Brown-Forman Corp (BF.B) 2003 Q1 法說會逐字稿

Good morning.

My name is Thea and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Brown-Forman first quarter 2003 earnings 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 period.

If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

I would like to introduce Phoebe Wood, Chief Financial Officer of Brown-Forman.

And turn the call over to Mr. Lawson Whiting.

Mr. Whiting, you may begin the conference, sir.

Good morning.

This is Lawson Whiting speaking.

I'm the Director of Investor Relations at Brown-Forman Corporation, I would like to welcome you to our fiscal 2003 first quarter conference call.

Phoebe Wood, our Executive Vice President and Chief Financial Officer, will discuss the results of each of our business units for the quarter, and offer some updated guidance on our expectations for the full fiscal year.

We'll then open the microphones to investors for a question and answer session.

Joining Phoebe and me will be Larry Probus, Senior Vice President of Finance for Brown-Forman Corporation, and Jim Bareuther, President BF Spirits America.

Except for historical information, the following remarks consist of forward-looking statements within the meaning of the Private Securities 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 not limited to: the absence of expected recovery in the U.S. economy in the near future, significant strengthening of the U.S. dollar against other currencies, a deterioration in economic conditions in the principal countries to which we export beverage products, and a further continuation of the decline in discretionary consumer spending or in the demand for tableware, giftware and our leather goods.

Increases in excise taxes to meet budget shortfalls could also affect earnings in the Company's U.S. beverage business.

These statements are also subject to the factors mentioned in part one, item seven, of the Company's form 10-K for fiscal 2002, which incorporates these by reference.

Brown-Forman has no current intention of updating or revising any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

These projections and other forward-looking information in this conference call may be relied on subject to the proceedings Safe Harbor statement as of the date of this call and may continue to be used until September 5, 2002, which is the date that the replay of this call will be removed from the Company's website.

Now I'll turn the call over to Phoebe.

Good morning.

It's a pleasure to be here to discuss our results for the first quarter of fiscal year 2003, which ended on July 31st.

Reported earnings per share of 53 cents were down 8%, compared to the first quarter of last year.

As we discussed at our last conference call in late May, the primary issue affecting our earnings for the quarter was a distribution change in the United Kingdom.

Excluding the impact of this change, and adjusting for the non-recurring costs of our business improvement program, our earnings per share were up 8%.

I will provide some more insight into our plans for distribution in the U.K. in a couple of minutes.

But first I'd like to summarize the results of our major business units.

The strongest area within Brown-Forman Corporation was our spirits business.

Jack Daniels and Southern Comfort were up solidly in the quarter, with both domestic and international markets showing healthy rates of volume and profit growth.

Several other spirits brands, including Canadian Mist, Early Times, and Woodford Reserve, also performed well in the quarter, with solid increases in gross profits.

The wine business continues to be much more challenging, although depletions for Fetzer and Korbel were up, sales and profits were down.

The domestic pricing environment remains extremely competitive in the wine business, and we do not anticipate the significant strengthening over the next 6 to 12 months.

Results in the consumer durables segment were also weak this quarter.

The U.S. market for table top, gift wear and luggage products reflects the slowing U.S. economy.

Although the segment typically shows a loss in the first quarter, actual results were below expectations.

Having said that, we are cautiously optimistic about the upcoming holiday season, and still expect a relatively strong rebound in earnings over the next three-quarters.

Turning now specifically to beverages.

As I mentioned, the spirits business was fairly strong this past quarter.

Domestic depletions for Jack Daniels were up 3% for the quarter, essentially resuming the long-term growth rate that the brand achieved in the U.S. throughout much of the last 10 years.

Outside of the U.S., depletions were in the high single digits, with particular strength in the United Kingdom, Australia, and a number of the smaller emerging markets in Asia.

We continue to see growing demand for Jack Daniels around the world, and are optimistic that the brand will have another solid year in fiscal 2003.

Southern Comfort depletions were also up.

With price increases in the U.S. significantly improving overall gross profits.

The positive news for this brand is the improving trend outside of the U.S..

