Brown-Forman Corp (BF.B) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Brown-Forman full year fiscal 2004 conference call. (OPERATOR INSTRUCTIONS).

Mr. Whiting, you may begin your conference.

Good afternoon everyone.

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 2004 year-end conference call.

Today Owsley Brown, Chairman and CEO of Brown-Forman Corporation, will begin the discussion with a review of the trends in the worldwide wines and spirits business and of our brand's performance past year.

Phoebe Wood, our Executive Vice President and Chief Financial Officer, will follow with more detail on the financial results of both our Beverage and Consumer Durables businesses and provide some guidance on our expectations for fiscal 2005.

We will then take questions from investors.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995.

Words like believe, expect, anticipate and project identify a forward-looking statement, which speaks only of the date the statement is made.

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 or other expectations expressed.

These risks include, but are not limited to, changes in general economic conditions, political or social trends; an impact on profits earned overseas by a strengthening U.S. dollar against foreign currencies, especially the British pound; reduced bar, restaurant, hotel and travel business in wake of other terrorist attacks such as occurred on 9/11; negative developments in the class-action lawsuits filed against Brown-Forman and other spirits, beer and wine manufacturers alleging that our advertising causes illegal consumption of alcohol by those under the legal drinking age, or other attempts to limit alcohol marketing through either litigation or regulation; tax increases, whether at the federal or state level; increases in the price of grain and grapes; continued depressed retail prices and margins in our wine business because of our existing inventories, existing grape contracts obligations and a worldwide oversupply of grapes; and the effects on our Consumer Durables business of the general economy; department store business; response rate in our direct marketing business; and profitability of our mall outlet operations.

These statements are also subject to the factors mentioned in Part 1, Item 2 of the Company's Form 10-K for the year ended April 30, 2003 which we incorporate herein by reference.

Now I'll turn the call over to our Chairman and CEO, Owsley Brown.

Good afternoon everyone.

Earlier today Brown-Forman reported record earnings per share for the year ended April 30, 2004 of $2.11 a share, up 16 percent over the previous year.

This is the largest percentage increase in EPS that we have reported in nine years.

This afternoon I'm going to first mention some of the broader U.S. and global beverage industry trends that are affecting our business, and then focus on our brands and their performance over the past year.

Phoebe Wood will then discuss how this performance translated to our financial results and provide some guidance as to what we anticipate for growth next year.

Over the past year the market in the U.S. for premium spirits has gained momentum.

According to industry data, total U.S. spirits volumes were up about 4 percent in calendar 2003.

And the most recent data show the trends continuing to accelerate.

Importantly, the growth rate for premium priced spirits is even higher.

These are the strongest grapes of total spirits growth we have seen in the U.S. since 1970.

And they are certainly providing a tail wind for our premium spirits portfolio brands that includes Jack Daniel's.

By contrast, the popular price brands in the U.S. are not doing as well as the industry as a whole.

Our large, off premise driven category leaders, such as Canadian Mist and Early Times, are particularly susceptible to the heightened price competition and discounting that has occurred in their categories over the last 18 months.

We will continue to support these brands at an appropriate level to make sure we are maximizing shareholder value, but we recognize that growth for these mid-priced brands will be difficult.

Outside of the U.S. the environment for premium spirits is mixed.

Over the past couple of years the United Kingdom has been one of the fastest-growing markets in the world for us, and that momentum continued in fiscal 2004.

However, we are seeing general weakness in several countries in Continental Europe.

Growing anti-alcohol sentiment in France has hurt both the on and the off premise business in that country.

And it appears that anti-alcohol sentiment is gaining momentum in other countries, which we believe could hamper feature industry growth rates in markets such as Germany, Spain and Italy.

In Asia the results have also been mixed.

Our business both Korea and Japan has been challenging over the past year, and our volumes are down substantially.

The Japanese market for premium imported spirits has been subdued for a number of years, and we remain cautious about growth prospects in that country.

The premium spirits market in China however, while still in its infancy, shows great promise given the size of that market and the strength of the economy.

