Brown-Forman Corp (BF.B) 2003 Q2 法說會逐字稿

Good morning, my name is Marcia and I will be your conference facilitator today.

At this time I would like to welcome everyone to the second 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 than the number one on your telephone key pad.

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

I will now turn the call over to Lawson Whiting.

Thank you.

You may begin your conference.

Good morning.

This is Lawson Whiting speaking.

I'm the director Of Investor Relations at Brown-Forman and would like to Welcome you to our second quarter earnings conference call.

We'll talk about two primary issues this morning.

First we hope most of you saw our announcement yesterday morning about our increased investment in Finlandia Vodka.

We'll be providing more detail about this investment, including its impact on our full year earnings estimate.

After that we will discuss our second quarter results and we will update our earnings guidance for the balance of this fiscal year.

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

Joining me on this conference call will be Phoebe Wood, our Chief Financial Officer and 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 Ligigation 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 the statements.

They include but are not limited to a further deterioration of the US economy, a significant strengthening of the US dollar against other currencies, the deterioration of economic conditions of the principal countries to which we export beverage products and a further continuation of decline in the discretionary consumer spending or on the demand for tableware, giftware and our leather goods.

Increases in excise taxes to meet budget short falls for a further weakening of the pricing environment in the U.S. wine business can also adversely affect earnings.

These statements are also subject to the factors mentioned in part one, item two of the company's form 10-q for the quarter ended July 31, 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 proceeding Safe Harbor statement as of the date of this call and may continue to be until November 29th, 2002, which is the date the replay of this call will be removed from the company's website.

Now I'll turn the call over to Phoebe.

Good morning, everyone.

Thank you for joining us on this conference call.

The first topic I want to discuss today is our increased investment in Finlandia vodka and the growth opportunities that this brand has around the world.

Following this update on Finlandia, I will discuss the quarterly results and provide some additional guidance for the remainder of the fiscal year.

For those of you who are not as familiar with our relationship with Finlandia, let me provide a brief history.

Finlandia is the second largest supper premium imported vodka brand in the world selling about 1.7 million cases last year. 80% of the brand's volume is outside of the U.S.

Making it truly an international brand.

Its Finnish heritage is a key marketing feature and the brand will continue to be distilled in Finland.

Brown Forman was appointed the U.S. distributor for Finlandia in 1997 and we have since increased U.S. depletion from 160,000 cases to about 340,000 cases last year.

This is the compound annual growth rate of about 16%.

We have also increased the price point of the brand from about $14 a bottle to nearly $18 a bottle today.

Looking ahead, we are making a substantial commitment to the brand in terms of increased brand investment and we believe that Finlandia will be a key growth driver to our U.S. spirit business over the next 10 years.

We purchased an initial 45% stake in the trademark in August of 2000 and began selling the product on the worldwide basis later that year.

Excluding several of the Scandanavian and Baltic countries.

We are increasing our stake in the brand from 45% to 80% for a cost of about 70 million euros.

The transaction is expected to close in late December.

Our finished partner, [ALTEO], will retain a 20% stake and continue its role as exclusive supplier of vodka at least through 2017.

At closing, Brown-Forman will assume full marketing responsibility for the Finlandia brand and is committed to increase brand spending significantly over the next several years.

As a result, this transaction will reduce Brown-Forman's earnings by 3 cents per-share in fiscal 2003 and buy 8 to 10 cents per-share in fiscal 2004.

This delusion is a combination of the interest cost associated with acquiring the additional 35% stake and a substantial deliberate increase in brand expense.

Although this acquisition will be diluted to earnings for the next few years, we believe this brand will be a key contributor to the long-term growth potential of Brown-Forman.

The vodka category is extremely competitive around the world but it is one of the largest categories in the worldwide premium spirits market and we feel very optimistic about the potential for this brand to create significant shareholder value.

Turning to go our second quarter results, which we released earlier this morning, Brown-Forman reported earnings per-share for the second quarter of $1.18, up one sent per-share over the same period last year.

Solid earnings growth for Jack Daniels and Southern Comfort was largely offset by lower operating income in our wine business.

Operating profit for our consumer durable business was up $4 million compared to a very difficult quarter last year.

