year. Now let me turn the call over to Paul for some additional comments. Thanks, Don. I'll talk just briefly here, supplementing what Don said. And I want to reiterate that the sense that we think we're off to a good start overall, as Don mentioned, and I'm particularly pleased with the start in our international markets. Let me mention just a few company wide highlights, I think, that caught my attention. First was that the Jack Daniel's family overall is off to a nice start with plus 4% constant currency net sales. As you might recall from either our June call or if you tuned into our Annual Shareholders Meeting, the continued expansion of the Jack Daniel's Daniel's family and our international business overall are important pillars in our 10 year strategy for the company. We're also pleased with the performance of our leading tequila brands, most notably El Jimador and Herradura, building nice momentum in recent quarters both of these brands and El Jimador continues to very well in the United States. Also super premium brands continue to do well pretty much across the board at the company with Gentleman Jack, Jack Daniel's Single Barrel, Woodford, Reserve, Herradura, Chambord, Sonoma Cutera and Bonterra all showing positive trends through the quarter. The development of our tequila brands and these super premium brands are an example of another one of the important pillars in our 10 year strategy, which is to grow the rest of our portfolio faster than Jack Daniel's. Now largely due to the softness in Southern Comfort's recent performance, we're not currently achieving this ambition. However, the development of these brands over the long term is important to Brown Forman's long range strategic ambitions. I'd also like to cite the performance of our ready to drink brands in the quarter, which continue to do well and are off to just a super start. And they, of course, are helping the growth rates of the Jack Daniel's and El Jimador families overall. Our soft spots for the quarter are Southern Comfort and the U. S. In general, and we'll obviously be focusing on improving performance through the balance of the year. Just to reiterate something Don said, it's still very early in our fiscal year and while we remain concerned about the just like everybody else about the global economic conditions and some of the heightened competitiveness that's in the marketplace, we're really pleased with the good start to our fiscal year. With that, we're happy to take any questions that you might have. Sorry, we're just with the pause. We were wondering if you heard us. We're ready for questions. Your first question comes from the line of Judy Hong with Goldman Sachs. Thanks. Good morning. I guess my first question is just in terms of the U. S. Market and the softness that you've alluded to, maybe just get a little bit more perspective on that. Industry perspective, it sounds like you guys sound a little bit more cautious than some of competitors. Just we've heard anecdotes of on premise actually getting a little bit better even in the recent months. So I'm just wondering if there's a little bit of a disconnect in terms of what you're seeing from an industry perspective versus some of your competitors. And then secondly, from your share performance perspective, I wanted to just get a little bit more granularity on how much your share was up or down in the Q2 in the U. S. And what you're doing to improve that share trends going forward? Yes, Judy, this is John. In terms of the on premise environment, I think we said in June that we were starting to see some signs of stabilization. And we did start to see some early signs of that in the May June period. July kind of went in the other direction. And I think it just kind of shows a lot of the how quickly consumers are reacting to the environment that they're living in today. And the quote that I referenced was coming out of the NAVCO data for July, where you can actually get a read on some of what's happening between the on premise and the off premise environment. So what all may be going on there? It's hard to tell at this stage. I mean, it just seems like it continues to see some of the volatility we've seen in the past. It's hard to tell how much weather might have impacted on how much consumers were going out or if it's just more a matter of reaction to the economic climate that they're seeing. But we do remain a little bit tentative about what we're seeing in that arena. I might supplement it just a little bit. Some of the ways that I tend to organize that are things that we've been seeing all along, which I think the consumer continuing to seek out value, however they define that. It's not always about trading down. But there I think there are all sorts of different expressions of that whether it's people seeking larger size purchases for lower cost per ounce, for example, but it can also reflect in pricing as everyone would naturally expect. But I think we're in an environment where consumers are consistently reevaluating and retailers in the on premise environment are constantly trying to find ways to create value. So it's hard to go on to one thing, which would be typical to say has pricing. But this certainly trading down would be a component of it. I actually noticed also in the more recent months something that I think is maybe more unique to a company like Brown Forman, which is that we saw particularly in Gilab, but also maybe a little through the summer months and a bit of an acceleration in the difference in performance between brown goods and white goods. When we use that phrase, it's sort of a summary phrase. But clearly, vodka continues to perform very, very well. And the trends as you move toward the more current months have you can just notice that the whiskey categories, the liqueur category are struggling a little bit more. And that's where I think Don actually made a reference potentially who knows whether weather made a contributing factor to it was a contributing factor to that in July. We just don't know. But it is one hypothesis that might be out there. And then I think the other thing Don mentioned a couple of times, which is just there's a whole bunch of new activity in the U. S. Market around