Korea, on the other hand, which was such a hot market for us a few years ago, has changed significantly.

A weakening economy, combined with some major consumer credit problems have really slowed the on premise premium whiskey market.

Medium to long-term, we still regard Korea as a high potential market, and believe we are well positioned for growth when economic conditions improve, but we have a guarded outlook for the next 24 months.

Now looking at our individual brands, it was another exceptional year for our largest one, Jack Daniel's Tennessee Whiskey, which is now past 7 million cases in annual depletions.

Worldwide depletion growth was about 6 percent, a pleasing increase from the 4 percent global growth in fiscal 2003 and the 3 percent growth in fiscal 2002.

In the U.S., which represents about 55 percent of the brand's volume, depletions continued to accelerate throughout the year.

The healthy environment for premium spirits, increased levels of advertising and promotional support, and the brand's overall positioning are combining to provide growth and profitability.

As I mentioned, the international markets are mixed.

The UK continues to report very solid results for Jack Daniel's with double-digit volume growth.

However, volumes are flat to down slightly in some major European markets such as Germany, France, Spain and Italy.

Some of this can be attributed to the price increases we've taken over the past year however, these markets are clearly an area of concern for us.

And we're working hard to regain the momentum we have built over the previous 10 years.

In some of the emerging markets meanwhile we're seeing good volume growth.

For instance in South Africa, Jack Daniel's depletions increased more than 40 percent, and our volume growth -- and our volume now exceeds 125,000 cases.

This is a very solid market for us.

And because of -- because our base of business now has some size to it, China followed only our established markets for the U.S., the UK and South Africa in terms of case growth.

We expect to allocate greater resources to China in the coming years to continue our progress in this enormous dynamic market.

Australia also remains solid.

Profits are up considerably due in part to the exchange rates, but also because of continued growth in volumes of Jack Daniel's Whiskey.

However, the real success story in Australia remains our ready-to-drink offerings, particularly Jack Daniel's and Cola.

Although the brand is growing at a double-digit rate and has passed the 7,000 case mark, it still commands only 6 percent of Australia's ready-to-drink market.

So we're very encouraged about its prospects for the future.

Japan continues to be a very difficult market and our volumes are down.

However, we did take our first Jack Daniel's price increase in a number of years, so we'd seen some margin improvement there.

Southern Comfort continued to provide good earnings growth for our beverage business.

As we have reported this brand has gone through a strong revitalization over the past several years.

In the U.S. we focused our efforts on creating a more premium positioning for Southern Comfort.

A new package and increased investment have fueled above market price increases, volume growth and a very impressive profit delivery.

Our goal is to leverage Southern Comfort's association with New Orleans, including the Mardi Gras, food recipes and music, which anchor the brand to its birthplace there as we look to replicate the momentum that we have built here in the U.S. elsewhere in the world.

In Britain, where Southern Comfort had lost significant volume over much of the '90s, the brand was up 8 percent.

Much of this can be attributed to Brown-Forman assuming shared distribution responsibilities for our own brands, giving Southern Comfort significantly more sales force attention than it had previously.

Results for Finlandia are improving.

We now have the global distribution rights for the brand with over 1.7 million cases worldwide.

We're working diligently to find the appropriate brand building models for Finlandia in each market around the globe.

In the United States our volumes were up about 8 percent.

As we have mentioned on other conference calls, the U.S. market for premium imported vodkas, while growing consistently, is also extraordinarily competitive.

We have introduced a new package for Finlandia to improve its appeal and shelf presence.

And we have significantly increased our level of advertising and promotional investment, especially in on premise channel.

As a result, our volumes are growing, but profits from this volume growth have been tempered by the slightly -- of slightly lower U.S. prices and by the weaker dollar, which has increased our cost of sales.

Of note is the brand's performance outside the U.S. where growth has been quite strong since we added the Eastern European countries to our distribution arrangement.

Our largest business outside the U.S. is in Poland, a market about which we are increasingly optimistic despite lower margins than prevail in the U.S.

We believe that international development of Finlandia is a major opportunity for us, and think that we have a brand that can take advantage of this growth potential.

