Brown-Forman Corp. Class B (NYSE:BFB) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.
Poland & Mexico
Vivien Azer – Citigroup: In terms of Mexico and Poland, did I – I hear you on the distributor inventory movements. Could you maybe speak to what the underlying business did, potentially brands that weren’t impacted or the health of the category to give everyone a little bit of reassurance, because some of the numbers around el Jimador were a little bit surprising to me?
Paul C. Varga – Chairman and CEO: Sure, I’ll start with Poland and then move to Mexico. I mean, when you look at Poland, obviously it’s a really large vodka market and it’s a large vodka market for Finlandia as we’ve seen like we do most of our markets is consumers are getting higher per capita incomes are looking to trade up to more premium brands and we’ve benefitted from that. One of the things that you have seen there over the last couple of years or a number of major competitors kind of in the popular pricing area for vodka that have been in a lot of financial trouble that has really kind of impacted some of their approach into that market. And so, it’s been a bit disruptive. Finlandia has continue to do pretty well within that environment, but I would say that when you look at the market fundamentals, not a lot has changed there from what we have been competing against kind of over the recent time in the recent quarters. One of the things that we’ve also benefited from in Poland is, and again, you see this in a lot of markets too, you have very heavy vodka market that are looking to other areas of interest, and whisky is one of those areas where we have been seeing some trading out of vodka generally into the whisky category, and as a consequence of that, Jack Daniel’s has performed very well in Poland. And so in spite of some of the things that we have seen in that market around Finlandia, we continue to see Jack do really well there. Let me turn to Mexico for a second. In a way it’s a little bit of a similar story. As you know from what we’ve talked about and others have talked about for quite a while, there was quite a glut of agave that took the prices down pretty low which brought a lot of competitive brands kind of in the low pricing arena. And so, the tequila market within Mexico has been pretty competitive for a while. And while we’ve seen agave prices starting to go up, we still haven’t seen any kind of knock-on effect of that in terms of reducing the level of competitive there. So, overall, when you look at the tequila market in Mexico, I don’t think that you see a lot of fundamental changes there. And again, similar to Poland, you’ve been seeing a lot of interest in consumers moving into whisky and Jack Daniel’s has been a big benefactor of that consumer interest move and it is continuing to do well in Mexico while we’ve seen a more competitive landscape on the tequila side. The one area in Mexico that I would say has changed a little bit is in the RTD arena where we’ve got our el Jimador and New Mix product, which has had a substantial share of that overall business. There are number of new entrants sort of going into that category. And so, that really precipitated us to take some actions down there to kind of trying to take advantage of the current situation. We did a few tactical things to make sure as we saw new launches coming into that arena; we were doing some things to kind of protect our distribution. And so, that’s an area where I think there is a little bit of a change in – and there was probably some particular issues that affected the quarter around New Mix. But generally speaking, when you think about that in terms of the corporation overall, it’s a relative – it’s an important part of our business in Mexico but a relatively small part of our business for overall Brown-Forman.
Paul C. Varga – Chairman and CEO: Yeah, I wouldn’t read the Schedule B data as consumer-related on New Mix. It’s very much related to changes in trading patterns between the spring and the summer, and Q4 of last year and Q1 of this year. One theme though that I think that Don touched on it, I think you all can – I mean, it’s not a 100% global observation, but places like Mexico and Poland where Brown-Forman made acquisitions into categories that we might call local categories, where there’s always a sizable standard price category. I mean it’s been our experience over many, many years that, and in these particular instances, where those local categories, in this case in Poland vodka and Mexico tequila that we are benefiting, and it shows up in the Jack Daniel’s business, not only from the distribution platforms that came from that but also the consumer shifting from the local category toward whiskey, and also in many cases, from lower price points to higher price points, so we benefited from that, and there’s a number of other countries where I think that that has occurred as well. It’s not a – you can’t make that statement about every country around the world, but it’s certainly is a theme that we think we benefit from, particularly in our premium whiskey brands. So that’s one thing. We have to take the hit for it though with the struggling standard price category in Poland that Finlandia certainly pays attention to and similarly el Jimador pays attention to in Mexico with tequila. But for the country overall, we think we net-net benefit…
Vivien Azer – Citigroup: My next question has to do with Australia. I understand that the first quarter largely came in line with your expectations on a total Company basis. Does that hold true for Australia and what are your expectations for that market for the remainder of the year?
Don Berg – EVP and CFO: I think when you look at Australia overall, a lot of what you are seeing is around what’s happening on a macroeconomic basis and the impact that that’s having on consumers and consumer spending and alcohol consumption. I think within that there is a couple of unique characteristics around Australia that we think about. Australia is one of these markets where by law they take excise tax increases every six months, basically around the rate of inflation. And because of the different taxing environment on spirits being higher than what they tax beer and wine and they have been doing this for several years, there is really a price disproportionality in that market that really puts spirits at a bit of a disadvantage. And so, when you find yourself coming under some of these recessionary squeezes and what have you, I do think that spirits ends up getting hit a little bit disproportionate to the rest of the alcohol industry. And within spirits it’s not surprising to see bourbon, because it’s such – it’s the largest category in Australia, kind of seeing that hit probably sooner or bigger than others. And so, I don’t know that I’d say that it is out of our expectations in terms of what you kind of see when you go into these kinds of economic downturns. Within the market for the most part we have been gaining share as it relates to several of our brands and several of our introductions there. And so, we’ve continued to perform pretty well in spite of all of that. But there is a lot of pressure on that market. And I think as you look forward, I mean, it’s anybody’s guess as to what will happen in the Australian economy. But there is nothing that I think we see that indicates that it’s going to improve in the near term.
