Brown-Forman Corp (BF.B) 2003 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Brown-Forman fiscal '03 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 key pad.

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

I would now like to turn the call over to Lawson Whiting.

Good morning, this is Lawson Whiting speaking.

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

Today, Owsley Brown, our chairman and CEO, will open up the discussion of fiscal 2003 performance with some highlights from each of our major brands.

Phoebe Wood, our Executive Vice President and Chief Financial Officer, will follow with more detail on the financial results of each of our business units and provide some guidance on our expectations for next fiscal year.

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

In addition to Owsley and Phoebe, joining us this morning is Larry Probus, Senior Vice President of Finance for Brown-Forman Corporation.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

These statements are subject to a number of important risks and uncertainties that could cause our actual results and experience to differ materially from the anticipated results.

These risks include, but are not limited to, a deterioration in economic conditions in the principal countries to which we export beverage products, a further decline in discretionary consumer spending, decline in the demand for tableware, gift ware, and/or leather goods, and the uncertainties of litigation.

Increases in federal or state excise taxes on spirits and wine would also depress our domestic beverage business.

Legal or regulatory measures against beverage alcohol, including advertising and promotion could also adversely affect sales.

These statements are also subject to the factors mentioned in part 1, item 2 of the company's 10-Q for the quarter ended January 31, 2003.

The projections and other forward-looking information in this conference call may be relied on subject to the preceding Safe Harbor Statement as of the date of the call and may continue to be used until June 6, 2003, 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 our Chairman and CEO, Mr. Owsley Brown.

Good morning.

It's a pleasure to be here to discuss our results for fiscal year 2003, which ended on April 30th.

For the full year, Brown-Forman's earnings were $3.63 a share, up 9% compared to last year.

This was the year of mixed fortunes for our company.

Our spirits business had an excellent year by almost any measure.

However, our wines and consumer durables businesses have been weak, and we're being cautious about our outlook for these segments for next year.

However, I can say with confidence that this company remains intensely focused on improving the value of all our brands by appropriately positioning them in the marketplace and pushing ourselves to take advantage of future growth opportunities wherever we may find them, whether at home or abroad.

This morning, before Phoebe Wood, our Chief Financial Officer, gets into the more specific financial and operating details, I'd like to mention some highlights and accomplishments of our brands during the past year.

It was an excellent year for our largest and most important brand, Jack Daniel's.

Consumer demand trends remain solid, and the brand continued to grow around the world for the 11th consecutive year.

We are seeing double digit depletion growth in a number of important countries, including the United Kingdom, Spain, South Africa, and Korea.

And the growth continues here in the United States, where depletions were up 3%.

Additionally, we have been able to combine sustained price increases with strong cost controls, resulting in solid growth and profitability for our largest market.

Other important markets for the brand include Germany, which was up in the low single digits last year, after a couple of years of declining volumes.

And Italy, Turkey, Australia, and Canada, all of which were up in mid single digits.

Of all the other major markets of the world, our business in Japan, with its weak economy, continues to struggle.

In addition, both France and Belgium have also weakened over the past six months.

Other than those few markets, though, the brand is thriving.

We're confident that the growth prospects for Jack Daniel's around the world remains solid, and we expect continued growth for the foreseeable future.

The second most important brand for our company is Southern Comfort.

In the United States, which is the largest market for the brand, Southern Comfort remains healthy and growing.

Importantly, much of the domestic growth in Southern Comfort this year was fueled by the strong growth trends on premise.

This indicates a vibrant and growing base of consumers who are between the legal drinking age and 29, a fact which bodes well for our domestic growth outlook for the next several years.

Results for Finlandia were mixed.

When Brown-Forman acquired its additional 35% interest in the brand in January of this year, we added new markets to the distribution agreement, which increased our volume for the brand to about 1,300,000 cases last year.

However, in the United States, where there have been over 100 new vodka introductions in the past year, results were weak.

As we told you when we acquired our additional stake in January, we will be significantly increasing our brand building activities over the next year.

