Brown-Forman Corp (BF.B) 2003 Q3 法說會逐字稿

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

At this time, I would like to welcome everyone to the Brown-Forman third quarter 2003 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks, there will 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 will now turn the call over to Mr. Lawson Whiting.

Sir, you may begin the conference.

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 third quarter earnings conference call.

We will talk about two primary issues this morning.

First, we will discuss the state of our business, our year to date and third quarter results, and we'll update you on our earnings guidance for the balance of this fiscal year.

Then we will briefly talk about our recently announced share re repurchase.

I'm sure you can appreciate that we are limited with what we can say about the share repurchase, but we will try to respond to any questions as best we can.

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, Bill Street, President of Brown-Forman Corporation and Larry Probus , Senior Vice President of Finance for Brown-Forman.

Except for historical information, the following re 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 a further deterioration in the U.S. economy, a significant strengthening of the U.S. dollar against other currencies, the deterioration in economic conditions in the principal countries to which we export beverage products and a further continuation of the decline in the discretionary consumer spending or in the demand for tableware, giftwear and or leather goods.

Increases in excise taxes meet budget short falls could also effect earnings for the company’s beverage business particularly in the United States.

Further weakening in the pricing environment in the U.S. wine business could also adversely effect earnings.

These statements are subject to the factors mentioned in part one, item two of the company's form 10-Q for the quarter ended October 31st 2002, and in Part one, item 7 of the company's 10-K 2002 which Brown-Forman incorporates by reference.

We have no current intention of Updating or revising any forward looking statements whether as a result of new information, future events or otherwise except as otherwise required by law.

The projections and other forward looking information in this conference call may be relied on subject to the Safe Harbor Statement and may continue to be used through March 4th, 2003 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 Phoebe.

Good morning, everyone, thank you for joining us on this conference call.

This morning, Brown-Forman reported earnings per share for the third quarter ended January 31, 2003, of $1.02, up 18 cents per share compared to the same period last year.

Adjusted for business improvement costs, earnings for the quarter improved 14 cents per share, or 16%.

The story is similar to recent quarters.

Our sprits business remained fairly strong while wines and consumer durables businesses remained soft.

Higher quarterly earnings were being driven by solid profit growth for both Jack Daniel’s and Southern Comfort.

Increased profitability for our spirits brands in the United Kingdom and benefits from a weaker U.S. dollar.

Partially offsetting this growth in earnings were substantially lower profits from our wine business which has continued to suffer from higher costs and a very competitive pricing environment in the United States.

Our consumer durables business remains challenging, reflecting softening trends in the direct to consumer channel as well as weakness in our Lenox retail outlet stores.

Before we dig deeper into the results of individual brands, there are a couple of factors from this quarter which need some further explanation.

Our reported earnings per share growth rate was 18 cents per share or an increase over last year of 22% for the quarter.

After adjusting for the business improvement costs, our earnings grew by 14 cents per share or 16%.

These headline growth rates were obviously very strong.

However, there are a couple of nonrecurring factors that had a material effect on the quarter's growth rate.

The first is foreign exchange.

Our quarterly results included about 4 cents per share increase from a weaker U.S. dollar.

Please note that this was for the quarter.

We estimate the positive impact to our year to date results from changes in foreign exchange rates was only 1 to 2 cents per share due to prior hedging contracts in place.

Looking ahead, we would expect earnings to benefit from stronger European currencies, if the U.S. dollar remains at its current value.

The other material factor for this quarter's result is the change in timing of our sales in the United Kingdom.

As we have discussed on previous conference calls, effective August 1st last year, Brown-Forman began selling spirits products directly to the trade in the United Kingdom via a cost sharing arrangement with Bacardi.

Although first quarter profits were diminished by a one-time reduction of trade inventory, subsequent quarters have benefited from higher profits earned in that market.

This distribution change in the U.K. also changed the timing of our holiday sales in that market.

We used to ship holiday orders to the U.K. in September and October, which is the second quarter of our fiscal year.

Now most of the holiday shipments are in November and December following falling in our third quarter.

Year to date, Brown-Forman has earned $2.73 per share, up 6% from the $2.58 earned last year.

Adjusted for business improvement costs, year-to-date earnings improved 4%.

Consistent with third quarter trends, the primary drivers of our profit growth are Jack Daniel's and Southern Comfort, while year over year profits -- profit from our wine brands have dropped substantially.

Now, let's take a closer look at our brands.

Through the first 9 months of the fiscal year, depletions for Jack Daniel's remained fairly solid with positive volume growth in 15 of its 20 largest markets in the world.

In the United States, volumes increased in the low single digits with steady price increases and strong cost controls resulting in expanded margins.

