Brown-Forman Corp (BF.B) 2005 Q1 法說會逐字稿

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

At this time, I'd like to welcome everyone to the Brown-Forman's first quarter earnings conference call.

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

After the speaker's remarks, there will be a question-and-answer period.

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

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

Thank you.

Mr. Graven, you may begin your conference.

Good morning.

This is T.J.

Graven speaking.

I'm the Director of Investor Relations at Brown-Forman Corporation.

And I'd like to welcome you to our fiscal 2005 first quarter conference call.

This morning, Jim Bareuther, Executive Vice President and Chief Operating Officer of Brown-Forman Beverages will discuss trends in the beverage alcohol industry and the performance of our brands.

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

We will then open microphones for a question-and-answer session.

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

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

Except as required by law, we do not intend to update or revise any forward-looking statement, 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 and social trends; impact on profits earned overseas by a strengthening U.S. dollar against foreign currency, especially the British pound; reduced bar, restaurant, hotel and travel business in the 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 [Inaudible -- microphone inaccessible] price of grain and grapes; continue to [Inaudible -- microphone inaccessible] the prices in margins in our wine business because of our excess inventories, existing grape contract obligation, and a worldwide oversupply of grapes; and the effects on our consumer durables business of the general economy; department store business; response rates in our direct marketing business; and profitability of mall outlet operations.

These statements are also subject to the factors mentioned in Part 4, Item 15 of the Company's Form-10K for the year ended April 30th of 2004, which we incorporate herein by reference.

Now, I'll turn the call over to Jim Bareuther.

Thank you, T.J.

And good morning, everyone.

It's a pleasure to be with you today.

First, I'd like to share some observations on the positive trends we're seeing in the beverage alcohol business, and then I'll review the performance of some of our key brands during the first quarter.

Then I'll turn the call over to Phoebe Wood.

Last year, volumes in the entire U.S. spirits industry experienced their strongest growth rate since 1970, approximately 4%.

This growth was even stronger at premium price points and margins, where many of our most important brands compete.

And although there are no official statistics yet for calendar 2004, the accelerating volume performance of many much our key brands indicates that the favorable industry trend is continuing with nice momentum, particularly at the premium end of the market.

Let me share with you some observations on our largest market, the United States.

First, I think you have to look at the changing face of our consumer.

The demographics of our business are changing.

In the United States, the size of the population from legal drinking age to 34 years continues to expand.

Today, consumers from age 25 to 34 make up approximately 12% of the U.S. population.

By the year 2015, they are projected to comprise almost 20% of the population.

We know that this age group is more inclined to try new products, and these individuals prefer to consume brands that communicate something about themselves, particularly in the on-premise channel.

A continuation of this demographic shift is favorable to our industry, and more specifically, to our premium brands like Jack Daniel's, Southern Comfort and Finlandia.

At the same time, the 45-and-older population is also growing.

By 2010, this group of Americans will make up 50% of the population.

This is it a very attractive statistic for our wine business, as the 50-plus segment has the highest wine incidence of any population segment.

But in addition to being a favorable wine demographic, this segment of the population traditionally appreciates the quality of premium products and has the financial resources to consume them on a regular basis.

The face of our consumer is also becoming increasingly female.

New products, new flavors, and the mixability of spirits appeal to a broad range of female consumers, a segment with whom distilled spirits has historically underperformed.

The success of the television show "Sex In the City" in recent years helped reinvigorate a vibrant and exciting cocktail culture in the United States, particularly among women.

Demographic trends and the re-emergence of this cocktail culture not only explain the recent growth of distilled spirits in the United States, but also give us a bullish outlook on the potential for continued growth.

Additionally, advertising investment behind premium spirits brands is increasing.

It has also been spread across a variety of media, and the advertising campaigns themselves are increasingly persuasive and compelling.

Further, we've been given greater access to consumer purchase opportunities in several states through legislation which now allows Sunday sales, and consumer tastings.

Put these all together, and you start to understand the underlying reasons for the growth we have experienced in the United States and the basis for our optimism, going-forward.

Now, how did our brands fair in this environment?

It was an exceptional quarter for Jack Daniel's, our most important brand.

Consumer demand trends remained solid, and the brand posted double-digit volume gains, globally, led by the United States, the brand's largest market.