As part of this program, we'll be introducing a new package for the brand in fiscal 2004.

Although the increase in brand building activities will suppress profits for the next couple of fiscal years, we believe that the long term payback for our shareholders will be meaningful.

As you may know, our wine brands faced a very challenging environment this year, and profits were down substantially over fiscal 2002.

An oversupply of grapes in both California and Australia, a shortage of supply in Italy, and fierce competition at the retail level has combined to make the wine business increasingly volatile and significantly less profitable for Brown-Forman in the last 12 months.

Although it's impossible to control some of the challenges in the wine marketplace, we'll be making changes where we do have the opportunity to do so.

While we believe in the long-term growth opportunities in wine, we're taking a hard look at all aspects of this business, so we can generate stronger returns with less downside risk from this business in the future.

The environment for our consumer durables business remains very challenging.

Underlying trends in the Fine China and Tableware markets haven't improved over the last year.

In addition, for the first time in eight years the direct-to-consumer division, also known as Lenox Collections, have seen a drop in their divisional profits.

Our consumer durables segment has implemented a number of cost-cutting measures over the past two years including the closing of three manufacturing facilities.

Although benefits from these actions in this fiscal year were minimal, we do expect to achieve some cost savings next year and more in the periods beyond.

We also remain diligent on controlling our cost and finding new faster-growing distribution channels for our brands.

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

Good morning, everyone.

Let me begin by focusing on Brown-Forman's core beverages business.

For the fiscal year ended April 30th, revenues were up 11%, and gross profits were up 6%.

Higher gross profit was driven by solid growth for both Jack Daniel's and Southern Comfort, increased profitability in the United Kingdom, and favorable foreign exchange trends, partially offset by lower profits from our wine brands.

Owsley has already spoken to you about the results for our key brands.

I'll review a couple of issues specific to the United Kingdom that affected our earnings per share this year.

First, a change in distribution partners in the United Kingdom added slightly to earnings as a higher profit margin more than offset the lack of shipments in the first quarter.

Looking ahead, a full year of shipments in the United Kingdom, offset by higher SG&A costs in that market, is expected to benefit fiscal 2004 earnings by a range of 5 to 10 cents per share before any organic growth in the market.

Another UK issue is the impact of excise taxes.

Because we now sell directly to the consumer rather than using a third party distributor, the company now records excise taxes for its UK spirits business in both revenues and cost of sales.

In fiscal 2003, the excise taxes in the UK were about $60 million, which effectively pushed our revenue growth rate for our beverages segment from 7% to 11%.

It also lowered the reported gross margin for the beverages segment by 1.8 percentage points, despite the fact that overall profitability is actually higher.

The transition in the United Kingdom over the past year has gone extremely well.

We believe we have a very strong team assembled in the UK and are confident that this market will continue to be an important source of growth for our company over the next several years.

Moving out of a focus on the United Kingdom, our worldwide beverage advertising expenses were up 8%, as the company continued to increase the level of brand building investments for our core spirits brands.

In particular, we remain optimistic about the growth opportunities for Jack Daniel's around the world, and we will vigorously support the brand to take advantage of these opportunities.

SG&A were up 9%, driven by increased selling and marketing expenses in the United Kingdom, as well as being affected by our corporate pension and insurance costs.

Moving then to consumer durable.

While operating income for the consumer durable division was up over 80% over last fiscal year, this largely reflects the absence of business improvement costs we incurred to close three manufacturing facilities in fiscal 2002 and 2003.

As Owsley mentioned in his remarks, we are disappointed that this business has not rebounded from a depressed period last year.

We will focus on controlling our cost in this division as well as finding new growing distribution outlets for our brands.

Although we are hoping that a stronger U.S. economy will improve the outlook for this business, our current expectations are for rather modest growth next year.

One of the changes to the format of our income statement that we made this year, the fact that we have separated out certain items that were previously included in SG&A now included in an item called "other income and expenses."

