Brown-Forman Corp (BF.B) 2002 Q4 法說會逐字稿

Good morning, my name is Amy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Brown-Forman 2002 fiscal year-end earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one, on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Mr. Lawson Whiting, director of investor relations. Please go ahead, sir.

Good morning. This is Lawson Whiting speaking. I'm the director of investor relations at Brown-Forman Corporation and would like to welcome you to our 2002 fiscal year-end earnings conference call.

Today, Owsley Brown, our chairman and CEO will open up the discussion on our fiscal 2002 performance, Phoebe Wood, our executive vice president and chief financial officer, will follow with more detail on the results of each of our business units and provide some guidance on our expectations for next fiscal year.

We will then open up the microphone to investors for a question and answer session.

Joining Owsley, Phoebe, and me for the Q & A will be Larry Probus, senior vice president of finance for Brown-Forman. Except for historical information, the following remarks consist of forward-looking statements, within the meaning of the

Private Securities and Litigation Reform Act of 1995. These statements are subject to a number of important risks and uncertainties, which could cause actual results to differ materially from those discussed in these statements.

They include, but are limited to, the absence of an expected recovery in the US economy in the near future,

a strengthening of the US dollar against other currencies, the deterioration in economic conditions in the principal countries to which we export beverage products, and a continuation of the decline in discretionary consumer spending, or in the demand for tablewear, giftware, and/or leather goods.

They also include the adverse impact of any additional terrorist attacks, or a general lack of investor confidence related to perceived inadequacies in the financial reporting systems in the United States.

These statements are also subject to the factors mentioned in part one, item two, of the company's form 10Q for the quarter ended January 31, 2002, which incorporates these by reference.

Brown-Forman has no current intention of updating or revising any forward-looking statements, whether it is a result of new information,

future events, or otherwise -- except as otherwise required by law. Projections and other forward-looking information in this conference call may be relied on subject to the preceding safe harbor statement as of which -- as of the date of this call, and may continue to be used

until May 31, 2002, which is the date that the replay of this call will be removed from the company's Web site. Now I will turn the call over to Owsley.

Good morning. It is a pleasure to discuss with you our results for fiscal year 2002, which ended on April 30th. For the full year,

Brown-Forman's earnings were $3.33 per share, down 2 percent compared to last year. On a constant currency basis, and adjusting for a change in accounting related to the amortization of goodwill, as well as adjusting for the non-recurring costs of our business improvement initiatives,

our earnings increased about two percent over fiscal year 2001.

Before Phoebe Wood gets into more specific financial and operating details, I'd like to hit upon some of the highlights and accomplishments of our brands during the past fiscal year.

For the tenth consecutive year, Jack Daniel's continued to show growth around the world. Worldwide depletions increased about two and a half percent, with particular strength in markets outside the U.S.

Southern Comfort had a good year,

achieving record worldwide gross profits. The repositioning of this brand in the United States as the Spirit of New Orleans, appears to have been effective, as depletions were up two percent in the U.S., and we anticipate the continued growth in the brand over the next several years.

We obtained the U.S. marketing and distribution rights for two new brands, Appleton Estate Jamaican Rums, and Amarula, a South African Crème Liqueur. Our wine group volumes were up solidly this year, particularly for Bolla, Fetzer and Korbel,

but a very competitive pricing environment has reduced margins in the wine business.

While we believe that the events of September 11th tempered the growth of our wine and spirits business, it had a much more profound impact on our consumer durables segment.

In particular, orders from department stores were significantly lower than the previous year, and have yet to fully recover. We've taken a number of steps to improve our cost and competitive position for next year, including the closing of three manufacturing facilities.

The business is now in a much better position for future growth, and we anticipate a strong earnings rebound for this segment during fiscal 2003.

In today's business environment, where people are paying more attention to the balance sheet, I want to highlight one of our company's strengths,

our solid financial position and strong cash flow. In fiscal 2002, cash flow from operations was $250 million. After capital expenditures and dividends, Brown-Forman's free cash flow reached approximately $85 million this past fiscal year.

Our business is highly cash generative, allowing us to make investments in our brands, facilities and our people. At the same time, we have a significant amount of free cash to pay dividends to shareholders, make opportunistic acquisitions and maintain the flexibility of a conservative balance sheet.

At the end of the fiscal year, our net debt position was less than $100 million, and our shareholders equity was 1.3 billion.

Now I'm going to turn the call over to Phoebe Wood, our Chief Financial Officer, and she'll discuss the results in each of our core businesses. Phoebe?

Thank you Owsley. Let me begin by focusing on Brown-Forman's core business, wine and spirits. For our number one brand, Jack Daniel's, domestic depletions were essentially even with last year. Off-premise sales in the U.S. remained relatively healthy,

but the slowing economy and effects of September 11th clearly affected on-premise consumption in the United States.

It is important to note that our shipments, and therefore our sales, were impacted by our continuing reduction in inventories at our wholesalers and retailers.

Year-end inventories for Jack Daniel's at the wholesale level are at the lowest levels that they have been in recent history.

Internationally, Jack Daniel's depletions grew by six percent, led by strong growth in the United Kingdom, Spain, Italy and Korea.

