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B Brown Forman Corp. (BF) Q2 FY08 Earnings Call November 29, 2007 10:00 AM ET

Executives

T.J. Graven - VP, IR

Phoebe A. Wood - Vice Chairman and CFO

Paul C. Varga - Chairman and COO

Analysts

Presentation

Operator

Good morning. My name is Lithuania and I will be your conference operator today. At this time, I would like to welcome everyone to Second Quarter Fiscal 2008 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]. Thank you.

Mr. Graven, you may begin your conference.

T.J. Graven - Vice President, Investor Relations

Thank you. Good morning everyone and thank you for joining us today. This is T.J. Graven, Vice Persistent of Investor Relations at Brown-Forman.

And joining me on the call today are Paul Varga, our President and Chief Executive Officer; Phoebe Wood, Chief Financial Officer; and Jane Morreau, Senior Vice President and Controller.

This morning Phoebe will lead off for the few highlights from the quarter and then will provide updates on Casa Herradura, our capital structure, and our earnings outlook for the remainder of this fiscal year. Paul then follow with some comments, addressing recent performance and plans for our U.S. business, and then we will open up the lines for your questions.

Our call contains forward-looking statements based on management's current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated 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 of our forward-looking statements and we undertakes no obligation to update any of these whether due to new information, future events, or otherwise.

Our press release containing our results can be found on our website under the section titled Investor Relations. We have listed in the press release a number of risk factors you should consider in conjunction with our forward-looking statements. Other risk factors are described in our Form 10-K, Form 8-K, and Form 10-Q reports.

During the call, we will also be discussing certain non-GAAP financial measures. These measures and the reasons we believe they provide useful information to investors regarding the Company's financial condition and results of operations are contained in our press release.

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

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

Thank you, T.J. Good morning everyone. Thank you for joining us.

This morning Brown-Forman reported another quarter of record earnings. The results for the second quarter of fiscal 2008, reflect exceptional growth in international demand for our global brand, the addition of last year’s acquisition of Chambord and Casa Herradura, and the weaker US dollar from which we benefit. These positive factors were partially offset by weakness in the U.S. market and higher cost of goods, reflecting rising raw material and energy cost. Together, these factors increased our reported operating income, an impressive 16%.

Instead of repeating the results, you have read in the press release this morning, I will note a few highlights. Jack Daniel's volumes grew 10% in international market on a rolling 12 basis through October, impressively the brand grew in 46 of its top 50 international market. Finlandia Vodka volume and increasing important component of our Company’s overall growth and specifically our international growth continue to grow at a double digit rate. In Poland, Finlandia’s largest market, the brand exceeded 700,000 cases on the 12 rolling basis. Because of the fine work done by many of the companies to grow our business outside the United States, we are geographically diversified Company. For the first time in our 137 year history, total revenues on a 12 month rolling basis, exceeded $3 billion and nearly half of these sales were in markets outside of United States.

The growth prospects you see for our business internationally are enormous. And we continue to develop infrastructure through partnership, acquisition, and organic investment to potion the Company to capitalize on these opportunities. This strong and growing base of international business is evidence of the benefit of diversification at a time when our U.S. business is under performing our expectations and when the weak U.S. dollar continues to boost our profit.

Offsetting some of these excellent results are cost pressures that are mounting. Many of our competitors and consumer product companies, in general, have seen higher cost begin to impact their results, we are no exception. In addition to the cumulative impact on the consumer of higher energy cost, which in recent years has been a concern, we are seeing cost pressures across virtually our entire basket of input costs, which when taken together has begun to have a meaningful impact on our rate of earnings growth. For us, the effective rising input cost is most visible for Jack Daniel’s. For several years, through fiscal 2006, costs for Jack Daniel’s have been essentially flat year-over-year. From fiscal 2006 to 2007, rising grain prices and other factors caused mid single digit cost increases, excluding excise taxes for our largest brand. It’s like solid cost management and our hedging of some component costs, we expect significant cost increases this year, again, excluding excise taxes, which all reflected in our earnings outlook.