Importantly, the United Kingdom has continued its strong growth trend and our switch in distribution partners does not appear to have had any negative affects on our brand.

Southern Comfort depletions were essentially flat, as growth in both the U.S. and the U.K. was offset by weakness in continental Europe.

However, higher margins for the brand resulted in record growth profit and operating income.

Volumes for Finlandia have generally been flat with gains in Europe being offset by lower volumes in the United States.

The market in the U.S. for super premium Vodkas has become increasingly competitive.

There have been more than 50 new product introductions over the past two years, which have clearly taken some share from more established brand.

Last month we increased our equity investment in Finlandia and we have assumed full marketing control for the brand.

It is our plan to increase brand spending significantly over the next several engineering years.

Although this increased investment will be diluted to earnings, we believe that Finlandia will remain near the top of the worldwide premium Vodka brand and will be a significant contributor to shareholder value at Brown-Forman.

Jack Daniel's original hard cola, our entry in the flavored malt beverage category continues to be a challenging proposition.

The category is proving to be more seasonal than our initial expectation and our levels of distribution are still somewhat disappointing.

In response, we have significantly cut our advertising and promotion activities during these slower winter months, although we expect to begin to ramp up again in the late spring.

We stated in our last earnings release that we had lost 6 cents per share on Jack Daniel's Hard Cola to media investments in advance of future expected revenues.

We broke even in the third quarter and we expect similar results in the fourth quarter.

We're taking a hard look at fiscal 2004 and working with our partner, SAB Miller to determine appropriate levels of investment for next year.

We remain cautiously optimistic about the prospects for the brand.

The key issue will -- issues will continue to be getting appropriate levels of distribution in all channels heading into our first and important summer selling season and the competitive dynamics resulting from several new entries into the category.

Turning to the wine business.

While Fetzer reported low single digit volume growth during the first 9 months of the fiscal year, achieving that volume level required a reduction in net prices from the previous fiscal year compounding the problems for Fetzer, the large number of long-term supply contracts which prevent it from realizing the benefits of lower cost spot market [inaudible].

As a result profits are down sharply.

Bolla depletions were down slightly, but profits were down significantly.

Unlike in California, Brown-Forman does not own vineyards in Italy, so we contract on an annual basis for all of our needs.

The combination of unfavorable exchange rate and significant increases in costs for nearly all of the major grape varietals from Italy has combined to reduce growth margins for Bolla quite dramatically.

On a bright note, Korbel continues to grain market shell in the United States and the brand is having another good year with increases in both volume and profit.

In addition Sonoma-Cutrer remains on allocation and is one of the most sought after ultra-premium wines in the United States.

Turning, then, to our consumer durables business.

The environment for our consumer Consumer durables brands has remained -- year to date sales and gross profit are down 5% and 2% respectively.

The retail environment for both department stores and outlet centers in our product categories did not improve over the holiday season and remains very difficult across the United States.

In the face of consumer confidence at a 9-year low, the direct to consumer channel is also experiencing a lower response rate.

The segment is not showing any signs of recovery from its very disappointing period last year.

Excluding business improvement costs, segment operating income for the 9 months ended January 31st was $2m lower than last year.

The tentative economic environment in the U.S. is make making it very difficult to improve the results in short term.

Current expectations are for segment operating income to be in a range of $30m to $35m for fiscal 2003.

However, the benefits from the business improvement program should begin to accrue in fiscal 2004, which should have a positive effect on the segment's earnings.

Brown-Forman has reaffirmed its growth of 6% to 10%, excluding any potential impact from a recently announced share repurchase.

Looking beyond fiscal 2003, we anticipate that the environment for wine and consumer durables will remain challenging, however, future earnings should benefit from cost savings result resulting from business improvement investments made in fiscal years 2002 and 2003.

A full year of higher profits resulting from our new distribution arrangement in the United Kingdom, and increased profits from stronger European currencies if the U.S. dollar remains at its current value.

Now a word on share repurchase.

As announced on February 3rd, 2003, the company is offering to repurchase up to 1.5m shares of its class A common stock and 6.8m shares of its class B common stock under a Dutch auction tender offer.

The price offered for both classes of stock will be within a range of $63 to $73 per share and the tender offer will expire at 12 midnight New York City time on March 4th, 2003, unless extended.

The company has received preliminary findings and commitments from a syndicate of banks to provide the initial funding requirements for this transaction.

The company intends to replace this funding with longer term debt from public bond markets shortly thereafter.

As a final note and many of you know this already, Bill Street is planning to retire in September.

This will be the last time that he'll be on a conference call, so it's your last chance to ask him the really tough questions.