The growth continues to be very broad-based. In fact, volumes were up in 17 of the 20 largest markets in the world for Jack Daniel's. We are confident that the growth story for Jack Daniel's around the world remains solid, and we expect continued growth for the foreseeable future.

Southern Comfort depletions in the United States were up two percent, which, when combined with sustained price increases, have resulted in record gross profits for the brand this year. Outside of the U.S., results were mixed, as strength in most of Western Europe was offset by weakness in Asia and European duty-free markets.

Our super premium vodka, Finlandia, remains an exciting opportunity for the company. The brand continues to show solid growth, with comparable depletions up nicely this year. Keep in mind, the worldwide distribution agreement commenced in August of 2000,

so year-over-year results are not quite comparable. We have made a number of changes to the brand's marketing programs over the past few years, including significant price increases in many markets around the world.

As a result of these changes, we believe that Finlandia is well situated to take advantage of its position as one of the leading imported vodka brands in the world.

I'm really pleased to provide some information about our new product, Jack Daniel's Original Hard Cola,

which we are about to begin selling in the United States with our joint venture partner, Miller Brewing Company. Its roll-out is scheduled to begin in the on-premise channel on July 1st, and it will be available in the off-premise by September. Jack Daniel's Original Hard Cola will be the first

major cola-flavored malt beverage, differentiating it from others in the category, which mostly are clear citrus-flavored products. Because of the Jack Daniel's name, the product's great taste, and unique cola positioning, we believe the brand will have more masculine appeal

than other malt-flavored beverages, while also attracting more females to the Jack Daniel's franchise. We also believe it will have more year-round appeal, as opposed to many of the seasonal flavored brands in the ready-to-drink category.

In addition to its expected commercial appeal, we view this new product

as a consumer brand-building tool for the Jack Daniel's trademark. The introduction of Jack Daniel's Hard Cola will help energize the Jack Daniel's franchise, and provide Jack Daniel's access to new consumption occasions.

I do want to stress that we have a major advertising and promotional campaign planned for the roll-out of this new brand, and it is our intention to reinvest most of the gross profit back into advertising and promotion activities.

Our plans call for the line extension to contribute modestly to earnings in fiscal 2003. If the product is a great success, and the category remains as vibrant as it has been over the past 12 months, the financial benefits will likely accelerate in future years.

I'm turning next to Brown-Forman's wine business, which is becoming increasingly important to our company. Ten years ago, our wine business was relatively small, with a focus on Bolla And Korbel, and total gross profit of less than $50 million.

IN fiscal year 2002, our wine business had depletions of over seven million cases, and a gross profit of over $150 million. Volume trends for the company's major wine brands accelerated this year, with Fetzer, Bolla, and Korbel all up strongly

Unfortunately, margins did not keep pace with volume growth due to higher levels of discounting. There is an over capacity of grapes in the marketplace which has put pressure on pricing for every major brand in the wine business.

Unfortunately, we do not expect the promotional activities to subside in the near future. And we don't expect any significant margin improvements in the next 12 months.

We believe that wine remains a long-term growth opportunity. The positive demographics are too compelling.

While financial returns in the wine business have traditionally been lower than they are for spirits we are confident that we have created a business that will generate long-term returns in excess of our cost of capital.

I'd like to take a couple of minutes to talk about Brown-Forman's distribution strategy around the world. For many years now, Brown-Forman has chosen its distributor in the various areas of the world on a country by country basis. We always felt that it made the most sense to choose the best distributor in a particular market

and let that distributor use its local expertise to sell our brand. This has had the added the benefit of allowing our people to focus on marketing and brand equity issues. And allowing our partners to focus on the selling and distribution business.

We have recently renewed our contract with

in Japan. We have expanded our relationship with

in much of central and eastern Europe, as well as Australia. And we have made a number of changes in other countries, such as South Africa, Russia and Taiwan.

In the United States we recently announced a formation of an entity with Bacardi which contemplates the appointment of a join broker to represent both company's brands in control states. It also envisions the possibility in the future of joint appointment of distributors in open space.

In the fast changing distribution environment in the United States, it is important to be able to act quickly as opportunities arrive. And we feel that this alliance helps us - helps to keep us ahead of the curve so we can remain one of the most important spirit suppliers in the United States.

Today I'm pleased to announce another meaningful change in distribution for our company. In the United Kingdom, effective August, 1, Brown-Forman's contract with Diageo will end and we will be begin selling directly via cost sharing arrangement with Bacardi.

The cost sharing arrangement is an innovative way to distribute our brands in the United Kingdom. By sharing costs with Bacardi we will significantly lower our distribution expense in our second largest market. Although, we will use the Bacardi sales force we will maintain full control over brand positioning and pricing issues.

Brown-Forman and Bacardi have complimentary brand portfolios. And together, we will represent a potent combination in this very important market. Because Brown-Forman will be selling directly to the trade, as opposed to using a third party distributor, this arrangement will have implications on the timing of our quarterly results.

I will discuss the changes to our expected quarterly results in a couple of minutes.

Turning to consumer durables. For the full year, operating income was down about $30 million

compared to fiscal year 2001. This includes about $17 million of pre tax cost to close three manufacturing plants. After adjusting for FAS 142 and the plant closing costs, the underlying business was down about $18 million, or 38 percent.

