Brown-Forman Corp (BF.B) 2006 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Brown-Forman first-quarter fiscal 2006 conference call.

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

After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

Thank you.

Mr. Graven, you may begin your conference.

Good morning, everyone.

Thank you for joining us for our fiscal 2006 first-quarter conference call.

I'm T.J.

Graven, the Director of Investor Relations for Brown-Forman Corporation, and I'm pleased be joined today by Paul Varga, our President and new Chief Executive Officer, and by Phoebe Wood, Executive Vice President and Chief Financial Officer.

This morning Paul will begin our call with a discussion of the performance of our brands and trends in the beverage alcohol industry.

Phoebe will follow with a review of the Company's financial results in the first quarter and some discussion on 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 whether due to new information, future events or otherwise.

Earlier this morning we issued a press release announcing our first-quarter results.

The release is available on our website at www.brown-formman.com under the section titled "Investor Information".

We have listed on page 4 of the press release a number of the risk factors that you should consider in conjunction with our forward-looking statements.

Other significant risk factors are described in our Form 10-K, Form 8-K and Form 10-Q reports filed with the SEC.

During this call we will also be discussing certain non-GAAP financial measures.

These measures, the 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 results of operations are contained in the press release.

With that I'll turn the call over to Paul Varga.

Thanks, T.J., and good morning, everyone.

It's a pleasure to be with you here today.

Before Phoebe reviews the financial details of our first-quarter performance, I'm going to highlight a few of the trends we're seeing in our business.

One quick note, however; we recognize that since our last conference call we have had lots of news including the June announcement by Constellation Brands that our consortium would not pursue an offer for Allied Domecq; our agreement with LVMH regarding the distribution rights for Glenmorangie; and our plans to sell substantially all of the assets of Lenox Inc. to Department56 for $190 million.

Since we issued individual press releases on each of these and touched on some of this at our recent annual shareholders meeting, we will talk only briefly about these in our formal comments this morning.

If you have any questions about them, however, we will be happy to entertain those during the Q&A portion.

Let me start by sharing with you that our most important brand, Jack Daniel's, has surpassed another notable milestone for the 12 months ended July 31st.

The brand now exceeds 8 million cases globally, ranking it as the fourth largest premium distilled spirits brand in the world.

Making this volumetric milestone even more noteworthy is the fact that amongst the top 15 premium spirits brands in the world Jack Daniels is the most premium priced with an approximate 30% premium to the average of the other brands.

And Jack Daniel's recent 12-month growth rate is approximately double that of these other leading brands.

Jack Daniel's is off to an excellent start this fiscal year with volumes and pricing improving nicely during the first three months.

Depletions increased at double-digit rates globally led by a very strong quarter in the United States.

International growth was in the high single digits with robust growth coming from Australia, France, South Africa and China.

While we are obviously pleased and encouraged by the Jack Daniel's performance, this brand's strength and top prioritization at our Company can sometimes overshadow the otherwise excellent progress on Southern Comfort and Finlandia, our other large and growing premium brands.

Southern Comfort in particular can get overlooked a little in discussions about the world's leading brands.

Since the late 1990s we have worked hard to improve the size, profitability and health of the Southern Comfort brand and that extra attention is paying off for us today.

Sold in over 90 countries around the world with its strongest development in the U.S., U.K., Australia, Canada, Germany and South Africa the brand ranks in the top 40 of premium distilled spirits worldwide.

We have been encouraged by a slight acceleration of the brand's volume trends over the last 12 months and, when combined with the brand's upward price repositioning in the U.S., Southern Comfort has produced uninterrupted double-digit increases in sales revenues on a rolling 12-month basis for the last three years.

For the first quarter Southern Comfort continued this positive trend with global volumes increasing in the mid single digits with particular strength in its number one market, the United States.

Finlandia was also very strong in the first quarter.

Volumes were up sharply in two of the brand's key markets, Poland and Puerto Rico.

While depletions were somewhat soft in the U.S. market we continue to being encouraged by consumer and trade response to the brand's repositioning and to our most recent flavor extensions, Finlandia Mango and Finlandia Wildberry.

Shifting to one of our midprice wine brands, volume trends for Fetzer improved during the quarter as our work to adjust the price position for this brand has begun to show favorable volume results.

Also, recent consumer takeaway trends for Fetzer are now showing growth as a result of better trade and retail support.

The brand has begun the important process of rebuilding market share and trade confidence.

Turning now to the environment for our brands, let me start with the overall distilled spirits trends in the U.S. which remain healthy according to the most recent consumer takeaway data from NABCA.

On a rolling 12-month basis volume for total distilled spirits in the U.S. control states grew approximately 2.9%.

While this is the first time in the last two years that the rolling 12-month growth rate has been below 3%, premium brands continue to grow at a rate significantly faster than the overall trend.

In the United Kingdom, the largest market for our brands outside of the U.S., business is understandably slow since the tragic events in London during July.

