Brown-Forman Corp (BF.B) 2005 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Brown-Forman Third Quarter Fiscal 2005 conference call. [OPERATOR INSTRUCTIONS] Mr. Graven you may begin your conference.

Thank you.

Good morning, this is T.J.

Graven, Director of Investor Relations for Brown-Forman Corporation.

Thank you for joining us this morning for our third quarter fiscal 2005 conference call.

I'm pleased to be joined today by Paul Varga, the President and CEO of Brown-Forman Beverages and a member of the Brown-Forman Board of Directors, and by Phoebe Wood, Executive Vice President, CFO of Brown-Forman Corporation.

As I'm sure many of you have seen, we've issued two press releases this morning.

One summarizing our third quarter stanch results and a separate one regarding the company’s decision to explore strategic alternatives for our wholly-owned subsidiary, Lenox.

I know you'll likely have more than a few questions regarding the Lenox announcement, but before we dig into that discussion, we'll start with the extremely positive news regarding the continued strong performance of our beverage segment.

Paul Varga will open with a discussion of current trends in the segment and then Phoebe Wood will review the company's financial performance for the third quarter, and discuss our earnings outlook for the remainder of this fiscal year.

We will then open the phones for questions.

Before we begin, I'd like to remind you that this morning's conference call contains forward looking statements based on management's current expectations.

Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements.

Many of the factors that will determine future results are beyond the company's ability to control or predict.

You should not place undue reliance on any forward-looking statements.

The company undertakes no obligation to update any of these statements due to new information, future events or otherwise.

The press release is available on our website at www.brownfforman.com under the section titled Investor Information.

We have listed on page 7 of the press release a number of risk factors that you should consider in conjunction with our forward-looking statements.

Other significant risk factors are described in our form 10k, form 8k and form 10q reports filed with the SEC.

During this call we will also be discussing certain non-GAAP financial measures, purposes for which management uses them and the reasons why management believes they provide useful information to investors regarding the company's financial condition and result of operations are contained in the press release.

Now let me turn the call over to Paul Varga.

Thanks T.J., and good morning everyone.

Results for our beverage business both in 3rd quarter and in the first 9 months of the fiscal year have been super.

Driven primarily by continued strong performance from the premium end of our portfolio, it's a pleasure to discuss these favorable results with you today and to share with you the continued optimism we feel for our beverage business.

But before I cover the highlights for the quarter, many analysts and trade publications have or will be writing about the performance of the industry, the company, and the brand during the calendar 2004 year, which just concluded.

I'd like to share with you just a few of our key highlights for our most important brand, Jack Daniel's Tennessee Whiskey during that period.

Global depletions for Jack Daniel's were up over 9% in 2004 to 7.7 million 9-litre cases.

This was a very large increase of an already significant base.

In the brand's most important market, the U.S., depletions grew by 8% or 300 thousand cases to over 4.2 million 9-litre cases.

This represents the brand's largest calendar year volume growth in the United States since 1981.

Just as important, worldwide, the brand grew its total sales dollars by almost 20% in the calendar 2004.

While some of this is attributable to the weak U.S. dollar, this impressive figure is also due to higher prices and favorable shifts in geographic niche.

This is one of the best years in memory for Jack Daniel's and a great example of what can happen when a strong investment of both dollars and time is placed behind an outstanding brand in an environment that is extremely receptive to that investment.

We can't help but be proud of the brand's performance and of the focus that has been exhibited by our employees and partners as they continue to build Jack Daniel's into one of the premier brands in the world.

No doubt, the positive trends in the U.S. spirits market are playing a big role in our overall beverage performance.

According to recent NADCA data, total spirits volume was up roughly 4% in calendar 2004, continuing the solid rate in growth experienced in 2003.

It also remains clear that premium brands are continuing to out-perform popular price brands and this premium positioning offered by spirits is one of the key reasons the consumers have been shifting some of their consumption to spirits and away from beer.

This trend toward premium brands, combined with favorable demographics, improvements in the regulatory environment and a more level, competitive playing field makes the U.S. an incredibly attractive, exciting and profitable premium spirits market.