Finally, let me shift to wine.

As we have discussed before, the global oversupply of grapes has resulted in significant downward pricing across the U.S. and an overall extremely competitive market.

The gross margin percentage for our wine brands increased slightly this year as price increases and a positive mix improved margins.

However, gross profit dollars were down slightly, as a drop in volumes for both Fetzer and Bolla hurt results.

As was the case in fiscal '03, our largest wine brand, Fetzer, has been unable to take advantage of reduced industry grape costs in California because of its previous purchase commitments.

There are numerous issues which will ultimately determine the length of our grape purchase contracts problem, but at this point it appears it will be at least two or three more harvests before Fetzer will derive meaningful cost savings from lower grape costs.

Partially in response to the challenges of the wine industry, we incurred about $4 million in reorganizational costs this past year related to restructuring our sales and marketing functions, as well as to changes in our California production sites.

In contrast to the oversupply of grapes in California, a shortage of certain Italian grape varietals and unfavorable foreign exchange increased costs for Bolla.

Aggressive price increases partially offset the cost pressures, but volumes suffered as a result.

We're introducing new packages both for Fetzer in the early fall and for Bolla this summer which should help results.

In addition, we will try to stimulate volume growth for Bolla in fiscal 2005 with the fall introduction of a Chianti to take advantage of increasing interest in this wine type in the U.S.

Lastly, volumes and profits for Korbel Champagnes were higher in 2004 as the brand continues to increase its market share in the United States.

Korbel is a great brand with a firm position here and generates solid income.

We have worked very hard over the past couple of years to improve the performance of our wine business.

It is clear however that the near-term outlook for wine is not nearly as strong as it is for spirits.

We have continued to support our core wine brands at appropriate levels, while also heightening our emphasis on new product development.

We discontinued a couple of brands where we decided the margins and the future was not acceptable.

We have restructured our California production operations, and we have made a number of changes to the management team.

We expect improved results and returns from our wine brands in upcoming years.

Let me remind you that we're dedicated to improving the value of each of our wine and spirits brands by appropriately positioning them in the marketplace and by pushing ourselves to take advantage of growth opportunities.

We remain committed to our goals of unsurpassed growth in brand equity, earnings and total shareholder return, and believe we have the people and the brands in place to successfully attain these goals.

I will now turn the call over to Phoebe Wood, our Chief Financial Officer, who will walk you through more specifics on our results, discuss our performance in the Durables segment and provide guidance for the next fiscal year.

Good afternoon everyone.

We're pleased to report record results for fiscal 2004 with earnings per share increasing 16 percent to $2.11 per share.

Results include a 6 cent per share charge to settle our lawsuit with Diageo involving the distribution of Jack Daniel's in the United Kingdom, and a 14 cent per share benefit from the March 2003 share repurchase.

Excluding the cost of the legal settlement and the benefit of the share repurchase, earnings per share increased 12 percent.

The overall growth story for our beverage segment is quite strong.

The segment recorded nearly $2 billion in net sales in fiscal 2004, an increase of 11 percent versus the prior year.

I would like to highlight some of the major drivers of that 11 percent growth in sales.

First, the weaker U.S. dollar accounted for about 4 percentage points of the growth rate.

On a net basis the British pound is clearly our largest foreign exchange exposure, followed by the Australian dollar, the euro, and the South African rand.

Over the past couple of years our net exposure to the euro has been reduced as we are now sourcing more from euro-denominated markets, including Finlandia Vodka from Finland, Bolla wine and Tuaca Liqueur from Italy, and Lenox Crystal from Germany.

The second issue affecting our revenue growth rate was a full year of revenues from new markets for Finlandia Vodka and its related agency brands.

These new markets, net of some discontinued wine brands, contributed about 2 percentage points to the Beverage revenue growth rate.

As you may recall, in fiscal 2003 the Company changed its distribution arrangement in the United Kingdom resulting in the Company owning inventory previously held by our importer.

The net effect in fiscal 2003 was a reduction in shipments in our first quarter.

In fiscal 2004 a normal shipment pattern resumed resulting in a positive revenue comparison to the prior year.