Although this is a combination of the number of relatively small items, within the beverages segment it includes increased earnings from our equity investments and higher royalty income from certain Jack Daniel's license investments and higher royalty income from some of our contracts, partially offset by a loss of $6 million related to our joint venture for Jack Daniel's Original Hard Cola.

The lower expenses for consumer durable generally reflects an absence of write-offs related to the manufacturing facilities closed in fiscal 2002.

Now a few comments about the balance sheet.

As you all know, effective March 14, 2003, we repurchased approximately 7.9 million shares of stock for a total cost of about $560 million.

We financed this purchase by issuing $600 million in bonds of three and five-year maturities on the date that the treasury rate had hit 44-year low.

This enabled Brown-Forman to lock in very attractive interest rates, fixing our weighted average cost - interest cost at about 3% before tax.

As a result of the share repurchase, earnings per share benefited by approximately 3 cents per share in fiscal 2003.

Fiscal 2004, earnings per share will benefit by an incremental 30 cents per share, adding a total of 33 cents to current-year earnings from the share repurchase.

I do want to make it clear that this transaction does not represent a change in business strategy for this company.

It is only a change in our capital structure, and one which carries out our long-stated objective of using our free cash flow for value creating opportunities for our shareholders.

Importantly, the debt issued for this transaction is not large compared to the free cash flow of this company.

We still have plenty of borrowing capacity to make acquisitions we feel can create value for our shareholders.

The share repurchase obviously impacts our balance sheet, as we issued debt to acquire the shares and reduced shareholders' equity by similar amount.

But there has also been some significant movement in the intangible asset account on the balance sheet.

In fiscal 2003, we acquired an additional 35% interest in Finlandia Vodka worldwide and an additional 55% interest in Tuaca Liqueur.

We now consolidate both of those entities because we have increased our ownership to over 50%.

As a result, we have reclassified the intangible asset accounts from investment in affiliates to both trademarks and brand names as well as goodwill.

Now looking ahead to the next fiscal year.

We believe that the outlook for growth and earnings for next year is positive for a number of reasons.

We have some very good momentum as we start this year, and I'm optimistic about the outlook for our core spirits brand, both domestically and in many markets outside the United States.

We will also have a full year of increased profitability for our spirits brands, in the UK.

And although we are not as optimistic about the short-term outlook for wines, we are making a number of cost cutting moves which should provide some modest improvements in earnings next year.

Foreign exchange trends continue to be favorable, and last but not least, the 30 cents in incremental earnings per share accretion from the share repurchase will be of benefit to next year.

Offsetting these factors for relatively strong earnings per share growth are our rather modest growth expectations in consumer durables, continuing reductions in trade inventory levels around the world, sustained and increased levels of brand-building activities, particularly for our spirits brands, including the previously disclosed dilution for additional brand spending for Finlandia, as well as significantly higher SG&A cost due to increasing pension and insurance costs.

Combining all these factors and assuming a stable-to-improving world business environment, the company is looking for fiscal 2004 earnings per share to grow in a range between $4.10 and $4.30 per share.

Before we begin the question and answer section of this conference call, I want to take a minute to say thank you to Larry Probus, both for his counsel to me over the past few years as well as for his 22-plus years of service to this company Brown-Forman.

For those of you who do not know already, Larry is leaving Brown-Forman to become the Senior Vice President of World Vision, a major humanitarian worldwide relief organization.

Based in Seattle, World Vision U.S. raises more than $550 million annually primarily to help children who are victims of poverty, malnutrition, and disease.

Although we greatly admire Larry's commitment to his new organization, we are very sorry to see him leave Brown-Forman.

That concludes our prepared remarks.

We will be glad to answer any questions that you may have.

If you would like to ask a question at this time, press star, then the number 1 on your telephone key pad.

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

Your first question comes from Derek Sheeler of Gabelli & Company.

Hi Phoebe.

Hi, Derek.

Just wondering if you could help quantify the benefit from foreign exchange as well as the increase in pension expense?