We have now owned Casa Herradura for 10 months. Our outlook for Casa Herradura remains unchanged. We continue to expect earnings dilution in the range of $0.13 to $0.18 for the full fiscal year. We have made great progress on our implementation of new business processes and have been very successful in reducing inventories throughout the retail and wholesale channel in Mexico, the largest market for these tequila brands. However, competitor activity is intense in this market, in part driven by the industry wide oversupply of agave, which has resulted in the introduction of many new competitive brands and has created a challenging pricing environment. Our ability to achieve our full year goal in that market depends on the performance of our brands in the holiday period, which is under way.

Outside the United States and Mexico, we have been a bit slow to get going, largely as a result of some timing related issues, transitioning the brands into our distribution network. We remain optimistic about the prospects for these brands and their international growth potential. In the United States, we have made excellent progress increasing points of distribution for Antiguo and Herradura by more than 70%, which equates to more than 7,000 on and off premise account, of course, increasing point of distribution is only part of the equation. Our brand teams continued their work during the quarter to improve our understanding of the consumer and to ensure that our advertising, promotional activities, pricing and packaging are appealing and compelling. From what we have seen thus far we are very pleased with this acquisition.

I will leave a discussion of the U.S. market to Paul Varga, who will speak directly about it in a few minutes. I will turn to cash and capital structure. For the first half of this fiscal year, cash from operations was approximately $196 million versus a $107 million in the same prior year period. Higher earnings and a reduction in working capital contributed to this excellent cash generation. You will recall that we also made a $204 million distribution to shareholders of proceeds from the sale of our consumer durables businesses in May and two weeks ago announced a healthy 12% increase in our dividend. Yesterday, we announced that our Board of Directors has authorized $200 million share repurchase over the next 12 months. This action is consistent with the long held philosophy of the Company to use its cash wisely. Our philosophy has been to invest in the business if needed to make acquisitions as they are available and deliver good value, and to return cash to shareholders. This is what we have been doing to deliver value to shareholders over the past years. This new share repurchase authorization is another tool that allows us to do this well. It reflects our confidence in this business and the strength of our cash flows.

This should not signal that we seek to diminish growth opportunities. At this $200 million level, we continue to have substantial debt capacity to pursue growth opportunities. This should not signal that we have changed our philosophy on capital structure. We do not have a target debt level or target debt ratio in mind, and we do not expect this to change our credit ratings. What this does signal is that we have an excellent investment opportunity for us to purchase A and B shares of our borrowing rates and our stock prices are attractive. We will be maintain excellent financial flexibility and take advantage of an efficient, cost effective and flexible means of enhancing shareholder value.

Now turning to our outlook for earnings from continuing operations for this fiscal year. You will recall that our previously communicated full year earnings outlook was $3.35 to $3.55 per diluted share. We are now narrowing our full year outlook to $3.42 to $3.54 per diluted share, which represents growth of 9% to 13% over comparable prior year earnings of $3.14. This outlook include expected earnings dilution of $0.13 to $0.18 associated with the acquisition of Casa Herradura, which is unchanged from prior guidance and it excludes any potential benefit from share repurchases during the remainder of this fiscal year.

Despite a more challenging environment in the U.S. and the Company’s expectations for higher energy and raw material costs, this revised outlook anticipates additional foreign exchange benefits solid underlying gross profit growth, particularly outside the United States, moderating increases in operating expenses, and a lower tax rate in the second half of the fiscal year.

With that, I will turn the call over to Paul Varga.

Paul C. Varga - Chairman and Chief Operating Officer

Thank you Phoebe and good morning everyone. For the first half of the fiscal year, our operated income growth was a strong 13%, driven primarily by a solid 7% underlying growth rate and significant help from favorable currency trends. This 7% underlying rate, while approximating a longer term underlying growth in operating income for Brown-Forman is down from the double digit underlying growth we have seen over the last three years. The reason for this is our performance… is our U.S. performance.