This distribution change boosted the revenue growth rate by about 2 percentage points.

Stripping out all of these factors, the revenue growth for fiscal 2004 was between 4 and 5 percent for the Beverage business.

Organic revenues from our wine portfolio declined, as both Fetzer and Bolla lost volumes.

However, the spirits revenue growth rate was quite strong, and we feel confident that this type of growth will continue into fiscal 2005.

We have also reached a new milestone in our Beverage business with over $1 billion in gross profit, a record for the Company.

Gross profit growth of 14 percent was largely driven by the organic volume and pricing growth of both Jack Daniel's and Southern Comfort.

However, the same factors that boosted revenue growth also affected our gross profit growth.

Stripping out foreign exchange, new Finlandia markets, and the changes in the UK we estimate that organic gross profit grew about 9 percent.

Also, the gross margin in our beverage business increased from 50.1 percent to 51.4 percent in fiscal 2004.

After a couple of years in a row of declining gross margin we're certainly pleased with the increase.

Importantly, we continued our long track record of reinvesting substantial dollars back into our brand building activities, which we believe will continue to be a major factor in our continued success into the 21st century.

Advertising expenses were up about 15 percent in fiscal 2004 for our Beverage business.

There are a number of factors which pushed this growth rate up into the midteens.

First, and most important, we saw a number of good investment opportunities for our spirits brands, and we believe the long-term pay back will be substantial.

We want to take advantage of the robust market for premium spirits, and feel this is an opportune time to invest behind our brands in the marketplace.

It is also worth noting that foreign exchange is a significant factor in our advertising growth rate last year.

We estimate that on a constant exchange basis our advertising costs were up in the range of 10 percent.

Beverage SG&A costs were up 11 percent for the year.

This is clearly an unusually high rate of SG&A growth and worthy of some explanation.

First, we acquired an additional 35 percent interest in Finlandia Vodka worldwide in December 2002, bringing our total ownership to 80 percent.

As a result we now consolidate Finlandia Vodka worldwide in our financial statements.

The sales and distribution organization we now have working in central and eastern Europe, combined with the G&A costs we have in Helsinki, significantly increased our overall Beverage SG&A expenses.

The second driver is the consolidation of Tuoni e Canepa, which we acquired in February 2003.

We now recognize additional G&A associated with consolidating the operations in Livorno, Italy.

From this point forward the comparisons will be normalized for both of these acquisitions as we will be lapping comparable periods.

We also incurred roughly $4 million in wine reorganization costs last year.

The benefits were essentially absorbed by the severance costs in fiscal 2004, but we will see some benefits beginning next year.

Finally, pension and post-retirement expense was up an incremental $7 million this year for the Beverage segment.

Putting it altogether, the full year operating income growth of 12 percent is the strongest growth rate we have seen since 1990.

Although the weaker U.S. dollar was clearly a big benefit, we also absorbed $10 million in expenses from the Diageo litigation settlement.

At the same time, we were able to accelerate the growth rate of our brand building investments and cover unusually large increases in pension costs.

Overall our Beverage business is in solid shape, and we are encouraged by the prospects for this segment as we move into our next fiscal year.

Turning to the Consumer Durables segment, the financial results in our Consumer Durables segment were disappointing compared to the prior year.

The environment for fine china, tableware, giftware and luggage categories remain very challenging.

Several of the major competitors are struggling financially, which is has not helped the competitive pricing environment.

And although there are some bright spots with our new product line, particularly Kate Spade Fine China, we remain cautious about the overall outlook for this segment.

Sales at Lenox were up 1 percent, essentially flat this year, as modest increases in sales to wholesale customers, particularly to the specialty stores, were offset by declines in sales in both the Company's retail outlets stores and its Direct-to-Consumer division.

This segment experienced a slight drop in gross profits, primarily from a shift in product mix and aggressive discounting designed to lower retail outlet inventory.

One of the biggest areas of concern for us is the Direct-to-Consumer division, also referred to as Lenox Collections.

Over the past five years this has been a very high growth and high margin channel for Lenox.