line extensions, new products, the way people are promoting the products. And we're particularly in tune to that because of we have Jack Daniel's 1st and foremost, but also Southern Comfort. And particularly on Jack Daniel's, it's such a big brand that you have many, many occasions from which you derive your business so you can get competition for all those occasions. And so we're really trying to pay attention to whether it's a super premium sipping occasion or an on premise mixed drink or shooting occasion or any wide variety of sorts of business that Jack Daniel's derive. And I think when you have innovation, a lot of these line extensions, you can get even if it's small in the grand scheme of things, it can have an impact in a particular month or a quarter. So we're looking at it closely and actually, I'm sure as we go through the course of the year, we'll be trying to understand it better and promote our brands in accordance with where we're seeing some of that competitive activity. Okay. And then just in terms of your share performance, because it sounds like the second sorry, the Q1 your share was down and maybe just go through what drove that the softness in terms of the market share performance and what you have in place to drive better share performance for your brand? I mean, I think it depends on where we think that last comment, I think, is what I was trying to reference. More just the U. S, I guess, the U. S. Market? Yes. I think that that's the point. I think if your comments are on the U. S, I mean, I think it varies by bringing you asking that from a corporate wide standpoint? You've talked about Southern Comfort being softness. Was Jack Daniels up from a share perspective? Jack Daniels, it depends on which Jack Daniels probably has from our the way we look at the Jack Daniels business as many as a half a dozen competitive sets. Yes. Whatever you think is maybe the most appropriate way of looking at it, I guess. I think probably the best way for you maybe to make sense of it is the reference I was just making it. Jack Daniels and Southern Comfort in the Q1 relative to the performance of distilled spirits overall would have seen share erosion. And that actually a lot of the leading brands over the last 2 years during this tough economy has been losing share to either a wide variety of brands that can be higher priced brands from small bases, but also the value conscious consumer trading down. We've talked about that a number of times. So I mean one of the biggest influences for our corporation though I think is we're skewed as a company more toward the whiskey and liqueur side of the business. And if you just look at the figures closely, a lot of we've we've continually working on. It's one of the things we mentioned in our last call as to why our work on Finlandia and the tequilas and some of the areas where the actual there's better wins at the back of the categories are really important to the company. Judy, I wanted to add one thing and you're focusing primarily on the U. S. But as Paul alluded to, one of our strategic pillars is to grow internationally faster than the U. S. And continues to be one of our biggest focus and more than half of our business comes from outside the U. S. And our international market share has grown in nearly all of our markets overseas. So we don't want to lose sight of that very important fact too as you think about our performance in our business, how big our international business is to Yes, I would venture to guess, Judy, that if we were doing a global market share for the quarter, we won't have data and we don't typically don't get it on a quarterly basis. I would venture to guess that Jack Daniel's, it has been its history on a 12 month basis to grow share of the whiskey segment globally. And we would anticipate that unless we see data that shows a change in the trajectory of some of the other leading global brands that on a global basis, we would continue to see share gains. Okay. And then just quickly Don, just in terms of the operating expenses, is there a way to quantify how much some of these upfront kind of temporary investments really impacted the Q1 just so that we have a better gauge in how the operating expenses really flow through for the balance of the year. And from a timing perspective, if I look at your quarterly progression last year, it was really the Q4 where you saw a big jump in terms of the SG and A expenses. So is a lot of the year over year comparisons getting more favorable mostly in the Q4 that we'll end up finding? Yes. And that's what's driving a lot of the comment that I made earlier. And if you remember towards the end of last year, we ended up having some compensation related items that really increased over the course of the last half of the year that at this juncture we wouldn't expect to see this year. And so the comps get a lot easier as we go forward. There were as I mentioned, there were some certain things like some market research studies that we've been doing on a strategic basis that ended up in the Q1. There's a host of things that have kind of ended up being in the Q1 of this year. We didn't have last year in terms of some meetings that we're having. These other kinds of things was related to travel and entertainment that are all kind of front end loaded. And so between the abatement of those kinds of expenses and going against the kind of comps that you were talking about, that's why we feel pretty comfortable where we are right now in terms of the overall operating income guidance that we gave, why we feel we can stay there, because right now pretty much everything is where we expected it to be. Okay. Thank you very much. Thank you. Your next question comes from the line of Dara Mohsen with Morgan Stanley. Hey, guys. Paul, advertising as a percent of sales has come down pretty significantly in the last couple of years during the downturn and even in the few years before that. So I'm just wondering, do you view this new level as the right base going forward? Or do you anticipate a need to reboost marketing spending as you look out over the next couple of years? I don't see the need to boost marketing spending if it's defined by the ratio that you're using. I