Volumes continue to grow in the United Kingdom, and rebounded nicely in continental Europe, compared to the same period a year ago, due, in part, to a comparison to a weak first quarter last year, where Jack Daniel's was impacted by price increases in Germany and the delisting of the brand from a major off-trade chain in France.

However, even after adjusting for these items, we are still seeing signs of improvement in this important part of the world, and are optimistic about the brand's prospects for future expansion there.

The brand also continued to post impressive results in key emerging markets like South Africa, but continued to struggle in markets such as Japan and Korea.

Southern Comfort, our second largest brand, experienced mid-single-digit depletion gains, globally, with slightly higher growth in the United States than overseas.

Volumes in the United Kingdom were up in the low single digits, and the brand also posted very nice gains in South Africa.

Finlandia Vodka volumes posted solid gains in the United States, Poland, Israel, and Germany, but those gains were offset by decline in the duty-free channel.

And I'd like to highlight a market where our brands are experiencing very strong growth.

This market is South Africa, where we have had tremendous success over the last several years.

It is currently the 9th largest Jack Daniel's market in the world, having just surpassed Japan on a 12-month basis.

This business was essentially built from scratch over the past decade.

Like our experience in the United Kingdom, our success in South Africa demonstrates how beneficial influence over the distribution of our brands can be.

In the early 1990s, we formed our own direct distribution operation.

A few years ago, we sold the operation to local management.

Although third-party brands are distributed by the local operation, Brown-Forman's brands represent the majority of the distributor's business, and hence, are given sales and marketing attention commensurate with our profit contribution.

Based on our experience in South Africa and other markets around the world where we have higher levels of influence over the distribution of our brands, we are looking at other, more established markets, in which to gain increased influence over the execution of our brand-building plans at the local level.

Now, let me turn to wines.

Our wine business, particularly our core brands, Fetzer Premium Varietals and Bolla, are suffering as the intensely competitive retail price environment in the United States continues to exert enormous pressure on brands that are not among the low-cost producers.

As has been noted previously, Fetzer entered into longer-term purchase agreements a few years ago at prices per ton that are in excess of current market prices.

These purchase commitments have made it difficult for Fetzer to match the retail shelf prices offered by many of its key competitors, including both domestic and imported labels.

As a result, volumes have suffered.

We are in the process of introducing new packaging for the Fetzer brand, and also plan to renew our focus on the 1.5-liter size, where we are significantly underdeveloped on a national basis.

Once everything settles, we believe Fetzer will be a significant brand in the 7 to $10 category.

For Bolla, volume declines in the upper single-digits were exacerbated by the brand's unfavorable cost structure relative to competitors in the U.S. table wine category.

The cost structure challenge stems from both a weakening of the U.S. dollar, which has a negative impact on the cost of grapes, and a shortage in Italy of certain grape varietals, such as Pino Grigio.

We have a new package for Bolla, which has tested very well with consumers and will begin shipping over the next few weeks.

We have also just begun shipping Bolla Chianti, which will be a boost to volumes for the remainder of the year.

On the positive side, wine profits benefited during the quarter from the introduction of 2 new wine brands, One.6 Chardonnay and One.9 Merlot, targeted at consumers interested in low-carbohydrate lifestyles.

These brands are named for the number of grams of carbohydrates in a 5-ounce serving.

While it is just too early to gauge consumer response to these new brands, trade response has been very positive and we are gaining solid points of distribution and creating awareness through advertising and consumer promotion campaigns.

We are hopeful that we will see encouraging consumer response trends over the balance of the current fiscal year.

Putting it all together, it was an excellent quarter for our beverage segment, and a great start to the fiscal year.

We're optimistic about continued growth from our beverage portfolio, in particular, our premium spirits brands, and will continue to invest in appropriate marketing initiatives in order to capitalize on the favorable consumption trends in key markets.

Now, let me turn the call over to Phoebe Wood for a review of our financial results and an update on our earnings outlook for the remainder of this year.

Thank you, Jim.

And good morning, everyone.

It's a pleasure to be here to discuss our results for the first quarter of fiscal year 2005, which ended on July 31st.

This morning, we reported earnings-per-share of 42 cents, up 66% compared to the first quarter of last fiscal year.

Earnings growth was driven by volume and margin improvement from our premium spirits portfolio, led by Jack Daniel's and Southern Comfort, and by profits from the introduction of our new low-carbohydrate wine products One.6 Chardonnay and One.9 Merlot.