And then also looking at capex, it was a little bit higher this quarter than I thought it might be.

Can you tell us where that was spent and what your expectations for fiscal '04 will be?

I think there are three questions there, and they are foreign exchange, pension, and capital expenditures.

Correct.

Let's start with the first one.

With regard to foreign exchange, some thoughts there.

Our exposure to the Euro has really become neutralized because we are sourcing much more product now from Euro-denominated markets.

So we're finding that that exposure is pretty much gone.

But our exposure to Sterling is clearing the largest foreign exchange exposure, followed by OPI (ph) dollars and the Japanese yen.

Now, if the average spot rate for the next fiscal year is the same as it was for the past fiscal year, we would benefit about 10 cents a share.

If you had current spot rates, which they are today, for the rest of 2004, it would be about 20 cents a share.

And we -- our guidance is somewhere in the middle of those two numbers.

Okay.

Generally, a metric to use is that a 1% change in the dollar relative to a basket of currencies results in about $1.5 million change in income for us.

I think that will help you on foreign exchange.

With regard to pension, clearly, the decline in equity markets reduced the value of pensions across America.

The exposure is pretty small for Brown-Forman.

And we have reduced the discount rate and reduced all our rate of return assumptions to reflect a more conservative outlook.

But for the very first time, Brown-Forman's accumulated pension obligations exceeded the fair market value of the planned assets.

Therefore, we have to recognize the full liability on our balance sheet.

I think the way to think about this, we valued all the pension assets and obligations as of January 31st.

Now, if the stock market one year later, January 31, 2004, is absolutely unchanged, then our contributions would be something like 6 to 10 million and the P&L impact is negative, because we went from an income to an expense.

And that switches 10, 11 million.

I hope that helps you on pension.

Okay.

Capital expenditures this year were up, which has primarily to do with the starting and very substantial completion, it's not completed yet, work on a distribution center for the durable business in Lenox Collections.

So, therefore, this year's expenses are higher, number 1, for that distribution center and, number 2, for work on Heritage, a project that we're doing here which has to do with our old bottling facility here.

We have also included in our 2003 numbers, $38 million that has to do with putting on the balance sheet an off balance sheet item that we had on there before.

This was the financing of a vineyard, some improvements to a vineyard that we had previously done in our only off balance sheet transaction and during the course of fiscal 2003, we actually put those assets back on the balance sheet and repaid that so everything is fully on balance sheet.

And so, therefore, that made it unusually high, those three items.

Looking ahead, we're going to return to a much more normal level of 75, kind of, 75, 80 million dollar capital expenditure which is going to be, you know, just continuing the kind of maintenance and finishing the distribution center for Lenox.

So we should expect 75 to 80 in '04 even with some continuing expenditures for the distribution facility?

Indeed.

This was an unusual year in 2003.

And that excludes, of course, our investments in Finlandia Vodka and in Tuaca, which of course we're delighted to make.

Great.

Thank you very much.

You bet.

Your next question comes from Ann Gurkin of Davenport & Company.

Good morning.

Hi, Ann.

I'm trying to get a better understanding of inventory levels particularly in the U.S.

Can you give me any shipment data, or can you give me any updates there by brand?

Ann, it's Lawson.

I'll give you some briefings.

We have taken inventories down in the U.S. as we have been for a number of years.

We won't be real specific.

I will tell you, Southern Comfort- really, our wine brands in general and then Southern Comfort are both down, Jack Daniel's is up a tiny bit, and that piece isn't a big deal, but in general, we are taking inventories down around the world.

Okay.

And then can you give me what we should use for a tax rate for 2004?

34.0.

34.0.

Great, thanks so much.

Thank you, Ann.

Your next question comes from Graeme Eadie of Deutsche Banc.

Hi, good morning to you all.

Two questions, first for Phoebe.

On 4X (ph), I'm sure if I had the mental bandwidth, I could work it out from the prior question.

But if you take the spirits business, the adjusting for the excise duties, you're saying revenues were up 7%.