The brand has been growing fairly steadily in the U.S. for several years now, but it has struggled outside of the U.S.

The new package, a reduced proof product, and increased advertising and promotional support have all contributed to the improved results and we are optimistic about the potential for this brand over the next few years.

The market for premium vodka is extremely competitive in the United States, and Finlandia depletions were down slightly during the quarter.

A new advertising and promotion campaign from the upcoming James Bond film "Die Another Day" is expected to stimulate growth of the brand.

We have numerous promotional plans that tie in with the movie and expect stronger performance in the second half of the year.

Perhaps the area under the most pressure within our beverages business is wine.

The wine business in the U.S. remains very competitive.

And pricing and cost pressures have combined to drive profits down in our wine group.

Fetzer and Korbel both continue to show mid single digit growth in depletion, but Bolla had a weak quarter.

We remain very focused at improving the efficiencies in our wine business, including reducing our costs of goods so that when the market turns around we have the brands and the people to support the growth potential of this business.

As I mentioned earlier, the biggest issue impacting earnings for the quarter was the change in distribution in the U.K..

Effective August 1st, Brown-Forman began selling its spirits products directly to the retail trade in the United Kingdom, via a cost sharing arrangement with Bacardi.

Prior it that, we recognized revenue when we actually sold the goods to our distributor.

The distributor then held title to the goods as they crossed the ocean and into the local warehouses.

Today, Brown-Forman retains title to the goods until they're sold to the retail trade.

Creating a delay in revenue recognition.

This one-time adjustment lowered first quarter's gross profit and operating income by approximately 13 cents per share.

As we discussed at the last conference call, the impact on full-year results should be negligible, however, as we expect to achieve a higher profit margin in subsequent quarters.

We have high expectations for our local sales and marketing team in the U.K..

And we are optimistic about the prospects for this new distribution arrangement.

Now back to review of our current business trends.

Our advertising investments in the quarter for the beverages business were up roughly $7 million, or 14%.

As we significantly increased the brand building support behind our core brands.

I would characterize last fiscal year's modest growth in advertising to be outside the norm, but the right thing to do, given the weakened economy and the events of September 11th.

It is our intention to increase significantly the pace of our brand building efforts this year, with a goal to accelerate our growth rates around the world.

A portion of the increase in advertising is being funded by strong SG&A cost controls.

Total SG&A costs for the beverage business were down 2% for the quarter.

Although the previous year included about $3 million in business improvement costs, and I'll talk more about them later.

Excluding those costs, SG&A expenses relatively flat.

Despite an inflationary environment for certain costs, including retirement, pension, and insurance costs, we are pleased about keeping our controllable expenses in check.

I'd also like to note that our first quarter earnings were not significantly impacted by the recent weakening of the U.S. dollar, due to hedging contracts in place.

However, a continuation of current exchange rates would benefit earnings beginning in the second half of this year.

Now more on business improvement programs.

For the past 13 months, Brown-Forman has been implementing a series of business improvement programs to streamline procurement and production practices, reduce inventories, and improve connections with customers.

In fiscal 2002, the Company invested 21 cents per share under this business improvement program.

Mostly in the consumer durables segment.

As we stated in the last conference call, we intend to spend approximately 8 cents per share through fiscal 2003, to complete this business improvement program.

Over this past week, we made a series of changes to our wine and spirits sales and marketing organizations, which are designed to strengthen the Company's focus on brand building activities.

After spending the last decade expanding our infrastructure around the world, we will now dedicate ourselves to improving and increasing our brand building program directed to consumers.

Much of this is made possible by the fact that the distribution system in the U.S. has changed significantly over the last decade, due to consolidation and improved technology.

The increased efficiency of our distributors has allowed us to reduce the number of people working directly with distributors and expand the number of employees in our global brand team and in field marketing positions.

In short, we are shifting people from traditional trade push responsibilities to more consumer pull positions.

It's our intention that this new strategic direction for our company will result in even better and stronger brands, which will result in continued long-term financial success for the corporation.

Approximately 3 cents per share in business improvement costs will be recognized in the second quarter as a result of this restructuring plan.