In addition, last year we had a 6 cent per share charge associated with the prior year legal settlement with Diageo in the U.K., and we don't have that [Inaudible -- microphone inaccessible].

Excluding that item, and the benefit of the Company's new low-carb wine introduction and the impact of foreign exchange and the net effect of restructuring charges in both segments, the Company's operating income grew by 15%.

Now, let me summarize the performance of our 2 business segments.

Beverages.

Once again, the strongest performance within our beverage segment was in our spirits portfolio.

Jack Daniel's and Southern Comfort were up solidly in the quarter, with both domestic and international markets showing healthy rate of volume and profit growth.

Finlandia performed very well in the U.S. and Poland, resulting in a solid increase in gross profit.

Domestic depletions for Jack Daniel's grew at a double-digit rate for the quarter.

The fastest quarterly rate of growth the brand has experienced since 1992.

Outside of the U.S., depletions also grew at a double-digit rate, with particular strength in France, Germany, Spain, and South Africa.

We believe the sharp increase over last year in continental Europe is due, in part, to comparisons to a weak first quarter last year.

There was a price increase in Germany, delisting from a major off-trade chain in France, and the conclusion of a 2-year distributor incentive program in the preceding quarter in Spain.

However, adjusting for these factors, volumes are returning to more normal levels in continental Europe.

We continue to see strong underlying demand for Jack Daniel's in other markets around the world, such as South Africa, which Jim talked about [Inaudible -- microphone inaccessible].

We're optimistic that the brand will have another very solid year in fiscal 2005.

Southern Comfort depletions were up in the mid-single-digits in the U.S.

Volume growth and margin expansion contributed to improving gross profits.

Outside of the U.S., depletions grew in the mid-single-digit range, as well, posting solid gains in South Africa, Australia and the U.K.

The brand has been growing fairly steadily in the U.S. for several years now, and outside of the U.S., it is also experiencing nice rates of growth.

The new package, reduced proof, increased advertising and promotional support, and more focused distributor commitment have all contributed to the improved results and we're excited about our opportunities and the outlook for this brand over the next few years.

While the market for premium vodka remains extremely competitive in the U.S., volumes for the category are growing nearly 5% per year, and are expected to continue to grow and gain in market share against all other categories of distilled spirits.

In the first quarter, Finlandia depletion growth in the U.S. outpaced the category, as consumer response to the new packaging introduced last fall has been favorable.

We also introduced a new flavor, Finlandia Mango, which began shipping during the quarter to key markets in the U.S.

Now while it's too early to gauge consumer response to Mango, early reactions have been favorable, and we are hopeful that this new flavor will gain momentum in coming months.

In Poland, the brand's second largest market, Finlandia is the number 1 imported vodka.

Volumes grew at a double-digit rate during the quarter in this market.

Despite this solid growth in the U.S. and Poland, global volumes for Finlandia were flat in the quarter, due to sluggish results in other markets around the world.

Turning to our wine business, the initial shipments of One.6 Chardonnay and One.9 Merlot, our new low-carbohydrate wine brands named for the number of grams of carbohydrates in a 5-ounce serving, boosted profits.

And a bright spot for our wine group was the Korbel Champagne, where volumes were up nicely as the brand continued to gain market share in the sparkling wine category.

With the exception of the revenue and profit growth contributed by the introduction of new products, and the strength of Korbel in the sparkling wine category, our wine business continues to be very challenging.

Volumes and gross profit for our core wine brands, Fetzer Premium Varietals and Bolla, were down significantly versus last year's results.

As Jim mentioned, the domestic pricing environment remains extremely competitive in the wine business, and we do not anticipate a significant reversal of this trend over the next 12 months.

Let me next review the financial results for the quarter.

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

After growing net sales to nearly $2 billion in fiscal 2004, revenue growth accelerated in the first quarter of fiscal 2005, and was up 12% over the same period last year.

Here are some of the major drivers of the 12% growth in sales.

First, revenues from the initial shipments of the Company's new low-carbohydrate wine brands contributed approximately 4 percentage points of the growth rate.

Secondly, foreign exchange contributed another 2 percentage points to this growth.

Now, stripping out these 2 factors, the so-called organic revenue growth for the first quarter of fiscal 2005, that revenue growth is roughly 6% for the beverage business.