Now turning to results for our fiscal year to date, Jack Daniel's has grown at a double-digit rate globally, with U.S. depletions of 8% and growth outside the United States a healthy 14%.

These strong international results reflect excellent year-over-year growth in the brand's priority markets like the United Kingdom, Germany, Spain, France, South Africa, and China.

We also find it encouraging that over 20% of the volume growth for Jack Daniel's on a year to date basis has come from markets outside of the brand's top 25 including markets like Mexico and Poland.

This statistic highlights the incredible breadth of the brand's appeal and illustrates why we remain so excited about its potential for future growth.

Not to be outdone, Southern Comfort has also delivered exceptional results so far this year.

Posting record volumes, margins and profits, the brand is delivering its best results in the 25 years that Brown-Forman has owned it.

On a year to date basis, global depletions are up 6% led by mid single digit growth in the United States, the UK, Australia and Germany.

In South Africa, depletions have grown by 25% providing additional evidence of why we are so pleased with the revitalized performance of this 130-year-old brand.

Southern Comfort has become a very important contributor to our current profitability and will play a big role in our future growth.

As you know, vodka continues to be one of the largest and fastest growing categories for distilled spirits.

Global depletions for Finlandia Vodka grew 14% in the quarter and on a year to date basis the brand is growing at a 7% rate.

Finlandia continues to deliver outstanding results in Poland where volumes are growing at a strong double-digit rate.

Also, the brand is up 4% year to date in the extremely competitive U.S. market.

We are encouraged by recent consumer take away reports for calendar year 2004 which show that Finlandia's growth rate all be it from a lower base, exceed that of Smirnoff, Stoli and Absolut.

In Australia our ready to drink offering, Jack Daniels and Cola passed a significant milestone in the quarter.

Through January on a rolling 12-month basis volumes exceeded 1 million cases, as the brand continues to out perform our ready to drink market there by a wide margin.

The success of this brand demonstrates both the strength of the Jack Daniels trademark and the importance of mix ability.

Our popular price Spirit and Wine Brand experienced decline during the quarter.

We are working to improve the overall performance and returns of these brands because they are very important to us, our distributors, and the consumer franchises who buy them.

Unlike the favorable environment, surrounding premium and super premium wine and spirits the prevailing dynamics of this predominantly off premise segment is fierce competition, usually based on price.

Since we have been hesitant to discount aggressively and erode our margins brands like Canadian Mist, Early Times, Fetzer, and Bolla have lost unit volume and share over time.

We remain committed to being smart about how we take these brands to market by managing the cost structures closely, and optimally balancing volume and price tradeoff, we will maximize the long-term value of these brands to our shareholders.

Shifting now to our younger developing brands we continue to be encouraged by our strong performances of Tuaca, Sonoma-Cutrer, and Woodford Reserve.

We have very high hopes for this brands and are investing behind them accordingly.

Building a spirit or wine brand, one that will endure, takes both time and patience, and we are giving just that with these developing brands.

We expect these acorn brands of today to be meaningful profit contributors in the years ahead.

Without a doubt one of the strategic topics that we spent the most time on in this last year has been distribution.

As you well know, there is an ever-changing distribution landscape around the world and we will continue to be both thoughtful and flexible market by market in developing a variety of models.

Our preference for a particular arrangement or partnership is dependent on a slew of factors such as Brown-Forman’s long-term aspirations for the market, the competitive dynamics in the market, and a stage of development of our portfolio.

It won’t surprise you that we’ve found a positive correlation between the level of direct influence we exert and our subsequent performance.

When we pair this learning with our desire to be both efficient, and flexible we device arrangements in partnerships that provide us with the appropriate access to the consumers and customers we intend to serve with our brands.

With many of our contracts in continental Europe expiring at fiscal yearend we will be making some announcements in the weeks ahead that put our distributions strategies to use in that important region.

In summary, we are very pleased with the overall performance of our beverage business.

We are particularly pleased that this progress is based on organic growth, which we believe is the healthiest growth of all and the kind that creates the most value for shareholders.