Just kidding, we're delighted to have you here, Bill, please join Bill, Larry, Lawson and I to open up the line for your questions and answers.

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 Anne Gurkin, of Davenport.

I was just wondering if we could spend time on your beverage portfolio, if you could talk about Finlandia, any kind of shipment data you can give us or depletion data in the U.S.?

I've got a little bit.

Here for you.

If we take a look at the year to date figures for Finlandia, in the U.S., it's down sort of mid- mid-single digits.

As Phoebe said in the script, you know, we're working very hard to turn that number around, but it has been a very difficult Vodka market here for the last year.

It is up outside of the United States, which is primarily European and eastern European markets.

Okay.

And then if we could discuss a little bit maybe if we could look out to '04, level of brand support for the Jack Daniel's portfolio and Finlandia versus '03.

If you can give us any kind of color on that.

Phoebe Wood We have -- with regard to Finlandia --

Both Jack Daniel's and Finlandia

With regard to Finlandia, we have stated and contractually entered into arrangements to significantly improve and increase the brand spending behind Finlandia in future years years.

With regard to Jack Daniel's, our most important brand, we continue to believe that brand support is important behind that and expect to continue to increase our spending behind that brand.

At the same rate we've seen in past years?

I think that's probably appropriate.

Same rate.

Okay.

Great.

Thanks very much.

Thank you, Ann.

Your next question comes from Sandy [Selmas].

Hello.

I have three small questions.

The first was -- whether you could give us any update or color on the Gemini situation in the control states with Bacardi, whether that's progressing well, whether you are moving on into a fuller integration and whether in response to NGG you might integrate more fully.

That's the first one.

The second one was to say that given the current circumstances of the wine industry, do you think your enthusiasm for further acquisitions in wine has diminished, and the third point was as to the share buyback, which was very interesting, does this reflect your view that in all probability, it's going to be quite tough to by additional spirit brands and when you've got a great record with those you own, but have you taken that judgment that, you know, apart from Finlandia, now, it's going to be quite tough?

Sandy, do you mind going back to your first question, I didn't understand MGG, I think you said said.

Sorry, that was just the next generation growth, they call it.

That's what they call this move to exclusive distributor.

Oh.

Which is really in the open states at the moment, but obviously, that's causing a big shakeup of the distributor networks.

Look, the Bacardi-Gemini initiative is doing just fine.

We continue to cooperate in looking at brokers in the control states, and we do have conversations together from time to time regarding the open states, as we watch what [Diagios’s] moves have been throughout the country.

Do you want to repeat your question on the wine business again?

Yeah, it's obviously a tough time and you've been a bit caught by the supply contracts, but would you say that your enthusiasm for expanding the wine business has come off a fair bit?

I mean, would you be -- if one or two of these wine businesses came on the market, would you in theory be interested in them at the right price or are you more cautious now?

I'd have to say we're probably slightly more cautious than we would have been as we learn more about the wine business.

However if the right property came on the market at the right price, Sandy, we would probably look at it.

Let me take your third question, this is Phoebe on the share buyback.

Hi.

Obviously, we're very limited given the constraints on what we can say.

I can assure you that the board feels this is a prudent use of the company's financial resources at this time.

More than that, I think I'd feel really constrained by the limits of the SEC on what we can disclose at this time.

Okay, that's great.

Thank you for your question.

Your next question comes from Eddie [Hargraves, of Dresner, Klinewort, Wasserstein].

Yes, hello, everyone.

I've got three questions of varying difficulty, I think.

The first one is on Finlandia.

Could you just say whether you are reporting that within your other line or in your gross profit line in these numbers?

I'm sort of assuming it's probably other.

And are there any other significant items going through that line?

The second question is, on durables, you've obviously reduced your guidance quite significantly, looking at the bottom of the range, $30 versus $37, three months ago.

That's a big drop, and yet you are maintaining your guidance for EPS at the group level.

Wine, I guess, hasn't improved, so has something happened within spirits making you more optimistic on your numbers for the full year there?

And the third question is, if your share repurchase offer was fully taken up, could you say what the free float of the company would be?

Eddie, this is Larry Probus.

On your first question regarding the Finlandia results, they are included in other through the third quarter.

They -- Finlandia is our biggest equity invest investment or was our biggest equity investment, additional investments in there would include our joint venture with Swift and Moore in Australia and the jack Daniel hard cola venture.

Going forward, starting in the fourth quarter, those results would be consolidated so they will not show up in the other going forward because we now own 80% of the company.

Sure.

All right.

Eddie, this is Phoebe on your second question on durables.