Tourism and general bar and restaurant traffic in central London were down in July and, while our quarterly results reflect only a few weeks of the downturn, we are cautious about our full-year outlook for our business in this key country.

A large percentage of our U.K. business is within the greater London area of both Jack Daniel's and Southern Comfort have a significant bias toward on premise consumption, the channel that has been most disrupted by the terrorist activity.

We continued also to transition to new distribution arrangements and partnerships in several key markets around the world.

In Germany, our long-standing relationship with Bacardi continues, although under a new arrangement which includes a stronger Brown-Forman presence and involvement in the marketing and selling of our brand.

In Spain and Italy we have assigned the distribution of our brands to new partners and, as you might expect, are working through typical business and inventory transition issues that occur when making these types of changes.

Despite this short-term disruption we have high hopes for our brands in these countries and remain committed to our new partners that they will play a key role in helping our brands reach their full potential.

We also anticipate that there could be more changes ahead as a result of the Pernod Ricard acquisition of Allied Domecq.

We have distribution relationships with Allied in several markets around the world, most notably down in Australia with our Swift & Moore operation.

We are currently evaluating our options in the effective market but are confident that we will select viable route to market alternatives that enable us to continue our focused brand building.

We are off to a great start to our fiscal year, so let me turn the call over to Phoebe who will provide more detail on our quarterly results and the outlook for the balance of the year.

Thank you, Paul.

Good morning, everyone.

It is a pleasure to be here to discuss our results for the first quarter of our fiscal 2006 which ended on July 31st.

Let me start by taking a minute to explain the format of our financial statement following our July 21st announcement that we agreed to sell essentially all the assets and liabilities of Lenox Inc. to Department56 Inc. for $190 million.

You will notice we have segregated our results into two sections -- one, continuing operations; and two, discontinued operations.

The section continuing operations includes results from both our beverages segment and Hartmann Luggage, thus discontinued operations consists of our entire Lenox business including the operations of Brooks & Bentley, which is a small subsidiary of Lenox located in the U.K., and the Lenox headquarters property and building located in Lawrenceville, NJ, neither of which are included in the Department56 transaction and both of which we expect to sell at a later date.

Our focus for the large majority of this call will be on the performance of continuing operations.

However, before explaining some the details of the quarter, let me bring you up-to-date on the transaction with Department56.

I am pleased to announce that the transaction has received regulatory clearance and we are on track to close within the next couple of weeks.

The team at Lenox has worked very hard to improve their business over the last several years and we believe Department56 is well positioned to grow the outstanding Lenox portfolio.

We take satisfaction from the fact that these brands, historically significant in the table top industry, should thrive in the hands of a new, more focused owner.

Now turning our attention to the performance of our continuing operations.

This morning we reported diluted earnings per share from continuing operations of $0.71, up 46% compared to the $0.49 earned in the first quarter of last fiscal year.

First quarter results were boosted by an increase in net global trade inventories which contributed approximately $0.10 of the growth in earnings per share.

We believe it is appropriate to adjust reported results for this change in trade inventory levels to really understand the underlying growth of our business and here's why.

When we refer to trade inventory levels we are referring to inventory levels held by wholesalers, distributors and importers -- Brown-Forman's immediate customers.

We book revenue when we ship to these customers, but we watch depletions carefully.

Depletions represent the movement of inventory from wholesalers to retailers and are commonly used as an approximation of consumer demand.

So at the end of the first quarter this year our distributor inventory levels were up compared to the same period last year; meaning we shipped more product, mostly Jack Daniel's and Southern Comfort, in both the U.S. and continental Europe than was depleted.

To compound the fact that shipments exceeded depletions for our major brands in the first quarter of this year, note that in last year's first quarter depletions exceeded shipments.

Thus, the $0.10 per share adjustment to reported results is calculated by comparing the difference between shipments and depletions this year to the variance between shipments and depletions last year.

Trade inventory levels are influenced by many factors, some of which we influence and some of which, quite frankly, we don't.

Individual distributors have their own outlook for our brands' future performance, their own unique buying patterns and they respond differently to the timing of promotional activities and scheduled price increases.

We believe the increase in inventory levels for the quarter is timing related only and by year end our overall ongoing supply chain optimization efforts, working with our distributor partners, will result in lower trade inventories which is our plan.

Results in the quarter also benefited by $0.07 per share as a result of consideration received from Louis Vuitton Moet Hennessy relating to the termination of our distribution and marketing rights for the Glenmorangie family of single malt Scotch brands.

Recall that LVMH purchased all the outstanding shares of Glenmorangie PLC last fiscal year including the minority interest owned by Brown-Forman, and it was expected that they would seek to consolidate these brands into their own distribution system.

Finally, last year's first quarter results benefited from profits associated with the initial pipeline fill of new wine brands which has not repeated this year.

Adjusting our results for these items, earnings per share from continuing operations grew approximately 19% over the prior year period which is very strong.