What would that be on a constant exchange rate?

If you take the net profits you say are in the statements, excluding wine, net income on the spirits business would have been up double digit.

Again, if we were to adjust for foreign exchange, what would be the sort of clean number coming out on those two items?

Larry Probus is going to answer that.

Graeme, if I understand your question, with respect to the UK in particular, fiscal '03 was not dramatically affected by exchange rate changes because we had locked in a lot of hedges.

So that growth statistic for revenues, it may be a half a point, I don't have the exact calculations in front of me, maybe a half a percent higher because of exchange rates, but it wasn't a significant factor.

It really, and I think as we explained in our earnings release, it was affected by the excise tax situation.

So you have to take that into account in understanding real revenue growth, but foreign exchange wasn't really a factor for '03.

Just so I've got this right, then, when you say there was a 10 cent benefit on the earnings?

No, that's -- I think that Phoebe was referring to next year, fiscal '04, if our spot rates - if spot rates in fiscal '04 mirror the spot rates on average for '03, we would have an instant benefit.

We had -- I think we were in the range of about a nickel benefit at the bottom line for foreign exchange in fiscal '03.

So it did help, but it wasn't a major impact, again, because of the fact that we were largely hedged for the year.

Perfect.

Thanks very much indeed.

Ok.

Thank you Graeme.

You next question comes from Bryan Spillane of Banc of America Securities.

Hi.

Good morning, Phoebe.

Hi Bryan.

I just want to try to reconcile or walk through how we get from 363 reported to the guidance next year.

Just tell me if I've got this right.

If I start with 363 as a base, and I add back 30 cents for the share repurchase, I also add back, I guess, 15 cents, let's just call it, for foreign exchange, that's kind of the midpoint of the 10 to 20 cent range, I add back about 3 cents for a lower tax rate, I've also got what I won't have next year is 6 cents of the incremental spending on Jack Daniel's Hard Cola, and also 8 cents adding back for the business improvement cost.

If I do that, and I back out 8 cents for increased pension expenses and 6 cents for the increase in spending on Finlandia, I get to about $4.10 which would be about the low end of your range next year, which would kind of imply that there's no profit growth at all organically.

Am I missing something?

I'm not sure that we would -- most of those we would tick through with you, probably not everyone of your ticks, Bryan, but let me address that specifically because, of course, it is something we've looked at very hard here.

First of all, the most important thing is that the range is wide.

It's very early in the year, and we face a lot of uncertainties in the markets in which we operate.

So very deliberately at the beginning of this year, we have made the range very wide, okay?

Second, generally we're cautious on our outlook for wines and consumer durable.

Third, we are expecting significant levels of brand-building activities for spirits next year.

So that piece, while we're not disclosing it, it is a significant increase.

Fourth, SG&A is going to be higher because we have both pension and insurance costs going up.

And we are, you know, reducing trade inventories, you know, systematically throughout the whole system.

Now, that all being said, I mean, if we're at the bottom of the range, we'd be very disappointed in the results.

But we are at the beginning of the year, broad range.

Does that help you?

Yes, it does, that's very helpful.

You know, the one piece I missed also is interest expense.

Do you have any guidance on net interest expense next ear?

Bryan, I don't have it right -

Okay.

I can just use -- I think I can you look a the -- I think we have it here, we're just going to look it up it up.

But just think about it, I mean. it is $600 million at 3% before tax.

And then we have some additional commercial paper.

It's around $22 million in interest expense next year.

Okay.

And your pension and insurance numbers were a little light.

Were they a little low?

Right.

Ok.

If I could ask just one more question for Owsley, you know, there has been, I guess, more talk about potential consolidation in the spirits industry, I guess, at least in part maybe the reaction to some of the actions that Diageo has taken on distribution in the U.S.

Can you talk a little bit about your feeling on that, and also how you think about your balance sheet and whether or not you've got enough capacity to make acquisitions if they're available?

Sure.