Although response rates picked up during the second half of the year, they remain well below expectations.

To partially offset the shortfall in gross profit we reduced both our consumer direct advertising and catalog circulation for this channel in an effort to balance the cost of attracting new consumers with the potential profit from these consumers.

We continued to monitor this channel very closely and are expecting better results next year.

Overall, operating profits for Lenox were down sharply as the reduced level of advertising was insufficient to offset the slight drop in gross profit and higher SG&A expenses.

The new management team has taken steps to reduce fixed costs, increase production efficiencies, close unprofitable retail outlet locations, and develop relevant new products.

These actions included a net $3 million charge in fiscal 2004, including severance, a write-down for impaired real estate associated with previous plant closures, and start up costs related to a new distribution center.

In addition, pension expenses and post-retirement expenses for this segment increased by an incremental $3 million in fiscal 2004, and will increase an incremental $2 million next fiscal year.

The management team, led by the new President, Jay Hanauer, has recently finished a detailed review of Lenox's operations and growth opportunities.

Partially as result of this study the organization was downsized earlier this month.

Severance costs are already included in our outlook for fiscal 2005, and the savings will begin to materialize over the next year.

We anticipate that these actions, combined with new product introduction, lower capital expenditures and inventory requirements will result in an increase in free cash flow and earnings for this segment next year.

Although financial results have been disappointing this year, we're confident that Jay and his team will improve the results and return this business to health.

A couple of comments on Brown-Forman's balance sheet and the changes in cash flow over the past year.

Cash flow from operations increased 26 percent from $243 million in fiscal 2003 to $305 million in fiscal 2004.

We have worked very hard to manage our working capital needs down, particularly the single largest item on the balance sheet, inventory.

We have successfully reduced inventories in the Consumer Durables segment where we have trimmed SKUs in the retail outlet stores.

And in Beverages we have reduced our raw materials and finished goods inventories.

As a result, year-over-year inventories are down by nearly $30 million.

There is also a $72 million increase in the other asset line item on the balance sheet and a corresponding $33 million increase in deferred tax liability.

These items reflect the fact that on a net basis our pension funds are now fully funded, whereas last year they were in a slightly under funded position.

The last major issue related to the balance sheet is that our PP&E expenditures decreased from an unusually high level of $119 million in fiscal 2003 to about $66 million in fiscal 2004, a drop of over 50 percent.

Fiscal 2003 PP&E expenditures included the costs of adding $39 million in California vineyard properties to the balance sheet, which were previously financed through a third party financing arrangement.

Even taking that into account, there was a significant drop in PP&E spending.

Looking ahead, we expect capital expenditures to be in the ranges of 60 to $70 million, somewhat less than what most of the analysts who follow Brown-Forman have been expecting.

Higher earnings, lower inventories, and lower capital expenditures resulted in a significant increase in free cash flow last year.

This free cash flow was used to reduce our net debt position by approximately $150 million.

One last issue I would like to discuss before we move to the outlook for fiscal 2005.

As most of you may already know, Standard & Poor's will be changing its index weighting from total market capitalization to a free float calculation.

Given the significant insider ownership at Brown-Forman, this will have a material impact on the ownership of our stock, as the index funds will need to reduce their weightings in Brown-Forman.

The details won't be announced until September 2004, but we do know that the transition will take place in two steps in March and September of 2005.

This does not affect the underlying value of the Company whatsoever, and it has no effect on the way we manage the Company.

We are quite sure that this issue will be analyzed in detail by (indiscernible) on Wall Street over the next year.

We just want to be up front with our shareholders in disclosing this potential issue for next year.

And now onto the outlook for fiscal 2005.

The environment for premium spirits in the United States look very strong, and we believe we are perfectly positioned to take advantage of the favorable trends in this market.

In contrast, we remain somewhat cautious about several of our important international markets, particularly Continental Europe.

And although earnings from our wine brands improved in fiscal 2004, most of this was done by reducing costs not because of a real improvement in the underlying business trends.

So we remain cautious on the near-term prospects for our wine brands.