Although consumer trends were generally soft for the segment.

For the first six months of the fiscal year, earnings were $1.71 per-share down slightly from the $1.74 earned last year.

The two biggest factors for the earnings decline are weakness in the wine business, and the one time reduction in trade inventory levels in the U.K.

You'll remember that effective August 1st, we began selling our spirits products directly to the trade in the U.K., via a cost sharing arrangement with by Bacardi.

We previously recognized income when goods were sold to our third party distributor.

Essentially when it left our warehouses in the United States.

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

We now retain title to the goods until they are sold directly to the retail trade creating a one time delay in revenue recognition.

As a result, we essentially did not record any revenue in the U.K. in the first quarter as our former distributor depleted its existing inventory.

This lower first quarter profit operating income by approximately 13 cents per-share.

A seasonality issue affected second quarter results.

Because we are now selling directly to the trade in the U.K., our sales of product for the important holiday period have been shifted from the August/September month to November and December.

We have estimated that this seasonal shift in sales net of margin benefits moved about 4 cents per-share from the second quarter into the third quarter.

Importantly we still anticipate that the affect on full year profits from changing distributions strategies in the U.K. will be negligible.

The higher profit margin earned in the second half of the fiscal year will make up for the 17-cent drop in first half earnings.

It's also notable that the Company now records excise taxes for its spirit sales in the U.K. both in sales and cost of sales.

These excise taxes used to be paid directly by our third party distributor.

Since August 1st when we began selling direct in the U.K., the excise taxes have been recorded on our books.

This change had the effect of boosting first half revenue growth for Brown-Forman segment by two percentage points while lowering segment growth margins by about one percentage point.

Now, back to a discussion of our results in other parts of the world.

Consistent with the results from the first quarter, our overall trends in the spirit business remain encouraging.

Worldwide depletions for Jack Daniels Tennessee whiskey were up 5% of the quarter led by solid growth in the U.S., western Europe and Asia.

Depletions for Southern Comfort were flat with price decreases in U.S. and Europe improving in gross profit.

As we mentioned in the earnings release, we recognize a 6-cent per-share loss related to our joint venture with Miller Brewing company for the distribution of Jack Daniels orange hard cola.

The joint venture recognized a loss due to the significant media spend ahead of expected future revenues.

As most of you know, we began selling the Jack Daniels ready to drink brand in August and September this year.

Admittedly we have not reached the levels of distribution that we expected at this point.

Inventories of other ready to drink products at the retail level are very high making it more challenging for new product offerings.

However, we believe it is still too early to judge consumer repeat purchase patterns and remain optimistic that the Jack Daniels name, the product's great taste and its differentiated positioning as a cola flavored product will make it a success.

I'd like to call your attention to a line item we have added to the income statement called other expense or other income when appropriate.

Most of these items used to be included in our SGA expense line item.

A large piece of this other expense in the second quarter is our portion of the Jack Daniels Original Hard Cola joint venture.

Although it also includes equity income from our unconsolidated affiliates as well as items such as bad debt expense and other various material income expense items.

We've added this line item to give shareholders and analysts a clearer understanding of results for these investments in joint ventures.

As you all know, the competitive environment for wines in the United States is very challenging.

There is a significant oversupply of grapes in both California and Australia and that is putting a lot of pressure on pricing.

Estimates from California they were about 75,000 tons of grapes which were literally left on the vine because there is no market for spot market grape purchases.

Industry rise pricing is down compared to last year.

In addition, our largest brand Fetzer is experiencing a significant increase in its cost of goods due to long-term supply contracts that do not allow us to take advantage of very low cost spot purchases.

The combination of these factors having a significant impact on Fetzer margin.

Bolla is also seeing an increase in its cost of goods.

Certain Italian [Inaudible] have become more expensive due to a major hail storm which damaged many vineyards in Italy.

In addition, the weakening U.S. dollar beginning to benefit our spirit's business is hurting Bolla.

Overall profits for our wine segment were down significantly for the quarter and first half of the fiscal year.

A trend we expect to continue through the rest of the fiscal year.

We're working very hard to balance the significant long-term top-line growth opportunities in wine with the current volatile supply situation.