There's no question that environment is such that you need to be very alert to be a successful operator in it, and we're very alert to what's going on, not only in the U.S. following Diageo and other company's moves in the distribution system, but also in every important market in the world for our brands.

We have not found net that we have been disadvantaged in the U.S. by their moves, in part because we have been very alert and made some moves ourselves, which we think give us an extremely strong distribution system in the United States.

We are in some houses where Diageo is also located, but they are not so many.

So we feel by and large that we have made those moves as have our distribution partners, which will allow our brands to have full thorough and complete and very active access to the U.S. market.

That being said, you still need to pay attention to what your competitors are doing.

And we very much do that.

Our balance sheet, we are a company that's blessed with very strong cash flows.

They don't happen by magic or accident.

We work very, very hard over a long period of time to ensure their consistency and growth.

We absolutely will continue in that regard.

We've taken on what, for us, is a pretty modest amount of debt and taken some actions which turn out to be very beneficial to the shareholders who did not tender their shares in our recent stock repurchase offer.

And so, we feel very comfortable about our future ability to take appropriate actions in acquisition marketplace when the time calls for that.

Okay, great.

Thank you.

Thanks, Bryan.

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

Good morning.

Larry, sorry you're leaving and wish you great luck in your venture.

Thanks Art.

Would it be reasonable to conclude that with a 30 cents per share increment result as a result of the repurchase program, making use of your financial capacity, that you're using the opportunity to kind of step up the fundamental side of the business in terms of your brand building?

Art, it's Owsley Brown.

Yes, that's something that we have not slacked off in.

It seems to be working very well, obviously you wish it -- we always have expectations that -- for results where we stretch our people in order to have worthy goals for them to reach for.

But that being said, we've found that it is just been very beneficial to our brands and our company to continue doing that.

Tactically, we pulled back where the market place doesn't look like it's receptive for it or the timing looks inappropriate.

But strategically, we continue that very strongly.

We feel very good about it, and your interpretation of our numbers for next year are very correct.

Yes, we will have a full and active program.

One of the newer elements is Finlandia where, frankly, there was a little under-spending, in part due to some of the reluctance of our Finnish partners to put as much money in it as we thought might be necessary, and now that we have 80% of that company, we will be putting in more money to help that brand out, that's one that's different.

We have some smaller brands also that we see great opportunity for in the U.S. and in other markets.

And the investments we have made behind Jack Daniel's and, to a lesser extent, behind Southern Comfort in various markets around the world have been very satisfying.

And so, we are going to continue in that.

Okay.

Phoebe, have you quantified the magnitude of cost savings that you expect from the various business improvement spendings that you did last year?

Not specifically.

We certainly entered into them with the idea that we would have, you know, good returns from shutting the manufacturing plants.

Those are probably the most visible and dramatic of all of them.

And we have, you know, certainly written down on paper what we find those -- you know, what we think those benefits will be.

The issue that we face, Art, is that the environment, it seems, in the durable business, keeps shifting on it, and so once we make those improvements, we face additional issues there.

So I would -- so we are not committing, certainly, even really to ourselves and not publicly, to exactly what the benefits of those closures are going to be.

They're not finished yet either.

So we're kind of in the process of really finishing all those expenditures, and we're finding out, you know, over time, just how much benefit will come.

Right.

And when we know that, we'll close it.

We just don't know that now Art.

Ok.

I think you did say in your remarks that there will be some cost savings from that spending in '04, but there will be more in '05, and that sounded like a little bit of a move backwards in terms of what you had said before, even though you still hadn't quantified it even before.

You're probably right, Art.

But I mean, frankly, one of the plants, I think, literally was finished its closing on April 30th, April 1st, and so while we've taken all of the accounting expense, as one properly should, to deal with all of those for various tactical reasons, as measures to shut them down well and properly and treat the employees honorably, we probably did have a little delay in when we actually did some of them.

Art, we'll just keep that in mind, and as we have the data, we'll disclose it.

All right.

Could you repeat again what you said about Hard Cola expenses or cost in '03 and where we are?