As Phoebe mentioned, we continue to make excellent progress outside the U.S. and we believe we have enormous short-term and long-term growth potential. Most of you are aware of our international expansion story and potential, so I won’t focus on that so much today. Rather, let me talk about what we think is happening in the U.S. and what we are doing about it. The executive summary is that the spirits industry growth rate is down a little from where it was just 12 months ago, and within the spirits industry Brown-Forman is disproportionally down due to combination of consumer dynamics, competitive efforts, and Company’s specific factors.

That’s the headline, but let me elaborate a little further. At the spirits industry level, we are estimating the growth rate of spirits to be down about 1.5 to 2 percentage point versus last year. Many of you have studied the data for wine, beer, and spirits quite closely. So, you already know that wine and beer are growing at the same or improved rates thereby recapturing some share back from spirits. We speculate that typically higher out of pocket costs for the standard sizes purchased, Chris [ph] spirits relative to beer and wine in an environment where many consumers are feeling short on cash. In this regard, the consumer can be thought of is actually trading down from spirits to wine or beer.

The slower level of growth in disposable income is also a key consumer influence within the spirits industry. There are a couple of implications that I would note. One is the consumer shift some of their occasions from the on premise to the off premise, thereby making price a more important variable in their purchasing decisions. Secondly, and partially as a result of this channel shift, the pace at which consumers trade up to more premium brands slows somewhat. Our data supports this thesis, and these trends can complement the growth rates for premium price on premise brands most notably Jack Daniel’s.

In this more challenging consumer environment, our largest competitors are increasingly focused on gaining market share, occasionally with regard for short-term costs or longer term brand equity. At a time when the consumer is somewhat cash challenged and our competition is discounting at deeper levels, we have been continuing on with our regular price increase and discount activity. And in some cases, because of our longer term ambitions for value creation, we have been even more aggressive with price increases in pursuit of higher margin premium price positions. These factors related to competitor pricing has contributed to lower short-term growth rate for several of our brands in the United States.

And additional factors that our end-market effort hasn’t been as strong as many of our competitors, due to the distractions we have had in working through our own reorganization. For the last year and a half, our U.S. team has been more focused on the internal organizational matters such as roles, responsibilities, and training. This has come at some sacrifice and focus on our distributors, the trade, and our consumers, and we have been working to address this over the last many weeks.

Finally, let me turn to Jack Daniel's U.S performance. In the six months of this fiscal year, the brand’s volume growth percentage is down roughly 4 percentage points versus the same period last year. We are encouraged that during the same time period the growth percentage in the brand sales dollars are down less then 2 percentage points, illustrating the contribution of higher prices. We’ve been thinking about the 4 percentage point volume drop over the first six months, we estimate that half… approximately half of this or 2 percentage points is attributable to this drop in the spirits industry growth rate, with the other 2 points more specific to Jack Daniel’s and Brown-Forman. We believe these latter 2 points have occurred due to a combination of trading down, trading over, and trading up.

A contributing factor to consumers’ trading off of Jack Daniel’s in any directions is the fact that the brand is recently crossed through the $20 and $40 price points in most markets on its key sizes. We are seeing temporary volume dips when crossing through key price points before, and we believe, we are recovering in a similar fashion this time. More specifically to the trading down, we believe this is due to impart to the fact that Jack Daniel’s drive its high volume premium price business from a consumer franchise representing a broad distribution of household incomes. When times are challenging as we are seeing today is more difficult to some of our consumers to pay the premium price for Jack Daniel’s with the regularity that they normally do.

The trading across has more to do with a comparative activity of other large premium brand and some of our own internal focus that I referenced earlier. Again, we believe this is fixable and the work is underway. The trading up has a silver lining as we estimated the majority of this is going to Gentlemen Jack, one of the Jack Daniel’s super premium line extensions, which was recently repackaged and is showing remarkable growth in the first half of this fiscal year.