We remain very focused at improving the efficiencies in our wine business, reducing our cost of goods that when the market turns around we'll have the brands and the people to support the gross potential of this business.

Turning to consumer durable.

While net sales for consumer durables were flat for the quarter, efficiency improvements and firmer pricing contributed to gross profit gross of 6%.

Generally, holiday orders are stronger than they were during last year's depressed period but remained rather sluggish, in particular, some same state -- excuse me, same store sales in our retail outlets have not proved in the past few months and we're seeing weakness in the direct consumer division.

We anticipate fiscal 2003 operating profits for the segment will be in a range of $37 to $40 million.

Significantly higher than last year's $17 million.

Please note last year's results included $17 million of non-recurring cost related to closing three manufacturing plants.

The key issue for this business will be consumer take away during the holidays.

We have some new products which are being well received by the trade and initial consumer reaction to the products have been excellent.

That being said, a tentative economic environment in the U.S. is making it difficult to improve the results in this division as much as we had planned and our expectations for full year results have been revised downward from where they were six months ago.

Our previous guidance for was for Brown-Forman to grow its earnings by approximately 9 to 12% over last year's $3.33 per-share.

This guidance did not anticipate the additional investment in Finlandia Vodka and also assumed stronger U.S. economy.

We've now revised our outlook for earnings to grow in a range of 6% to 10% over fiscal 2002.

Importantly, this revised outlook anticipates a strong and increasing level of marketing support behind our core spirits brands.

These estimates also include the cost of our business improvement program which reduced earnings by 21 cents per-share in fiscal 2002 and as we have stated previously will reduce earnings by approximately 8 cents per-share in fiscal 2003.

Looking beyond fiscal 2003, our 2004 earnings should benefit from cost savings results from business improvement investments made in 2002 and 2003, a full year of higher margins resulting from a new distribution arrangement for the company's spirits brands in the United Kingdom and the U.S. dollar remains at its current level, increased profits from stronger European currencies.

Our core brands remain vibrant and healthy and most of the 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 pieces 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 interest of our shareholders.

Now, Larry Lawson 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 one on your telephone keypad.

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

Your first question comes from Matthew Web

Hello, I wonder if I could ask three questions actually, please.

Firstly, just a quick one on the Jack Daniels original hard cola.

I appreciate that you've had some problems with this with the distribution of that brand, it's not your fault.

Has there been any early indication of the consumer response to that brand, and secondly on wine particularly regarding Fetzer, can you tell us how long your long-term supply contracts are and when you will be able to take advantage of their prices and finally on Finlandia, we've estimated that the count, the contribution after marketing promotion of the Finlandia brands is, you know, somewhere between 30 and $45 million which suggests that you have increased your stake at that business at a very attractive price.

Are those figures anywhere near right?

Are they perhaps a little high?

Is there -- is the supply taking quite a big production margin on this reducing the profits on you?

I wonder if you had any general observations on that?

Thanks for the questions.

Let's take them in order.

First with regard to Jack Daniels Original Hard Cola, we are getting excellent trial and we -- in those areas where we have achieved distribution have some very nice results.

However in general, given that it's only been out there a couple of months, I think it is frankly too early to tell exactly how the consumer is responding in terms of repeat purchases.

However, we remain confident in the category, we remain confident in our product, Jack Daniels Original Hard Cola and, so, you know, we remain optimistic about this.

The second question that you raised has to do with Fetzer in the long-term contract.

We have over 300 different contracts for our grapes.

All of differing lengths and all different [variatals] and, so, therefore, you know, on any individual brand given what the consumer -- we're trying to balance out what the consumer will be drinking in the next few years with what those contracts are for those different variatals.

In some cases, we find ourselves in a situation that we're out of the Woods in a couple of years and some cases we're probably looking at in excess of five years.

It just depends.

We don't -- it depend on which variatal we're really looking at.

In some cases, it's a much shorter term issue and for some of our variatals it is a much longer term situation where we don't think we'll be able to take advantage of those spot prices.

That being said, all this goes away, if consumer purchases increase and you're really able to grow your top line, you know, then we would not be in a situation where we would find ourselves because we would be able to take advantage of the spot prices.