think it's the brand building models we have brand by brand tap in to everything from packaging to cost of sales to discount line all the way through to SG and A. So we really have redefined over the last this goes back several years now, how we really view investments. And so I think it's not something we focus on with great precision trying to manage to an advertising as a percentage of sales ratio. So and as we sit right now in the environment we're in, I don't think any of I mean, we're really sort of pleased with the progression of our underlying sales growth rate that Don mentioned over the last say 4 quarters or so. So a lot of what we're doing we think is working at the top line. We want to just try to continue it. I don't think that there's any competitive disadvantage we've heard for our company around the world right now that deals with level of advertising It just depends. I mean, it depends on how much of the growth you're seeing in the It just depends. I mean, it depends on how much of the growth story for a particular brand or the growth plans deal with things such as packaging or product formulation or I mean the hottest brand we've got in the United States right now, I mean the primary impetus for its acceleration in growth was a product formulation coincided with a packaging really a modest packaging change in and that's El Jimador, which created momentum from which we then have continued to put some resources behind it because we thought that particular brand was very much under invested. We were under investing behind it because its base of distribution was small, etcetera. So I think it varies by brand. So it's just a hard one to give you a blanket answer that says, yes, as the consumer returns, you should expect to see big media budgets. I mean, I just it depends on what we're trying to accomplish with each brand in each market around the world. Okay, that's helpful. And then, Don, can you give us an update on your agricultural costs and your grain strategy, if you have hedging in place, what level of pressure you're expecting this fiscal year and if you expect incremental pressure next fiscal year also? Yes. Most of the lion's share in terms of when you look at the value terms of our cost of goods when it comes to grains, it's mostly around corn. We do have a hedging program in place. I believe we're about, well, somewhere to a little bit over 60% hedged at this juncture. And so we are as exposed to variability of the corn prices. So and relatively speaking, it's not a large component when you think about the overall magnitude of our cost of goods. I know if you went back a couple of years ago when corn prices just really spiked up to like $6 $7 a bushel, I think the overall impact to us was somewhere around $10,000,000 in that year. And so, as much corn as we buy, it's a relatively small component in our overall cost of goods sold. Okay. That's helpful. Thank you. Thanks. Your next question comes from the line of Lauren Torres with HSBC. Good morning, everyone. My question is relating to your inventory levels. If you could talk about what you're seeing with respect to distributors and retailers? I know there's been reductions historically. I'm not sure if we're at comfortable levels now or if the environment is getting softer if you're seeing some changes there once again? Oren, this is Jane. We continue to see volatility really around distributor inventory levels that you saw in the quarter, largely in this particular quarter was in Southern Europe that we saw some fluctuations in inventory levels. But we continue to see fluctuations in different pockets of the world. I think we said at the end of last year, we thought we were about back in line what we expected to be. But again, I think you're going to see from quarter to quarter just fluctuations happening. But I would say compared to what had us all concerned maybe 15 months to 16 months ago in terms of some of those more dramatic reductions that were occurring post the fall of 2,008. We haven't rebuilt through the course of FY 'ten. And so we think we're probably a little more stable overall inventory levels, but it's going to jump around based on everything from price increases and the timing of those to distributor changes to a wide variety of things. But I think those are different. You kind of expect those versus things where people are just ratcheting down their inventories. And so we haven't seen as much of that, just conscious reductions of inventories. Right. And I could also ask on pricing. You keep mentioning that you'll remain competitive. And just curious versus some of your larger competitors here in the States, what you're seeing? And I know you're going to reveal your pricing strategy at this point, but just kind of your reaction to what they're doing, how you're going to manage that as you think about this year? Yes, Lauren, it's Don. Certainly, the competitive activity that we feel like we're seeing at the field level continues to be very competitive. We've talked about this quite a bit. I mean, the way that we think about pricing is really more along the lines of keeping our consumers in our franchise and really being very specific and targeted around our pricing strategy. And so it will vary from state to state in the United States depending upon what's happening in the individual markets and what kind of competition that we're seeing and kind of the environment within that state and how much we need to be doing in order to keep our consumers leasing our franchise. The way we've kind of talked about in the past is, particularly in those states, which were particularly hurt in the downturn and for those in our franchise that continue to be hurt, giving them an opportunity to be able to stay in and to buy in at various times. And as much as we talk about how the economic recovery has been very inconsistent outside the United States, there are some inconsistencies within the U. S. Too. And so keeping this focus on looking at it on a market by market basis has served us well. I know when you look back at last year's holiday timeframe, I don't think we went as deep as some of our competitors went. And when you ended up looking at the syndicated data at that