We believe, we diagnose what’s going on in the U.S. We see much of it is fixable, and we began the process of getting back on track. We are encouraged by our consumer tracking studies, which tell us that our brands remain very healthy in terms of brand image and appeal. We simply need to make the more relevant and competitive by promoting them in a manner consistent with the current trade and consumer environment. In last several weeks, we have significantly stepped up our competitive efforts end-market execution, paying a particular attention to distributor programming, pricing execution, in-store merchandising, and consumer value added programs. As one example this holiday season the Jack Daniel’s brand has significantly increased its offering of special gift packages, which includes collectable glassware.

Let me close by saying, it was short challenging period before in the U.S. and each time we bounce back our placing, our attention, our resources, and our management to people and partners against those challenges that we are facing. We believe the U.S. market continued to hold tremendous growth potential for Brown-Forman brands, and we plan to see every bit of that potential.

Now, we will open the call up for questions.

Question and Answer

Operator

Thank you. [Operator Instructions].

Your first question comes from the line of Bryan Spillane with Banc of America Securities.

Bryan Spillane - Banc of America Securities

Hi. Good morning.

Paul C. Varga - Chairman and Chief Executive Officer

Good morning, Bryan.

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

Hi, Bryan.

Bryan Spillane - Banc of America Securities

Paul, just a follow-up on your comments on the U.S. First, I just wanted to make sure as clear that the… your industry… comment on the industry growth rate being down 1 to 2, is actually that the industry is declining 1% to 2% or that its growth rate is 1 to 2 percentage points off were it was a year ago.

Paul C. Varga - Chairman and Chief Executive Officer

The latter.

Bryan Spillane - Banc of America Securities

Okay. And then on… in terms of restoring growth, I guess, especially at Jack Daniel’s, will it require maybe moderating price increases for awhile or changing your promotional behavior? Or do you think it’s really more a matter of just getting back some of your sales and execution focus?

Paul C. Varga - Chairman and Chief Executive Officer

I think it is a combination of the executional focus… some of the things I mentioned towards the end of my comments to in-store merchandising and I will give you now my call blocking and tackling in some regard. I do think as it relates to the pricing, we are going need to be step up what I would call our pricing execution, making sure that we are looking it really, really closely at individual price points market-by-market making sure, because we think we should and we plan to continue our moderate price increases that have been very successful for us and will be continue to be important in environment where a consumer is continuing to trade up. I just think in some of this more challenging times, you really got to be on top of the promotional price points making sure you are getting retail ads, a lot of the traditional sort of in-store promotional pricing and I thought just intense focus on the point of purchase. And so, I think it is a combination of those, but it does it really make us feel like we can’t go forward with the moderate price increases that we’ve been experienced on Jack Daniel’s for so long.

Bryan Spillane - Banc of America Securities

And then just one last, if I could, is it seems like the deceleration in spirits is kind of happen more recently or more quickly. Are you surprised that how fast consumer seemed to be change in behavior? And looking back at past economic cycle, is there anything different about how consumers are behaving now relatively to less purchasing power, let’s say… then it has been the case in other points in history?

Paul C. Varga - Chairman and Chief Executive Officer

I don’t… some of I would be speculating to be honest with you. I mean a couple of views so on it, just personally. What happens… I mean, I have seen these numbers jump around and go as much as the 1 or 1.5 and then within six months to here backup. So, I don’t know what kind of cycle how to determine whether sort of cyclical that will have some specific period of time, but I do think if one of things is happening is the shift that goes on and when there is the purchasing power reduction as you say, when people move from the on premise to off premise and now as price become more sensitivity, it is others just little practical things that I think happen, for example, I think spirits is actually when people move their consumption from on to off, suffer a little bit because they are not as easy to prepare. I mean if you just think about in consumer perspectives that beer and wine, it’s easier for people to actually prepare their way they drink the brands in their home. It’s more difficult to somebody who make a cosmopolitan or a mix drink in their home. and I’m just little practical consumer behavior things occur and I do think though it… a lot of what is been going on in the spirits industries between spirits wine and beer and within spirit, is related to sort of I thought a cash crunch that some consumers are experiencing. And they are just are unable to trade up in some of the ways that they have been able to historically.