Despite a drop in revenues for Jack Daniel's Country Cocktails and Fetzer Premium Varietals, our beverage segment organic revenue growth rate was solid.

We believe this was partially attributable to our significant increase of brand-building investments during the fourth quarter of fiscal 2004.

Beverage gross profit growth increased 13% for the quarter.

This was driven largely by the organic volume and pricing growth for our premium spirits brands, particularly Jack Daniel's and Southern Comfort.

The same factors that boosted revenue growth, also positively affected our gross profit.

Stripping out foreign exchange and the impact of our new wine brand, gross profit grew about 7% for the quarter.

The gross margin in the beverage business also increased in the quarter from 52.4% to 52.8%.

We continued our long track record of reinvesting substantial dollars into brand-building activities, which we believe will continue to be a major factor in our continuing success.

Advertising expenses were up about 8% for the quarter for our beverage business.

We estimate that on a cost-dollar basis, advertising costs were up in the range of 6%, reflecting investments made to support the launch of our new wine brand and continued brand-building efforts for Jack Daniel's, Finlandia, and some of our other premium spirits brands.

We continue to see a number of good investment opportunities for our spirits brands, and why take advantage of the robust market for premium spirits, and feel this is an opportune time to invest behind our brands in the marketplace.

Beverage SG&A costs were up 3% for the quarter.

Higher pension and post-retirement expenses were offset by the [Inaudible -- microphone inaccessible] approximately $2 million of the wine restructuring costs incurred in last year's first quarter.

Putting it all together.

First quarter operating income for the beverage segment grew 53%.

A significant portion of this percentage increase is due to the absence of both $10 million in expenses from the Diageo litigation settlement and $2 million of wine restructuring charges, both of which occurred in the first quarter of last year.

Additionally, profits from the initial shipments of our new wine brands and the benefit of foreign exchange boosted first quarter reported results.

After excluding all of these items, beverage operating profit was up 14%.

Turning, then, to our consumer durables segment.

Results in the consumer durables segment were again disappointing in this quarter, although the segment typically shows a loss in the first quarter, actual results were below what we expected.

During the quarter, the management team at Lenox took steps which we believe will improve the health of this business, including a major strategic restructuring if the Lenox organization.

This new structure is designed to shift the focus of the entire organization from a channel focus to a brand focus, and from a product focus to one that is consumer-centric.

As previously announced, Lenox is shifting its distribution and marketing strategy for the Dansk brand to focus on strengthening the brand's presence in the wholesale channel.

Today, Lenox manages a total of 99 retail store locations under the Lenox and Dansk brand names.

But our decision to exit the Dansk outlet business, which is currently operated from 40 of the 99 locations, will significantly reduce our total number of retail locations.

Our plan calls for closing 22 stores in fiscal '05, and 11 stores in fiscal '06 as the leases expire, and converting the remaining 7 stores to Lenox.

On a positive note, outstanding results from the newly introduced Kate Spade fine china line have helped offset softness experienced in much of the traditional wholesale business.

The environment for fine china, tableware, and giftware remains challenging.

Several of our major competitors continue to struggle financially, which is has not helped the competitive pricing environment.

There are some bright spots at Hartmann Luggage, which experienced increases in revenue and gross profit, and at Lenox, with our new product line introductions, particularly Kate Spade fine china.

However, we remain cautious on the overall outlook of this segment.

A couple of comments on the balance sheet and the changes in cashflow over the quarter.

With the outstanding financial performance in the beverage segment, cashflow from operations was $80 million in the first quarter.

For all of fiscal 2005, we expect capital expenditures to be in the range of 55 to $65 million.

Putting the changes in our balance sheet together with strong growth in earnings, our pre-cash flow generation for the year looks very attractive.

And now on to the outlook for the remainder of fiscal 2005.

As you've heard, first quarter financial results were very strong, even when you exclude the benefit from our low-carb wine brands, the absence of last year's legal settlement and restructuring charges, and the modest benefit from foreign -- favorable foreign exchange.

Our full-year expectations remain tempered by the competitive pressures within the U.S. table wine category and the difficult environment for the consumer durables segment.

Also, we're contemplating a reduction in global field inventories, resulting from the continuing evolution of our global distribution system.