You are right in that we are taking down our estimate in the face of what we see as a difficult environment out there for durables businesses, and yet yes yes, we are confirming our guidance is the same, and the obvious conclusion that you reached is that spirits is strong and spirits is strong.

Okay.

The third question has to do with the share repurchase.

We don't really know what the extent will be of people who, you know, sell into the share repurchase.

All we've really can repeat for you is, you know, the offer, you know, of 1.5, you know, what percentage that is.

Of the shares outstanding, I mean, just 1.5m out of $ $28.9, and 6.8 out of $39.6m or a total of 8.3m shares out of 68.5m shares.

Of that, at this point, we don't know when what amount of shares will be tendered.

We can't speak to free float.

We can repeat those numbers for you.

Unfortunately, as you know, Brown-Forman has a 75-year policy of not expanding the family shareholdings in relative to the total.

A lot of people have made guestimates over the years, but there is information in the tender offer that will help you on that, but it's something we cannot go any further with.

Okay.

Thank you.

Thank you, Eddie.

Your next question comes from Thomas [Rousseau of Gardner, Rousseau and Gardner.]

Hello, everyone.

Thank you for your conference call.

Thank you for your update.

First would be a question for Bill, let's home hope it won't be one of the tough retirement soon to be questions, but it has to do with the long-term plans for Jack Daniel's.

At one point, he commented that he was laying down stocks for a 10m case a year run rate rate.

To get there clearly it will involve international.

I'm interested in a profile as to the domestic versus international mix for Jack Daniel's, and then within the international talk beyond just the United Kingdom to the other major markets.

What are you seeing there, Bill, as you march towards 10m cases?

Thomas, obviously Jack Daniel's is the most important brand we have in our portfolio.

And our long-term goal has been to get to the $10m cases.

The -- right now, I think I'm correct that our mix of business is about 55% U.S., 45% international, and our growth rates overseas exceed our growth rates in the United States, so we expect that part of our business to continue to grow.

We are encouraged, for example, in our Asia Pacific markets where I've just attended the annual meeting of that group last week in Australia, we're encouraged that the growth rates there continue to be in the double digits, albeit from a very small base, that the brand appears to be gaining accepted -- acceptability within those markets, with the exception perhaps of Japan, where I think the brand has been been -- it is the number one American whiskey brand in Japan today, but of course, if the economy in that market, the brand is at best in a stable position there.

But elsewhere in Asia Pacific, we're seeing nice growth.

In central Europe and parts of western Europe, we continue to see good growth for the brand.

We're particularly encouraged with the U.K., which turns out to be the strongest market for us, outside of the United States in the world.

It's still growing in double digits for us.

Wow.

Germany is an issue today, primarily driven by the economy in that country.

We're not growing.

We're showing some stability in that country.

The rest of them are growing in western Europe and central Europe, but slightly lower rates than they have been in the previous years.

But we still see -- frankly, we're still encouraged that there is a great deal of business that we can continue to garner outside the United States, and we continue to pay an enormous amount of attention to the business here in this country, and we're encouraged to see that our growth rates are improving in the United States, and so, with that brand, we are optimistic and as Phoebe said, we will continue to make sizable investments behind it to continue the growth pattern.

And those investments are -- of the recently announced global advertising agency arrangement that you cited, how does that split between Jack Daniel's and all of the rest and talk a bit about your thinking, Bill, in terms of re-engaging of global effort in advertising?

How did that surface?

Thomas, I think what you saw was a statement made by the company where we have consolidated most of our media purchasing within one agency.

There are some exceptions to that but for the most part we have.

Jack Daniel's has always had a a -- I will call it a common theme in its approach to consumers throughout the world.

The executions could be different but we always talk about the character of the brand and try to position that brand in an appropriate manner with its consumers.

We do have one agency leading in the creative effort now, picking up on what we've built on the past and that effort continues to go forward smoothly.

With Southern Comfort, we are consolidating our creative activities down to one agency, and we have developed a campaign called "Between Friends" and we are encouraged and we have begun to roll that out here not only in the United States but in certain European markets where we have enough business to justify television.

And to present -- can you scale the order of magnitude for the U.K. market for Jack Daniel's it's double digit growth from what kind of base?

The base is about 600,000 cases plus.

Great.

Great.

Let's see --

Those are 9 liter cases, not flat, that I'm giving you.

I'm going to come back with other questions, but I'll C cede the call for the moment.

I have more but I'll come back later.

Thanks, Tom.

Your next question comes from Michael Blakely, CSFB.

Michael Blakely from Credit Suisse.

I have questions on both distribution , particularly on Europe, I guess.