Paul C. Varga – Chairman and CEO: The other thing that I would cite that is unique to us down there is that Australia has been one of our most active countries on the innovation front. And when you’re active on the innovation front down there, it’s been both very much so in RTDs historically. Last year they had the launch of Tennessee Honey that they’re cycling against that pipeline that went in there, as well as even standard price tests we’re doing down there. So, there’s always comparables against introductory periods in markets that are very active with innovation. So, I think, that can be a contributing factor as well, particularly the 90-day results…
Vivien Azer – Citigroup: And my last question is a quick one. Can you just comment on inventory levels with distributors given that your shipments are up double-digits so far in the second quarter?
Paul C. Varga – Chairman and CEO: You are thinking about forward-looking?
Vivien Azer – Citigroup: Just kind of where are you kind of restocking inventory with distributors, how are your shipment (indiscernible) is running.
Paul C. Varga – Chairman and CEO: Sure. I think Don’s comment on that was just to describe the seasonality of the shipping patterns and what we – they from month-to-month, of course, vary based on these fluctuations. But, no, I think that was more a reflection of things coming back into balance with our historical rates for whatever season we are entering. I mean, they fluctuate within the year or even on a normal basis based on whether it’s a holiday season or what other months might be unfolding based on our programming. But no, I think that reference was just to let you know that some of the seasonality that was working against us in the first two months of the year seems to be – we seem to be benefiting from in the ensuing two months.
Don Berg – EVP and CFO: Just to kind of reinforce that point, Vivien I think, we have seen buy-ins in advance of our price increases this year, just not anywhere near the extent that we saw them a year ago. And so, our expectation is that there will be some kind of giveback in the second quarter but nowhere near the amount of giveback that we would’ve seen a year ago. So, that net-net, by the end of the six months, we would anticipate kind of being back in kind of a normal balance at that juncture.
Gross Margin Performance
John Faucher – JPMorgan: Just two quick questions here. First off, can you talk about the gross margin performance in the quarter? The top line was probably heavily weighted towards pricing. So do you think you see relatively consistent gross margin performance like this over the balance of the year or was there something interesting in the comp given the buy-in before the price increase? And then the second question is about your Europe commentary. Can you talk a little bit, particularly the Western Europe piece? How optimistic you are that it will get better from here or is it something where you see it sort of skimming along at the bottom.
Don Berg – EVP and CFO: Couple of things, I mean, I think as we have talked about kind of the full-year, we are anticipating the cost lines somewhere around about 2% inflationary cost, and so when you think about a 2% to 3% increase overall on pricing, that’s where you end up where we talk about some modest, very modest improvements kind of at the gross profit line. I think, the first quarter was somewhat in line with that. I think one of the things that you saw a little the first quarter was still getting a little bit of the advantage of last year’s higher price increases, kind of in the May, June timeframe when we were taking July 1 price increases. So, I wouldn’t read too much into that. I’d really kind of focus more on kind of how we’ve talked about the full-year overall.
Paul C. Varga – Chairman and CEO: As long as the portfolio and geography mix holds up, about like it was last year planned, and that…
Don Berg – EVP and CFO: (indiscernible) of inflation.
Paul C. Varga – Chairman and CEO: Yeah, that always has an influence on it, it’s the higher or lower gross margin countries or brands in the portfolio in terms of the mix, but I mean after 90 days, we don’t right now have any new position on that. And then, on Europe there was – Don made some comments about that. I mean, I think any of the short-term news on Europe, I mean one encouraging thing was much better performance from Southern Comfort over in Europe, well, I don’t know if that was necessarily directly related to the economy or the environment as much as it was to our own efforts in the competition that exists for the brand, and we were really encouraged by some of the things we’ve transferred from learnings in the United States and other places to see particularly the U.K. and Germany to get off to nice starts. And I think Jack Daniel’s, and Don cited statistics, it’s just off to a nice start, and – which is encouraging given what we’ve just talked as it’s related to other large countries like Mexico, Poland and Australia, that in France, Germany and the U.K., countries there are lot of people on our space are not talking about. They were very important to the first quarter and continue to grow nicely. We’ve been gaining share there even when the market was declining and sluggish.
I mean Jack Daniel’s particularly not only gained share but continued to grow in Western Europe. So, notwithstanding the Southern Europe difficulties, we don’t have any new stories that relates to perspectives on Western Europe. I think like a lot of places around the world, it will depend somewhat on how any of our innovation, whether it’s in the Jack Daniel’s family or otherwise unfolds over the next balance of the year to see what kind of impact that could have on Europe.