But based on our excellent first quarter growth and the underlying strength in our beverage segment, particularly in our premium spirits portfolio, we are raising earnings guidance, and now expect earnings in the range of $2.35 to $2.43 per share for fiscal 2005, or a full year of growth rate of 11 to 15%.

That concludes our prepared remarks this morning.

Now, Jim, T.J., and I will be happy to answer any questions you have.

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

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

Your first question comes from Jeff Kanter of Prudential Equity.

Good morning, everybody.

Hi, Jeff.

Hi.

Phoebe, quick question.

Can you break down the impact on beverage's operating income of -- of currencies and -- and the low-carb wine?

Yes.

Thank you.

Let me repeat what I -- just go straight to my script here, because I thought I'd laid it out for you.

We have 3 cents, call it, for initial shipments of our low-carb wine.

Okay.

And foreign exchange, 2 cents.

I guess I missed that.

I apologize for that.

Yeah.

Okay.

Just moving on, then.

Does that help?

Very much so.

Okay.

In your outlook, there's also a -- a comment about the potential reduction in field inventory levels.

I was hopeful you could flush that out a little bit, and tell us what you're thinking.

Well, I think that, you know, we have a number of distribution contracts which expire at the end of our fiscal year.

And so, we really don't know how those distribution contracts will be resolved.

I mean, we have a number of opportunities available.

We can renew with our current partner, we can, you know, change to a cost-sharing arrangement similar to what we have in the U.K., we could just build our own.

And we don't know what that's going to be, but, you know, with trying to provide disclosure of that, we just, you know, let people know that that's a possibility that we could have some reduction in distilled inventories, particularly if we move to our own cost-sharing arrangement.

But at this point, we don't know those -- what those might be.

We just don't know.

And I know that, you know, that companies, and particularly yourself, probably don't -- don't comment on what's been circulating around in the press.

But, you know, can you comment at all on the recent news about Glenmorangie and what your thoughts are there?

Yeah, Jeff, the Company has a long-standing policy on not commenting on any rumors or possible acquisitions or divestitures.

And I'm not going to be the first to change that policy.

Okay.

Well, this was a good quarter.

Thank you, very much.

Yeah.

Thank you for your call.

My pleasure.

Your next question comes from Thomas Russo of Gardner.

Hi, Tom.

Yeah.

Hi, Phoebe.

Congratulations on a good quarter, great quarter.

Thank you.

A question for Jim about Jack Daniel's in the U.S.

I'm curious what you're seeing from one of your competitive products, in terms of the competitiveness of Crown Royal.

And just in general, how you're feeling about the pressures that others have placed on your business through their strength and distribution, muscle, let's just say?

That's the first question.

Yes.

Tom, the -- first of all, with respect to Crown Royal, they're -- they're continuing to grow.

But I think the results that -- that we've demonstrated in the first quarter for Jack Daniel's, in particular, are quite encouraging, and are the result of -- as Phoebe mentioned -- not only increased advertising and promotion, but also a very positive environment.

So, we are very encouraged by the performance of Jack Daniel's, it's the -- it's the icon American brand.

Everyone uses it as a benchmark, and we couldn't be more pleased.

Terrific.

Terrific.

And especially in the face of increased distribution strength held by others, I would guess, you're not losing share, I suspect, you're actually gaining it with the kind of numbers that you're showing.

We are gaining share, and I think from an executional standpoint, across our distribution network we are very satisfied and very pleased, particularly with the execution over the last 12 months.

Good.

And second question, Jim, just by reference, what would be the carbs in a serving of Jack Daniel's that would be equivalent to the 5-ounce serving of wine or 1 beer?

What would be the carb amount there?

Well, you might be surprised, but it's 0.

0?

I thought it was low, but I didn't know it was 0.

Right.

Distilled spirits are 0.

Terrific.

Thank you.

And then, Phoebe, last question for you.

What is the purpose of highlighting the income contribution from the launch of low-carb so early in its career?

And what will be the impact over the coming quarters of those numbers?

Is the launch impact now a function of channel filling that will only work its way out of the numbers, going forward?

And then, it's a fairly large number if you think that there's a 3 cent impact to net income per share from just that -- that factor.

I'm curious as to how it's so large.

So if you could just work through those numbers.

Sure.

Tom, we highlight it, in fact, because it is so large.

And it is -- it reflects the shipment -- the shipment, okay, of about a quarter million cases of that new low-carb wine.

And that is getting excellent distribution.