After investing one cent per share in the first quarter for certain supply chain initiatives, there's approximately 4 cents per share in business improvement costs remaining for the rest of the fiscal year.

Turning now to consumer durables segment.

The U.S. market for table tops, giftware and luggage products remains very challenging and our consumer durables results were weak this past quarter.

Sales were down 9%, and gross profit was down 10%.

A primary factor affecting results is that overall traffic in retail outlet stores is down compared to the same period last year.

Apparently, consumers are less willing to travel to a relatively remote outlet location, when the local retail stores and our shopping mall are continually running sales at very competitive prices.

Trends in the direct to the consumer channel also weakened during the quarter, with sales and profits down from last year.

As the segment begins to realize a portion of the benefits from business improvement investments incurred in fiscal '02, and in anticipation of holiday orders will rebound from the depressed period last year, we remain optimistic that our consumer durables segment will show a recovery in earnings during the last three-quarters of the year.

Looking ahead, our expectations are that most of the growth for the full fiscal year will occur in the third and fourth quarters, primarily because of the timing of our sales in the U.K. market.

Importantly, we remain comfortable with our full-year earnings growth estimates of 9% to 12%.

In closing, I would like to reiterate that this company remains intensely focused on creating long-term shareholder value.

We have made a number of changes to our businesses over the past year, in an effort to make them more efficient and put them in a position for stronger future growth.

Our core brands remain vibrant and healthy, and most of the major business improvement programs have been announced and are in the process of being implemented.

Although there are certainly a number of big challenges for certain parts of our business, we remain confident in the strength of our brands and our people, and we will continue to make decisions which we feel are in the best long-term interests of our shareholders.

Now, Larry Lawson, Jim Bareuther and I will be happy to answer any of your questions.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad now.

We'll pause for just a moment to compile the Q & A roster.

Your first question comes from Matthew Webb with Casanova.

Hello.

Yes.

I've got two questions, actually.

Firstly, I was wondering whether you had any comments on the ready to drink category, we've seen some recent data suggesting that category may be slowing some what.

Has that led you to revise your own plans in that category particularly regarding the amounts of resource you're going to put behind pushing your brands there?

And then secondly, are you at all concerned that you appear to us to be taking resources way from your relationships with the distributors at a time when [inaudible] seems very much to be increasing its focus on that area?

Thank you for the questions, Matthew.

Let me take the first one, and I'll turn the second one over to Jim Bareuther, who is the President as you know of our Brown-Forman Spirits Americas group.

The ready to drink category I think has been well studied and well documented because indeed it is a new category.

Our entrance into that Jack Daniels Hard Cola is really just getting out now into the market.

We have just initiated our own advertising program, just on the conclusion of getting it literally rolled out into the on premise and into the off premise.

We have put down for our own internal expectations very, very modest additions to our full-year profits based on this category.

I think that we would expect for this category to be here.

We think that there are a number of entrants we expect that there will be some that will be more successful than others.

Ours is unique in that it is more directed toward the male consumer, in that it's Cola, more of a Cola base.

But we are in early, early days.

I don't think we have any reliable information at all in terms of sharing with you how we think our entrance will do relative to the competition.

And Jim, I'm going to ask you to -- see if you can expand on that and answer the question about the resources away from the relationships with the distributors.

Yes, Phoebe.

Matthew, in terms of the ready to drink category, the RTD category, I think it's safe to say this is a dynamic category and one which we remain very optimistic about.

And I believe over a 12-month period, you'll continue to see rather substantial growth in that category.

With respect to the restructuring and your comment as to [inaudible] expanding relationships, I would say that in essence we're actually improving the relationships with our distributor network.

And we have spent a great deal of time assessing the needs of not only our distribution network but also customer requirements.

And essentially we are aligning our selling organization with our distributor network and putting ourselves in a better position to service customers in the marketplace.

Principally through a single point of contact, and placing more resources against channel segmentation, and then finally placing more marketing resources closer to the customer and the consumer on a regional basis.

So what we have simply done is to redeploy the resources in what we will believe will be a more efficient manner, and will enhance our brand building efforts across the country on a state by state basis.