As we have discussed in earlier communications, a sharp drop in orders from department stores following September 11th had a dramatic impact on sales, and we have yet to see a significant improvement in this wholesale channel of distribution.

The direct-to-the-consumer, however, is healthy and growing. This division, which sells predominately through direct mail, catalogues, and the Internet, had sales of over $150 million this year, growing at a double-digit rate over last year.

We have taken a top to bottom look at the entire consumer durables business to reduce our cost base to levels appropriate to today's climate.

The restructuring charges in fiscal year 2002 of $17 million, have largely been taken. Benefits will begin to accrue in fiscal year 2003, with significantly larger savings to be realized in

fiscal year 2004 and beyond.

As we have discussed in previous conference calls, the company is undertaking a series of business-improvement initiatives to streamline procurement, and production practices, and improve connections with customers. The total cost of this program reduced earnings-per-share by about $0.21 in fiscal year 2002,

and is expected to reduce EPS by additional $0.08 per share before its completion by the end of fiscal year 2003.

Before I turn the discussion to fiscal year 2003, I want to clarify comparisons of our results to first calls consensus estimates.

First call is currently listing our consensus estimate at $3.51 per share. This estimate excludes the cost of the business-improvement initiative of $0.21 per share.

If you add the $0.21 per share to our reported earnings of $3.33, we reported $3.54 per share, which is $0.03 above the consensus estimate. I just wanted to highlight this issue so there is no confusion.

Looking ahead to fiscal year 2003, we see relatively strong earnings-per-share growth next year. The new distribution arrangement in the United Kingdom will affect the pattern of our quarterly earnings results next year. In the first quarter, the company expects to reduce earnings on a one-time basis by approximately $0.15 per share,

due to a one-time adjustment from changing from a third-party distributor to Brown-Forman.

However, the impact on full-year results should be negligible, due to an expected higher profit margin earned in this arrangement.

Beyond next fiscal year, we expect substantial strategic and economic benefits from this arrangement.

Assuming a continuing US economic recovery, we anticipate earnings-per-share growth of about 9 to 12 percent over this past fiscal year.

This includes an estimated $0.08 per share in additional restructuring costs to complete the business-improvement programs announced last July, and also provide for strong reinvestment behind our brand. On a long-term, sustainable basis, it is our goal to achieve high single-digits, or low double-digit earnings-per-share of growth.

In closing, I'd like to reiterate that this company remains intensely focused on creating long-term sustainable value for all shareholders. Although fiscal year 2002 was full of unexpected changes, both large and small, we believe the strength of our brands and our

people make Brown-Forman's prospects for success very attractive. Now, Owsley, Larry, Lawson and I will be glad to answer any questions that you may have.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one, on your telephone keypad. Please hold for your first question.

At this time I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Please hold for your first question.

Your first question comes from

with CSFB.

Hey Owsley, how are you? A couple of brief questions. In looking at your nine to 12 percent earnings outlook for the year ahead, could you give an idea please

as to your outlook on depletions, both for Jack Daniel's, both worldwide and in the U.S., embedded in your expectations? And then secondly, if you could also comment on the continued reduction of inventory at your U.S. wholesalers,

do you believe we're at a level now where inventories have sufficiently been reduced, what's your best case on how many days of inventory in your system was reduced last year in this past fiscal year,

what your expectations going forward please?

good morning.

Morning.

I'll talk about the inventory and then I'll let Larry Probus talk a little bit about the depletion question you asked first.

Thank you.

On the inventory,

I think it is, there has a been a reduction of about a day or two a year on average over the last six or eight years in the United States. Overseas those numbers have come down a little bit,

but there's not been such a steady pattern in how the overseas inventories have developed, as far as I can remember. This year was, there was more of a reduction, there was a reduction at the retail levels,

which actually reduced depletions, because we had some programs near the end of last year, prior year, which encouraged retail sales on the part of our wholesalers.

Right.

And also our

wholesalers themselves had inventories lower than they have in the past by a noticeable amount, in part I would say, because we had, we had a good close, I mean, the sales people did their job, and depletions were good.

It's a sort of three to $5 million or something like that, drop in gross profit from the cases that we're, they'll be coming down this year, something in that neighborhood. Now let Larry talk about the depletion.

if you recall, Jack Daniel's worldwide has been growing the past several years,

sort of a five to six percent clip.

Yes.

And in '02 it dropped to two and a half percent. Most of that adjustment was in the U.S., the U.S. was essentially flat this past year. Like everyone, we're obviously trying to read the tea leaves to see what's going on with the U.S. economy, but all the anecdotal information, and some of the statistical information we see is encouraging

for the U.S. trends improving.

As Owsley mentioned, we actually had kind of a, just a timing thing that also affected that two and a half percent, it probably would have been a little higher because we actually think we reduced some retail inventories as well. But we are encouraged that that sort of five to six percent trend

we had seen in past years will resume and with the U.S. coming back to sort of low single-digit growth, you know, as we work through all of the September 11th issues, the on-premise gets back to normal.

But of course, we'll be reading the on-premise and the

statistics very closely the next several months, but we feel pretty good about the outlook for going back to that mid-single-digit growth.