And as you know, the outlook for the Consumer Durables business is uncertain in this economic environment.

Overall we're optimistic about the earnings outlook for the Company.

For fiscal 2005 we expect earnings of $2.32 to $2.42 per share, or growth of approximately 10 to 15 percent.

While we're not providing any guidance on the first quarter, last year we had the Diageo settlement, some wine reorganization costs, and a very poor performance for Consumer Durables, none of which we expect to repeat in first quarter '05.

Two last comments before we open the phone lines for questions.

Number one, I would like to correct what Owsley talked about for case sales of Jack Daniel's and Cola in Australia.

The correct number is 700,000 cases, not 7,000 cases in Australia.

And secondly, for those of you to don't know, Lawson Whiting will be moving into a new role at Brown-Forman as Director of Finance for our wine groups.

We all think this is a great promotion for Lawson as it will give him the opportunity to put his stamp on a business that has really struggled for the past few years.

We wish him much success as he moves to this new opportunity at Brown-Forman.

T.J.

Graven has been named the new Director of Investor Relations at Brown-Forman, effective August 1.

Lawson and T.J. will be working together up until that time to provide an orderly transition and to give T.J. the opportunity to meet many of you in the investment community.

That concludes our prepared remarks.

Now, Owsley, Lawson, and I will answer the questions you have.

(OPERATOR INSTRUCTIONS).

Jeff Kanter with Prudential Equity Group.

Congratulations, Lawson.

Thanks, Jeff.

Phoebe, lower CapEx is an understatement going forward.

What is driving that decrease?

You know it is a variety of things actually that are affecting that.

First is that we have certainly invested a lot in Consumer Durables over the past few years, primarily to build a new distribution center and also to build up some retail outlets that we were testing.

That is not going to continue.

Also, we entered into an improvement in our bottling facility here in Louisville, and so that is finished.

The other thing is that we have finished some improvements that we're making to our facilities.

I think those are largely finished.

We will continue to make investment in Jack Daniel's.

That is probably the single biggest one and -- continue to do that.

We invest in information technology.

But I think the main thing is that we have seen such a drop because it was so high in 2003, and that is because of the $39 million that we brought onto the balance sheet for some vineyards that were in California that previously were financed off balance sheet.

Fair enough.

The tax rate was materially lower in this quarter.

Why was that, and is that what we should be using going forward?

Use that rate going forward.

And it is really based on the fact that we have lower -- given our shift now in sales between the U.S. and international, and also just generally lower tax jurisdictions we're moving toward a lower tax jurisdictions, and it has put our effective rate a little bit lower.

Said this 31.5 to 32 percent is embedded in your guidance for next year?

33.5.

33.5.

33.5 is what you should use going forward.

Currencies in the quarter, Phoebe?

What did they contribute to the top and bottom line?

In the quarter?

Let us come back to you.

I have got it for the full year, let me see if I have for the quarter.

For the full year you'll recall that is 16 cents of our --.

2.5 cents in the fourth quarter.

Benefit, okay.

Yes.

Ann Gurkin with Davenport.

I was just wondering if I could get some shipment data for your brands in the U.S.?

You gave depletion, but I didn't see shipments?

I can tell you the shipment and depletion data is very close this year.

There is not -- there's really not a material difference.

Okay.

How about pricing?

Can you give me an update there?

I can give you a little bit, yes.

It is fairly consistent with the trends that we've had the last few years were Jack Daniel's has been in that 2 to 3 percent range.

It has been that way forever.

Southern Comfort has been even better, more the mid single-digit range.

The rest of the brands have been relatively flat.

And as Phoebe or Owsley said in their comments that Finlandia was actually down.

Okay.

Are you getting any closer to getting out of the Consumer Durables business?

We're working very hard to fix the business, and we feel that that is the most important thing that we can do to add value for our shareholders, which after all is our overall goal.

And we always explore every way we can to add and get value out of our investments.

This one of course has been more difficult with industry trends being really pretty bad since 9/11.

And so there are extra challenges that make this one pretty hard.

But we've got a new team in there.

