Brown-Forman Corp (BF.B) 2006 Q2 法說會逐字稿

Good morning, my names is Lisa and I will be your conference facilitator today.

At this time I'd like to welcome everyone to the Brown-Forman second 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 session. [OPERATOR INSTRUCTIONS]

Mr. Graven, you may begin your conference.

Good morning, everyone and thank you for joining us for our fiscal 2006 second quarter call.

I'm T.J.

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

Before we get started let me remind you this morning's 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 are 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 today we issued a press release announcing our quarterly results.

The release is available at our Web site at www.brown-forman.com, under the section titled, "Investor Information".

We have listed on Page 6 of the 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 the call we'll also be discussing certain non-GAAP financial measures.

These measures the purposes for which management uses them and are reasons why we believe they provide more useful information and results of operations are contained in the press release.

Now let me turn the call over to Paul.

Good morning, everyone.

Thank you for joining us today during this short week before our Thanksgiving holiday.

For those of those who have had a chance to review our earnings release from earlier this morning you will certainly understand why all of us at Brown-Forman have extra reasons to give thanks this time of year.

We are very pleased with the health and vibrancy of our Company, excited about the prospects which lie ahead, and immensely appreciative of the hard work put forth by our employees and our business partners to produce the results that we'll share with you today.

This is the first conference call we've hosted since the September 1st sale of substantially all of the assets of our Lenox, Inc. subsidiary to Department 56.

We wish the new owners much success as they continue marketing some of the finest brands in the tabletop industry, and we bid farewell and best wishes to our friends at Lenox.

The global environment for our premium brands remains robust and we continue to be particularly encouraged by the prospects for growth in our most important market, the United States.

In the United Kingdom, Londoners have shown their resilience in the aftermath of the July terrorist attacks, as consumers have returned to the restaurants and bars that are so important to our business.

In Continental Europe our business remains healthy despite some of the difficult trading conditions that have been described by several of our competitors.

We also continue to see enormous opportunities to further develop our brands in the Asia-Pacific region, specifically Australia, Japan and China, as well as in many other developing markets around the world.

Against this receptive backdrop we continued to evolve the global distribution models for our brand portfolio during the quarter.

The changes we announced last spring for Germany, France, Spain, Italy and Russia are now complete.

These transitions were generally completed as expected.

Through these sometimes complicated and delicate transitions, the biggest concern we always have is interrupting the flow of product in such a way that a consumer might be affected.

Our team and our distributor partners worked carefully through these channels to ensure that our products continued to be available when and where the consumer wanted them.

We are encouraged by the early results from these new partnerships, but more importantly, remain enthusiastic about their potential to meaningfully impact our long-term business in these markets.

Our business performance in the United Kingdom, following our distribution change there in 2002, confirmed to us the greater Brown-Forman influence of in-market brand building activity directly correlates with improved performance.

While we will continue to deploy a variety of distribution models around the world we will always seek out the right opportunities to exercise more direct influence because we found it pays handsomely for us in the long run.

Along these lines we've begun our work to transition to 100% ownership of our Australian distributor, Swift & Moore.

As we announced on September 23rd, our new partner in Swift & Moore, Pernod Ricard, made the decision to transfer the distribution of this brand to its wholly owned distribution company.

While there are many changes that must be made prior to the plan's February completion date, we expect that the customer facing functions of the distribution company will remain largely unchanged.

We are pleased that through the 100% ownership of Swift & Moore we will have full responsibility for critical sales and marketing activities, and our brands will be the number one priority on every sales call in the growing Australian market.

Accordingly, we have expectations for even better performance in a market that is very important for bourbon and RTD brands.

Before Phoebe discusses our excellent first half results with you, I thought I might just take a moment to review some of our longer-term performance.

We believe that one of the benefits of the significant Brown family ownership stake in our Company and of their active participation in the business is the alignment of management and shareholders' interests.

The long-term perspective on creating shareholder value promoted by this alignment has served investors well throughout the history of our Company.