The underlying favorable business trends we experienced throughout fiscal 2005 continued in this quarter with solid volume and margin improvement coming from our global premium spirits portfolio led by Jack Daniel's Tennessee whiskey, Southern Comfort and Finlandia vodka.

Now let's review in more detail the financial metrics for the quarter.

On the heels of exceptionally strong sales growth in fiscal 2005 revenue growth accelerated in the first quarter of fiscal 2006 increasing 14% over the same period last year.

Revenue growth was strong across most of the beverage's portfolio with revenues from our midpriced wine and spirits brands growing 7%, premium global bland brands up 22% and our superpremium developing brand portfolio growing revenues 24% over the same prior year period.

I'd like to highlight some of the major drivers of this 14% growth in sales.

First, increased global trade inventories contributed approximately 5 percentage points of this growth.

Second, the absence of the benefit from the wine brands that were introduced in the prior year period reduced this growth by 3 percentage points.

After adjusting for these two factors, the underlying revenue growth of our continuing operations for the first quarter of fiscal 2006 was approximately 12%.

Now let's look to gross profit from continuing operations which grew 20% for the quarter.

This increase was driven largely by organic volume growth and margin enhancement from our premium global brands.

The same factors that boosted revenues also positively affected our gross profit.

Stripping out the impact of higher trade inventory levels, which contributed 8 percentage points of the growth, and adding back the impact of profits associated with the new product introductions in the prior year, which accounted for 4 percentage points, gross profit grew approximately 16% over the same prior year period.

The gross margin for continuing operations improved from 52.6% to 55.3% reflecting price increases on selected brands, favorable brand mix shift and the continuing benefits from our important focus on allocating resources to the most profitable brands, markets and sizes.

In addition, the absence of the new wine brands introduced last year at a relatively lower gross profit margin also contributed to this year-over-year margin improvement.

Again this quarter we continued our history of reinvesting behind our brands which we believe will contribute to future growth in volume and profits.

Advertising expenses were up about 17% for the quarter.

We made significant incremental investments behind Jack Daniel's, Finlandia vodka and Southern Comfort.

We continue to see a number of good investment opportunities for our brands; opportunities that we think will help us take advantage of the continuing robust market for premium spirits.

SG&A expenses from continuing operations were up $14 million or 14% over the prior year period.

Banking, legal and consulting fees related to our consideration of tendering a bid for Allied Domecq, higher pension costs and expenses associated with new distribution agreements in Europe all contributed to the year-over-year increase.

Excluding these items SG&A expenses increased approximately 8%.

Pulling this all together, first-quarter operating income from continuing operations grew $38 million or about 40%.

Adjusting this by roughly $19 million associated with increased trade inventory levels, $13 million for the buyout of Glenmorangie marketing and distribution rights, and approximately $7 million for the absence of prior year profits from new products, operating income from continuing operations grew about $13 million or 14%, a very strong and particularly encouraging start to the new fiscal year.

Turning now to discontinued operations.

As I mentioned earlier on the call, results from discontinued operations include the operations of Lenox Inc.

Results from discontinued operations for the period include an impairment charge and advisory fees related to the impending sale of approximately $0.32 per share.

Excluding these items the operating loss from continued operations approximated the $0.07 per share loss posted in the same prior year period.

A couple of comments on the balance sheet and the changes in cash flow for the quarter.

Free cash flow from continuing operations was approximately $43 million, down $29 million compared to the first quarter of fiscal 2005 largely as a result of growth in working capital due to the strength of our underlying business.

For all of fiscal 2006 we expect capital expenditures to be in the range of $60 to $70 million.

And now on to the outlook for the remainder of fiscal 2006.

First-quarter results were excellent and business trends remain healthy for our beverage portfolio globally.

We are optimistic regarding our outlook for the remainder of the year.

However, we should note that we are closely monitoring several items which could have the potential to temper our optimism.

These include any lower consumer confidence or purchasing associated with either rising oil prices or future terrorist activity; two, any negative profit implications associated with the strengthening U.S. dollar; and three, any impact from recent trends indicating a slight reduction in the growth rate of distilled spirits in the U.S. market which is a key market for us.

For the full fiscal year we continue to expect earnings in the range of $2.70 to $2.80 per share from continuing operations.

This guidance reflects the removal of Lenox's full year profit contribution offset by consideration received for the buyout of marketing and distribution rights for the Glenmorangie family of brands.

One final note.

As many of you are already aware, the second and final phase of the adjustment of the S&P 500 index will occur on Friday, September 16th.

Based on our experience with the first phase of this adjustment back in March, trading volumes for our shares could be very heavy that day and may provide an opportunity for investors to purchase larger blocks of shares than are normally available given our typical trading volume.

That concludes our prepared remarks this morning.

Now Paul, T.J. and I will answer the questions you have.

(OPERATOR INSTRUCTIONS).

Dara Mohsenian, JP Morgan.