It's really a function of demand and variatal.

The third question that you raised on Finlandia, and Lawson is -- we're going to make sure we understand the question first and then see if we can answer it for you.

Did you say you were trying to estimate the overall profitability of Finlandia?

I thought you said $35 to $40 million?

Exactly.

That is right.

The contribution after marketing promotion, which is how we look at it.

So, you know, not --

We obviously don't give out brands profitability so I can't really comment too much on that.

I will tell you, that number is too high.

Right, okay.

But I really can't give you any more detail beyond that.

Could you just tell us, you know, whether it is the case that -- you know, your supplier takes a very high margin on its -- you know, on its supplier of the brand to you?

Matthew, it's Larry Probus.

To that point we think we actually have a very reasonable transfer price with our supplier.

I don't think that is an issue.

I think the thing to keep in mind when we look at our profit after marketing, certainly in the U.S. we have an investment posture right now and we stated in our announcement that we expect to expand that investment posture with respect to our marketing investments.

I think your numbers from an on-going sustainable point of view in kind of a status quote situation are -- you know, are not that far off but I think what we're certainly in the -- in the investment posture that we're in now was -- in the context of that, then it is probably high.

Okay.

That is very clear.

Thank you very much.

Your next question comes from John Wakeley with Lehman Brothers.

Yes, good morning, guys.

As usual, I apologize if I seem to only like one of your brands, Jack Daniels and hate everything else but I'll try to be polite.

First of all, just to confirm, I thought you had said that the weaker U.S. dollar was beginning to hurt our spirits business.

You mean the opposite, presumably.

But a couple of other questions.

In your forecasts in terms of profits, the RTD business, are you assuming that you at least break even sometime this year on a quarter by quarter basis question one; question two, what actually was the price increase when you repackaged Southern Comfort?

And then also, in the U.S.

Vodka market, you have seen or have begun to see some significant down-trading at the upper, upper end of the wine industry.

I don't mean for the Fetzer, I mean the $20, $30, $40 range.

Are you seeing any of that yet in the vodka market?

The absolute has been pretty weak for the first time really in its history.

You see -- have you seen any weakness in the gray goose category or the Finlandia category, what is happening with absolute, just kind of a problem of its change and distribution?

John.

Thank you for your questions.

Let's take them in order.

There is one on dollars.

Just to repeat the effect on what I said in my opening statements was that the weakening dollar, which is benefiting our spirits business was hurting Bolla you're absolutely right.

Just to clarify that.

We should see that increasing.

We had some hedges on it the first part of the year but as they work off we'll see some very nice uptake on that.

On your question on the ready to drink, I think you asked the question when that will be break even this year.

Our expectation is we probably will not quite reach break even this year.

I'm not talking so much for the whole year but in terms of your -- let's say on the fourth quarter, would you assume that maybe you break even by the fourth quarter, not on a yearly basis but on a quarterly basis.

Yes, yes.

On the question you raised about Southern Comfort package increase, I think we're going to have to get back with you.

I don't think any of us brought that data to this conference call.

We can get back to you on that.

And then the question about vodka, the whole vodka market and absolute, very interesting what's happening there is what we see is we see that the premium, the gray gooses are actually increasing their market share and, so, just the opposite appears to be happening and that the down take in absolute does not -- has more to do and this is [antidoteal], has more to do with it losing its sort of cache more towards -- more tending toward the gray goose.

We do not see a trading down hurting absolute.

In fact, we observe the opposite, that indeed it is the gray gooses and the other super premiums that are gaining.

Okay.

Thank you.

Thank you, John.

Your next question comes from Ann Gurkin with Davenport and Company

I wonder if you could comment on all the changes and reorganization in your spirits division in terms of personnel.

Can you walk through what has been going on there?

Right.

Thank you and hello.

We made a number of changes in our spirits organization toward the -- I guess it was really the beginning of September, end of August.

The major change is that we have gone from three sales forces where our brands were split essentially by -- not by category but more by type or how they were sold in to one sales force.

So what we are doing at the moment is we are in the process of basically getting our sales team really geared up and fully understanding all our brands to be able to sale all of our brands.