And as that moves, then, into retail and as the consumers take that off, you know, we've got pipeline sales, as a way to think about it, really, in the first quarter.

And so we're just beginning, now, to put the advertising behind it to the consumers who actually start drawing that.

So we didn't want to leave the impression that this was the kind of thing you would expect now on from every quarter.

No.

I mean, it's a -- this is the initial shipment of it, and I think time will tell what the consumer response is going to be from that.

And so, because of that, it's exactly because of that, that we wanted to disclose it openly and straightforwardly.

We're also really proud of the fact that there was that kind of interest and demand for this kind of product, and it's a good product.

Terrific.

So the point there, you shipped for the first time, building impact -- income consequence.

But you now start to advertise, so there will be some associated expenses, going-forward.

And you now see whether the consumer take-away rewards those early shipments.

And so it's -- it's just to suggest that there's an early positive impact in [Inaudible] for the rest of year.

Right.

Exactly, and that may not -- that may not repeat itself.

Thank you.

Just until the consumer is there.

I think, Tom, just to add to Phoebe's comments, you know, certainly, we're -- we're conscious, you know, about the outlook.

But we are seeing increasing consumer take-away data, and we're also seeing a direct correlation between consumer take-away and the advertising and promotional efforts that we implemented in many markets across the United States.

Thank you, Jim.

Thanks, Tom, for your call.

Yeah.

Your next question comes from Sandy Soames of Cazenove.

Yes.

Hello, good morning.

Hi, Sandy.

I just was -- wanted to ask you briefly about pricing, perhaps, in the U.S. and on a global basis.

But particularly in the U.S., because I was, sort of, under the impression that 1 or 2 of your competitors have been pushing pricing up for in a slightly more aggressive way in spirits, and whether your volume growth in the quarter for Jack Daniel's actually benefited from not moving your own prices?

Or, you know, whether this was a temporary factor?

If not, wonder if you could just broaden out how much of an increment you've achieved on your price this quarter compared to a year ago?

All right.

Sandy, thank, you very much, for the question.

We're consulting here our notes.

Sandy, I think the short answer to your question is -- is that we have continued to increase our prices as we have traditionally done each and every year.

And so, in fact, on all of our major brands, we have increased prices in the -- in the first quarter of fiscal '05.

We don't -- we don't think about it that way, Sandy, in terms of holding our prices back to gain on others.

We try to do what's absolutely right for the brand, and we have a history of taking price increases and supporting them with good brand investment.

So we would see that it is a combination of the strength of our brands and the advertising behind it that would be driving our volumes.

Yes.

Understood.

No.

It's a very good performance.

I mean, would you be lifting your prices at, sort of, between 2 and 3% at the moment on average across your portfolio?

Would that be the sort of increment?

Or you actually going a bit harder than that?

It's more.

It's more.

It's a very strong market, isn't it?

Yes.

Yes, it is.

More like 3 to 4%, really.

I think you're better in that range.

Thank you.

Yes.

Of course, Sandy.

Your next question comes from Ann Gurkin of Davenport.

Good morning.

Hi, Ann.

Hi, Ann.

I was wondering if you could talk a little bit about category growth for the spirits industry here in the U.S. year-to-date, and then in your international markets?

The -- yes, Ann, the category growth, as I think I pointed out in my -- in my opening comments, is that the category growth in the -- in the spirits industry for calendar 2003 was as strong as stronger than at any period, frankly, over the last 20 years.

So we are certainly benefiting from a -- from a healthy environment.

On a global basis, we're continuing to -- to see very solid growth in the -- in the spirits category.

That's not necessarily in all segments of spirits, but certainly in the segments we're participating in, we're experiencing growth and seeing growth on a global basis.

How about year-to-date in the U.S.?

Year-to-date in the U.S., we're seeing growth, but -- but I don't have a specific number that I could convey to you.

At a pace similar to what you saw last -- in 2003, any comments on that?

Another 4% year?

I would say that -- that, you know, the industry data that we have thus far would suggest that it is slightly stronger than last year.

Okay.

It's interesting, Ann, just to interrupt, this is Phoebe.

The -- we've had the best environment for distilled spirits since 1970.

That's really -- that's very impressive if you think about the distilled spirits environment.

Right.

Okay.

And then, I was wondering if you would just review with me your -- your policy on acquisitions?

Would you be willing to take dilution?