Could you review your priorities for free cash flow post the Lenox sale and specifically I'm wondering about the likelihood of returning cash to shareholders?

I'll be happy to take that one.

The priorities that we have for using our cash really haven't changed over time.

And first of all, the first and most important thing we do is we look to reinvest in our business importantly behind all our distinct brands whether that's new warehouses for Jack Daniel's, increased advertising spend.

We also have the possibility there of looking in to acquire new brands.

So acquisitions will factor in there.

We're also mindful of the debt we have on our balance sheet.

We took that debt on in conjunction with our share repurchase a couple of years ago and so we have one piece of that $250 million which we will be repaying next year in 2007 -- excuse me, 2006.

And finally, we do have a history of returning cash to shareholders.

We are very focused on that and sometimes that takes the form of dividends and sometimes that takes the form of share repurchases.

So I think just to think about it that way, those will continue to be our priorities in terms of the use of cash.

Okay.

And is there anything specific that would prevent you guys from pursuing a Dutch auction?

I mean from my perspective at least given low interest rates and low debt leverage it would seem like a good time for that.

Is it just a matter if you guys determining your cash flow priorities or is there anything that would prevent you from that?

I think there's a -- we'll be thoughtful about whether or not we would use that technique or any other technique as a way to return cash to shareholders.

I think it's one of several that we would consider from time to time as a very effective way for us to return cash.

But the priority right now, honestly we have really stepped up our investment in making Jack Daniel's really within the primary new investments that we've seen over the last two to three years.

And so I think that will take priority.

But then as you outlined it, it's just looking at your cash flow priorities in the most responsible way.

Okay.

And can you quantify the advisory fees that were embedded in the continuing operations in the quarter?

I don't know that we can.

Is it a significant amount?

No.

On a relative basis I think it is -- would be considered modest.

It just reflects the fact that we use other people and we just book so that there would be a couple million.

And what it did was -- I think more than anything it helped for us to look closely at the organic year-on-year growth in SG&A by backing that out so that's why we shared it with you.

Okay.

And the full-year guidance of $2.70 to $2.80, that is based on a $0.71 earnings result this quarter?

Is that correct or is anything stripped out of that result this quarter?

That's correct.

Based on that.

Okay.

Thank you very much.

Tim Ramey, D.A. Davidson.

Just a follow-on to that last question.

I thought I heard you say earlier that you were taking the Glenmorangie gain out of that 2.70 to 2.80.

But if not then that's actually a reduction in guidance, is it not?

What we have in the 2.70 to 2.80 -- what I said just to repeat it -- we removed Lenox's full year profit contribution which occurred in the last fiscal year and that is essentially offset by the consideration that we received for the buyout of the Glenmorangie distribution contract.

So those essentially are offsetting.

So thank you for helping us make that clarification.

So the $2.70 to $2.80 guidance includes that Glenmorangie receipt of payment, but it does not -- it no longer includes Lenox's full year profit.

Just their first-quarter loss.

Okay.

In thinking about the assets held for disposition, it looked like there was about $60 million of incremental assets that you cited to be the Company headquarters in this business in the U.K.

Is that their book value or your expected realization?

Tim, I have to ask you to repeat the question.

Okay.

There are two pieces that we are putting in discontinued operations, the building headquarters in Lawrenceville, New Jersey and then there's a small subsidiary in the U.K. called Brooks & Bentley.

Both of those we intend to sell so they are reflected in our discontinued operations.

Understood.

And the net discontinued operations asset on your balance sheet today is 240 million which is 60 million above what Department56 is supposed to be paying you.

Shall I think of that $60 million as the book value or the expected value of those assets yet to be sold?

Tim, I think you're looking at the -- I guess 239 was the end of the fiscal year; the next column is 210 which gives you another number.

So maybe you were looking at the wrong number there in terms of our -- the net assets from --.

Okay.

Well, maybe we'll take care of that offline.

And if you could repeat, Phoebe, you were sort of quiet in a certain area, but you were talking about the revenue growth of premium global brands.

Can you talk about what you're including in premium versus superpremium?

I assume that that's Jack Daniel's, Southern Comfort and Finlandia and that superpremium would be things like the Woodford Reserve and so on.

We've used the same definition that we used in our annual report and we're just trying different segments of brands.

And so the complete portfolio in each one of those is the same we used in our annual report.

And, Tim, when we refer to industry statistics and groupings I can understand why you asked the question.

Because sometimes those definitions, like for example if you use impact classifications it would include basically everything basically at the Bacardi price level and above in premium.

So you'll see it in a variety of ways addressed that way.

I think a good way to think about it is on premise versus off premise is sometimes the way I think about it as it relates to premium versus more standard price.

And Tim, we'll come offline and answer your other question about the book.

I think you just picked up a number that is not recognizable to us.

Sounds good.

Thanks.

Ann Gurkin, Davenport.

I just wanted to start with Jack Daniel's in the U.S.