Bryan Spillane - Banc of America Securities

Thank you.

Paul C. Varga - Chairman and Chief Executive Officer

Sure.

Operator

Your next question comes from line of Lauren Torres of HSBC.

Lauren Torres - HSBC

Good morning.

Paul C. Varga - Chairman and Chief Executive Officer

Good morning.

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

Hi, Lauren.

Paul C. Varga - Chairman and Chief Operating Officer

Good morning.

Lauren Torres - HSBC

You obviously talked about… you… we are sharing a lot about the challenging cost environment, but can you just give us a sense of the offset for you. We have talked a little bit about pricing so far, but with respect to cost saving, what you have offsets that you feel comfortable that you will be able to manage through this environment?

Paul C. Varga - Chairman and Chief Executive Officer

We are having a traditional offset. We are… has always had if you look more broadly on the margin standpoint was there are price increases that were so regular, in some cases mix as well where... would always more than offset some of the cost that occur in input cost. I mean the most significant thing is occurring the beneficiary for Brown-Forman right now is foreign exchange, of course, which is adding to our margin, but it is a more difficult things, because these cost have come up rather quickly, particularly on some of the grains. And so, we are intensely looking at ways to offset them in other areas of the supply chain, but nothing that we would be ready to talk about right now.

Lauren Torres - HSBC

And also as you mention, Paul, you didn’t touch too much about international on this call. But you heard a lot about it and the growth potential that you have there. So, now we are seeing some challenges here in the U.S. how are you thinking about managing growth and focusing more on building a global business rather then just a U.S spirits business?

Paul C. Varga - Chairman and Chief Operating Officer

Yes, I mean it’s actually… it’s really the key point and is actually the real beauty in what’s happened to Brown-Forman over the last many years is that this U.S. business, I mean, if it turn… it used to be a Brown-Forman of the U.S. business had some softness. I mean you felt it throughout the entire Company in a very dramatic way, and when you think about it today, this international business is very significant for our Company, and it’s not just on Jack Daniel’s, it’s on Jack Daniel’s line extension, it’s in Finlandia, and Southern Comfort. And we are so, so optimistic about what’s going on with Jack Daniel’s internationally and for our other brands. And it shows up in some of the results we've reported today, but Jack Daniel’s continues to do extremely well in places like the United Kingdom, Germany, France, really strong European results. But even beyond Europe, it’s in places like Australia and Africa, even in the last 12 to 18 months, we're seeing more exciting growth rates in places like Latin America. So, we're very excited about what’s going on outside the United States, and it serves as a great offset when the U.S. market is a little soft like it is now.

Lauren Torres - HSBC

And I guess that’s where the confidence, going to the high-end for your EPS range, is coming from?

Paul C. Varga - Chairman and Chief Operating Officer

Excuse me… I couldn’t pick up the question.

Lauren Torres - HSBC

As far as you raised your… took the top end of the range for your EPS guidance for this year mostly because of the encouragement that you're seeing I guess from the international business.

Paul C. Varga - Chairman and Chief Operating Officer

It’s really…but we can’t… we narrowed that and moved toward a higher point at the top end, but I think that most of that is to reflect foreign exchange that we've seen so far, and then also thinking about as Phoebe said in her remarks. I mean we continued to expect great contributions from the international business in the second half. And we're also hopeful for improvements in the United States in the second half too.

Lauren Torres - HSBC

Okay. Thank you.

Paul C. Varga - Chairman and Chief Operating Officer

Thank you.

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

Thank you, Lauren.

Operator

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

Timothy Ramey - DA Davidson & Co.

Good morning. Phoebe, a couple of questions for you. Would you mind detailing if you could the currency impact on the quarter isolated from the other impact, so you kind of lumped it all together--?