They're doing a remarkable job.

They are very bold and we're confident that they will do good things to add value.

Graeme Eadie with Deutsche Bank.

Two questions, if I may.

Phoebe, you guys kindly waltzed us through the top line organic sales growth and sort of stripped out -- and you said that on an underlying basis on the wine and spirits side, you would be looking at sort of 4 to 5 percent organic top line growth for the year.

What do you think that number was on the profit line?

That is the first question.

And the second question, I don't think I've seen you before actually highlight the performance of the ready-to-drink business.

You have obviously don't that today.

Does that signal perhaps a bit more confidence in that whole segment than perhaps you have indicated over the last six months?

I will be quite anxious to hear your views on that side of the business.

Okay.

Thank you, Graeme.

Let us take your questions in reverse order.

So we will do RTDs first, and then we will go to your question on earnings.

With regard to RTDs, yes, and I did highlight it.

It is very noticeable in the Australian market.

That is actually growing at a double-digit rate.

And it has got a very good price point and a very good margin, and it is about 6 percent of the ready-to-drink market in Australia.

So we think there are additional opportunities there, so we are actually very positive about that.

We're going to continue to test the demand for a Jack Daniel's ready-to-drink in Europe.

And so that is going forward this summer.

So we will see how that is.

We have long been in the ready-to-drink business in the U.S.

It was always called Country Cocktails.

We have recently switch it to malt-based so we can take advantage of many more distribution points that exist here in the United States.

And so within that now product line, Graeme, we introduced something called Blackjack Cola.

And that is just to take advantage of America's preference for cola-based products.

However, just to point out on Hard Cola, it certainly didn't meet our expectations, but we still have over 100 distributors selling it into the -- in the United States right now.

And we purchase all the finished goods and looking at options for cola packing in the future.

So we see ready-to-drink as an important component of offering our consumers products that they like to enjoy from our portfolio.

Now with regard to your earnings question, if you take a look at splitting out the organic growth from the other, when we look at gross profit, that comes through at about 9 percent.

Right.

Does that help you?

Part of the challenge is, Graeme, is we never know what -- everybody calls organic something different.

So we get very hesitant about quoting figures on that, because every analyst out there has a different definition of what organic is.

So I just caution you, but (multiple speakers).

Just adjusting for the Finlandia and currency is it fair to say that there is sort 4 to 5 percent organic top line growth, as you described it, would basically translate into about an 8 or say 9 percent gross profit increase?

Does that broadly sound right?

Yes.

(OPERATOR INSTRUCTIONS).

Bryan Spillane with Banc of America Securities.

A couple of questions.

First, Phoebe, if you could talk a little bit about maybe a free cash flow target for next year and also kind of longer-term?

And also, I didn't hear it and you might have said, are you talking at all about potential for restructuring charges again in fiscal '05?

Okay, let me just make sure I understand.

The second question you're asking if we will have any restructuring charges (multiple speakers) in '05?

Yes.

And then the first was just free cash flow growth, if you have got some perspective on what you are expecting growth out of there?

Okay.

Let me see if I can take these.

First of all, Bryan, we will -- we have charges for restructuring that will occur in our business.

We do not call them extraordinary.

They're just part of our normal way of doing business.

So that is the first thing.

We don't try to separate them out that way.

We already know of one that has already occurred in fiscal '05, and that is what has occurred in Consumable Durables earlier this month with the unfortunate laying off of many of our colleagues there.

And so those severance expenses are built into the fiscal '05 numbers, and net we will see a benefit coming from now.

So that is all that at the moment that we've got built-in.

If we have it, we just -- we're just going to do it as the need arises, but we don't -- I think that is -- what has happened is what you will see.

The second thing is free cash flow targets, we really -- we don't really budget that way.

And so I don't really have a number to share with you because we just don't -- we don't look at it that way.

But it has been wonderfully healthy.

You notice the increase in free cash flow between 2003 fiscal year and 2004, it is -- one of the most important things that I like to look at is how much cash we're generating.

And that seems to be healthy and strong, and I don't anticipate any changes.

I don't have a new target to give you.