time, it pretty much bore out that, we stayed pretty strong in the kind of price mix category and end up being one of the best performers in terms of net sales. And we're going to continue we were very happy with the performance during that time and we're going to continue looking at pricing kind of along the same lines as we have historically. Lauren, I might just add one thing that just I think one of the ongoing influences we should all I mean, just if you were going to pay attention to something, it would be this on versus off, the portion of business that's occurring in the on premise relative to the off premise. Unfolds in the unfolds in the entire industry is, when you have a softer on premise environment, I mean, I think you generally see as an industry less pricing capabilities because I mean just the one thing we know is consumers move from on premise off premise, they just generally become more price sensitive. And so I think that distribution of business actually has as big an impact on our industry as it does relative to other packaged goods, which don't have that heavy on premise component. And so they've got 100 percent of their pricing considerations concentrated in a retail environment. And for us, I think subtle shifts as we've had in this on off premise environment play a major role in the ability to get pricing. I mean, my take on looking at it over more of a 2 or 3 year level is that people are still getting moderate price increases and the degree to which they have to maybe give it back in terms the best the best. And we certainly have a few of those. So in any event, I don't think it means the end of pricing. I mean, it's just how you treat the combination of frontline pricing with promotional pricing. And I think some of that at a corporate level gets influenced by the ability to get higher priced items typically through the on premise. I know it's probably hard to gauge this, but do you think that the competitive activity heading into this holiday season could potentially be worse than last year? I mean, any sense of comparing this year versus last year? I wouldn't I'd be guessing. I would say probably an increasing component of competing for retail merchandising attention and space and priority is going to be not only dealing with pricing, but a lot of this innovation as well. There will just be I think there is so much that a lot of the companies are attempting to do in terms of line extension, etcetera. That will be another form of competitiveness at retail beyond just the normal pricing. Okay, great. Thanks. Sure. Your next question comes from the line of Tim Ramey with D. A. Davidson. Hi, good morning. This is Madelyn Miller stepping in for Tim today. I was just wondering, so the ready to drink segment is relatively new and especially this good growth you guys have seen. One of the questions I had is, what do you guys expect out of that for the holiday season? Well, I mean, I think it's a for us, it's the ready to drink is really a global category. So it goes well beyond the perceptions that a lot of people who cover our company from a U. S. Perspective would have. So it may be a wide variety of comments. Actually, our largest one of our largest, I guess it is our largest RTD market is Australia. So that is actually holiday season, it's also the beginning of their summer selling season. So their influences are quite different than the kind of holiday season we would have in this hemisphere. All I can really say about it, it'd be hard to forecast any sort of competitive dynamics there. All I can say is that we've been benefiting over recent quarters from the development of ready to drink expressions under the Jack Daniel's, El Jimador, Southern Comfort Trademarks. And we're really pleased with what those brands in those forms contribute not only economically to the company, but also from a consumer standpoint and our ability to for people to try mixed drinks from our trademarks and also some of the branding that comes from a single serve expression of Jack Daniel's Southern Comfort or El Jimador. So it's the numbers are in our release. They're actually very, very good start as I mentioned to the fiscal year related to the ready to drinks. We think they're an important marketing component and we're pleased with the way that they've been actually contributing to the financial performance as well the last couple of years. Also, so you reiterated the guidance even though it was EPS this quarter was a little bit low than the Street expectations. In terms of timing or growth or cost reductions or FX, how what's going to change this year to in order to reach your guidance? Well, to be honest about it, I think that we don't give quarterly guidance. And so part of it is that, as we said in both Don's and mine, I mean, we think we're off to a good start and performing within the expectations we had for sales at this stage. We talked earlier in response to one of the questions about the seasonality of our spending, some of the changes that we saw just in the 1st 90 days related to foreign exchange rates. So a couple of those things, if I'm trying to read your question as to how do you make up from where you all have us, I think part of it deals with a continuing our expectation of a a continuing nice top line progress and then a moderation of the expenses that we saw in the Q1, which we would expect and we sort of explained a little while ago. And then also then you start to bring in when you do an EPS range, of course, the things such as foreign exchange and other factors. So we reiterated our guidance this morning. Okay. Thank you very much. You're welcome. Your next question comes from the line of Thomas Russo, Gartner Russo. Hi, good morning, Paul. Hey, Tom. How are you? I'm just fine. Good morning. A couple of quick questions. India, where you mentioned it's a growth, you saw good growth. What's your route to market there now and sort of partner and main products in the market with just some color on India? Yes. In India, we have a sales force on the ground there. Their primary role is to create demand. And so they're more like brand ambassadors and market promoters and calling on accounts and particularly the on premise arena in