Our decisions on acquisitions, most notably the purchase of Jack Daniel's in 1956, our steady focus on improving returns on invested capital, our consistent and appropriate reinvestment in the business and our track record of sharing the Company's strong cash flow with shareholders are all the results of our very active, yet very patient, approach.

We are proud of our long-term track record of delivering consistently superior total shareholder returns.

Now it would be convenient for me to discuss the 20 and 30-year trends of the Company if our shorter-term trends had been weak in some way.

That is not the case, however.

More recently consider that $100 invested in Brown-Forman just 10 years ago is today worth $420.

And over the last five years our compound annual growth and total shareholder return has been over 17%, significantly ahead of the S&P 500 and many other consumer product companies.

During the last 12 months alone our total shareholder return has been over 38%, and our return on invested capital has grown to an industry high 23% as a result of our strong organic growth, our thoughtful approach to acquisitions and the recent divestiture of Lenox.

These excellent more recent return metrics are only possible because the leadership of Brown-Forman made smart, thoughtful decisions 10 and 15 years ago such as more aggressively pursuing international brand development, significantly increasing the investment program behind Jack Daniel's and committing to the repositioning and revitalization of Southern Comfort.

We take great pride in the fact that after 139 and 120 years respectively, Jack Daniel's and Southern Comfort today are both at their greatest level of brand vitality with both also having significant further potential for brand development.

For that, all of us at Brown-Forman are very thankful.

Now I will turn the call over to Phoebe to discuss our second quarter results in more detail and to provide an update for our earnings guidance for the full fiscal year.

Thank you, Paul.

Good morning, everyone.

Indeed, we've had another good quarter and I'll talk first about our brands.

Leading our premium global brand portfolio January Daniel's Tennessee Whiskey's worldwide depletion grew in the high single digits for the quarter.

The United States, which represents more than half of the brands total volume, continues to perform nicely with depletions up in the mid single digits.

Our long-term approach to building this brand, and our willingness to invest in exciting and relevant advertising in support of our brand building goals, have fueled volume growth and positioned Jack Daniel's as a price leader.

While increased energy costs are expected to moderate consumer purchasing power, particularly in the upcoming winter months, and fuel surcharges are beginning to make it through to higher shelf prices on a variety of consumer goods, we remain optimistic that U.S. consumers will continue to purchase affordable luxuries like Jack Daniel's Tennessee Whiskey.

Outside the United States the brands performance was also very strong.

Depletions of Jack Daniel's internationally grew at a double-digit rate both in the quarter and on a year-to-date basis.

Growth was particularly strong with Germany, France, Spain, South Africa and Japan all recording double-digit depletion increases in the quarter and on a year-to-date basis.

On a global basis Southern Comfort depletions grew in the mid single digits for the quarter and on a year-to-date basis, driven by solid first half performance in the United States.

However, even more impressive statistics for the brand can be seen by looking at its profitability metrics.

The brands compound annual growth rate in growth per year [inaudible] gross profit over the last three years has been 14%, while advertising investments have grown 9%.

Southern Comfort's premium pricing, low cost structure and minimal investment base requirements provide very high returns on invested capital.

Given these return characteristics, it's easy to understand why we have spent so much time and effort repositioning the brand and why we believe incremental investments in relevant marketing programs are so important.

In the wake of Hurricanes Katrina, Rita and Wilma, our thoughts and concerns have been with the people of the U.S. and Gulf Coast regions who witnessed the devastating tragedies.

Through Southern Comfort we have made donating to relief efforts and continue to look for ways we can help our friends and neighbors in New Orleans, the city Southern Comfort calls home.

Finlandia Vodkas performance on year-to-date basis has been excellent outside of the United States.

On a rolling 12-month basis shipments reached 2 million 9-liter cases, growing at a double-digit rate over the prior period.