And Larry, following just on Phoebe's commentary, because inventories I imagine she was talking about the U.S. business, are at the lowest level at a number of years. Do you anticipate, in following up on Owsley's comment, that in the U.S. will continue a day or two. Is there anything to believe that Brown-Forman has still some inventory reductions beyond what we've seen as normal over the last couple of years, either at the retail level, or at the wholesale level in this next fiscal year?

Let me talk -- let me break it into two pieces. I'll talk about the U.S. first. You know, everybody spent a lot of money, including ourselves, on our supply chain initiatives, so we certainly have the ability I think to see continued reductions in wholesale inventory levels, and retail inventory levels, in the U.S. We're expecting that to be kind of a more a normal clip. You know, a one to two day trend per year in the U.S. Now, you should be aware that in the UK, as Phoebe announced, we're going to have a fundamentally different arrangement in the UK,

where we will in effect own the wholesale inventories for that market, which is our second biggest market. So that's going to have a very meaningful effect on lowering the quote "trade inventory levels" for the brand out side the U.S.

Right, correct. Thank you very much.

Thanks,

.

Thanks, Phoebe.

Your next question comes from

with

.

Good morning.

Morning.

Hi,

.

Couple of questions. Can you give me Jack Daniels' depletion numbers for the fourth quarter in the U.S., and worldwide?

We'll have to get that off-line, I'm not sure we -- let's look here. We'll see if we ...

Well, here, I -- I can give it to you. Worldwide fourth quarter comparisons was a little over three percent, on a worldwide basis.

And U.S.?

Around one.

Up one?

Yes.

OK. And then, what is the pricing outlook for Jack Daniels and Southern Comfort for -- what have you modeled for '03?

What have we bottled?

Modeled.

Modeled.

Modeled.

Oh, in both cases,

I think if you look worldwide, we're certainly -- outside the U.S. it's -- and really inside, it's a fairly steady upward progress for both brands. We really are staying the course.

stands market by market specific, too, so -- but I don't think we're planning to change our historical pricing strategy.

Strategy, no.

So we look for prices to go up,

say in the U.S. for Jack Daniels, what, mid-single-digit this year?

No.

No?

Not mid-digits. I don't think it's gone up mid-single-digits in the U.S. for years. It's about the same pattern that it has before.

Yes, it's more like closer to lower single digits.

Two or three per year.

Yes, two per year.

And a little stronger than that this fiscal year, but that's -- I think we'll get back to a more kind of twoish range.

OK. And then, can you tell me what the atmosphere is like at distributors?

How competitive is it? Kind of what's going on there? Can you give me an update?

I'm sorry, I didn't physically hear all of the words in your question.

Can you give me an update as to atmosphere at the distributors? How competitive, what's going on?

Around the world? In what market? Have you ...

In the U.S.

In the U.S., Our distributors, as far as they're dealing with our brands, we find them to be doing an excellent job. We work very closely with them. We treat them as our partners.

They are a very important part of our getting our goods to market. And we found that the atmosphere surrounding our brands to be excellent.

Great. Thank you.

Thanks,

.

Your next question comes from

with Gardner, Russo and Gardner.

Yeah, hi. I have several questions. Good day all. Larry Probus was the first one. It has to do with the

direct to consumer since he once ran it. At $150 million of revenue this year up 15 percent, presumably up 10 percent, presumably up a similar amount in prior years, wouldn't that business at some point start to itself generate profits that could exceed those which you reported for the whole business.

Maybe you could just highlight for us how profitable. And then what the rate of profit growth is for direct to consumer.

For Phoebe I would have a couple of questions. The first in the wine business, Phoebe, do you know has anybody else grown volumes this year as fast as Fetzer? And if so, is Fetzer indeed the company most forceful in driving down prices to grow volume. I'm wondering who is the price discounter in the wine business, as reflected in part by your volume growth versus others?

And Phoebe,

the second question for you has to do with your '03 forecast. You highlighted eight cents of trade reorganization spendings per share still burdening 2003. You also cited heavy up advertising, reinvesting in the brands.

Is there any portion of that advertising spend that you consider of a one time nature that we should then back away off of the burden for '04 earnings per share.

And then lastly, for Owsley, Oswley I wonder to what extent you might cannibalize you country cooler business with the new flavored alcohol beverage it launched. And whether you consider that important or not.

I wonder to what extent, the Brown-Forman relationship with Bacardi might run afoul of the Bacardi relationship with Budweiser in the U.S.

And then the last question for Owsley is can you talk about the management team that you have now taking over the international markets where you're doing so much more in markets like England than you once did. And how have you stepped up that business? So it's a whole series of questions.

It certainly is

.

Thank you.

I think we've got six of them. Why don't I - I'll start and do the Jack Daniels country cocktails which we had successfully in the marketplace only in the United States for a number of years. And Jack Daniels hard cola which will enter the marketplace.

The country cocktails were definitely hurt by the introduction of Smirnoff Ice this past year. It was a very innovative and formidable competitor and that hurt our business there. With the introduction of Jack Daniels hard

cola which is - will be sold via the Miller distribution network rather than via our traditional wine and spirits distribution network. We both - we'll certainly have our product in a lot more outlets than they have traditionally been.