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

Okay. Sure, I would be happy to do that. Just a good reminder, foreign exchange effects in the first quarter $0.05, second quarter $0.06. So, the first half total of $0.11. So, that’s what the foreign exchange impact year-to-date has been. We tried to detail it on schedule A of the earnings release, so we could draw your attention to that. We tried to isolate the effects of foreign exchange specifically for you so you can see it’s very net and positive effect on us.

Timothy Ramey - DA Davidson & Co.

And I know you have some sort of a color on that, is it likely that you're not going to…you're going to see diminished positive impact in the second half or?

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

I think if you were to… if you took today’s rate, I estimate that it would be about maybe a $0.05 more in the second half. But that’s at today’s rates, and they can also come down. If the dollar can strengthen as much as it can weaken, but if you look at today’s rate, it’s about $0.05 or so in the second half.

Timothy Ramey - DA Davidson & Co.

Thanks. And then a couple more. The tax rate was obviously up strongly. Did you mention why that was or was that anything in particular--?

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

I did not mention, but I will tell you why. In fact, it is a very high, 35.4% and last year was 31%. And it really… a couple of things. First of all, is that last year, we had a gain on the sale of our Italian Winery, Bolla. And that was taxed at a very low rate. Second thing is that throughout the course of any fiscal year, you're going to have sort of a timing related events, which are going to impact the actual rate in any quarter, and we are expecting that by the end of fiscal year ’08, we’ll be back to sort of a 33% estimated tax rate for the year. And that’s the best way to think about that.

Timothy Ramey - DA Davidson & Co.

Okay. And just finally, Herradura, were there any non-cash items in the quarter?

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

In the quarter we had $0.02 of dilution in a quarter. About half of that was base business and the other half is just a transition and the non-cash piece. It’s about half and half for the quarter. But if you want to think about the full year, the full year’s at $0.13 to $0.18 and just to be clear about it, a third comes from transition cost, a third comes from the non-cash charges in the U.S. distributor, and a third from the dilution, operating income interest expense, net. That’s the way to think about that. A third , a third, a third.

Timothy Ramey - DA Davidson & Co.

Thanks so much.

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

You bet.

Paul C. Varga - Chairman and Chief Executive Officer

Thanks Tim.

Operator

Your next question comes from the line of Andrew Sawyer with Goldman Sachs.

Andrew Sawyer - Goldman Sachs

Hi, good morning guys. I was wondering on the Jack Daniel’s cost of the goods. You said mid single digits in ’07, are you saying it’s quite a bit above that this year?

Paul C. Varga - Chairman and Chief Executive Officer

Can you repeat that?

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

Can you repeat the…

Andrew Sawyer - Goldman Sachs

You said… I think you said that there is no Jack Daniel’s cost of goods inflation through fiscal ’06 and then you said fiscal ’07 was up mid singles. Is fiscal ’08 tracking quite a bit above that?

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

It is single digit.

Andrew Sawyer - Goldman Sachs

It’s still in the mid singles.

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

Yes.

Andrew Sawyer - Goldman Sachs

And you're not seeing competition really following price despite the drain inflation. Is that the correct way to interpret what you're saying?

Paul C. Varga - Chairman and Chief Executive Officer

No, actually not. And I think some people are continuing to take prices up. We've historically been maybe just a touch more aggressive than the market as a whole going back many years. And most of the premium beer brands, particularly been able to take up price relatively consistently. I think where the larger difference comes in is how deeply some competitors will promotionally price their brands. But on a shelf basis, we continue to see people go up. We monitor it closely, particularly in the tougher environment, we will continue to see people go up moderately, but I think the biggest distinction is how deeply they will deal the brands.

Andrew Sawyer - Goldman Sachs

Is some of this reflecting and Fortune [ph] talked quite a bit about spending a lot more back against business and this is their year of the whiskey. Is that something you think is playing a role in this?