Jack Daniel's volume growth, you were mentioning that you've seen growth in the brand.

I guess I tried the U.S. in 15 of the 20 exports 20 export 20 export markets.

I was wondering whether you could tell us, firstly, how many of those markets you are working with Bacardi with in terms of distribution, and secondly what with that would actually represent in terms of percent of your total Jack Daniel's export business, and the second point again on upper was on Southern Comfort, I know you mentioned briefly Germany being a difficult market for Jack Daniel's, but can you talk us through the reasons why you think Southern Comfort is seeing a decline in continental Europe and which markets might be particularly the problem there?

Michael, thank you for your question.

We're still writing it down here so we don't lose it.

Bill, do you want to tackle the distribution in Europe question?

Yeah.

I'll be honest with you.

I'm not sure which 15 countries out of 20 we are -- we have stated.

I saw the statement, I just don't know which 15 countries, so I might be a little bit wide of the mark, trying to address that specific part of it.

We are combined with Bacardi on on -- in distribution in most of old western Europe, if not all, including the U.K.

We are -- we have other lines of distribution primarily with Allied [Dimeck] in central Europe.

Bacardi is aligned with us in Korea, and we're aligned with them in Thailand at the moment.

And we just introduced Bacardi -- we just introduced Jack Daniel's and Southern Comfort into the Bacardi organization in Mexico in January.

And I think that's the extent of the relationships, plus the close relationship we have here in the United States.

Most -- as I said, I believe I'm correct in saying for Jack Daniel's, all of those markets are growing for us with Jack Daniel's with the exception of Germany, at the moment.

As far as Southern Comfort is concerned, the U.K. had some nice growth so far this fiscal year, as did the United States.

However, Germany, and several other markets in which we're aligned with Bacardi had slight declines in the business there.

And just on the Southern Comfort point, I mean, any specific reasons behind that?

The distribution with Bacardi is clearly working for Jack Daniel's across most markets.

Was Southern Comfort a marketing issue?

I think Southern Comfort is a marketing issue, not a distribution issue, Michael.

We have still -- we still haven't quite found the right key to getting sustained growth with that brand.

Interestingly, though, for Southern Comfort in the U.K., it's actually caught a turnaround.

It's short, but it is up year to date.

It's continental Europe that's been slow.

Thank you very much.

Thank you.

Your next question comes from Graeme Eadie of Deutsche Bank.

Two quick questions.

As you make it pretty clear in the commentary, the key driver for the business is the spirit side.

It's quite difficult for us to look at numbers as they are and try and get some sort of feel as to what the underlying picture looks likes like given the wine business as well as the change in distribution.

I don't know whether you've got numbers you are prepared to share with us as to what was the real underlying picture for the first nine months of the year on the spirit side.

The second question has to do with the state taxes in the U.S Obviously, I think it's 18 states that are looking to raise taxes on alcoholic beverages at the moment.

It would be interesting to hear your thoughts as to how that's likely to play out in the future future, but that's all, thanks.

Thank you,.

We'll take your second question first.

On state taxes they are always a concern.

Every time the legislature meets we seem to be vulnerable to considerations of increases.

I will report to you that I believe last year there was some 20 states that introduced legislation to increase taxes on alcoholic beverages, but only five actually did so.

And I think -- I don't know if that same proportion will hold this year, but we -- we are -- this is not something that it unusual for us.

I think we have the resources to state our case every bit as clearly as we should be able to.

The other thing I would just tell you, it will depend entirely whether the state chooses to increase taxes on all alcoholic beverages as opposed to just increasing taxes on spirits.

That's something that we'll be looking at also.

Graeme, it's Larry Probus.

With respect to wines versus spirits, we focus brand by brand as opposed to aggregate that way.

It is fair to say as we said in our release, that generally speaking our wine business, all of the brands with the possible exception of Korbel are down in terms of profits, and most of our important spirit brands are doing very well and part of that is due to some non-organic things, with foreign exchange in the third quarter and with the U.K. distribution profitability and seasonality issues, we perhaps will be able to give a little more flavor at the end of the year, but I think it is fair to say that the organic growth for spirits is certainly very solid and positive, and the organic growth for wines is negative.

Does that help?

I mean, is it fair to say if you look at the overall numbers, 7% top line growth in the first 9 months, 6% underlying profits growth.

If you adjust for the wine and the one-time benefits on things like currency in the U.K., is it fair to say that the spirit underlying performance is better than the aggregate total than you've already disclosed?

That's fair.

Thank you.

Your next question comes from Brian Spillane of Banc of America Securities.

Hi, good morning.

First on the tax rate, with 34% effective for the quarter, and I think it was 34.5% at the second quarter.