Can you just go through that again?

You know, Brown-Forman is always looking for the kind of acquisitions which add shareholder value.

And so when we look at something, we look at how we can really enhance shareholder value to the Company, and we don't measure shareholder value in, you know, pennies per share on any dilution.

It's looked at over a much longer period of time, what the brand can do in our hands, et cetera.

So we're not adverse to dilution, but we are -- we are very much focused on adding shareholder value in all of the acquisitions that we do.

And I think we're going to continue to look for them and continue to be attentive to our competitive position in the market all the time.

Great.

Thanks, very much.

Mm-hmm.

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

Hey.

Good morning, everybody.

Hi, Bryan.

Hi, Bryan.

Jim, a couple questions for you.

The first, I just wanted to make sure I understood this right.

You talked a little bit about the market in South Africa and the benefits you're seeing from having a almost exclusive distributor, is that right?

I would -- that's correct.

But let me just slightly change the words.

We have a distributor who is, certainly, very focused on -- on our brands, they do sell -- they do represent other brands within the organization, but we are the majority of the business in the South African operation.

Okay.

And I just wanted to try to link that back to what's happened in the U.S.

You know, over the last 2 years, there's been quite a bit of debate about the, you know, effectiveness that some of your competitors may or may not have from trying to achieve a certain, you know, level of focus.

So, can you kind of talk about where we are today?

How that's impacted, you know, the distribution of spirits and the effectiveness of spirit sales and distribution?

And, kind of, how you have faired in that environment?

Well, I think the results speak for themselves.

Let me take the last question, first.

Is that we have faired extremely well, and that's, you know, obviously the result of a very committed distribution network for the portfolio of Brown-Forman, both wine and spirits, but -- and, certainly, spirits are performing extremely well.

The distribution network in the United States has continued to evolve, and will probably continue to evolve, driven, in large part, not only, you know, by what other suppliers may or may not be doing, but also the consolidation of the retail market and -- and the national account market, as well.

So I think what -- what has transpired over the -- over the last 12 to 18 months is that Company's like Brown-Forman have simply become much more proficient, much more efficient in executing their brand-building plans with their distributor partners throughout the United States.

And therefore, I think, probably from an executional standpoint, one could say that -- that we in the industry are simply more effective today that -- collectively -- than we were 2 to 3 years ago.

That's helpful.

And just 1 other question, you know, we've seen over the last few months the consumer, and especially in some other beverage categories, has been somewhat elusive.

And so I'm just curious to see what you're seeing in the market today.

Have you seen any change in momentum, both in wine and spirits category?

And actually, also, by channel, are you seeing any change in trends, either on-premise or off-premise?

And it, certainly, appears like wine and spirits are outperforming classes of beverage alcohol.

And if that -- if you could, kind of, you know, say -- let us know if that's, certainly, the fact, and also, what you think is causing that.

Well, I think that, you know, wine -- wine and spirits are certainly benefiting from the demographics that I mentioned earlier.

It was interesting to note that, specifically for wine, in 2003, that the per capita consumption per adult in the United States rose to 2.68 gallons per capita per adult, I think, which was the -- which is a record, which exceeded the record that was established back in 1980, which was about 2.5 gallons per capita.

So -- so the consumer is, certainly, very interested in wine.

I mentioned the, you know, the reinvigoration of the cocktail phenomena and the mixability of spirits is fueling the spirits side.

And one could look at that and saying that wine and spirits are benefiting, and beer is benefiting less so.

And particularly from the whole discussion of carbohydrates in the U.S., with 60 million Americans or some number around that, participating in some type of low-carbohydrate diet, wine and spirits fair -- fair very well in that type of an environment.

So the consumer will always, I guess, in some ways, continue to -- to be elusive.

But the programs that we have in place, we just feel very, very comfortable with -- with the campaigns and the programs that we have in place for our major brands.

Bryan, Adams Handbook is the statistical source for many of us.

And it documents over a period of years a very definite shift out of beer into wine and into spirits.

And so, that is certainly, I mean, that's just in the statistics, frankly.

And I think that part of it is just how people are choosing to drink.

And spirits are very mixable, they're flavorful, they're creative, and they're fashionable.

So that appears to be, you know, some of what's happening there.

Demographics is certainly working in the favor with the consumption of wine as the baby-boomers age and tend to consume more wine.