Can you talk about the pricing outlook for your brand as well as what's going on in terms of the competitive landscape?

Really no change for us as it relates to pricing, experience or outlook.

Sometimes the only thing that sometimes changes is actual month of implementation.

So you will see shipped sometime depending upon individual market dynamics of somebody taking a price increase a couple months earlier or later.

But in general, in terms of amount and general pricing plan, it's business as usual for Jack Daniel's.

We always look at it though -- I'll just remind everybody -- very closely, side by side, market by market to make the right determination.

As it relates to the rest of the industry, we have not picked up anything that would tell us that the historical practices of pricing would have changed.

I think that a strong on premise business versus times where it's not as strong I think always encourages a little more pricing activity and I think we've had a pretty robust U.S. on premise environment for the last three or four years.

So those are the comments I think that are most applicable to us.

The one I would say for our company is different than the industry performance on pricing relates to Southern Comfort where we have been averaging greater than the norm price increases because we have a long-term price repositioning underway -- been at it for several years now and continue to pursue that.

Okay.

Then switching to Finlandia.

You talked about increasing the support behind the brand, yet I guess the quarter you said there was soft growth.

Can you just reconcile a little bit what's going on there?

I assume you're talking about the United States.

In the U.S., yes, excuse me.

I think last year some of the things that were occurring last year was we had a pretty successful launch last year of Finlandia Mango as it got into distribution and they're always filling up the pipeline.

And we're continuing to introduce new flavors this year.

We've introduced Finlandia Wildberry.

But Finlandia Mango was very well-received last year and in some ways you're working against that.

The other thing was we were in a full rollout of our new package a year ago so there was a lot of changing out old bottles and bringing in new so it does influence your depletion trend somewhat.

But I think all in all we're pretty pleased with the repositioning of Finlandia in the U.S. and we're very excited about what's going on with it outside the United States in key markets like Poland.

So do you think you'll get depreciable growth in the U.S. this year?

Oh, yes.

We're planning on it for the year.

And the underlying consumer takeaway trends on Finlandia are much better than the depletion trends for the quarter and the 12-month trends on Finlandia are better than the three-month trends.

So we think it's more of an exception than the rule for the brand.

Okay.

And then, Phoebe, I was wondering if you'd comment on what you've built in for currency for the year?

Yes.

Just to give you a little perspective on the foreign exchange, we're 70% to 90% hedged for the remainder of the fiscal year on our three major currencies and the strategy that we have employed is to hedge at or near sort of 2005 rates so that it just sort of covers some potential downside.

Now, we're not completely hedged and you know the positions change, so I mention it as a potential downside but we're pretty well covered.

But it could be as much as maybe $0.05 downside that I would see in foreign exchange but we're pretty well covered.

And it continues to be primarily the pound.

It's mostly -- the pound is our greatest exposure by now.

For example, in the euro we have -- we purchase more now in euro denominated so it offsets some of the income and revenue that we receive -- revenue to be specific -- the revenue that we received is euro denominated.

That's great.

Thank you.

Thomas Russo, Gardner Russo.

A couple of questions today.

Update if you would the progress on NASCAR and then progress on emerging markets of particularly China.

Sure.

First on NASCAR, we continue to be in our first year.

We really began this thing in earnest with the rollout last February and we continue to have an extremely strong and visible presence at NASCAR events.

You've got to remember, for many of our -- we've been more focused on the execution stage and what we call the -- really the activation of it -- turning it into local marketing events.

And so for a number of our people who are responsible for that, many of them are still experiencing NASCAR for the first time as they make the stop in the local city.

So I think there's still a lot of newness, although as an overall exercise I think we've really been pleased with the execution that has occurred against it.

And I know you've been to one or two of these and we just think it's a perfect lifestyle affiliation.

The brand is getting the exposure that we like, it gets added television exposure.

And so all in all we think as a marketing investment benefit for the brand it is an excellent program.

I do think as it relates to the emerging market question, we continue to be really enthused about what's going on over in China, but specifically you mentioned where the brand is on a roll.

And we're getting out to more and more cities.

And the place is so large that the original base of business that we built there was so concentrated in the major cities that we're picking it off basically city by city and account by account because you have to really target the Western style accounts in the way that we have and I think that's been maybe the key to our success out there.

But it's not just China.

We think in places such as Eastern Europe and other places in Asia as well where we're doing sort of foundational brand building work, we're really enthused about the reception we're getting to Jack Daniel's, we really are.

Thank you.

Let's see, Phoebe, the excise taxes seem to have gone up fairly considerably from 82 to 97.

Is it mix?

What causes that rate?

Tom, I think it is not rate as much as it is just more sales in the U.S.

I think if you look at it that way it's mix.

If you think about it it's just mix and -- geographic and brand mix because we tend to -- we're getting more premiums in our portfolio sales.

And U.S. growth has been excellent.