order to continue to introduce Jack Daniel's in particular to the consumer base there. Outside of that, I mean, the route to market basically, and we've got some wholesalers there that we do business with that we import the product into and just kind of makes its way through the traditional channels. Yes, Tom, in that market, we're really it's very Jack Daniel's focused at this stage. There's a lot of our competition that are in the local Indian whiskey market. They have JVs. And as you well know, it's very good brown spirit market with that huge whiskey category. And so far, we're playing mostly in the important side with the Jack Daniel's brand. Thank you. Don, you also mentioned the investment setup costs for the route to market in Germany and in Brazil. Can you give some color on that? And then what type of benefit that you think you'll get from that current investment spending burdening income? Sure. Yes, I mean, starting with Germany, you might remember in Germany, we had a commissionaire arrangement with Bacardi. And so through that, we still at the time we went to Commissioner about 5 years ago is when we first had all of this basically all the sales coming into our sales line, but still paying some form of a commission for their sales expenses. So we have taken the sales side across to us now as well along with all of the logistics and distribution of the products there. We're in the process of hiring a number of folks. A lot of that happened in kind of the May June timeframe. We are gearing up for kind of a early October start. Shooting for October 1, but certainly sometime in early October to have the thing up and running and we'll have the thing fully transitioned over to us. So that at that juncture we'll be like any traditional spirits company that has their own distribution in that market. In terms of the benefits we expect to have, there's a couple. 1, we definitely believe that Jack Daniel's in Germany is a must have type brand and that status gives you a lot of opportunity to have access to the trade and to kind of use that access to your benefit as opposed to allowing your agency partner to use it to his benefit. So we see benefits coming that way. The other benefit, Tom, in that particular market is that it will allow us to put even greater focus on the rest of our portfolio beyond Jack Daniels. And one of the things that we have found traditionally in these agency relationships is that everybody is excited about JAK. It's a very easy sale. It's something that you can get your own sales force very efficiently excited about Southern Comfort to a certain extent. But when you go beyond JAK and Southern Comfort and you get into a lot of the missionary work that's required in terms of building brands from scratch, it gets a little bit more difficult to get an agency partner to be willing to put that kind of sweat equity into something they don't own. And so as Paul mentioned in kind of the BF150, where one of the things that we're looking at is both expanding our international presence as well as growing the rest of our portfolio faster than Jack Daniel's. It's going to be moves like this that's going to help us to accomplish that objective. Brazil is similar. There's really not much more to add versus when you compare it to Germany. We've been in strong inroads in that market going forward in the future. It's going to take the focus of a Brown Forman group down there in order to get that job done. Tom, I know you assume this, but I just want to reiterate so people don't miss it. While we're having some of those upfront costs now, one of the ways you pay for those as you go along also is when we make a shift such as we do in Germany, we actually we see the margins go up in the gross margins in order to help pay for those costs of having your own district route to market. And so that's one of the ways we've typically been able to afford it. You don't actually go in and just start having upfront costs without any kind of benefit. So we do recoup these costs as the year goes on by having a higher selling price or higher profits for brown form because those were shared with Bacardi in the past. Thank you very much. Then the same theme, one more country, Russia and the proposal that you go to market with a bottle or a soft drink bottle, how does that stand? Where do you stand on that one? Yes. Are you talking about in terms of? I think there's a measure with Coca Cola possibly partnering with you in Russia. There is. And I'm just not sure. We've had that relationship with them in a number of markets. We started that relationship a couple of years ago and a couple of smaller markets. I think we started in Croatia and we've added the Ukraine and a couple of other places that went very well. And so we made the decision to make the change over to Cola in Russia this year. I know there was something in the press earlier that talked about some difficulties that Coke had in getting a license there to do business. They've got that license. All of that is beyond an issue at this stage. Great. In the process of finalizing our discussions and conversations with them and we're looking to have that also up and running sometime in the October timeframe. And just to clarify that Tom, it is it's the Coca Cola Hellenic bottling company as opposed to Coca Cola in Atlanta. Thank you. Thanks, Tom. Your next question comes from the line of Camille Jarvalo with UBS. Hey, guys. Good morning. Good morning. Can you talk a little bit about on premise trends? It seemed like sequentially they had stabilized and maybe were getting better. And my sense from the commentary is that maybe they're now trending negative or sequentially maybe it's looking like they're getting worse? My view is it's under some data in the more recent months in the United States market for which we have some data that showed while we thought there was some stabilization maybe occurring in a prior quarter to that it actually showed more shift toward the off premise versus the on in terms of the of on it is not to try to forecast what will happen over the next 12 months and what happened in the latest 60 days because the data itself can vary, I mean, wildly on a 1 month or even 3 month basis. So we're