Thanks very much.

Thank you, Matthew.

Your next question comes from Bryan Spillane of Banc of America.

Hi.

Good morning.

Hi, Brian.

Couple of questions, kind of following up on the last one.

The first is, in terms of redeploying resources, are we looking at sort of a net reduction in head count?

And then the third -- or the second part of it would be, there's a 3 cent charge, so if we can get some sort of idea where or what the money will be spent on, and then is there a cost savings sort of associated with this?

Some sort of -- or margin improvement that you'll have associated with it?

Thanks for the question, Brian.

You're welcome.

In -- Bryan, this is Jim Bareuther.

In terms of redeploying and head reduction, there is a modest head reduction that is taking place in the Americas, and the ultimate savings from that are being redeployed in terms of marketing expenditures against the brands.

Bryan, this is Larry Probus.

With respect to the 3 cent cost, it is mostly recognizing the cost of those people leaving the company.

It also includes some moving costs for people that are changing jobs.

In taking on different responsibilities.

We do think there are -- there will be direct savings in the future.

The hard costs with respect lower head count amount to somewhere in the 3 to $4 million per year range.

I think the question there will be whether or not we take that to the bottom line or whether or not -- in brand building activities.

So for now, is it safe to say in terms of trying to model out the impact of this change, is really more -- it's meant to help drive top line and less in terms of margin expansion?

Yes.

Absolutely.

All right.

Thank you.

Thanks Bryan.

Your next question comes from Richard Diamond of Inwood Capital.

Yes.

Could you please provide some color on the competitive dynamics, in wine?

I'm curious whether you believe the issues that you're experiencing is coming from other imports or a change in consumption patterns, such as consumers trading down or eating out less.

Thank you.

Richard, it's Lawson.

No, I don't think we are seeing changes in consumption patterns.

Really hasn't changed dramatically over the last year.

It's more of a supply issue than it is a demand issue.

There continues to be an over supply in California and in Australia, and that is really what is impacting the sales numbers, or the profit numbers more than anything else.

It's not a demand thing.

We've not seen a significant shift either in the restaurant business.

Most of our wine business is sort of middle America, premium wines.

It's not the low end of the wines but it's not the $20 and above stuff, which is really what got hurt post-September 11th last year.

Our exposure to that sector is relatively small.

So once again, it's not a industry demand issue.

We think it's more of a supply issue.

And how long do you think will it take for this supply issue to work itself out?

Yeah, it's a tough question.

Internally, we're saying somewhere around the two years from now, 18 months to two years.

Of course it depends upon the harvests, because you know, vines keep on producing.

And so it's a question of how substantial those harvests are.

The consumer numbers do show a steady increase in consumption of wine and beer and spirits, actually.

Thank you very much.

Thank you, Richard.

Your next question comes from Art Diesel of T. Rowe Price.

Good morning.

Hi Art.

I was just -- wanted to get straight in my own mind what kind of earnings numbers we're talking about for fiscal '03.

If you take last year's reported $3.33 and grow it 9 to 12%, you get 3.63 to 3.73.

And then if you want to add back the 8 cents of business improvement costs, you get earnings power, if you will, of 3.71 to 3.81.

Is that the right way to look at this?

It is.

Okay.

Now, if you take the fiscal '02 number, 3.33, and you add back the business improvement costs of 21 cents to that, you get 3.54, as the earnings power in '02.

Right?

Yes.

And then if I compare the '03 earnings power of 3.71 to 3.81 to 3.54, I get a gain of 5 to 8%.

Is that -- is that in keeping with your long-term objectives, and in fact is that the right percentage way to look at what's going on during this period, when there's a lot of things happening?

Your math is right, Art.

That's the way we look at it.

If your question is, does that growth rate represent what we would expect long-term, I think we are a little more optimistic for the longer term.

I think one of the key issues there that's been depressing things and certainly in the past several years has been foreign exchange rates, and if we continue to have a little wind behind our sails in that area, I think that would be the -- that would certainly help us to expand on the growth rate.

But your math is right.