While there will always be some challenges for a multi brand portfolio, which does business all over the world we continue to believe in our brands, their organic growth potential and feel that the environment for investing behind our premium brands remains excellent.

Now let me turn the call over to Phoebe Wood who will discuss our financial performance.

Thank you Paul and good morning everyone.

This morning Brown-Forman reported diluted earnings per share of .78 cents for the third quarter of fiscal 2005, up 19% over the same period last year.

We are certainly proud of that result.

A number of items included in reported earnings for the quarter deserve further explanation.

1st, we recorded a gain of .39 cents per share from the sale of our investment in Glenmorangie PLC.

2nd, we recorded charges for asset in parents associated with our Lenox retail operation from .30 cents per share, and our minority interest in a small Mexican tequila company of .02 cents per share.

3rd, incremental pension expenses in incentive compensations related to this year’s robust beverages performance reduced quarterly earnings per share by about .05 cents.

Finally, results for the quarter benefited from a weaker US dollar, which contributed about .04 cents per share to earnings.

Adjusting our quarterly results for the items I just mentioned and several other items including the net effect of restructuring charges in the gain and the sale of a closed consumer durable distribution facility.

Our underlying growth in the 3rd quarter was closer to .05 cents per share or about 8%.

Through the first 9 months of the fiscal year, Brown-Forman earned $2.05 per share, up 25% from last years $1.54.

Similar to the quarter, there are several items that effected earnings on a year-to-date basis and it may be helpful to take you through these in order to provide a more accurate picture of our underlying year-to-date growth.

1st, the Gelmorangie gain added .38 cents to earnings per share on a year-to-date basis, .01 cent less than the quarter due to fees in the prior quarter.

Asset impairment charges reduced EPS by .32 cents, including .30 cents associated with Lenox retail and .02 cents relating to our investment in the small Mexican tequila company. 2nd, favorable foreign exchange rates contributed about .15 cents to earnings through January. 3rd, the absence of legal settlement expenses recorded in the prior year associated with the change in our distribution structure in the United Kingdom benefited this year’s comparison by .06 cents per share, adjusting for these items and several other adjustments that net to zero on a year-to-date basis.

Our growth in EPS was approximately .14 cents or 8%, the same as our underlying quarterly earnings growth.

Before our review the performance of our two business segments, I would like to discuss the press release that accompanied our earnings announcement.

This morning we announced that the company has engaged in services of both Goldman Sachs and Cavendish to assist with the exploration of the strategic alternatives for Lenox, Inc. including, among several possibilities, sales.

Lenox comprises of vast majority of assets and revenues and virtually all the profits associated with out consumer durables business segment.

Lenox has been part of the Brown-Forman family since 1983 and quite frankly has had its share of ups and downs.

A new management team is beginning to gain traction and it is developing and implementing exciting plans to improve the long-term profitability of the business, making now an ideal time to explore possible alternatives.

We believe that a new business structure including the possibility of new ownership may best allow management’s profit improvement plans to be successful and enable Lenox to strive and grow in its own right.

We believe in the value of the Lenox line of brands and we plan to pursue those options that provide the greatest value for our shareholders.

I am sure you may have questions about how the strategic evaluation process will play out.

However, we have just begun and it is too early to comment on the process or speculate on the final outcome.

Now let me turn to the performance of our 2-business segment.

Beverages.

As Paul highlighted earlier our premium spirits portfolio continues to provide exceptional results.

Earnings growth in the third quarter was driven almost entirely by the beverages segments premium global spirits brands, reflecting outstanding organic growth for Jack Daniels, Southern Comfort and Finlandia Vodka in a favorable impact of foreign exchange.

Beverages revenue was up 13% for the quarter, although the weaker dollar accounted for about 3 points of this revenue growth.

Gross profit in beverages was up 14% for the quarter and up 15% to the 1st 9 months of the fiscal year.

Favorable foreign exchange accounted for approximately 5 points of the growth to both of these areas.

Advertising expenses increased 20% during the quarter bringing year-to-date growth to 14%.

On the constant dollar basis, advertising expenses increased 13% in the quarter and are up a more modest 9% through the 1st 9 months of the year.