The second big piece is that we have substantially increased the marketing personnel who are in the field and, so, and have done that so by brand.

So we are very much more marketing focused, many more feet on the street on the marketing side as well as those changes that I referred to in the sales organization.

And, you know, I think that people are enthusiastic.

We have had a number of conferences with those people.

I would report that it's exciting.

These are changes.

These are changes that distributors have been encouraging us to make so we're trying to be responsive to our very important distributors.

And I think that we're going to find that it's a successful move for us.

At the end of the day people buy brands and we're trying to make those brands understandable, accessible to all of our consumers.

Okay.

And can you just give me depletion numbers for Jack Daniels in the U.S. for the quarter?

I'll get it for you.

The quarter or for the -- let's talk about first half.

They are about the same really.

Sort of low to mid single digit growth in the U.S. and more like mid-single digit growth worldwide.

hank you.

Your next question comes from David Winters with Mutual Series Fund.

Hi, David winters here.

How are you?

Hi, David.

You've done a nice job, very clear, very concise.

Thank you for getting us more deeply involved in the vodka business.

Now we have to have a rum.

We have Appleton rum which is delicious

I know it is good stuff.

Is that -- is there any take-up there?

Of acquiring Appleton --

No, is there any traction in selling Appleton in terms of more orders?

Depletions

Let me see if we have depletions of Appleton rum with us

If not you can come back.

Still any thoughts about buy backs?

I'm glad you're investing for the long-term not as much paying attention to quarterly results.

You know, we are always looking at buy backs, David, as an alternative for investment opportunities within the company and just to confirm that they remain on our radar screen as something that we will consider in -- sort of as an alternative to sort of longer term brand kind of investment.

So that's really about all that I know to say.

They remain there as an option for us but we have no plans

And at this point no plans of divesting consumer durables?

No.

We still remain focused on improving those businesses.

Certainly the issues are there.

We are very much aware of them.

Continue to look hard, I think, at the portfolio question but there are no plans there.

Our focus is really on getting that, you know, division really back to health and I think we're beginning to see the real benefits of the restructuring that we did last year.

So what holes there are in terms of acquisitions at this point?

Obviously hopefully Appleton Rum will be -- soon Bicardi will be very small compared to Appleton, but what else is there that is a whole and is Sonoma-Cutrer suffering as well?

The whole wine business is suffering.

Sonoma-Cutrer doesn't suffer at all from lack of demand.

The demand is excellent for Sonoma-Cutrer.

I think the issue there is much more getting the Grapes and having enough grapes to meet the demand.

And just getting those, you know, vineyards?

What holes are there in the product line, in terms of on your dream list, do we still need

Well, if you think of our portfolio by category, there are a number of holes in our portfolio.

More importantly we tend to think about the holes in our portfolio, David, as oriented towards brands that we can do something with and that will really benefit by having them in our fold.

We really look actively for those kinds of brands we can really grow and take advantage of our brand building activities.

So we have not had a specific focus necessarily on categories.

We must have a rum.

We must have a gin, whatever.

Instead we look intensively at the quality of the brands and what those -- what we could do with the brands in our hands.

And so, therefore, we're always looking for those kinds of opportunities where we think that given our brand building strength and given our distribution strength we could really add to.

That we're always on the lookout all the time for those kinds of opportunities.

That is how we think about it.

Okay.

Make us lots more money.

Okay, thank you very much.

Your next question comes from Bryan Spillane from Banc of America

Hi, good morning.

Hi, Bryan.

Two questions.

The first is in terms of the cost and changing over distribution in the U.K. in the first half, did it cost a little bit more than you originally anticipated?

For some reason I thought that total cost was going to be about 15 cents and it looks like it may be a little bit more than that.

And then the second question I have is just relative to Jack Daniels and whether or not you have seen any noticeable lift in sales of Jack Daniels relative -- or due to the hard cola advertising that has been out since August.

Bryan, this is Larry.

With respect to the U.K. transition, no, actually that has gone very smoothly and a little more efficiently than we had planned.

I think maybe what the issue is, we had identified in the first quarter that the -- you know, the one time loss of sales, if you will, in the first quarter was about 13 cents a share.

There's a related issue in the second quarter that is kind of a seasonality issue.