trying not to read too much into it. I think there are I mean, I think there continues I think the issue with it is there continues to be a consumer out there that is looking for value. And that will in part, of course, I think take them to the off premise. And when they do go out, I mean, we were speculating earlier on the call that maybe some of this could be weather related, particularly in parts of the world where it was very hot during the more recent weeks, but it's all speculation. So if that was part of the contributing factor, you'd expect for that to reverse when things weren't so hot. So we really don't have a definitive view on the direction of what's going to happen with on premise and off premise as it relates to the next quarter, particularly the next 8 weeks or 12 weeks. Got it. And then on the promotional activity that we've been seeing, especially what we saw during the holiday period, would you say that yourselves and the competitors of the industry in general is it came to lift that they had hoped for when they stepped up to promo activity or do the volumes come in a bit below despite how heavy the promos were? I don't I mean, I just wouldn't know how to even answer that question, because I didn't have a lot of expectations about competitive promos. So I think you'd have to look at each individual brand and the region where they were giving the promotion. So I just I really wouldn't be able to comment on it in a broad way. I just don't feel comfortable, John. There might be some data you're looking at that would illuminate it better, but I just I don't have a real view on that. Yes. It's hard to know how the competitors felt about their own promotion. Yes. But I know I mean kind of what I said earlier, I mean as we came out of last year's holiday period, we were pretty happy with the effect that the promotions that we had out there had and our ability to kind of find a sweet spot between giving the consumer value and how it translated into volume and value for us at the end of the day? Yes. I mean, I think that just again, there'll be a temptation to look at the latest data and forecast it out. I think you're going to see dependent whether it's syndicated data in Spain or Mexico or the U. S, I think you're going to see many of the players in the industry regularly dabbling with their price volume mix in order to try to find the right recipe for value in an environment where it's not perfectly clear. And so I think it's going to be really hard for anybody to make blanket statements about an era of this type of behavior or that type of behavior. I just I think I find it personally really difficult. So I think it requires a review of of the data at a much more granular level than we're able to make with sort of an overwhelming observation, particularly as it relates to doing business all over the world. And I think you talked about there's a looks like there's going to be quite a bit of innovation in the back half of this year. Is it almost all focused on or are they is it primarily value based innovation? Or are we seeing some launch of premium products and some things that could get the net revenue case numbers up from a mix perspective? You were breaking up a little bit, but I think I got most of it. I'll say something and Don you can chime in. I mean Don actually cited at least in the U. S. Innovation arena that a lot of the innovation was at the premium price level and above. I think there is some value based innovation. We've seen quite a bit of introductions in the popular price arena, particularly for unaged products. But I think it's all over the place. And in fact, I think people are I think if it's good innovation, really genuine innovation and it comes from consumer insight, it may be dealing some of the trends that we've been talking about, such as the shift that's been going on the last couple of years from on to off premise. So RTDs or ready to pours end up being expressions for a period of time where people are consuming more in the off premise and are seeking the same convenience that they get by having a bartender in the on premise. So I think some of the innovation is actually directed at some of the behavior people are observing. I know that that's part of it in our case and I think some of the things that I see going on from our competition are trying to capitalize on the But I suspect the stuff that makes it will actually, But I suspect the stuff that makes it will actually be directed at true consumer or trade needs and help the consumer and meet the consumer's needs as well through a period of time that has changed from the way it was 3 or 4 years ago. Got it. Thank you. Sure. Your next question comes from the line of Vivien Azar with Citi Investment Research. Vivien? It's the best question we've had all day. Just kidding. Any questions? Your next question comes from the line of Ann Shackleton with Nomura. Yes. Good morning. Good morning, Ian. Good morning, Paul and Don. Hi. Two questions really. When we talked a bit around the holiday season coming up in the U. S, and obviously, you're giving a reasonably cautious message into that. And I just wonder if there's anything more substantial that you're seeing in terms of wholesaler ordering patterns that are causing to be a little bit cautious? Or is it really just a worry that the industry pricing dynamic may not renew and the consumer remains weak? So that's the first question. I think it's the latter. I mean, in terms of the consumer environment, which you referenced there to just using the U. S. Data as an example, you've got a 12 month and 3 month trend and at the consumer takeaway level, at least the NAFTA data that's about the same, it's about 1.5, something like that at the volumetric level. So we haven't seen any big uptick that would cause us to say that there's anything like that. Yes. I would just comment too. The I think anything like that. I would just comment too. The whole thing around wholesaler inventories and what have you, we have been when we do this going from reported sales to underlying sales, one of the factors that we take into consideration on that is the distributor and wholesaler inventories that we see. And we've been doing it for a