Yes, it was 6 cents, Art.

It was 6 cents in the second quarter, remember when we disclosed that as break-even in the third and fourth quarter.

So costs, 6 cents in '03?

Yes.

And also, in my remarks, I talked about it moving to a new line.

It was previously included in SG&A, and now it's included in other income and expenses.

And what's that going to do in '04?

(Inaudible)

It's going to do what?

Not an easy one for any of us. -- Flat or very little benefit at all.

Okay.

And finally, any help on the July quarter?

I think it was the weakest one you had last year for various reasons that might have been one-time in nature.

Is July going to be a particularly good earnings quarter for you?

It should be.

When you look at the -- when we look at quarterly, we do not provide any guidance on a quarterly basis, Art, and you know that.

But we, as you look through, we had a lot of unusual things happening in fiscal '03 with that change in the UK, so, yes, I mean, if you just take the fact - how many change occurred last year when you look at the incremental benefit, it should be up smartly in the second quarter.

Okay.

Well, thank you all very much, and, Larry, I hope our paths cross again some day.

Thank you so much, Art.

Thank you, Art.

Your next question comes from Sandy Stone (ph) of Cazenove & Company.

Yes, hi.

Hello.

Hello.

I'm wanting to ask briefly about the Gemini Alliance that you set up in controlled states for Bacardi.

Obviously, it's been a rougher year since that started.

Wondering if you can give me some sort of update into how it's going, what level of integration you have pursued, and whether you might expand it into other states in the U.S.?

It was set up, Mr. Stone, to operate either in the controlled states or in open states, as was advantageous to both Bacardi and us.

And its initial application was in hunting for brokers in the controlled states.

We actually have achieved that objective in several of the markets.

And it gave us both the ability to jointly approach some of the open states' distributors while Diageo was being highly active in their talk about what they were going to do in the marketplace but had not actually done so much in a number of cases.

And we think it's something that's served us well in a time where there was a lot going on, and we're very pleased with how the results have been.

I think the key issue there, Sandy, is the - on a formal contract basis, there's only been a couple of control states who have got things.

It's the informal that we're, you know-wouldn't really call it the Gemini Alliance, but we continue to work with Bacardi in a lot of areas.

It gives us -- it's the structure which permits us to do that.

Yes, absolutely.

Could I just ask one more point on your capital structure.

You've --I've -- from memory I think your interest cover might be roughly ten times post the buy-back.

I just wondered if you couldn't find any attractive brand acquisitions, whether you would consider doing a further share buy-back, you know, in another two or three years?

Is this very much part of your ongoing strategy in that?

We have, from time to time, over the years, as it's been advantageous to the shareholders, had stock buy-backs.

We have never, in advance, you know, kind of said when we might do them.

It's not really proper or advantageous to our shareholders for us to do that.

But we've always stayed alert.

Having just finished one, it certainly isn't high on our list of priorities, but it certainly is a very valuable tool to use on behalf of one's shareholders, and we're very accomplished at using it, and I would anticipate that it would be used again in the future.

Sandy, this is Phoebe, a couple of further points.

Our interest coverage is much, much greater than you think, than you quoted,

Sure.

So it's very strong.

We are very strong in the A category, and we noticed that we borrowed relatively short-term three and five years, and that matches the cash flows, so it's very strong cash flow generating.

Also important, the share repurchase is not a change in our business strategy, it's a change in our capita structure.

And as we have said before, as we entered this, because of the very low interest rates that we were able to get, the after-tax cost of debt was slightly, actually, below the dividend yield.

So I mean that's just good financing.

Absolutely.

Absolutely.

Thank you very much.

Yes.

Thank you.

Again, if you would like to ask a question, press star, then the number 1.

You have a follow-up question from Sandy Stones of Cazenove & Company.

Thank you.

Could I just ask briefly about wine pricing?

Obviously, we have heard some rhetoric from South Core (ph) in terms of their attempts to straighten out their pricing, particularly in the U.S.