If you could walk through the climb in the tax rate and if you can give a number for the full year to use for the model, that would be helpful.

We did drop our tax rate in the third quarter to 34.0.

We think that's an ongoing rate that would apply for the rest of this year and into next year, and it really reflects a shift of earnings to lower tax jurisdictions.

By that, it's primarily reflecting the U.K. business at something around a 30% tax rate, versus a U.S. tax rate, including state taxes of closer to 40%.

So would 34% be a good number to use?

Going forward in fiscal '04, 34% would be a good number.

I qualify that a little bit because our share repurchase could have some impact on that, but setting that aside, 34.0 would be a good number going forward.

Okay, great.

Next on pricing, I know you gave color on pricing on Jack Daniel's here in the U.S Could you talk a little bit about your ability to raise prices outside the U.S., and also, could you just give a little bit of color on the pricing environment on Vodka and with Finlandia I know that the volume is declining.

Are you having a difficult time raising prices?

And has it become a much more price competitive segment?

First of all, on pricing, we have -- we will -- outside of the U.S., we will take selected price increases where we think it's appropriate and we have done so.

Both on Jack Daniel's and Southern Comfort.

The -- in fact, we've been successful in raising our prices on all of our spirits brands.

We have actually raised our price slightly on Finlandia, Brian, and in answer to the second part of your question, it is a very competitive market here in the United States.

We have been -- we believe we can continue to take some individual price increases, but we're being cautious.

We're probably more cautious about our price increases on Finlandia than we are on Jack Daniel's and Southern Comfort in terms of percentage.

Frankly, I believe the amount of marketing investment we've put in behind Finlandia has been more the cause of the reduction of selling cases -- reduction in cases than it has been the pricing issue.

But although, you know, as I said, it is a more challenging market than it has been for Southern Comfort or Jack Daniel's to raise prices with imported Vodka.

Okay, great, thank you.

One last question.

When you converted or changed your distribution agreement in the U.K. over the summer, one of the concerns was that your ability or the level of penetration that you would have using or teaming up with Bacardi relative to what you had with [Diaggio].

Can you tell us how that's gone or do you have the same number of customers today that you had 9 months ago, and have you gotten more or less focused with those customers?

I think the answer is as far as I can tell, in talking with our people over there, we have not lost any distribution points on either Southern Comfort or Jack Daniel's and we are getting -- we believe we're getting somewhat more focus on those two brands, because of the size of the Bacardi portfolio in the U.K., versus what it had been with the previous distributor.

So all in all, the transition through January has gone extremely well, and we're pleased with it.

Just one last follow-up on that, any idea how Bacardi has performed in the U.K. and in other areas where you've joined distribution?

Has their business actually improved because it's teamed up with Jack Daniel's?

I can only make a generalization that Bacardi's business seems to have improved because they have shown growth in their other parts of the business over the years where we've been partnered with them.

We've been with Bacardi in several markets for quite some time now, an the compatibility seems to be well established, and they've learned how to grow their entire portfolio with either no particular emphasis on their own brands or the Jack Daniel's brands.

That's great.

Thank you.

Thanks, Brian.

Your next question comes from Art Cecil of T. Roe Price.

I think this was asked the last time, but going out as these are great supply contracts expires, is there much of an earnings opportunity there for you all?

The answer is yes.

It should -- you know, depending on the pricing at the time of the expiration of the contracts, Art, we should find our gross margin improving.

If prices -- if spot prices, if that's the term, stay where they are now, looking down two or three years, could you give some order of magnitude of what the benefits to your growth gross profits could be?

I haven't quite looked into it to that degree, Art, so I'd hesitate to make a generalization, other than to tell you that we are aggressively managing those contracts today in order to try to get some of the benefits of the current spot rates sooner than the expiration of the contracts.

Could I conclude it's not terribly significant if you haven't looked at it that closely?

No, I wouldn't conclude that either.

All right, thank you.

Thanks, Art.

Your next question comes from Shrihar Mahcoli, from S&P.

Just three questions, please.

Well, on the wine -- I know you've talked a little bit about it, but how do you see the pricing situation over the next, say, couple of years, and the second question is on the premium Vodka segment.

I'm just wondering if you can maybe give us your views on whether or not the premium market segment as it is slowing down or it does continue to grow at a rate of the last couple of years, and the third one is on RTDs, the drink, [category] how do you see that taking shape in terms of pricing and volume growth in that segment, please?

That's it, thank you.

All right.

Thanks for your question.

We'll take them one at a time.

The first one has to do with wine, and how we see pricing occurring in the next couple of years.