While most of the brands growth came in Poland, the Czech Republic and in smaller developing markets, the brand has delivered solid growth in the very competitive U.S. vodka market where our gross profit per case is higher than anywhere else in the world.

The important work we are doing on the brand includes the introduction of new flavors and the development of a new creative campaign that drives home the distinctive differences between Finlandia and competitive premium imported vodkas.

In our mid priced regional perform Fetzer wines posted depletion growth for the sixth consecutive month, largely as a result of the work we have done to improve the brands price position.

While we still have exposure to long-term supply contracts at higher than market prices, and will for the next several harvests, higher volumes will enable to us source more product on the spot market at today's lower cost.

The net result is that we expect improved profitability for the brand throughout the remainder of this year.

We're encouraged by the fact that consumer measures are showing strong signs of improvement headed into the important holiday season.

Our results in the super premium developing brand category have been very strong.

While this portfolio contributes a relatively small percentage of overall revenues, it consists of high margin brands for which we see tremendous growth opportunities around the world.

In the quarter and on a year-to-date basis Sonoma-Cutrer wine, Tuaca Liqueur, Woodford Reserve Bourbon and Appleton Rum posted solid double-digit growth at very attractive margins.

One quick note before I get into more detail on the results for the quarter and year-to-date.

Since we completed the sale of substantially all of the assets of Lenox, Inc. on September 1st, total Company reported results include four months of an operating loss at Lenox, Inc., as well as the loss related to the sale.

For the remainder of the fiscal year, discontinued operations will reflect the operations of Brooks and Bently, a small direct mail subsidiary headquartered in the United Kingdom and the impact of potential of any potential sales of the remaining assets including the former Lenox headquarters building in Lawrenceville, New Jersey.

We intend to sell both of these assets in the near future and will report any new information as soon as it's appropriate.

In order to provide relevant commentary and analysis, the focus of our earnings release, my comments this morning and our earnings guidance will be on the continuing operations of our business which we believe to be more relevant to investors than total results including discontinued operations.

In addition to talking about reported results, also provide information to allow you to see the underlying, or organic growth, of the major components of our net income.

So this morning we reported earnings per share from continuing operations for the second quarter of fiscal 2006 of $0.91per share, up 19% over the same period last year.

There were several items that affected results in the period.

While the net effect of these adjustments only modestly impacted earnings in total, I'll walk through these in some additional detail so you can better understand the underlying results.

First, a reduction in global trade inventories, that is representing those held by wholesalers and the importers, reduced earnings per share by about $0.07.

You'll recall that the first quarter reported earnings growth from continuing operations of 46% was boosted by a significant increase in net global trade inventories which contributed nearly half of that quarter's growth in earnings per share.

During the second quarter, as we expected, trade inventory levels moved closer to more normal levels.

Now while year-to-date results were boasted by higher trade inventories, the net impact on the second quarter was actually a reduction in revenue and gross profit growth as consumers demand, approximated by depletion, was higher than shipments due to this reduction of trade inventories.

Second, we were able to offset the capital gain related to the early termination of the Glenmorangie distribution agreement reported in the first quarter against the capital loss that resulted from the sale of the Lenox assets.

This reduction in current year tax expense contributed approximately $0.04 to earnings per share in the quarter.

Third, lower net interest expense associated with higher cash balances and a lower year-over-year operational effective tax rate contributed another $0.04 to earnings per share in the quarter.

Finally, the absence of expenses associated with the introduction of low carbohydrate wine brands and Glenmorangie advisory fees, both of which occurred last year, accounted for roughly $0.02 of reported earnings growth in the quarter.

Adjusting quarterly and year-to-date results for these items, and also removing year-to-date results for the income associated with the termination of Glenmorangie distribution rights, underlying earnings per share were up 16% in the quarter and 16% year-to-date.

Revenues were up 6% in the quarter.

The impact of lower global trade inventories reduced revenue growth by about $19 million, or about 3 points.

Adjusting for this and also adjusting approximately 1 point, or $6 million of revenue associated with the Glenmorangie family of brands which we no longer represent, underlying revenues grew 10%.