It may - one could make a case that our Jack Daniels country cocktails sales will diminish some because of that introduction. One could also make a case that people will be reminded of our product or because of the advertising an the availability of

Jack Daniels hard cola. So, I don't have any particular prediction as to how that will come out of -- we hope both of them do well. Certainly, I'd say the prospects for this summer for Jack Daniels Hard Cola would be -- that they would certainly outshine, simply because of the novelty alone and the pipeline filling of the Jack Daniel's Country Cocktails.

In

we are going to take on more and more ourselves of our own marketing and selling activities. We have foreseen this possibility for a number of years as we looked at the expiration date of our contracts in that market and, so, we have taken preparatory steps to bring on board people very knowledgeable in that field.

We're glad to have the ability of a company that's been in the market actively selling for a long time like Bacardi, but to do the physical selling and distribution for us, it works very well. Our people can do the marketing, pricing, and all of those things, and they are in place, now, to do that.

We will be adding to our staff appropriately, and I feel confident that a year from now we'll be more accomplished at it than we will the first day we go out. But we've -- we're very comfortable with a management team of this in place, and it will grow.

Tom, it's Larry. I'll pick up on your question on the direct consumer channel for Lenox ...

Thanks.

You're right, it's a very bright spot for that segment. You know, this past year, there really -- the collectable business,

or the direct consumer channel, really didn't see virtually any impact from September 11th, so it was very different in nature to -- than the rest of the businesses. And you're right, over the years, that channel has evolved somewhat.

When I was involved in it, it was primarily

collectable-type products that people bought more than one, you know, item. Over a period of time, it is evolving more and more to a -- using the Internet and catalogue channels to sell a broader range of consumer durable products.

So it's moved into casual table-ware, and gift-ware, and that's the other very positive thing that's going on there, is that we're using that infrastructure in place to sell a broader-base group of products to consumers, direct.

So, we see the outlook there continuing very strongly, it's not -- it's a much broader product base than it used to be, and that will continue to grow in importance, I think, for the segment.

So that has the full line of Lenox products going through that channel?

Tom, it does not have the full line. That's obviously a very strategic issue for us, how -- what products we put in that channel versus products that we keep exclusive to the wholesale channel, and that's something we debate a lot and evaluate.

It is fair to say that over time we have continued to broaden the types and numbers of offerings through the direct channel.

OK, thanks.

OK, Tom, your questions to me, this is Phoebe. With regard to wine, we watch our -- obviously,

the -- our trends very closely with regard to competitors. And frankly, Fetzer has been doing very well in terms of volume growth in wines, and that has been deliberate on our part, particular to put ourselves in a better inventory position, so that we would do not have excessive amounts of inventory there. And so we have had, you know, a promotional led, you know, volume strategy.

However, when you look at it on a, you know, dollar, sort of dollar weighted volume percent change, you know, it's, and we haven't done all that badly when you take all that into consideration.

Anecdotally

, we hear about some discounting occurring in stores,

particularly from Australian wines, that leave us to think that we are not the leader in price discounter, but it certainly has been our strategy to work off the excess inventory that we have by leading with promotional discounts and how long that goes sort of depends upon the market dynamics in that wine market. But that's what, where that is.

The second question that you asked me had to with the additional remaining charges for the business improvement programs, and

thus far

what we have done with that is, because of the, sometimes the sensitive nature of them, we have announced them as they occur, and we have not really talked about what the nature of those are going to be in advance. So we're really not disclosing that.

Your third question had to do with our investment in brands, and wondering whether or not that was, this was one-time nature for this year, our increase, or whether or not it's the same. I think the market will tell us that, and depending upon the success of some of the products, will also tell us that.

We have a new line extension, Jack Daniel's hard cola, given what happens in that category may be quite influential in terms of the absolute dollars spent in that category. We think that those are dollars well spent, because they also support our number one brand, Jack Daniel's, albeit in a little different form.

Hope that helps you, and ...

Thanks a lot, it was very helpful. Thank you.

OK.

Your next question comes from

with Lehman Brothers.

Good morning

.

Good morning.

Couple of questions. First of all, the U.K. is easily now your third-largest brand market combination. First of all, can you give us some guidance about how the two big brands did in this recent fiscal year? Now changes in distribution always tell a story,

obviously the

had done a pretty good job for you over the last decade or so.

You've decided to go with Bacardi, who's traditionally not been very good in the on trade in this market, and presumably they're thrilled,

you know, to get such an icon as Jack Daniel's, and presumably that's why you're showing such a large incremental profit gain next year, because the new arrangement doesn't amount to a great deal of profitability for Bacardi. So that's the first question.

Second is really a request, rather than a question. As I guess as a traditionalist I'm clearly not thrilled with this RTD business, but on the assumption that it may be successful, how are you going to start, you know, how are you going to categorize it in terms of telling us about depletions of Jack Daniels? Are you going to split it out as a separate category, or blend it in as a the

does with Smirnoff?

it's Larry. I'll pick up the last question first, we clearly will not report Jack Daniel's hard cola in some

blended way with Jack Daniel's, we'll keep that separate, and I think it's important for everybody to understand what's going on, to have that as a separate statistic.