Paul C. Varga - Chairman and Chief Executive Officer

No. I think there is a lot of influences. I mean, it ranges in just a wide range of what those influences can be. People can be working specifically within their own consumer franchise trying to do it. I think there is also some, oftentimes distributing trade dynamics. Whether it would be people who are focused on, like for example, here in the last year Diageo has been working on their distributor contract renegotiations, which offer a source of influence and leverage with the distribution channel, which can result in people really getting aggressive with price and I think there’s been other influences that relates to Fortune since the Spectra is the largest one for Fortune these days has to be… the possibility the sale of VNS and people really not going down trying to make numbers on that brand. So, those would be just a couple of the types of influence since they are actually get into the marketplace and there’s a wide variety of other ones.

Andrew Sawyer - Goldman Sachs

Then I just can shifting gears, SoCo was also a bit weak in the U.S. in the quarter, is the dynamic there… is this a similar execution is to the Jack Daniel’s or is there anything different going on there versus JD?

Paul C. Varga - Chairman and Chief Executive Officer

Well, Southern Comfort’s actually been one of the… in terms of if… for just some background for many, many years, going back seven or eight years has been taking prices at a sort of higher rate than distilled spirits and its been pretty noticeable. Because we've been trying to fundamentally reposition the brands over a decade or more. Just to try to make it a more premium price brand. Its been very successful so it has continued to go up quite aggressively as part of that program and so that along with I think some timing related thing as well as some of the things I mentioned related to baulking tackling and just getting back on track in terms of promotion or some of the explanations on Southern Comfort.

Andrew Sawyer - Goldman Sachs

Just following up on that. Now that you are seeing some… I think previously you've been taking the SoCo price up and seeing relatively stable or low single-digit volume growth. Did you read anything into it at all that there’s… and now you're seeing some price, but maybe you are hitting us dealing on the price point there?

Paul C. Varga - Chairman and Chief Executive Officer

We're going to watch it just like I said on Jack Daniel’s, we're really going to watch the promotional price point. It’s not as promoted the brand as Jack Daniel’s at the retail level. So it’s a little bit of a different composition there but I think, listens the key thing on Southern Comfort for the long-term is to really get it into the, firmly entrenched in the premium set and so we're going to continue on with the pricing there and what we’re going to need to do in those environments where we’ve got some consumer challenges where there’s some price sensitivity is fine new sources of business and that’s what we’ve done probably in three different way for Southern Comfort over the last 10 years.

Andrew Sawyer - Goldman Sachs

Then is this finally can close up on the Bacardi stores, how you got, I mean Bacardi surplus and how you guys are thinking about pricing in Mexico as you move into the holidays. Do you intend to more promotional to respond to some this excess supplier as we think about managing through that over a couple of months.

Paul C. Varga - Chairman and Chief Executive Officer

No I think it varies that particular brands down there. I mean the Herradura brand’s very premium price down there. But, it also during the holiday season is when we are trying to make sure as priced well they are still very premium at attractive point so that the consumer will find it quite attractive during the holiday season. Herradura in more competitive arena in terms of the number of participants at that price point. But we are doing a lot of work on Herradura right now to keep it competitive and I mean won’t know until another sort of I guess four, five weeks here until we get all the results, see how that’s going. But we think that both brands are priced in the right area and have the promotional effort behind them in the Mexico market and just have see what happen.

Andrew Sawyer - Goldman Sachs

Thank very much guys.

Paul C. Varga - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions]. Your next question comes from the line of Thomas Russo, Gardner Russo.

Thomas Russo - Gardner Russo

Yes, hi, good morning. Paul, I hope this reception is clear. On the, Herradura can you bring us up to date with any of the… of your ongoing maybe still early learning’s about the brands equity in the US and then positions you might be seeking to 3000 (ph) what your feedback is in the early stage.

Paul C. Garga - Chairman and Chief Executive Officer

Well I will answer the first question, the second let Garvin address.