So it would be in some measure a reflection of the growth in the U.S. share of the business and that in the U.S. growth from the high end of the U.S. business.

Tom, also the shift from wine brand to spirit brand (multiple speakers).

Well said.

Then lastly, in the trade inventory shipments that we talked about, when you also then described how revenue was lifted 7%, 22% and 24% by midprice premium and superpremium, how does that also track what was going into trade inventories versus selling through?

How do those three categories lineup against the phenomenon of shipping to trade.

We don't have those numbers broken out for you.

Those numbers all read like the reported top-line 14% growth.

And so therefore they reflect that.

It is I think quite difficult for us to segregate and burst all that out.

Tom, I would add that directly in terms of not the numbers but the differences between them, they would be directionally correct even down at the consumer takeaway level.

Even if we're more robust with the actual shipments during the quarter to those individual segments, if you were to study closely the takeaway at each of those levels, those gaps between the three classes would still exist and we're seeing -- I'll just give you general comments -- something like flatness to maybe slight gains in the midprice brands and then when you look at the -- some of the more globally sold brands we're seeing mid to high single digit type performances.

And then when you get into the developing brands, ones that are newer at their stage of development, you almost across the board see double-digit consumer takeaway.

So I think they are indicative of differences in performance if not 100% specifically accurate and a predictor of consumer takeaway.

Thank you, Paul.

Thanks, Tom, for your questions.

Graeme Eadie, Deutsche Bank.

Hi, guys.

A couple of quick questions for Phoebe, if I may.

If you go back to the very helpful breakdown of the growth in the first quarter you said on an underlying basis sales were up 12% having made adjustments and net profits up 14%.

How would those figures look after adjusting for what must presumably have been some four ex benefits in those numbers?

And the second question goes back to the balance sheet.

I mean certainly my numbers -- next year you're not going to have any debt as things are going at the moment which is clearly suboptimal.

What would you regard as being an optimal balance sheet for something like Brown-Forman?

Graeme, your two questions, the first has to do with the impact of foreign exchange.

In the first quarter net of hedges we have no material impact.

Great.

Thanks.

So that helps you there and I think we've disclosed for the balance of the year what upside/downside -- what downside might be.

Sure.

With regard to optimal balance sheet.

Brown-Forman is a very healthy business and it generates a lot of cash and we have another -- we have the ability in our balance sheet to borrow to raise additional cash for things that we'd like to do.

And so I'd think about in terms of what we want to do with our cash not necessarily as what is an optimal balance sheet.

So it kind of goes back to the question I think that Dara was raising which is what are we going to do with the cash and what investment opportunities are there?

For example, if you think of acquisition opportunities, just take that one, we're certainly prepared to raise lots of cash using our very strong financial position to put us in a position to buy the kind of brands that we think will fuel our growth well into the future.

So we see our balance sheet as being a real asset for us that we can use our strong financial position clearly as an asset for us.

And I think we can also use it as we did a couple of years ago, to recapitalize and return equity to shareholders and take on additional debt in a kind of recapitalization.

I think we will always be cognizant -- certainly I will be cognizant of the relative cost of getting equity and how we want to position it that way.

So we have typically borrowed based on events and needs, not because we think that we should have a 20% debt in our capital structure or 40% or whatever.

We've not picked that number.

We've said what is it that we really need to have?

So it's been event driven more generally and those event have been based on how can we do the very best thing for the shareholders be it investment in the business, acquisitions, share repurchases, etc.

Does that help?

It does.

I guess what you're saying is that we just really have to be patient and wait and see what happens.

It that probably fair?

I think that's right.

Let me add to that.

We don't just wait for someone to come knock on our door either when there's -- we're not totally opportunistic about it.

So strategic capital planning, looking ahead, we're well aware of when our debt levels will be zero and so we start to think about it well in advance and look at all the alternatives and the context and the environment and all sorts of other things that can influence what the best decisions are what the best uses of cash are.

So we're alert to it.

Okay, thanks very much.

Bryan Spillane, Banc of America.

A couple questions.

First, I don't know if you gave this.

Did you give a total depletions number for the Company for the quarter?

No, we did not.

We gave a sales that would be a blend of pricing and volume that was 14%, but it's 12% organic.

Okay.

And FX was neutral and I'm assuming there was some pricing in that number?

Yes, in mix too.

Remember, you get brand mix, geographic mix and volumes were good.

They were healthy for the quarter.

So depletions were up a probably mid single digits for the whole Company, is that fair to say?

I'm trying to bid (ph) my head with the averages for the individual brands.

I mean it's probably a safe statement about them.

And then just U.S. versus international depletion growth, any color you can give there.

Both are running at a continuation of last year which both are doing very well.

If you look at depletions you've got to remember you're going to see a lot of noise in the international numbers as it relates to distribution changes.

So that's why we go a little deeper and start to look at consumer take away and Nielsen and things like that.