, you'd said something

about the bump in earnings from the UK agreement, or something like that? I want to make sure that we're clear -- I'm not make sure I understood your correctly. But the 15 cents a share is a drop in the first quarter,

which gets made up in the subsequent three quarters. And then, we do expect -- you know, so that's basically a wash. In fiscal '04 is when the true bump comes up from this particular market, as we earn a higher margin in there. So ...

Yes, but I'm saying is the reason that you earn a higher -- will get a higher margin, is

because presumably Bacardi has been willing to accept a much lower distribution profit. To get such an icon brand as yours, given their relative weakness in the on-trade, are you concerned about that? And is this the reason perhaps you're going to have to add some more people to beef that up?

Well,

, it's a very appropriate question. Yes, we have more favorable terms under our new arrangement with Bacardi, than we did under our old arrangement with Diageo. So you're certainly correct in that regard. There's no question Diageo was extremely accomplished on the on-trade.

And obviously Bacardi, with our brands, will become more so. And we'll work very hard with them to see that that happens.

I'm trying to think if there was a third part of your question?

Just how the two brands did in the recent fiscal year in the UK?

Oh, sure. They've done very well for a number of years, including this past year.

So you're -- JD is now well over half a million cases?

Yes.

Yes.

Yes.

It's over 600, actually. Just about 600.

And so it's the second, rather than the third, largest market for us.

So it's brand market combination, in the sense I see I guess I lumped your wine business as one. As a brand, a single brand. I know it's not completely, but presumably that is still more profitable than Jack Daniels than your UK operation?

Well, we don't really look at it that way, but so, I can't give you that ranking.

One other last -- just to add-on the following, the Southern Comfort in the UK now is about 260,000 cases. So it's awfully large, in and of itself.

It was over 400 about 10, 15 years ago, wasn't it?

That's correct. No question that Jack Daniels itself has taken some of that business. Having such a very large growth over that same period. And net, if you add the two brands together, we have definitely had a lot of growth.

Thank you.

Thank you,

.

Thank you,

.

You're next question comes from

with

.

Yes, good morning. I have two questions regarding wine. The first is I had thought from competitor calls that

over-capacity in grapes should result in a net positive, in that it reduces the cost of goods sold. And I guess are the lower grape costs being passed on to the consumer? And could you provide some color?

And the other is that a major competitor claimed that they weren't seeing any pricing pressure in wine, so that I'm just wondering if the wine competition -- is the price competition in wines limited to certain price points?

OK, Richard, this is Phoebe, let me try those. First of all, you would think that with an oversupply of grapes, that the first thing that would happen is that your cost of goods would go down, as a result of oversupply.

However, the United States market is influenced by the existence of a number of contracts with suppliers, with growers of grapes. We have a number of those that we entered into to ensure the quality and security of supply of grapes, and that is also the custom throughout the industry.

So therefore there is actually less immediate -- less immediate reduction in cost of goods sold that you would expect, because of the nature of those contracts, and the existence of those contracts. And they stabilize the market on an upside, and they stabilize it on the downside.

And so there isn't the immediate effect, at least for us, and I think that is the case for many other of the competitors as well.

You may have been looking to someone who did not have -- the nature of those grape contracts. The second had to with pricing pressure at all price points.

Frankly, we trade, and are positioning ourselves, only in the premium, and with some of our offerings in the super-premium category. And so therefore I can't really speak to the pricing pressure in bulk lines because I frankly don't know.

We know that in that $6 to $10 category, per bottle, there's a lot of pricing pressure. Part of it has to do with successful imports from Australia, which is in its own oversupply situation, et cetera, and favorable exchange rates that really help them -- their situation.

So, just to let you know that, in the category we watch, we certainly feel that there is that pressure.

Thank you very much.

You bet.

Your next question comes from Art Cecil with T. Rowe Price.

Good morning.

Hi, Art.

brown (?): Good morning, Art.

I was just curious, the 9 to 12 percent earnings growth forecast for '03. Could you clarify that that's off a $3.33 base?

brown (?):

It is.

OK, so 9 percent takes us to $3.63, and 12 takes us to $3.73 ...

brown (?): That's it.

The consensus is $3.72, using all two of the analysts being recorded. So, the consensus is pretty much right there.

Now, the three-sixty -- the 9 to 12 percent is after incurring $0.08 of further restructuring charges, correct?

Yes, correct, correct.

Now also, the 15 cents in the first quarter from the UK distribution chains, that $0.15 is one time.

Correct, and will be made up by the end of the year.

So in '04, if I dare to look out to '04, we can look at recapturing $0.08 from the restructuring, along with another $0.15 cents from the one-time UK stuff.

You got it.

OK, so we're looking at $0.23 in '04 incremental, before we even look at volume growth, correct?

Yes.

OK. How much of -- how much savings --

can you tell us how much savings we're going to get from the restructuring that you're undertaking '03, and then '04. I know you said '04 is going to be much larger. Can you give us some -- quantify that a little bit.

You know, that's not something we've disclosed. And part of the reason that we're not disclosing it is because it is successful executing all the things that we've announced,

.