Have you noticed any improvement in the wine pricing environment over the last couple of months, or is it too early to say?

There is a very simple answer to that question, Sandy, and the answer is regrettably no.

I'm sorry about that.

And I think that- just a word about wines for us.

When I look at the change in pricing, it's all down from last fiscal year, and it faces just, you know, lots and lots of retail competition.

It is as good a time as everyone ever to consume wine.

The quality of the wine in the bottle for the price paid, that ratio was never better than it is today.

So we encourage everyone who is listening and encourage all of your friends to enjoy our fine wines.

Thank you.

Thank you, Sandy.

Your next question comes from Bob Coleman (ph) of Russo & Gardner.

Hi.

It's Gardner Russo.

And, Larry, I extend my best wishes to you as well in your new job.

Thank you Bob.

A question on the wine division.

Is it fair to assume that wine was unprofitable for the year '03?

That is incorrect, Bob.

It's incorrect?

Incorrect.

So you did generate a cash return in the wine division?

That second question is a different question than the first one.

Okay.

Did you generate a cash return in the wine business in the year '03?

I'm not sure what you mean.

What do you mean by cash return?

Some of the expenses, I would imagine, are accrued by nature-

Oh, I thought you were trying to offset capital expenditures or something like that.

No, no.

The answer to that question is, I guess, we had --we generated a net positive income.

Okay.

And then would you care to quantify the amount?

Was it, you know, under 5 million, 10 million, 20 million?

We have a longstanding policy of not separating out our spirits and our wines.

Okay.

And we will maintain that policy.

And then on an industry level, you know, we've gone through many years of inventory re-balancing and reductions.

And I was wondering if anyone had a thought how much longer this would continue and how would it affect Brown-Forman?

I think I'll try that.

I think as long as technology in the transportation systems around the world improve, and you have smart people running warehouses and distribution centers for large retail outlets, and I think it will go on that long, which could be a very long time.

And the impact of Brown-Forman over time?

Are you asking specifically, Bob, about wine or about overall inventories?

Just overall inventories.

I mean, we have been simply taking our lumps as they come for 20 years, and it's our plan to continue doing so, so that we have modest annual reductions over time for a number of years, and it seems to work very well with our distribution partners and how they see the world and how their ability to operate on lower inventories is working.

And so, we'll probably continue with the historic pace that we have in the past.

Bob, we watch inventory very carefully here.

The one inventory that we make sure that we don't run out of is Jack Daniel's, and that's something that we see as an inventory that increases in value every year as opposed to decreases in value every year, so just to make that differentiation between the Jack Daniel's inventory as opposed to the inventory of finished goods or maybe even the durable side.

Okay, thank you.

And Larry, good luck.

Thanks Bob.

Thank you.

Your final question comes from Michael Bleakley of Credit Suisse First Boston.

Hi, everyone.

I hope this one won't take you too long.

It's just a brief follow-up question on Gemini.

I was wondering whether you could give us a flavor for how operationally, I guess, Gemini and your Bacardi arrangements around the world internationally work?

To what extent are you seeing regular operational meetings, for example, with the Bacardi guys, is that at a country, regional or head office level?

How does that work?

Our partnerships are different in different parts of the world.

They are our agent in continental Europe, and so our people there meet with them very frequently, higher level people slightly less frequently than those operating everything on a day-to-day basis.

But that would be no different than how, you know, we operate with our distribution partners here in the United States.

In the United States, it is - the alliance was really enabling legislation which allowed us to have conversations at critical junctures.

We have very good relations with our friends at Bacardi here in the United States.

Obviously, we compete for attention of our distributors' time with them like we do with everybody else.

So we come together where it's been mutually beneficial and approach the U.S. distribution whether control or open.

But I'd say it's functioned in practice on a rather informal basis, although the document which set it up was formal.

That's very kind.

Thank you.

Thank you.

There are no further questions at this time.

Thank you, everyone.

That concludes the fiscal 2003 earnings conference call.

This concludes today's conference call.