Pricing in the next couple of years years, I think, is going to be highly dependent upon the competitive environment in which we face, and how much pressure there may continue to be from surplus of wine primarily from imported wine into the United States and surplus of grapes.

So we have, you know, some natural sort of cyclicality in that market, and I think that pricing to large extent is going to depend on -- especially in the premium category the $5 to $10 bottle wines, their pricing will be dependent upon that competitive environment.

And so there are many predictions about what that future environment might -- and I think just to hazard much more of a guess would be difficult.

I think in the premium segment, it might not be as -- excuse me, in the super premium where you are in very high priced -- prices per bottle, again, I think it's going to depend upon the economic environment, not necessarily the conditions of the wine market per se, but just general economic conditions and about that, again, there are many forecasts for what kind of environment we might face here in the United States.

Bill, I don't know if you want to add or take on the second question on the premium Vodka.

On the wine thing, I would only state that we're not looking for a particular upsides on our wine pricing at this point in time over the next several years.

Okay.

If they develop, we'll take advantage of them.

Okay.

What we are looking at, I think, Art hinted at it in the previous one, we're looking at reducing our costs in order to get our margins back to more acceptable ranges.

It would probably be the better upside for us than pricing.

Premium Vodka, I would have to say that -- I have detected no slowing down.

The segmenting of the Vodka market above the premium level has been fascinating to me over the last several years, and -- there still appears to be good, solid organic growth going on at about the same rate.

So, as far as I can tell, that particular piece of business looks to be good.

Okay.

The RTD, there is no doubt, the volume growth in that market has slowed down considerably.

We are looking at it cautiously, as to what the appropriate investment rate should be, along with our partner SAB Miller, and so far at least, pricing has not been a particular pressure point.

Whether it will be this summer or not, I don't hazard any guess on any speculation on that particular issue.

Okay.

Just a quick follow-up on the wine pricing again, please.

This year so far, year to date, would you be able to give us any numbers on how the pricing has been for your U.S. brands?

Compared to last year, they have fallen sort of mid-single digits digits.

Okay.

Thank you very much.

Thank you.

Your next question comes from Robert Levin , private investor.

I have a question regarding your two challenging business, the consumer durables and the wine business.

Would you say your attitude is different moving forward between those two businesses, as to the future prospects?

My second question just regarding Finlandia.

Do you still feel comfortable that you received an excellent value in your acquisition of that brand?

I'll answer your last two one ones and I'll let Phoebe do the consumer durable part.Thepart.

The wine business, we've known for sometime, it's a much more challenging business to manage than our spirits business.

I don't think -- I don't see any reason why we're less optimistic about the wine business for the long-term than we were as we entered that this current situation where margins have become quite depressed.

The -- it is a business that is susceptible to cycles, much more so than the wine business, and it's just a -- it is a matter of our learning how to manage those cycles better than we did this time around.

The -- I'm sorry what was the --

Finlandia values.

I'm very comfortable with the price that we paid for Finlandia.

Before you leave me and give me back to Phoebe, I just want to thank you for -- you've been wonderful all of these years of service, and I wish you the best.

Thank you.

I appreciate that.

Back to consume durables.

I think that we always have high expectations for the performance of all of our brands and for both of our segments.

However, you know, we certainly haven't had the kind of performance out of wine and consumer durables as you note and as we've stated in the past couple of years.

However, just to affirm, we have no current plans to change our portfolio, and our focus really is working to improve the performance of this segment.

It's been a focus of our business improvement programs and a lot of time and energy internally here to turn that around.

That's about the best way I know how to answer that question at this time.

Thank you, Phoebe.

Thank you so much.

You have a follow-up question from Thomas Rousseau of Gardner Rousseau and Gardner.

Hi.

Let's see.

Question related to the political environment and your attitude toward continuing television advertising and the place that might put the industry in front of regulators.

What are your thoughts on TV advertising?

I'll give you our thoughts, Thomas.

Yes.

We believe that we have the right to present our products to the American public in the same way which our competitors in the alcoholic business can do so.

We've always felt that way.

We've been very cautious about the approach we've taken.

We've tried to be very conservative in both the content of our ads and the scheduling of our ads in order to minimize any people under 21 years of age seeing those ads.

But nevertheless, we will continue to try to increase our advertising dollars in the television channel.

Okay.

And a question on the Jack Daniel's Hard Cola, Bill.

As you track its reception and go through the key summer months, at what point does your decision reflect its potential impact on the parent brand as you decide if and how much to promote the brand extension?

I don't know at what point.

If you are looking for a mathematical point --

Yeah.

Thomas, I would say in our judgment, there is some spillover from the spending that we do on Jack Daniel's Original Hard Cola to the Jack Daniel's Tennessee Whiskey label.

