Brown-Forman Class B Earnings Call Nuggets: Poland & Mexico, Gross Margin Performance
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…