very long time. And when you look at it prior to when we had the economic crisis, it was not unusual to see that varying up or down a point or 2 on a quarter by quarter basis. And so, in anything, sometimes it could be the U. S, sometimes it could be outside the U. S. There could be different factors at different times that would be driving it. And so, as I've seen that number now kind of slowly come back into kind of a 1% to 2% range every quarter, to me it feels like we're getting closer to a normalcy situation than anything else. And so, I don't think there's any we're necessarily seeing any kind of wholesale patterns that's affecting how we're thinking about the holiday season at this juncture. Okay. And I had a second question really around there was a comment about some further destocking in Southern Europe. And I'm just keen to know whether that was mainly focused on Greece, where clearly there's a real downturn? Or is it more a comment across quite a few of the Southern European markets? It was actually just a handful of markets largely. There was some in Greece, there were some in France and Spain. It's a handful of markets in Southern Europe. And it sounds what you said earlier on, you see this as perhaps a small one off adjustment rather than ongoing trend that we should see in the next few quarters as well in Southern Europe? Absolutely. As we talked about, I think it's just fluctuations that are going to continue to happen. I don't think it's sustainable or ongoing. That's just you're going to see fluctuations come quarter to quarter. Okay. Thanks very much. Thanks, Ian. Your next question comes from the line of Graham Eady with UniCredit. Good morning everybody. Just really following up on the high levels of promotional activity in the States. It's quite difficult for us on the outside really to get our heads around this to some extent why this is happening given that we've seen historically that all that has done is to destroy brand equity and to delay the sort of recovery in the industry. So I'd be interested in your thoughts that given the consolidation seen in the industry, one would have thought the response might have been different this time around. Why do you think the industry has become so a lot more aggressive on pricing? And secondly, who's driving that? Is it the retailer? Is it the distributor? Or is it within the manufacturers themselves? Thanks. I mean, I just the first thing I'd have to conclude is that people are being ultra aggressive in the first place. And I think it all depends upon your view of it. If I look at if we had a situation where volumes were up 5% and sales dollars were down 10%. That's a very different story than percentages and shifts and price mix that are far more subtle than that. And I mean, as we said, I think we are they've been pretty comfortable with the types of adjustments we're making. So I can really only comment on our own company's behavior. And that has been evolving over the last really several years. I mean, it goes all the way back to when in the U. S. Market, the gasoline prices started to rise so much. So we've seen all the way back to that period, subtle adjustments that have been made in terms of frontline pricing and then the ability to promote it at varying levels and you try to be very targeted. I think one of the keys is to be very targeted versus just making a sweeping change to pricing. You will notice periodic patterns in certain companies or certain brands, whether it happens to be around a heavy promotional period or certain time of the year that people get a little more aggressive. But I mean, I'd really like based on what your question was to go back and look at the last sort of 2 to 3 years to see how dramatic that because implied in your comment is that there's a deterioration of price position by main brands in the United States. And I really just I mean, I know some activity, several of it I think is probably a probably manufacturer, distributor and retailer participating. You always have to I mean, it's just the way pricing is set in this environment. It's a collective exercise of it because you have a 3 tier network. So there's a lot of parties that get involved in setting pricing. But I don't maybe share the same observation that we've had this dramatic erosion of pricing in the United States as much as maybe everyone's expectations were that during the difficult economy prices we're going to continue to rise at 4% a year or something like that. And when you look at aggregate data remember that you're looking at a lot of mix too. So you really have to get in and look at where specific price points are in the marketplace. It is hard to read from afar. I agree with you. That's why it's best done I think market by market or brand by brand. Your question comes from the line of Ann Gurkin with Davenport. Good morning. Hi, Ann. Hi, Ann. Hi, two questions. 1, if you can just review use of cash flow, if there are any changes? And 2, as you look out to the second half of your fiscal year, are you moderating expectations for consumer behavior? Or have you made any changes to kind of the consumer outlook portion of your fiscal year results? I'll take the cash flow part, Ann. I mean, there really isn't any significant change to our cash flow. The only item that's kind of new for us this year is we are having to make some contributions to the pension fund. And in the Q1, it was around $20,000,000 $21,000,000 that we ended up. And that's about the biggest effect. Otherwise, everything is pretty much in line with what we've said in the past in terms of what our cash flow plans have been. And related to maybe the consumer environment, I mean, I think the only subtlety as we entered this fiscal year and just as you all noted, you've probably seen this in commentary from the market as a whole. People, I think, based on trends we were the whole world was seeing back in the sort of January through April or May period, we would have had a hope for a slightly improving consumer environment through the course of fiscal year 2011 for us. And I'd say what we've seen in the Q1 is sort of a mixed signals at best. I mean, so I don't know that we'd say it's rapidly deteriorated or anything. We