Reported revenues grew 9% on a year-to-date basis.

Adjusting revenue for the absence of low carb wines and Glenmorangie in the prior year, which reduced growth by about 3 points, and the impact of higher debt trade inventories, which added about 1 point of growth, underlying revenues were up 11% in the first half of this first fiscal year.

Now on a rolling 12-month basis the gross margin for continuing operations improved from 51.8% to 53.5%.

This margin improvement was driven by price increases for our premium global brands as well as a positive shift in mix.

In part attributable to our continued focus on allocating resources to the most profitable brands, markets and sizes.

SG&A costs increased 4% for the quarter which is less than the growth we've experienced on a quarterly basis over the past five quarters.

The underlying rate of growth was actually about 6% after adjusting reported growth for the higher compensation expense recorded last year that was directly related than a better than expected performance from our premium [shared] portfolio.

On a year-to-date basis SG&A expenses were up 9%.

Adjusting reported year-to-date results for advisory fees directly related to our effort to partner with Constellation Brands in the acquisition of Allied Domecq and incremental pension costs, SG&A increased approximately 7%.

Reported advertising expenses were also up 7% in the quarter and 12% for the first half of the fiscal year.

However, underlying spending was much more robust, up 11% in the quarter and 16% year-to-date after adjusting for expenses associated with the introduction of low carb wines and the termination of the Glenmorangie distribution arrangement.

The increase in spending represents significant incremental investment behind our premium global brand portfolio.

Putting it all together, second quarter operating income grew 11%.

The impact of lower global trade inventories reduced operating income by about 9 points.

Partially offsetting this was approximately 2 points of expenses associated with last year's low carb wine introduction.

Adjusting for these items underlying operating income grew 18% for the quarter.

Operating income grew 23% on a year-to-date basis.

Adjusting operating income for the absence of low carb wines, which reduced growth by about 2 points, the impact of higher net trade inventories level which contributed about 2 points of growth, and finally, consideration received for the termination of Glenmorangie distribution rights which contributed 6 points of growth, underlying operating income was up about 17% in the first half of this fiscal year.

Now free cash flow for the first half of the fiscal year was approximately $43 million versus $90 million in the same prior-year period.

This reduction was driven by higher working capital reflecting an increase in inventory and timing differences related to deferred taxes.

Total cash balances grew by $157 million as a $30 million reduction in debt and approximately $60 million in dividends only partially offset proceeds from the sale of Lenox.

Our strong operating cash flow coupled with proceeds from the sale of Lenox and Glenmorangie have resulted in relatively high levels of cash on hand and consequently low net debt.

Our priorities for the use of our cash remain unchanged.

We intend to invest to ensure the continue growth of our business including acquisitions, pay down debt when it matures and return appropriate levels of cash to our shareholders as we have for the last 60 years.

Now turning to our outlook for earnings from continuing operations for the remainder of this fiscal year.

Based on continued strong demand for our premium global brands we're increasing our earnings estimate for fiscal 2006.

Our previous estimate was for earnings per share from continuing operations in the range of $2.70 to $2.80.

This estimate included a $0.05 per share net benefit related to the early termination of distribution rights for the Glenmorangie family of brands, which some people found confusing, since our earnings guidance typically reflects ongoing operations.

To avoid further confusion we are excluding this one-time $0.05 earnings benefit from our guidance going forward.

Therefore, our previous guidance, excluding the Glenmorangie benefit, was really $2.65 to $2.70 per share.

Based on the excellent performance of our business year-to-date and our expectations for a solid second half, we are raising our guidance for full-year earnings per share from continuing operations to a range of $2.73 to $2.79 per share which represents full-year growth of 13 to 15% over comparable prior year earnings of $2.42.

Reiterating our revitalized guidance excludes the net full-year benefit of the Glenmorangie termination, and an anticipated net favorable impact from the restructuring of the ownership of our Australian distribution company, which we expect will occur in the second half of this fiscal year.