There would be positive lift.

If the product doesn't gain traction, do you have a sense that you want to address it soon sooner than you might otherwise for fear of it adversely affecting the parent brand?

I'm not too nervous about it adversely impacting the parent brand, but if the product doesn't track as we would hope it would, we will manage it in a very conservative manner, in our opinion.

Okay.

And then last spirits related question, or wine actually, the annual report cites the growing involvement of wine in testimonies of your gross margin margin.

I think it said that it had grown in excess of 10% of gross profits which would place wine at something north of $150m of gross profit last year.

How steep, when you talk about substantial declines, might it be, and does that help us scale order of magnitude, what Art Cecil was trying to get at in terms of the cost of the grape contract, if that number is 150 plus or minus a little bit, how sharp might the decline be and how much is that related to the grape purchase problems?

Tom, I don't know that we're prepared to disclose that number today.

Okay.

There are a couple of pieces to the issue in wine.

One has to do with grape contracts.

The other has to do with the lack of grape contracts in Italy Italy.

I see.

And if you look at the big brands, let's just pull apart wine a little bit more and start with the positive, Corbel, doing very nicely, growing both in volume and in price.

If you take a look at Bolla, it has had been really hit hard by foreign exchange and by the fact that they had some hail and essentially all of the prices which we contract or excuse me, all of the prices for the grapes that we contract on an annual basis have gone up.

So it's kind of been a double whammy in one year, especially because we had advantages as sort of a stronger dollar in previous years, and so you definitely have a double whammy hitting Bolla.

And then on the Fetzer side, we've not been able to take advantage of the grape contracts at spot rates.

So you would hope that you would have had better balance between your long-term contracts and the spot purchases with, you know, we've not had the volumes that we would have liked to have had, and so therefore we have had less opportunity to be able to purchase this spot -- the grapes at a spot and at a very low price.

So therefore, you know, that just looks and the -- feels like much higher prices -- excuse me, much higher costs going into our bottles of wine which indeed, it is.

So we have a lot of excellent contracted grapes growing into our bottled wine, so we have a great product, which everybody should buy because it's a wonderful time to buy wine great value and great product in our bottles.

So you understand those three pieces of it now.

Yeah, yeah, yeah.

My last question is probably for Larry, if he can go back to his direct to consumer Lenox days.

How much -- maybe not -- how much does the collectibles business reflect a shift in the consumer's pattern?

Possibly to other [inaudible] like QVC or other Internet purchases versus the earlier comments about it being a problem with lower response rates due to the economy?

Do you again to see a weakening of what's been a terrific growth engine for you?

Well, Tom, this is Larry.

I think to contrast it to the days when I was collections which at that time it was primarily a collectable company that was -- that sold things strictly through the mail, it is now a very broad direct-to-consumer channel that includes Internet and catalogs and other direct-to direct-to-consumer venues.

And overall that remains very probably the healthiest segment of the consumer durables business, but it is fair to say that in the last -- well, frankly, we've been surprised over the past year and a half that that business remained so vibrant and continued to grow, but over the last three months, they have seen their response rates and order rates flatten out and in some cases actually decline slightly versus the previous years.

So we have seen some definite slowing in that piece of the business, though it remains a very important and very healthy part of the consumer durables.

Do you think it's a cyclical story with the economy or a secular one with shift away from the product to other venues?

No, I think we're seeing the economic conditions, lower consumer confidence, the whole -- I think just the tentativeness of the U.S. consumer.

In fact, one of the healthier parts that continues to grow quite well, frankly is the U.K. direct-to-consumer business.

We have a division there that doesn't seem to be slowing down at all.

Also, Tom, we have growth in Internet sales, but we have low response for direct mail and catalog.

Okay.

Thank you.

Good day.

Thanks, Tom.

Your last question comes from Shrihar Mahcoli from S&P.

One follow-up question.

I don't know if you are willing or prepared to share the wine business on its own in terms of the operating margin of that business, and how it's changed compared to last year.

As opposed to wines and spirits that is.

Thanks for your question.

We have never shown wine business separate from the spirits business or segment earnings or from really separated into two parts, one, consumer doubles and the other beverages.

While we've -- what we've tried to do while not reporting individually on wine is give you a very strong sense of what has happened to operating margins in the wine business without telling you exactly what those numbers are.

Okay.

That's not very satisfying, but we're trying to give you good guidance there without specifics.

Shrihar Mahcoli Okay.

Thank you very much.

Thank you.

Thank you for participating in today's Brown-Forman third quarter 2003 earnings conference call.

You may now disconnect.