Okay, so the earnings power of the company in '03 would be up 5 or 8% from '02.

Yes.

And secondly, my last area of question, has to do with looking at the wine and spirits operating profit for the first quarter.

And I was just curious if you take the 13 cents a share that was the impact or the hit from the change in U.K. distribution arrangements, and you try to gross that up to an operating profit or a gross profit number, you know, you can come up with 13 to $14 million in the hit, in the wine and spirits business, as a result of that exchange.

And now, last year's wine and spirits operating income, did that bear the full brunt of the 5 cents a share in business improvement costs?

Most of it.

About 4 cents was wines and spirits.

Okay.

But it looks like to me if you make these adjustments for these one-time items, that the wine and spirits operating income in the first quarter was up in the order of 15%, or maybe better, when you add back some of these things.

And that strikes me as an awfully nice number, especially if wine -- if the piece was down.

So I guess I'm wondering, was the spirits operating -- the spirits operating income alone adjusting for the U.K. distribution had to have a huge increase in the quarter, didn't it?

Well, as usual, your analysis is very good, Art.

You're right on in everything, all your observations.

The only thing I'd add to that is I think as we look at the first quarter results, in part it reflected the fact that we ended the year in a very healthy position in fiscal '02, with respect to a lot of things.

We had a lot of programs that were ready to come out with respect to strong promotional programs, with respect to trade inventory levels.

So I think in -- throughout all dimensions of the business, relative to previous years, we just had a very -- we start in the strong position and that's what's reflecting there if that strong growth rate in the first quarter.

Now, clearly, we're not expect that kind of growth rate for the entire year.

All right.

But your observation is right.

Okay.

And as far as the 13 cent hit in the first quarter, you're suggesting that that's pretty well all going to be made up so that we don't need to add 13 cents back to what you report for the year as far as a base is concerned for establishing an '04 estimate?

That's correct.

It's all going to be made up by the end of the year?

Yes.

Alright.

Thank you very much.

Thanks Art.

Your next question comes from Graeme Eadie of Deutsche Bank.

Hi.

Just a question on the U.S. distribution again.

I think I must be a bit slow in the uptake this morning.

I'm not quite sure what it is exactly you're doing in the U.S..

Is the announcement to be really significant or is it tinkering at edges?

Is it as a result of the Gemini alliance?

And what is it that these guys were doing that's now being changed in terms of their role in the U.S.?

Perhaps if Jim could put a bit of color on the announcement this morning, it could be quite helpful.

Okay.

He'll do that for you Graham.

Thanks for the question.

Graham, first, it's the restructuring is not as a result of the Gemini alliance.

And in terms of -- I think Phoebe described it as moving from push activities to pull activities.

Maybe to put it in its proper context would help.

Over the past 10 years, there has continued to be, I think two things that are very descriptive of the distribution network in the United States.

First, there's consolidation, which has been quite significant, so that we are simply dealing with fewer wholesalers across the country than we were 10 years ago.

And then secondly, is the implementation of technology in the wine and spirits business, both at the supplier level and at the wholesaler level.

And then the third frame of reference that I would provide is that we essentially had three selling entities selling our spirits portfolio in the U.S..

We have consolidated that into one selling organization, therefore providing a single point of contact with our distributor network, and have redeployed resources into what I will term as field marketing activities, essentially taking our marketing strategies and tailoring those on a region by region basis to enhance their effectiveness against principally the consumer.

Now, in terms of how substantial that is, I guess it depends on what side of bridge you're looking at it.

We think from the standpoint of improving our efficiency and driving top line growth, it will be very substantial.

In terms of comparing it to other industries or other companies, I don't think I would characterize it as a massive restructuring.

But it is certainly a restructuring that we believe will drive top line growth.

Thank you.

That's much clearer.

Okay, Graem.

Thank you.

At this time I would like to give participants an additional moment to press star, then the number 1 if there are any further questions.

There are no further questions at this time.

Would you like to have closing remarks?

Thank you very much for participating in our conference.

And for continuing to be investors and followers of Brown-Forman stock.

Thank you.

Thank you for participating in today's conference call.

You may now disconnect.