Garvin Brown - President, Chairman, Board of Directors

I think its still a simple answer which is we haven’t got up yet in our own efforts with the brand equity that exist in United States. It’s a… I mean Phoebe mentioned in hers new point of distribution that we have been able to get out and seize. And that’s really only a small percentage of the universe that’s available. Its nice early success but still only a small percentage of the universe available. And are particularly in the target geography and account that where this brand has or it has equity and we have resonance. We still got a lot of work to do and its not just on really selling and distribution from. Its really trying to get consumer messaging out and tapping into what is what we consider to be still very strong legend consumer in trade equity associated with Herradura.

Paul C. Garga - Chairman and Chief Executive Officer

Yeah.

Thomas Russo, Gardner Russo

And you do not…. did you win a recent award on your tequila offering one layer, I think I read somewhere you have receive some of… appeal industry price.

Paul C. Varga - Chairman and Chief Operating Officer

There is coming up and apparently, it’s a broader one and just the Herradura brand we are going to be recognizing as the stellary of the year for… I think Wine Enthusiast magazine is awarded that to the Casa… full Casa Herradura distillate so we are quite exited that we are going to make some noise about that.

Thomas Russo, Gardner Russo

Well, I got… I though you might… in the terms of… shift to off premise or on premise, one other things is the on premise in general remains the highest margin channel I got because you don’t get… the consumer pays so much higher prices of product. But you mentioned when you went on off premise with trouble with kind of the mix ability of spirits versus the ease-of-use for beer and wine leads to the question of packaging pre-mix products that might travel more easily to the home and what your thoughts are on that, I mean Brown spirits?

Paul C. Varga - Chairman and Chief Operating Officer

Well, sure, actually for a lot of the Brown spirits was actually wonderful about it, because that was a broad common about the whole portfolio. It’s wonderful about the Brown spirits is they are not typically made up concoctions requiring seven ingredients. You tend to get a lot of consumption on the rocks or need which you also get easy mix ability with like, for example, the largest like Jack Daniel's was consume with Coca Cola so. That makes a little easier for Jack and some of our whiskey brands. And so, I think we have been time-to-time cross merchandise, there are great way for us to get our focus back on the… to tie two of these things which cross promote with mixtures and try to get floor space and hits actually the point of blocking and tackling and providing in a way that allows people to consumer in a better way in the home.

Thomas Russo, Gardner Russo

I see. And then last question across the channels, in the U.S., what’s your outlook, what’s your sense of the health of the premium American whiskey segment… premium beverages segments in general. I think as of your competitors at the high-end, anything going on there that either reconfirms or departs from your experience of service slowdown at the high-end?

Paul C. Varga - Chairman and Chief Operating Officer

The number is there so small, but they can’t… and the people who consume those products tend to be less influence by some of the economic stuff that is going on. So, I see maybe a few examples of small percentage point changes. But that business is continuing to really do well in the United States in a wide variety. And we now have been at that business for about, I guess, 17 years with first Gentlemen Jack which is just doing outstanding. But also Woodford Reserve, which I think we talked about before, is crossed the 100,000 cases globally for us and is really a hot brand right now in United States doing very well. And the other one we have which is even up higher, which is Jack Daniel’s Single Barrel, which has been very successful for us. So, those brands are doing well. There is a lot of new entries there. There is expansion in the new categories and I just think it’s a pretty hard arena. And while I suspect there will… maybe a slight amount of activity that could be offset during this tougher times. I just think that business is still at a small base and people, who purchase it, are less price sensitive.

Thomas Russo, Gardner Russo

Thank you. Sorry for the background noise. Thanks for your answers.

Paul C. Varga - Chairman and Chief Operating Officer

Thanks Tom.

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

Thank you, Tom.

Operator

[Operator Instructions]. At this time, we have no further questions.

T.J. Graven - Vice President, Investor Relations

Thank you very much for joining us today and have a great day.

Paul C. Varga - Chairman and Chief Operating Officer

Thanks everybody.

Phoebe A. Wood - Vice Chairman and Chief Financial Officer

Thank you

Operator

Thank you. This concludes today’s second quarter fiscal 2008 conference call. You may now disconnect.

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Source: B Brown Forman Corp. Q2 FY08 Earnings Call Transcript
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