But for the brands that I think that you all follow and study the most closely -- I mean Jack Daniel's has been in that high single digit range both -- in almost all parts of the world when you start to look at it on longer periods of time.

Southern Comfort has picked up, as I had said, and is sort of in the mid single digits and Finlandia is up in those high single digits as well on a worldwide basis.

So I think those being the priority global brands that's about how we would estimate them for now.

And then, Paul, if you can talk a little bit about -- I guess with Allied now having gone to Pernod and Fortune brands gaining a platform, a distribution platform and especially in Spain is where I'm most interested.

Can you talk a little bit about does that change at all your strategy in Europe?

And if you can talk a little bit more specifically about where you stand in Spain today and what your plans are to build out in that market.

Sure.

The most important thing about Spain for us is we just changed partners there.

This is one the markets we referenced where we switched to a partner there, VIESA, who we're very excited about being in partnership with.

And we think together we can build Jack Daniel's to -- it's just an exceptional whiskey market and we have long felt, even though we've had good progress there, that Jack Daniel's can get quite a bit larger there.

And the other thing that's so attractive about it as a whiskey market is that whiskey in that market, including Scotch whiskey, is mixed -- is the predominant form of consumption typically with Coca-Cola.

So we think there's just great opportunity in Spain and, like I said, we've been making progress, we just think this can take us to the next level.

And so our investment posture as it relates to resources on the ground and in A&P reflects that and so we're excited about it.

Now, there are things to consider about Spain.

One is one competitor went away, Allied Domecq, and an existing player there, Pernod, got stronger as did Fortune becomes a stronger player.

So net/net in the marketplace it's still the brands that you're competing against and, yes, there are different distribution houses and different players, but they're going through us and expect some of the same disruption in transition that we are -- but everybody is when you make an acquisition or change over the distribution platform.

So I think the near-term stuff -- there's just a lot of noise in it.

Longer-term, I think the key is for us to pick the right partner that enables us to do what we do best which is focused brand building and make sure we're continuing to be steady in our investments, both people and dollars behind the brands we're focusing on, and that has really served us well both in Europe where the environment hasn't always been conducive as it has been in some other places and it's particularly -- serves us particularly well with the environments really receptive to it.

And if I could just ask a question about the wine business.

You've begun to see a good turnaround there and I guess my impression had been that the appetite for having a larger wine business wasn't really there in recent years and any change in your view in that business at all over the last year or so and do you think there are more opportunities to grow that business?

Sure.

We always like to have a larger wine business.

We'd like to do that through growing the top line just like anyone's intent would be in that.

But I think you almost have to look at it brand by brand.

There are certain price segments, particularly in the U.S. market, that are just very competitive and our actions in the price/volume trade-off gain with brands like Fetzer and Bolla reflect how competitive it is.

So part of it is if you're going to market in those segments you sure want to bring strong brands, brands that have equity and frankly we're very pleased to have Fetzer and Bolla to go to market with us.

I think we are happy that the price repositionings we've made are producing results.

They don't always do that and so we're really pleased that we're actually getting some of these new results and we're constantly working on those elements in that business that can add value that are different than adding value on Jack Daniel's, things such as packaging or product formulation.

So we're constantly working on it.

And then we also shouldn't lose -- we're really optimistic about the future for brands like Sonoma-Cutrer which have extremely good per case profitability and are really I think worth the time for the right sort of expansion and growth and we've seen really nice progress on that brand in the last couple of years and have high hopes for it in the future.

And when I think about we have a more limited portfolio than many of the other wine players, that the brands we bring to market and focus on all have -- for their segments tend to have leadership type positions.

So when you pick your spots, as the way we are in wine, we think it's important to do it right.

You have to manage the business well just like you do on spirits.

And then critical to this business, because on many of the brands the margins aren't as strong, is just really you have to watch the cost.

And so we've been really working hard at that the last couple of years as well.

Would you envision making any acquisitions in wine?

It would have to be the right time.

It hasn't been the priority of our focus as much as premium spirits brands have been.

But of our last three acquisitions one of them was a wine brand, that was Sonoma-Cutrer.

So it was a high-end brand that we thought would do well in our hands.

But I think if they fit a number of the objectives we've had, which is like strong asset utilization or had great gross margin or fit some things that we could do really well and add value to, we would remain open to it.

But the priority of most of our acquisition focus the last several years, and continues to be today, more in the premium spirit brand.

Okay, great.

Thanks, guys.

Corey Horsch, Credit Suisse First Boston.

Just a couple quick accounting questions and then one larger question on the accounting side.

I just wanted to make sure that both the reported numbers and the prior year without Lenox are -- include options expense.

And then I was curious whether the advertising expense line was sales curve accounting where the 17% growth was partly due to the step up in trade inventories?

Or that was underlying organic advertising expenditures?

Corey, let me take that second one first.

The 17% increase in advertising and promotion, that is not related to inventory.

That's not related to that.

So that's just an increase that we're putting behind our brand.