And of the three plant closing in consumer durables announced, only one has occurred. So, until that is actually closed and the benefits really start to accrue, we're not counting our chickens before they hatch ...

OK.

... but we do expect those investments to be excellent ones for us to have made.

OK, Now, as far as the -- I'm just wondering, can you provide any more detail on how you make up to $0.15 in the last three quarters of this year on the UK businesses?

Is it simply that the income statement margin out of the UK is that advantaged that you get $0.15 more out of it over a 9-month period?

That's it, that's it. The pattern does change though.

Typically, we've had the strongest sales over the second quarter as the distributor, Diageo, builds up its own inventories in advance of the holiday season.

OK. But ...

But now we'll change it because we'll be selling direct, so it will push to the third quarter.

OK, so then in '04, along with the $0.08 and the $0.15 that I mentioned before, '04 is going to benefit from 12 months of this new agreement versus nine.

Don't take that 15 and convert it 20, though. That's the trap you can fall into. That will not be the case. It's truly -- the timing issue, the timing is changing so dramatically for us in the UK.

The money in that market is really being made up in our third quarter, which we're going to capture this year and the following fiscal year, so stick with the 15.

OK.

I was afraid you were going to go down that path of taking it a little bit farther and writing down a $0.20.

OK, historically, if you go back five or six years, I think,

the company's tended to be very predictable in terms of its earnings growth -- earnings-per-share growth, on the order of 6 to 9 percent. Now it sounds like the forecast going forward is 9 to 11, or maybe 8-12, in terms of earnings-per-share growth. Have you all determined as top management that the company simply needs to start showing a higher growth rate than it has historically?

Art, I'll respond to that. Obviously, we have. We've been shooting for double-digit growth for a number of years, and we've come -- we've actually made it a quarter or two,

but we have not achieved it. Obviously, you want to set your sites so you can go as far as you can go. It seems to me that probably -- there are two things that are happening that take the number up. One is, unfortunately, we had a year that we just

completed that was actually down. So it's from a low base. And so you -- getting a higher growth rate in the next year or two is one of the unfortunate consequences of not having had a very good year this year.

The second thing is, and you discussed them Phoebe just a moment ago, there are a number of actually very positive things that look like that they are improving our base business. And we'll raise it to a higher claim over the next several years.

Yes.

And we've taken some of the costs, now. We have a lot of the action we need to take in this coming fiscal year, and the benefits will come in 2004, and so on, and beyond. What we've done in the UK, what we've done with these Lenox plants, and so on are good examples of those. And so it certainly looks like over the next couple of years, from a low base, we hope we can get higher rates than our old, predictable numbers of -- were in the past.

OK, so Owsley you're saying then that management has not in fact determined that it needs to grow faster, because you've always had a target in this area.

I think it simply -- it's not so much the questioning of a need, it's a question of the ability, given the market place and our brands and the reality of economies that we're dealing wit.

So we try to grow on a long-term basis as a, and so as far as we can, so it's really more determined by our imagination and our good fortune in the marketplace, putting that imagination to work, and the economies

and so on that we're dealing with, rather than setting some need and then trying to force the result on a short-term basis to achieve that, but not having it be sustainable.

What will advertising expense do in '03 consistent with the earnings forecast that you've given us?

I'm going to let Larry or Phoebe ...

Art it's Larry. We actually have pretty bullish plans with respect to brand support this coming year. Now of course, this past year we cut back the level of spending to kind of just barely, I think about one percent growth ...

Right.

... beverages, and that was in reaction to the, you know, the soft U.S. economy and the September 11th events, we just didn't think it was the best time to be pouring money into incremental spending. So off of that lower base, we're looking at sort of high single-digit, low double-digit growth.

And we will, you know, our, the way we monitor that, we've monitored it very closely, we watch the environment and we see if these, you know, the actions we're taking are working. If they do, then we keep adding to it, if they don't, then we pull back. So ...

OK. So wine and spirits advertisement's up, you know, nine, 11 percent.

Yeah, that's right.

One final thing.

Oh by the way Art, I'll just mention that does not include the Jack Daniel's hard cola spending, that's kind of, we keep that as a separate kind of ...

OK.

... valuation, and that's all kind of a shared cost ...

Good.

... amongst another group. So, and that could be very sizable this year.

Thank you. One final question. You all highlighted yourself the excellence of the balance sheet in terms of its, you know, liquidity and cash generating capabilities.

What are the implications for shareholders of that?

It's, I think it's the same that Brown-Forman has had for many years Art, that we are lucky to have one of our greatest management challenges being how to successfully invest money on our shareholders behalf.

And there's the same list of opportunities which has been open to us for a number of years, first putting them, everything we could think of behind our brands, our production facilities, our people, to get all of them to their highest level.

There is the world of acquisitions out there that we have participated in vigorously, sometimes actually acquiring something. Sometimes just spending a lot of time and not acquiring something ...

OK. Well thank you very much. I'm sorry to be so long-winded.

That's OK. And then last of course, there remains the opportunity to do share repurchases, we've done them over the years, and we understand the mathematics of that fully.

All right, thank you.

You're welcome Art.

Your next question comes from

with JB Ware.