The point being when we were shipping to a wholesaler, we were shipping and recognizing those revenues a month or two earlier, in other words, to get product to the -- as soon as it left the Jack Daniels dock, we were recording those sales in August, September, October.

Well, now, we're recording the sales with the retailers in the U.K. buy them.

The holiday shipments are skewed more squarely in the third quarter where as in the past, they were in the second quarter.

We should see more of those profits shipped in the third quarter?

We should see a nice lift in the profitability in the third quarter, yes.

Have your penetration levels or execution levels changed at all, have you noticed any difference or have your accounts noticed any difference in terms of your service level?

No.

Obviously that has been a huge issue with us when we made this decision.

We put a lot of safeguards in place, a lot of extra people on the street and we feel very, very encouraged by the results we see there.

Okay.

To back that up Bryan, a little bit, the consumer take-away data we look at in the U.K., if we compare the data as of July 31st and then take the same thing as of October 31st, the growth rates are exactly the same.

I feel comfortable that the things are moving forward the way we had hoped.

Bryan, with respect do we see -- do we think there is a lift in the Jack Daniel mother brand from the hard cola advertising?

Right.

Yes, without a doubt.

I mean, we are seeing higher trends in the U.S. market, in recent months and we think that is attributable to the hard cola advertising.

Will that have you thinking about spending more in the hard cola advertising than you originally thought

Our plans are to spend a fair amount.

Of course we have a partner that has to agree with this as well and has to be an attractive opportunity for them.

So it is -- we believe the advertising is working and we're enthusiastic about it.

And we will -- we do expect to continue to advertise through the next two quarters

Thank you.

Thanks, Bryan.

Your next question comes from Art Cecil

Hi, Art.

I'm trying to follow your earnings pattern and expectations is like hitting a piece of mercury with a hammer and trying to fall where all the little slivers go.

We wish it was easier, too.

In looking at first call Estimates for the second quarter, I am looking at a $1.30 and I assume that is comparable to $1.18.

If I take $1.18 and add back 6 cents for cola, 3 cents for BIP what I think was 4 cents on U.K.

I get myself up to $1.27 versus a $1.17.

I assume that last year's $1.17 didn't include any BIP expenses.

Is that right?

That is right.

Art, the one thing I'd point out, that $1.30 for first call, there is only one analyst that had that estimate out there.

I don't think there is a lot -- anybody these days are focusing on these numbers.

Most everybody is focusing on the full year

So it's just One full, not collective fulls.

People are a little nervous about forecasting our quarterly numbers what you said at the beginning of the call it is up the track a share in the specific guidance, so --

EPS guidance is again my calculations which could be full, EPS guidance for 03 is 7 to 10 cents lower than it was in the last conference call and 3 cents of that appears to be the Finlandia deal.

I guess I'm wondering whether the hard cola situation was included in your original guidance and/or whether the rest of the estimate reduction is really all tied to the wine situation?

Art, I would say -- let me site four factors, three of them down and one of them up.

You're right, wine is probably the biggest one that we have seen a deterioration in wines versus where we were at the beginning of the year.

So that -- that is the biggest -- that would be the biggest one.

Secondly would be a softening of our outlook for consumer durables.

We still expect consumer durables to be up for the year even after you strip out the BIPS and everything.

It is not recovering at the rate we had hoped for.

The holiday season is yet to -- that will be the proof in the pudding to see what the consumer take away.

We're cautious about the holiday period and, so, that is .2. .3 would be hard cola.

We're not -- we actually do expect to lose a little bit of money on hard cola this year whereas our expectations at the outset was to break even to make a little bit.

So that is a third factor.

On the upside, our outlook for spirits is quite a bit better actually.

And of course that is primarily Jack Daniels but the volume -- the volume trend rates and our gross margin on spirits, we've taken up our outlook there.

What was versus 37 to 40 for consumer durables?

What had you been looking at one quarter ago?

Well, we were looking in the 40's, let's put it that way, and just to give you a base -- let me make sure I get this excluding our BIPS last year, we did about $34 million last year.

We were looking for initially a fairly healthy bounce back from a poor year last year.

Now we're just seeing a very modest bounce back.