With regard to the options and stock options, we adopted that last year and so it is -- reflects all of the -- when you look at fiscal '05 which is when we completed in there, when we completed fiscal '06 it is just going forward.

So we adopted it in the fourth quarter of last year but we have restated it for the full year of fiscal '05 so that the numbers should be comparable in both the numbers.

Great.

Thanks, guys, that's helpful.

And then second question, just to follow-up on one of Bryan's inquiries, just kind of the consolidation of the spirits suppliers, focusing on the U.S.

I know it's early, but any anticipated change to how you approach the market particularly as some of the kind of more traditional large retailers focus on the spirits category and arguably larger portfolios mean increased bargaining power with those retailers?

Actually that's been a long-running trend and I think consolidation helps to bring that to like periodically.

Most of the work and thinking we've been doing as it relates to coaching the United States market is considerate of all that but is really more about just us becoming ever better brand builders in the United States and how we take what is a unique situation for our Company, it being the largest market, but also the market where we have the most brands in our portfolio.

So for us we think about route to market in the United States more about how to get the right attention behind all of the brands that we want to see realize their full potential.

And so we work on it from that lens (ph) probably predominantly with an open eye to the environment around us.

And it's not just the key retail chains focusing more on spirits and selecting category captains and things like that.

It's also there's a lot of consolidation and changes that continually go on at the distribution tier in the U.S. market that you need to remain alert to.

But I actually think our size in the United States is actually a very good size because we're important enough to be important to just about anyone, but also of the size that we can stay focused on individual brand building activity.

So in using that as an asset not a liability we try to craft individual strategies that can help us leverage that.

Do you think kind of down the road that it will be important or -- and a strategic advantage to have influence in both key spirits brands and the wine portfolio?

Or do you anticipate that retailers and distribution partners will continue to view those us kind of separate categories?

Well, some of them consider them more closely today than others do, so I think it depends on the market.

But the way we look at it, we just want great brands.

I mean, it really is if they happen to be great wine brands and make attractive margins for the distribution system throughout, I think that will prevail over whether they're also owned by a company that has a spirit brand or a vodka brand or a gin brand.

I think the key thing is to bring strong brands that have consumer pull and interest to the distribution system where there's a real economic incentive and interest on their part of helping you build them.

That's helpful.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Tim Ramey, D.A. Davidson.

Just a clarification, Phoebe, on the base for the 2.70 to 2.80 number.

Should we assume that it is about $0.07 higher than what we were using for FY '05 or is there a -- do you have an exact number you can give us?

Let's see --.

And will we get your restatements relatively timely?

Yes.

Pro formas will be coming out in with the 8-K, so that's going to be really within a few weeks -- really.

I mean, that will be coming fairly quickly on the restatement of everything.

So I think it should get clarified at that point.

The $2.70 to $2.80 has in there --.

We won't see it until that comes out.

I think when we file it should be clear what that $2.70 and $2.80 -- I mean it should be clear how the assets are split.

And the $2.70 to $2.80 outlook is really unchanged.

I understand, but I just would like to know what that compares to.

And it sounds like you're saying that take last year's number and add $0.07 to it if the Glenmorangie gain is roughly offset by the earnings from the Lenox business to be sold.

Where you getting the $0.07?

Well you said Glenmorangie was $0.07 I believe.

That's the buyout.

Let me just see if I can try this.

The $2.70 to $2.80 is our best estimate of full year impact.

The Glenmorangie $0.07 is just what's reflected in the first quarter.

That's the buyout, not necessarily the subsequent impact of the loss of that during the course of the year.

I think there's more than just that $0.07 going on in there.

So does that help you?

So we really don't know what 2.70 to 2.80 compares against?

Probably don't have at it as clear as you would like.

Let me suggest that you all deal with it offline.

But it is definitely from continuing operations.

Okay.

And then just to circle back to the question on depletions.

I understand mix can impact that, but that is essentially a unit driven number.

Are we wildly wrong to be thinking that units were up in double digits in the U.S.?

Units were up -- on what level?

Are you talking about shipments, depletions, consumer takeaway.

Well, shipments is what generates an excise tax payment, correct?

Correct.

It's revenue based.

And with the inventory levels that we reported shipments for the quarter would be up double digits because that's on a shipment basis.

But we should assume not all of that 19% is shipment.

Some of it had to be mix.

Mix.

Given what less wine/more spirits.

You're absolutely correct.

(multiple speakers) and some pricing.

I mean you'll have it depending upon its an aggregation of all the world's shipment.

But pricing doesn't impact excise taxes, does it?

It's a unit.

Oh, you're trying to reconcile excise taxes.

Yes, unit based item.

Yes, you're correct.

Thank you.

At this time there are no further questions.

Thank you.

If there are no further questions, thanks a lot for joining our call today and have a good rest of the day.

This concludes today's Brown-Forman first-quarter fiscal 2006 conference call.

You may now disconnect.