We expect that our full year advertising investments will be up double digits lead by healthy increases for our global spirits brand and several of our developing brands, offset slightly by reduced investments behind a few of our wine brands.

Beverages SG&A costs were up about 19% in the quarter, which represents a significant change over last year due largely to incentive compensation adjustments, relating to our robust financial performance.

As a result of these adjustments being made in the third quarter we believe it is more appropriate to exam our SG&A performance on a year-to-date basis.

Let me explain the factors behind the reported 11% year-to-date increase.

First, higher incentive compensation expense recorded through January representing a tour [ph] up of prior period estimates based on our latest improved financial outlook for the remainder of this year accounts for 2 points of this growth.

Second, higher pension expenses and the negative impact of foreign exchange counted for another 2 points of this increase.

The remaining 7% year-over-year increase represents inflationary growth, cost associated with exploring potential changes in European distribution and higher costs associated with our culturing arrangements with Bacardi in the United Kingdom.

Reported operating income grew 1% for the beverage segment in the quarter and 21% on a year-to-date basis.

Adjusting for $8 million of operating income attributable to favorable foreign exchange, $10 million of incremental performance based incentive compensation and pension expense, a $3 million impairment charge related to a small investment in Mexico, and the absence of $3 million of Glenmorangie equity income and other smaller items, beverages segment operating income grew by 8% in the quarter.

Now on a year-to-date basis beverages segment operating income was impacted by these 5 major items. 1), $29 million favorable effect from foreign exchange; 2), $14 million from the absence of both legal settlements and wine restructuring expenses in the prior year; 3), $4 million of incremental pension expenses; 4), a $3 million asset impairment charge and 5), the absence of $3 million of equity income related to our minority interest in Glenmorangie.

Adjusting for these factors and netting out smaller items beverages segment year-to-date operating income increased 10%.

Now turning to Consumer Durables segments.

Net sales for the Consumer Durables declined 4% in the quarter, as the benefit from liquidation sales related to the previously announced closing of Dansk retail outlets was insufficient to fully offset continued softness in the direct-to-consumer channel.

Although segment gross profit declined $5 million during the quarter, operating income, excluding the impairment charge, improved $4 million due to reductions in operating expenses, the absence of restructuring charges incurred in the prior year, improved profits from Hartmann, and a gain recorded on the sale of a closed distribution facility.

The $37 million goodwill impairment charge recorded in the quarter reflects our revised outlook and long-term strategy for the retail business.

Turning our attention now to our cash flow performance for the overall corporation, which has been quite exceptional through January.

Cash from operations for the 9-months ended January 31st was $343 million, up nearly $100 million compared to the same period last year.

Additionally, proceeds from the sale of our Glenmorangie PLC interest, offset by the acquisition of our remaining 20% interest in Finlandia Vodka World Wide and capitol expenditures, added to our cash balance.

During the period, we were able to reduce our short-term debt by $47 million and payed substantial dividends.

Now that we've reviewed the quarter and year-to-date performance, let's turn to our outlook for the remainder of the fiscal year.

Based on the strength of our results through the 3rd quarter, particularly for our Global Spirits Brand and the continuing favorable foreign exchange environment, we are increasing our full-year earnings outlook.

While we anticipate solid consumer demands for several of the company's beverage brands we are expecting moderate growth in EPS for the remainder of the year.

This is due to increases in advertising investments and reductions in global trade inventory levels related to both supply chain efficiency initiatives and potential distribution changes in certain markets in continental Europe, which we anticipate will reduce EPS by $.03 to $.05 in the 4th quarter.

Additionally, we intended to adopt FAS 123-R related to the expensing of stock options during the 4th quarter of this fiscal year, which will reduce full year earnings by approximately $.033 cents.

We plan to retroactively adjust our financial statements for all periods since fiscal 1997, when we began granting stock options, so this year’s full year impact will not be recorded in the 4th quarter but will spread over all 4 quarters.

Incorporating all of these factors, we are increasing our full year earnings outlook to a range of $2.47 to $2.51 per share.