think it's still a sluggish environment out there. It's tough. It's causing a lot of, I think, competitiveness. And so versus our original expectations, maybe a little softer environment than we were hoping for. Nonetheless, we think we're off to a good start. We're going to adjust accordingly as we go through the year based on what we see and observe. But I don't think it's a dramatic difference. I mean, we still thought it was going to we were very cautious going into the year. We thought it was going to be difficult and competitive, but we were hoping I'd say just like a lot of people who were in business back in March or April who would have been forecasting the next 6 or 12 months, we're hopeful that trends we were seeing in those winter and spring months may continue on. And of course, there's been a lot of difficult economic news out there in the media over the last 60 or 90 days. That's helpful. Thank you. Sure. Your next question comes from the line of Andrew Keesee with Deutsche Bank. Hi, good morning, Paul and Don. Good morning. The first question, I just want to go back to the promotional pressure. I know you talked about the channel impact, but was there any major difference in the competitive impact either by product category or any specific geographies that stood out? No, not really. I mean, I think one just one thing we observe from time to time and have conversations, but I don't have a lot of data front of me is that a real value oriented consumer, I mean, again use the U. S. Example, but I suspect it would be true that I think this is probably more over the last couple of years versus anything I can cite in the last 60 days or anything is we're club store, the large club store businesses because they tend to offer the low some of the lowest prices in the marketplace. So again, that might be a marketplace trend for the consumer that has that can have an impact on the dynamics in the marketplace. But what it means is as the consumer just continues to shop for the best value they can find on maybe the brands they like. And so that might be one thing that we've observed over the last couple of years. And of course, I'm not sure, I wouldn't validate this with Don and Jane that data doesn't get picked up and a lot of the syndicated data does it or is it picked up? Yes, it's not picked up in a lot of the U. S. Syndicated data. So whatever that impact is can have an influence on overall performance. But versus everything else that we've sort of cited here, unless you have something a little more specific, it's hard for me to answer that. That's good. And then just in terms of the price mix and the margins, is there much impact from the faster growth of the ready to drink products and the faster growth of international versus U. S? Does that exert much pressure on the margins? Actually on the margin, Andrew, I would like to point out while our margins on a reported basis were down 60 basis And we And we also there's one of the tables we put in our release that gives you the ready to drink on an equivalent basis. That's why we give it in sort of 2 formats, nanoliter and equivalent, so people can actually see in different forms. And so on an equivalent basis, we find that the ready to drink actually can help on the higher gross profits per case because you converted it down to an equivalent and you're selling it the drink. So those actually can have a positive contribution. The other thing too, I'll just add on the whole margin question. When you look at the size of our RTD business today, there's also a big mix effect now that is included in there between the margin that you get on Jack Daniel's versus the margin that you get on something like new mix, it's different. And you also will end up with different margins on a country by country basis. And so it's hard to answer that question directly because there's just such a mixed component in RTDs as well as when you look at it on the full strength spirit side. Okay. And then Don, just finally, could you talk about any other further route to market realignment costs for the balance of the year? Will this be material or is it basically was this quarter the bulk of it? We may have just a little bit more Andrew in the months of August September as we get ready and get started for these rapid markets that Don was referring to in Germany and Brazil. But in the grand scheme of things, they will be more in line with what you saw in the Q1, which was fairly immaterial to the grand scheme of SG and A spending. And at this stage in terms of I think you've asked if there were any different markets or new markets, that's something that we wouldn't have already forecasted. Okay, thank you. You're welcome. Your question comes from the line of Dara Mohsen with Morgan Stanley. Hi. Can you give us a sense of if you saw any changes in consumer demand either in the U. S. Or in Western Europe as you move sequentially through the quarter? Meaning sort of like month by month? Correct. Okay. I don't know if there'd be any overall change, gosh, it varies so much from month to month. And I really wouldn't I think maybe the best thing if you're trying to look at that, you could probably if you're looking at U. S. Syndicated data and you could probably spread the months out, we just haven't done that. We look at it more we have a hard time sometimes even looking at it on a short term basis like 3 months. So you can imagine we don't focus that much on 1 month. But if I was going to look at it and analyze it, what I'd do is just I'd look how you can get 4 week data from Nielsen and stuff like that, but we just don't tend to focus on that shorter timeframe. Okay. And the organic sales number in the U. S. In the quarter, do you guys have that? And can you give us a sense of depletions in the U. S. Versus price mix? Organic sales numbers were down in the low single digits, just modestly. The depletion numbers were about the same. Okay. All right. Thank you very much. Thanks, Darren. And there are no further questions. All right. Well, thank you, Kimberly. We do not have any closing remarks today. And thanks everyone for joining us. Yes. Thank you all. Thank you. That does conclude today's conference call. You may now disconnect.