Okay.

Are you all obligated under the arrangement with Miller on hard cola, are you obligated to stay with this thing even though one might argue that the segment opportunity doesn't appear what it was a year ago?

Obligated from what point?

From any standpoint.

Are you obligated to stay with this thing?

Can you unilaterally pull the plug on this thing, given the opportunity might not turn out to be what you thought it was

We have a contract with Miller.

So does that obligate you to stay in the game for two years and keep spending money like this or what exactly is the

Art, we do have a long-term contract.

As these things go, if either partner frankly as the desire to terminate, we have to reach agreements on spending and profitability levels and so I think it is fair to say that we do both parties have to be enthusiastically involved in the developing the brand and right now we are.

But so to -- to your point, we have -- we do have a long-term contract that will be, you know, the actual terms of that what we spend against the category and what's the business plan is altered every quarter as we sit down with our partner.

Do you agree the opportunity isn't -- doesn't look now as good as it looked a year ago?

I think that we are less optimistic.

We still believe in the category and believe in this product.

We think our positioning because it's cola based makes it unique and therefore, a much better chance of succeeding against other industries in the category.

We're not giving up on this category

Is it fair to say and I'll close with this, in looking at '04 and I don't remember that you gave us any specific guidance for '04 other than to list some of the pluses and minuses, I guess, to consider, but in '04, we're going to have no more BIP costs - more BIP costs which are costing 7 to 8 cents, right?

Yes.

But we're going to have the Finlandia costs which incrementally versus this year would be 5 to 7 cents.

That is fair.

So essentially you're trading in no more BIP costs for new costs on Finlandia.

So given that, is it reasonable to expect that '04 should, you know, be a long-term growth rate proposition for you all or maybe can you do better than a long-term growth rate given some of these positive points that you made, Phoebe, in your discussion about the cost savings from BIP start to flow you get the higher margins on the U.K. business an maybe the wine business doesn't keep [cratering].

That and finally foreign Exchange.

Even though we have been in a positive foreign exchange environment this year, the fact that we were largely hedged has really tempered that this year.

If the dollar stays at its current --

Do you all think there is a Possibility that EPS growth in '04 can be at or above your long-term growth targets because of some of these factors?

I think that is possible, yes.

I mean, the Finlandia thing strikes me as a wash because you don't have any more BIP spending so that is a wash and everything else, there is no reason that you shouldn't be able to grow it at a long-term rate

Your observation are right, Art.

Thank you.

I'm sorry to take so long.

Your next question comes from Graeme Eadie with Deutsche Bank.

Good morning to all.

Given how important the U.S. is for the whole business, it would be interesting to hear your thoughts on, you know, how you see the trading over the vital Christmas period going.

I mean, judging by some of the smaller comments made to date it does appear that your U.S. business is in pretty good shape.

What is it that is really driving that at the moment?

Well, I think our U.S. spirits business is in excellent shape and we are expecting and anticipating a good holiday season.

What is driving that, we would like to think that it is, you know, quality products supported by very strong, you know, that hit exactly what the consumers are looking for and that are responding to -- you know, to the way in which those products are positioned and marketed.

You know, we also think it's just a combination of, you know, very good execution.

All the way along the chain.

So to lock at one individual thing and say why is spirits up in the U.S., I think a variety of things that are happening there.

We don't know the extent to which the advertising on television projects whether Jack Daniels Original Hard Cola has had any impact on the mother brand, that is totally unknown for us.

It might be a contributing factor as well.

On the wine side, I would say that we're going to just see what happens over the holiday period.

There is a glut of wine in the U.S. and globally.

There is this oversupply of grapes that I talked about earlier as well as a lot of imports, a lot of pressure on wines coming in to the United States.

So it is a great time to buy wine.

And we -- you know, I think we need to have some additional growth there, additional growth at the top line would help the whole industry, especially with our brand, Fetzer.

Corbel is holding its own.

The way to characterize spirits is very strong in the U.S. as well as outside of the U.S.

Thank you very much

Graeme, thank you for the question.

There are no further questions.

However, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad.

At this time there are no further questions.

Mr. Whiting, are there any closing remarks?

No, thank you everybody for joining the call.