Excluding the Glenmorangie gain and incurrent charges EPS are expected to be in a range of $2.41 to $2.45 reflecting growth of 16-18% for the full fiscal year.

So as we've mentioned in the last few conference calls and at every opportunity possible over the last 9-months or so Standard and Poors will adjust our indices by calculating a companies relative weighting using only the market capitalization represented by those shares that flowed freely and thus will exclude shares held by insiders.

This transition will occur in 2 stages, the 1st on March 18th and the 2nd on March 16th, 2005.

For the publicly traded company with significant family ownership we anticipate a substantial change in ownership of our Class-C shares on or around these dates and assets to the performance of Benchmark to the S&P 500 index are forced to rebalance their holdings.

We believe that this may provide investors with a very good opportunity to purchase our shares in a sizable amount, which some investors may have found difficult to accomplish in the past due to our relatively low historical daily trading volume.

That concludes our prepared remarks for the 3rd quarter.

Paul, TJ and I will now answer any questions that you may have.

[OPERATOR INSTRUCTIONS] Your first question comes from Tim Ramey of D.A. Davidson.

It appears that Christmas comes in February this year.

Thanks for all that wonderful performance.

Just a—on the—I know you're not prepared to comment very much on the strategic initiative with the table-top business, but can we assume that a spin-off is in the mix of potential outcomes?

Your press release seemed to favor the idea of a sale versus spin-off.

We are not limiting our strategic alternatives in any way, we are just going to explore those and we're going to do what we think is going to be in the best interest of our shareholders.

You did mention a couple of the wine brands would be de-emphasized in ad standing and they were some of the brands that under performed in the 3Q.

Can you talk a little bit more about the potential for a turn in the wine business, that's maybe the only piece of a very blue-sky scenario that didn't occur in the quarter?

Sure.

I –we have been favoring an allocation of our A&P toward the premium spirits brands really for the last several years and so I think the news you are referring to was just really a continuation of that.

As it relates to the performance, I think you are probably well aware, it remains really competitive in that $7.00 to $9.00 dollar segment in the United States for varietal wines and we are working on a lot of activity which potentially looks at really optimally balancing the price and volume of our leading brands which are Bolla and Fetzer and we are also looking at other ways to participate in wine in the same way that we've have done so in the most recent, say 12-18 months, with new labels and new brand introductions.

And Phoebe, There was a large, and I am not sure if this is seasonal since I'm kinda out of my office right now, but the large increase versus April 30th on accrued taxes on income, is there anything noteworthy there?

It went from $48 million to $113.

I think it is the tax associated with the gain on the sale of Glenmorangie And it's at a slightly higher tax rate than our average effective tax rate, so it looks higher than it might otherwise look.

But it's Glenmorangie related.

Thank you.

Your next question comes from Dara Mohsenian of JP Morgan.

I just want to get a little bit of clarity on what’s changed recently or what specifically the impetus was that led you to this decision to explore alternatives for Lenox at this point?

Like we said in the News Release, with the new management team that we have at Lenox they’re really making progress toward improving their performance and so with that, we think that now is an ideal time to explore alternatives so that Lenox I think can thrive and grow and attract investment in its own right.

So, I think it’s the combination of the management team there and progress that they’re making gives us, I think an ideal time.

Another thing I would add there is just if you think longer term about our company, we really – a part this is very much related to our excitement about the results, long-term results and the opportunities we see for our beverage business.

We really think that there’s tremendous continued potential for growth there and this will allow us to really, really focus on the beverage business.

Just for -- to give a measure of how this fits together. 96% of the companies operating income last fiscal year came from the beverages segment.

And so, kind of gives a perspective of how important beverages has become for Brown-Foreman and this exploring strategic alternatives gives Lenox an opportunity to attract and invest in its own rights.

And assuming you guys end up selling the Lenox business which obviously is an assumption, but I was just wondering perhaps if could review in what areas you mostly would redeploy cash proceeds is consolidation in the spirits or wine business a big focus or returning cash to shareholders a bigger priority in the end?