Yes thanks very much. I was just wanting to know the revenue per case of say Fetzer and your other wine brands in terms of where they were for the last year versus PCP, the previous year? Thanks.

And I don't have,

I don't have that in front of me. Not typically something we give a lot out of, are you trying to assess the percent change year over year or something like that?

Yeah, just to get a sense of the level of sort of promotional discounting activity in terms of selling process for your wine portfolio.

You want to call me about that later, and we can talk about it. I just don't have that stuff in front of me.

Certainly.

I think we'll take our last question.

Your final question comes from

of Bank of America Securities.

Hi, good morning.

Hi Brian.

How are you?

Good.

Just two very quick questions. The first is are there any other major markets, outside the U.S. obviously, where Diageo is your sales agent? So any other major potential changes in distribution?

There are no other major markets.

OK.

There's I think Holland is one of a market that was probably I think -- I can't remember whether that's changing or not at this time. But there are no other major markets.

OK. And then, just to take another sort of shot at trying to assess the potential margin recovery in the durables business. It seems if you strip out the charge in the fourth quarter, that you got some pretty good margin expansion in the fourth quarter. So I was curious how much of that was due

to traction from the cost-savings of the plant closing you did back earlier or later in 2001? And how much of it was really due to a stabilization in the sales environment?

I think on the old stuff, there is a little bit, but it is little that we're getting from some actions we took in the first quarter of fiscal 2002.

But the plant closings, they simply have not taken effect in that time period. So that the answer for those is effectively zero. Probably the biggest change would come about in the percent of our business that's in the direct to consumer, which has an inherently higher margin than the business that we sell up in other channels. So it's a question of probably a favorable mix.

So it's more of a mix shift that you saw in this quarter, than anything?

Yes, the others will come in the future. Some of it will begin later in this present

fiscal year that we're in. Most of it will come in 2004 and beyond.

OK. And then, in just trying to look out at the future impact. I mean, you had operating margins that were historically in the seven --

between seven and eight percent. You know, is it possible with this smaller asset base that you can move margins to a point that are even higher than they were previously?

Brian, it's Larry. Yes, we do think there's that opportunity, and we're looking for, I think in your terms if you're talking about operating margins,....

Yes.

... around a 10 percent would be a fair objective.

OK, but that is not -- is that sort of in the between now fiscal '04 time frame? Or, is that for another term?

I would say the sort of '04 would when we'd be start to reap the main benefits.

It probably is more fully realized in '05 kind of time frame.

OK, all right. All right, thank you very much.

OK, I think we have time for one more.

OK, you're final question comes from

with Legg Mason.

Thank you, and good morning, everyone. Owsley, partly

adding on to some of Brian's questions, at least at the beginning there. But I wonder if you can give us a sense of distribution opportunity, changes in distribution opportunity around the globe. You know, key major markets that you see that, in spite of not relying on Diageo, over the next 12 to 24 months,

not that they're going to happen, but places where you see a change being potentially materially beneficial to you? You know, not necessarily being specific, but do you think that this is an area you're going to continue to work on, I suppose, over the next 12 to 24 months? And then, I have a follow-up.

Yes, I think it simply goes with the territory. We have been working on it diligently for about the last seven or eight years, when we began our expansion efforts in new markets. It continues to be important to us, and we will not cease working on it.

Just to give one small example, in Korea, where we could not find appropriate distribution partners, we started our own, small company. And it has worked very well for us. It's small, not old, but we're very pleased with the results so far and we're now doing the same thing in Taiwan.

So that again, a market where we hadn't done much business before, and so we'll see how that goes.

But there are two things that -- one that is presently up and running, and one that will get going that you can see our activity in.

And, this actually wasn't my follow-up, but listening to your comments,

those are some smaller things, obviously the last six months have seen some very significant things with the US and the UK, I guess announced. Not necessarily realizing results yet,

do you think that we can see order of magnitude big move

activities continuing over the next, you know, near to intermediate horizon?

You mean on our part?

Yes.

I don't know that there's a great deal of activity that I see. I mean, we -- where the marketplaces are moving, we are extremely alert and try to get in our -- get ourselves in a position to be able to move quickly when needed,

but it's kind of hard to forecast that in advance. We just -- we try to be extremely prepared and to know exactly what is the right strategic course for us to go on, and then when the times come, to execute it, we're ready to do so.

And if I could, one more thing. Brown-Forman's always, or long I should say, distinguished itself for fighting the urge to merge and just staying focused on building brands and doing acquisitions as was appropriate.

Is it fair to say that, from a corporate, kind of ownership standpoint, as you look at what you're doing with Bacardi and more broadly, that your level of concern, particularly about Diageo's consolidation has abated relative to perhaps six months, 12 months ago?

We've always been alert to what Diageo is doing. Frankly, we've never been afraid of it. I think that there's some companies that had not taken our views, so we want to be very alert to what a big, powerful competitor is doing,

but that doesn't mean you're afraid of them, and we simply have never been of that school.

So we've -- we have no urge to merge, we feel very confident in our present corporate structure, and we'll try to keep that maintained for the indefinite future.

Thank you.

Thank you to everyone who joined us.

Thank you so much.

Thank you for participating in the Brown-Forman 2002 fiscal year-end earnings conference call, you may now disconnect.