So, demographics, general consumer trends.

Beyond that, we wish we knew, because we would take advantage of that in what -- how we approach the market.

All right.

Thank you.

Thanks, Bryan.

Your next question comes from Daniel Paris of Federated Investors.

Good morning.

Hi.

I have a couple questions.

The field inventory changes that you're contemplating, is that, if I understood correctly, primarily an international event, or does that also involve the U.S. spirits inventory distribution contracts?

It's worldwide, but with an emphasis internationally.

Okay.

I -- you may have discussed them in your present -- in your prepared remarks, but the Finlandia U.S. depletions, what were they running, roughly?

They're up in the -- they're up in the single digits.

Mid-single-digits?

Yes.

A little above that.

A little bit higher.

And finally, the -- back to one of, I think it was Bryan's question.

There's been some mixed evidence that I'm getting about spirits consumption in the most recent, say, 4 weeks, 6 weeks, 8 weeks.

It sort of overlaps with the end of your last quarter.

But you had -- did you see any sign, whatsoever, of category weakness?

Just, even if it's just, in your term, noise, potentially, in the past few -- in the past month, perhaps due to the weather, perhaps due to the consumer, whatever the cause may be?

In which category?

In spirits in the U.S.

We are not seeing that.

Fair enough.

Thank you, very much.

Mm-hmm.

Your next question comes from Graeme Eadie of Deutsche Bank.

Hi, Phoebe.

Good morning.

Sorry to make you to go through all this again, but it's just a couple of points I wanted you clarify.

Just in terms of the organic growth on the spirits business.

In your presentation, you said, I just want to clarify this, that if you adjust for currency, one-off charges, and the impact of the new wine brand launches, is -- have I got these numbers right?

So you're saying the top-line growth is 6%.

The gross profit growth, 7%.

The number I wasn't sure about was the operating income, plus-14.

Have I got that right?

Yes.

Yes.

Yes.

You're right, 14.

Sorry.

Sorry to take you through that again.

Thanks, very much, indeed.

Yeah.

It's 14.

Bryan -- I mean, Graeme, Graeme.

Yeah?

Sorry.

When you get to 14, if you strip out the shipment of all of our new wine brands, you strip out all foreign exchange, okay, and you strip out what occurred in, you know, in the settlement with Diageo --

Sure the 2 charges, essentially.

-- you have to strip out all those things.

What we're trying to get at here, is to disclose what's really, organically, going on with our brand, taking out new brands, and taking out foreign exchange.

I mean, obviously, the interesting thing there is the operating leverage from the gross profits into the net income, if you like?

Right.

So there's quite a bit of leverage there, which is -- which is excellent.

Yes.

That's great.

Thanks, very much, indeed.

Yeah.

Thank you, Graeme.

As a reminder, to ask a question, please press star, then the number 1 on your telephone keypad.

Your next question comes from David Hayes of Lehman Brothers.

Hi.

Hi, David.

Hi, hi, hi.

Just -- can I just come back to the Glenmorangie issue.

I know, obviously, you can't comment upon rumors and speculation.

But I'd like you to just outline the current relationship between yourselves and some of the economic share voting rights.

Any preemptive rights that the family might sell their share?

And also, just briefly distribution agreements in the U.S. and Europe?

Okay.

All right.

I'll give you some facts.

Thanks.

Brown -Forman has about a 10% -- 9.6% -- interest in the equity of Glenmorangie PLC -- voting equity in Glenmorangie PLC.

We have been distributing Glenmorangie since 1992, and expanded that distribution agreement in the year 2000.

Okay.

And any preemptive rights or -- ?

You know, I think we're beyond what we can disclose.

Okay.

Fair enough.

Okay.

That was great.

And then, just quickly, on the growth then for Jack Daniel's and Southern Comfort in the U.S., is there any big difference between on- and off-trade, and so when that growth profile, in terms of double-digits for Jack Daniel's, and high single-digits for Southern Comfort?

David, our growth is equally positive in both on and off.

So it's not skewed to one particular channel.

Okay.

That's great.

Thanks, very much.

Thanks for your call.

Thanks.

Thank you.

At this time, there are no further questions.

If there are no other questions, then we'll end the call.

Thank you, everyone, for your time and attention, and have a great day.

Thank you.

This concludes today's Brown-Forman first quarter earnings conference call.

You may now disconnect.