You know, we’re not counting on – we’re not dumping a shed and I’m certainly going to be careful not to jump ahead to any kind of a sale as any kind of pre ornate outcome of this exploratory strategic alternative.

That being said, we’re very proud of the cash that the whole company is generating and it raises a very important question about what should we be doing with the cash that Brown-Forman generates.

I think and I’ve often said, cash is a CFO’s best friend and it allows us to becoming -- to really be that grand building company and to invest behind our brand to make the kind of capital investments that we need behind them.

Once you’ve satisfied that, we have with our extra cash as we indicated we have been re-paying debt.

Beyond that you need to look at those kinds of things that are acquisitions which help us build our whole portfolio and build the future of the company and then look at those dividends and share repurchasing options which I think are also shareholder friendly.

We’re going to look at that whole array of what those opportunities are and try to pick the best things at the time that make sense for assuring a great growth of this company.

If you had to prioritize I guess maybe right now, dividend returning cash flow to shareholders through dividends or share re-purchase or acquisitions is one of a priority than the other?

You know, I think our sense is that we would prefer to continue to invest in brands.

Whether those are brands that we own or brands that we would be acquiring.

Because I think that is the future growth.

So I think that we’d do that.

That being said, we just can’t go out and ring up someone and say I’d like to buy your brands.

And then so, sometimes it becomes an issue of what might be available in the marketplace in terms of sound acquisitions because we’re careful about the acquisitions that we make and really want emphasize putting money behind our brands.

That being said, I can’t tell you know that I’m going to put acquisitions ahead of dividends or share re-purchasing, because they just simply might not be available but as a philosophy we’re going to be more oriented toward brands and building those brands.

We think that builds a long-term shareholder value.

Yeah, a real logical priority too.

Carrying on with that theme really is making Jack Daniel’s.

You have to remember that’s a use of our cash as well as we plan out into the future and forecast demands.

So, I think it’s just a really important prioritize use of our cash.

Just the wine business specifically, is it acquiring greater scale in that business at some point a priority for you guys or are you pretty comfortable with where you stand on the wine business?

As it relates to acquiring assets it wouldn’t be a priority for us right now as much as making the best use of our existing assets and I do think having an improving performance in general from a couple of our wine brands is a priority, that’s for sure.

And I think you’ll probably see us busier on new product development and new label and brand development then you will in the acquisition front in wine.

Thank you your next question comes from Graeme Eadie of Deusche Bank

Two questions, first of all in your presentation you refer to the fact that in the coming weeks that you’re likely to make some sort of announcement on the distribution on your brand – given we’ve actually got (indiscernible).

Is there any chance you could just flash out a bit in terms of what instance your thinking to actually make those changes that you’re likely to announce in the future?

My second question is that some of your European compacters have been saying that they’ve seen much higher levels of this kind of thing in the industry in the state.

Is that something you’ve experienced as well?

Sure, let me answer those with unfortunately as it relates to your question on Continental Europe distribution changes or the potential for those it’s not something we really want to comment on now and I think the comments we made in the initial script that we read are probably all we’re going to share with you today on that.

As it relates to the discounting question I think we’ve noticed it particularly on the United States front.

It’s clearly been a dynamic at the popular price level and actually I’ve been a little bit surprised particularly during the holiday period to see so much aggressive pricing and discounting from some of the premium bands.

We have not participated in it ourselves, and we noticed that in the latter 3months of the calendar year in the United States that our performance actually was improved versus some of our competitors so we really didn’t see a correlation between heavy discounting and performance.

But, clearly particularly in a lot of the chain markets in the United States we saw a lot of reports.

It makes it competitive, it makes it really seriously competitive for merchandizing but when you look at the consumer take away results on the other end of it, it didn’t seem to have a large impact on our brand.

Thank you your next question comes from Thomas Russo of Gardner, Russo and Gardner.

Hi, Phoebe and Paul having just returned from the Daytona 500 and seeing lines seven people deep at your Brown-Forman trailer purchasing paraphernalia.

I’d love to have your thoughts post-weekend of how you’ve been able to responsibility and promote position your brand on the 07 car.