Okay, that's great.

Thanks.

And if I can just follow-up for Owsley, could you just talk a little bit about the potential for the court in the U.S. to change the three tier distribution system?

You've got a challenge in the wine business in terms of shipping wine via the Internet.

You got a Costco challenging three tier distribution in the state of Washington.

Can you kind of give your thoughts, perspective on where that might evolve and how that might evolve?

Well, I think you know we can say in general that it is all coming from consumer interest in wines, which is actually a very good thing for all tiers of the business.

And so I think that is the first thing.

How the courts are going to react between the interstate commerce clause of the Constitution and the 21st Amendment to the Constitution, I'm going to leave to the Supreme Court as we have to do.

But I think that the real thing is this is an indication of consumer interest.

And you know exactly how these two thing conflicts with the law will be resolved.

I don't think I'm going to speculate on that.

I don't know any better than anybody else.

David Hays with Lehman Brothers.

Two questions, if I can.

Firstly on South Africa, you mentioned the strong growth there.

Forty percent I think was the figure you gave.

Can you give us some more color in terms of the trends you are seeing in that marketplace, whether that is share being taken from beer and other categories or whether that is just a push by you guys specifically?

And also some idea in terms of outlook, whether you see that being a strong grape market at similar levels moving forward into next year?

And the second area is around the U.S. market and the idea of NGG program, clearly now they're rolling that out and actually implementing it.

I just wonder whether you can give us any indications in terms of whether you're seeing any benefits from that in terms of the distributors that aren't chosen being more focused and more willing to focus on your product, or whether there's anything negative coming out of that as they roll it out more extensively?

Yes, David, South Africa.

I am trying to say I don't the shares coming from here to that level of detail.

I can tell you some of the things that I have heard about.

Part of it is we made a distribution change down there which has helped.

But one of the key -- yes, it's been a few years, but they are (indiscernible) doing very, very well these days.

The other part of it is we're moving out of just some of -- really we started really in one big city and we've moved out more into the other sort of medium-sized cities.

So a lot of the growth is coming from just being entered -- moving into some new markets that we just never were there before.

But we're also seeing -- not only Jack Daniel's is showing great growth, Southern Comfort is also doing very, very well down there too.

So there is pretty broad-based growth that we're seeing down there.

And it has just been -- as we said I think it has been one of the most successful markets in the world over the last year for us.

We're very close to those distributors there.

They are great partners and a very talented group.

I think I will talk about Diageo.

I think their next generation of growth plans to the United States.

Certainly they have caused all sorts of changes in the U.S. distribution system primarily about eighteen months ago now.

So most things have settled down, and everybody is now having to operate pretty much in whatever the new environment that they are.

We feel that we, and I won't speak for the other competitors, are doing very well in this new environment.

They are a big company.

I hope they do well too.

There is room -- a little room for a lot of people in this industry.

But I would suggest to you to ask them themselves how they feel about their plans rather than us.

And one of the comments that we always use as a specific example, David, and I think it is interesting.

We look at the markets where we have actually made a change, and obviously are closely monitoring whether or not we're doing better or worse than we were before, or how the other markets maybe are performing compared to the rest of the U.S.

And California and Texas, which are two largest markets for us where we have made changes, they're doing very, very well.

California in particular is one of the strongest markets that we have in the country for us right now, and is growing well above sort of our national average.

So we feel pretty good about our --.

Right.

We, just to be clear about California, we didn't change our distributor.

I said that wrong anyway.

Diageo left the distributor with which we're at, just for purposes of clarification.

At this time there no further questions.

Mr. Whiting, are there any closing remarks?

Given that this is my last conference call, a short remark.

I just want to thank everyone for the opportunity the last couple of years, or last three years, of working with you.

As much as I enjoyed my time in this role, I'm very much looking forward to my new role in our wine business.

I will give you my last request.

I hope that each of you go out and actually go buy some more Fetzer and an extra bottle of Bolla.

My bonus depends upon it.

Thanks everyone.

Thank you so much.

Bye.

This concludes today's conference call.

You may now disconnect.