We expect a much more moderate rate of growth in earnings per share for the remainder of the fiscal year reflecting further expected reductions in global trade inventory levels, additional transitional expenses associated with changes in global distribution, long-term brand investments driven by the favorable outlook for our wine and spirits brand and the anticipated negative impact of a stronger U.S. dollar.

That concludes our prepared remarks.

Now, Paul, T.J. and I will any questions you may have.

[OPERATOR INSTRUCTIONS] Your first question comes from Dara Mohsenian with JPMorgan.

Thanks.

First, Phoebe, just to clarify, does your full-year EPS guidance include the tax benefits in this quarter?

Yes.

Okay.

Great.

And then can you guys comment on the spirits pricing environment in both the U.S. and Europe heading into the holidays?

Sure, I'll take that.

I mean, I think in terms of general pricing in the United States, I would consider it to be on an ongoing basis the same as we would have reported in many previous calls, which are the premium, the super premium brands, finding it acceptable to consumers to take moderate price increases on just on ongoing basis.

And I'm still seeing some of that.

There has been I think last year and there's certainly been some of it this year more, I think, discounting pressure that you hear, I mean, certainly wines and spirit brands are reporting some that, you know, just occur during the competitive holiday season in the United States.

It remains to be seen I think how deep some of that discounting is and what the impact is on actual pricing and sales until we get through the holiday season.

But that's about what I would report as it relates to general pricing activity in the United States.

In Europe, I'd say it's a little more moderate, less ability to get consistent price increases for many of the brands.

I think some of it depends on how exposed you are to the off-premise versus the on-premise.

But generally, Dara, I would say it's a little bit more pressure in the United States discounting environment than we would have seen three, four, five years ago but I don't think it's inhibiting the ability of premium brands to take price increases generally.

Dara, this is Phoebe.

I just want to clarify about that tax rate question.

I did not give you any clarification.

In the second quarter our results include a lower operational tax rate.

Anything that has to do with Glenmorangie, we've excluded that from our guidance just to be clear.

Okay.

Okay, I just want to make that clear.

So is Q2, when you look at the Q2 result are you assuming a $0.91EPS result when you talk about your full-year guidance?

Not really.

Okay.

Because you're giving a net Glenmorangie number?

Right.

Fair enough.

Okay.

And last question, it sounds like your business is still performing well in Europe.

Can you give us some more detail there and specifically I'm wondering how you're performing from a market share standpoint?

Well I mean longer term and I think even recently, you know, we have been taking share from the total distilled spirits market in general in Europe for some years.

More closely, the whiskey market, we've been gaining share with Jack Daniel's and we see that continuing.

We have not been experiencing some of the difficulties that have been reported I think actually several quarters by some of our competition.

We also have Finlandia which has done particularly well in eastern Europe these days and you heard us report in our script this morning progress in Poland and Czech which are contributing to our European progress.

I mean I do think on this front a couple of things contribute to it.

We really are at a different stage of development than some of the major companies we compete with who, you know, started developing their business in Europe decades ago, and while we've been at it now for 25 years or more we still are at an earlier stage of development than many of our competition so we're kind of still going up the growth curve.

I also think and particularly as it relates to Jack Daniel's, a lot of the pressures that people feel oftentimes in these difficult trading conditions relate sometimes to the off-premise in Jack Daniel's business, Southern Comfort's as well will tend to skew somewhat to the on-premise.

So I think those are a couple of things that contribute to our performance there.

Okay, Thanks.

Thank you, Dara.

Your next question comes from Tim Ramey with Davidson.

Good morning.

Congratulations.

Thanks, Tim.

Just a couple more questions on the what's included and what's excluded front.

I thought it was interesting that you talked about the benefit of the Swift & Moore integrations being sort of excluded from operating results in the second half, and I'm interested in that point of view because I would think it would be very much about operations just as your European, you know, increased ownership of distribution has generated operating results.