There was some tremendous coverage I think both leading up to Sunday’s race and then post the race surrounding this whole topic there’s obviously been a lot of publicity around the acceptance of spirits sponsorships in general and I think some right minded people over the course of the weekend actually in the Charlotte Observer and down in the Atlanta Constitution excellent articles about our presence, particularly Jack Daniel’s and all the other spirits brands as well, and how important it is for NASCAR and I think we’ve just on the heels of last weekend are off to an extremely good start and we remain really committed to doing this just like we do with all of our marketing and promotional effort highly committed to responsibility.

But it also – the reports I got back where this is just a beautiful match for Jack Daniel’s in terms of a partnership and sponsorship and so our early read on it is that we’re very enthusiastic about this alliance.

Terrific and Phoebe what do the prospects for foreign exchange impact look like for the balance of the year and then going forward, how are you positioned for that?

Tom, I think for the balance of this fiscal year I wouldn’t anticipate any really further increase.

We’re nearly finished and we’re all locked in.

For next fiscal year we are – we put in place hedges for about 1/3 or so we’re allowing ourselves upside at this point.

If the dollar continues to weaken but I think that we are protected if the dollar strengthens unexpectedly.

So, I would say don’t expect any more FX out of these year of a material amount.

And for next year the idea would be to just sort of not have any real effect on the down side [inaudible] on the outside if the dollar weakens.

And then lastly on capital spending, what are you projects that you envisioned to this year and then for next year, any major highlighted projects?

I think we have normal maintenance capital plus we are building some more warehouses for Jack Daniels the kind of investment we like to make.

Thank you the next question comes from Bryan Spillane, Banc of America Security.

Just two questions one for you Phoebe, where there any impact in this quarter on reduction of inventory?

Were you shipping behind consumption at all this quarter?

No.

And then second, Paul, you know you have significantly increased your advertising spend this year and I am just curious to see how or where are you spending those dollars.

Is there more opportunity to spend those dollars on sort of consumer poll, television, you know and those types or promotions or are you able to use those dollars more to aggressively merchandise and do more sort of in store activity?

Bryan I think the highlights from those would be heavily skewed toward advertising and promotion that would, over at least some extended period, have the objective of increasing consumer poll.

But, if you were going to dive deeper within just a general A&P area I think you would see it in a combination of advertising, on premise investment, and sponsorships.

It would be really those 2 arenas predominantly that you see taking a disproportionate amount of incremental investment over, really over the last several years and I think with those areas tend to see the investment more towards poll type of spending versus push.

The beer companies in particular have talked about stepping up their spending on premise in the US and I am just curious if you have seen that yet and if so do you see that having an impact on your business or your efforts.

I think we have seen, I mean we have reports.

I don’t have any data or statistics to sight but we definitely heard reports of a more competitive on-premise arena.

We are not seeing it impact our trends here in the short term but any competition is simultaneously welcomed and something that you, over a long period of time, have to be willing to face.

I think their efforts are as much focused from what I can tell from where I sit on things such as new product development, as well as serious on-premise focus behind their existing brand.

So, we will see how things pan out but they are clearly trying to, I think, address all of the areas that the last couple have been discussed as short comings of beer relative to spirits and wine.

Thank you.

Your next question comes from Lauren Torres of Prudential Security.

I just had a general question regarding, you know lately we have been hearing a lot more about consolidation or potential further consolidation on the spirit side.

I was just curious to get your comments regarding how do you see your business going forward and can you go at it alone or do you need to get bigger and potentially pair up with someone, do something along those lines to be more competitive?

Lauren I think that the answer to do we need to pair up with someone or somebody in order viable in the future.

The answer to that is no.

I think the results we have reported and have been reporting the last several quarters would be evidence of just a robust environment for really good strong brands in this industry, not just the United States but we think there is tremendous potential still outside of the United States.

So, we plan to have a blend of those organic growth in portfolio development, paired with investments like we have made in the last five years for dying brands that I mentioned in my trip.

Brands like Tuaca or Sonoma-Cutrer, which we think are targeted good additions to our portfolio.

They sit well with us and we can add value.

So, that would continue to be our, sort of our program as we look out on the horizon on acquisitions and portfolio development.

On the beverage side, you mentioned part of your sales growth had to do on spirits on pricing.

How do you see that going forward?

Is it something that you can continue to be steady on or be more aggressive, less aggressive?

I think the answer is steady in the good.

On the brands that have good pricing power we tend to be moderate but consistent.

We try to reinvest behind the brands to provide value so that we can command higher prices.

We invest a lot in packaging.

I do think that over a long period of time you will see us being steady and moderate with maybe the exception of Southern Comfort, which has been a brand that we have been in sort of a more material overall price repositioning for several years.

And so we have been slightly more aggressive on that brand than the rest of the portfolio in order to position it higher in the premium segments.

Thank you.

You next question comes from Corey Horsch of Credit Suisse First Boston.

I just have a followup to Bryan’s question regarding the advertising spending.

It seems like your guidance suggests this year that advertising growth will exceed top line growth.

I am just wondering, kind of looking into the horizon what you are using as a benchmark to decide when you can start to get a little bit more operating leverage out of that line?

Well, I think that our long-term trends in these studies would indicate that our investment and operating expenses in general do not exceed our top line growth or our growth in gross profit.

We have seen moderate improvements overtime in our operating margin and we would anticipate that we would strive for that in the future.

I think that any particular quarter you can see shifts but our long-range forecast would be to try to continue to make moderate progress on the operating margin line and the margins we have are not small margins so part of the program is to continue to drive the gross profit in an efficient and effective way.

I hope that helps to answer.

We are not striving to cut back our A&P or investment in people in any serious way nor are we trying to have them far exceed our top line growth.

Is the growth in advertising kind of a allocation of taking some of the margin from your quarter brands and investing them in these developing brands or developing markets or is it incremental advertising on your core three brands?

It is really a mixture.

You would see what we would call our more cash oriented, or income oriented brands would not being prioritized for incremental investment.

And some of that we clearly are investing behind Jack Daniels, Southern Comfort, and Finlandia and then we probably, just because they are at early stages of development you would see disproportionate types of investments to try and fit behind these developmental brands.

Brands like Tuaca, Woodford Reserve, Sonoma-Cutrer, brands like that.

So, I think it is logically played out the way you asked the question actually.

Corey we are also very proud of the fact that we have tremendous consistency over the last decade or so.

At least that is what we routinely show in presentations etc.

And that is that we invest 25%, 26-27% of our gross profit in A&P.

We reinvest that behind our brands year after year and I think that is a hallmark of a great brand building company and it provides the kind of consistency.

Now how we spend that money becomes the strategic issues that Paul is addressing.

But in terms of financial performance we just do that consistently year over year.

[OPERATOR INSTRUCTIONS] Your next question is a followup question from Tim Ramey of D.A.

Davidson and company.

I wonder if you would give us a little bit of your views on the outlook for ’05 industry growth particularly if it might relate to changes in the regulatory environment?

Do you expect this 4% rate of growth for the category to continue to strong, to accelerate, any thoughts there?

I assume you are referring to US environment.

And I think the US split into spirits and wine.

I think the US spirits are at 7consecutive years of organic volume growth, this last year being consistent with the year before in about the 4% range.

Earlier in the year, it was actually running at a 12-month basis up above 5 closer to 5.5%.

I think it is good evidence to suggest whether it is the demographics, the offerings of spirits and the investments behind spirit brands that say that that organic growth level is perhaps sustainable.

I think it is going to be competitive.

There is no doubt that a lot of people will be trying to get their fair share and more of that growth.

I think it is something we are clearly forecasting.

We don’t think it is going to jump up high above that – that 4% range.

It is really a good time in the spirit side in the US to have that kind of momentum.

The wine business is showing equally good consumption increases although they have much more different dynamics in that category.

As far as we are looking ahead, I am just going to speak for the remainder of ’05 and into’06, but it is going to continue as was played out in calendar year of ’04.

At this time, there are no further questions.

That concludes our conference call, thank you very much, and we will talk to you again soon.

Thank you.

This concludes today’s conference you may now disconnect.