Can you kind of elaborate on that?

I think your question is why we have not included it in our guidance, is that your question?

It's because it hasn't happened yet.

And we're, I mean, we haven't, in terms of the Swift & Moore, we're going, when it occurs, I mean, it is, it has not occurred yet.

It's actually, Tim, it's scheduled to officially kick off in early February and one of the things was occurring that late in the fiscal year, and the fact that we, in taking over full ownership while there is margin benefit to Brown-Forman we are also gearing up, and we also bring in all the SG&A into Brown-Forman's income statement, and we're making sure that we have sufficient resources to have market coverage so you won't see in this fiscal year a big benefit from that.

Okay.

And Phoebe, another question on Europe.

Is part of the cash balances, is that cash that just can't be repatriated and does it, with your sort of expanding operational footprint outside the U.S., does it make it easier to put that cash to actual operating use?

We have cash held, as you might expect, both in the U.S. and outside of the United States.

We are certainly aware of the opportunities afforded us by the Jobs Creation Act for us to, you know, repatriate some of that cash which is certainly a study that's ongoing right now so that we can take, you know, appropriate advantage of those.

There's not huge amounts of it overseas just to be clear in terms of cash.

Okay.

And just one other question on channel.

There was a lot of news, Wall Street Journal article and so on about Wal-Mart getting more involved in the spirits and wine business.

Have you seen any further movement, not specifically with Wal-Mart, but with kind of the mass and club channel for your products?

I mean I think over longer periods of time, Tim, a lot of big box, they're called sometimes in the business, retail have noticed the nice margins and momentum in wines and spirits and so I think increasingly we've seen people get interested in promoting and stocking wine and spirits.

I don't see that there's anything that is fundamentally shifting in the way that we approach the business.

I mean they're key and critical customers just like a lot of channels provide.

And, you know, something we'll monitor as we go along.

But on a relative basis versus a lot of packaged-goods businesses, they represent a smaller portion of our business than they might to what you would consider traditional consumer products companies.

Thank you very much.

Sure.

Thanks, Tim.

Thanks, Tim.

Your next question comes from Ian Shackleton with Lehman Brothers.

Congratulations on some good numbers.

Thank you, Ian.

Couple questions about the U.S.

One of your major competitors highlighted some slow down in its business because of the hurricanes.

I was wondering if that was part of this little slower guidance you're indicating as we go to Q3 and Q4?

The second issue is you do highlight this uptick in the mid-priced brands.

Is this a sign of some trading down starting to happen in the U.S. market?

I'll take that, Ian.

I think as it relates to the Gulf region and impact there, we're not seeing anything that would be in terms of meaningful to our overall results that we would think is worth sharing with you.

I mean, I personally think it's still very early in the impact of that.

We've seen maybe, early on we've seen some maybe some different results than our competition, but honestly I think because of the dramatic impact it had on that region, we really won't know what the ongoing influence is on results for that region for some time.

But I need to remind you that for us while it's important business, it is pretty small in the grand scheme of what we're doing given that our business is spread all over the world today.

I mean, I worry more about sort of the knock-on effect of consumer confidence and other things that go on in the entire United States related to events like that more so perhaps today than I do the, you know, direct impact on those two or three markets.

So I hope that answers that question.

I do think then your second question dealt with, can you repeat what it is?

It's mid-priced brands in the United States.

Yes.

We're seeing some pickup particularly noted Fetzer and I think that really was related to a price repositioning downward, actually getting the price right on Fetzer and making it more competitive in a key market that has given us a little bit more momentum on the brand and has actually improved the net sales and volume performance of the brand versus where we were a year ago.

I have not seen any evidence of trading down.

If anything in our portfolio we're seeing more positive mix shift continuing.

So I wouldn't signal our message related to Fetzer as something more broad in the environment.

And you did refer, I think early on, to perhaps some evidence of some discounting activity around the holiday season.

I mean, when do you think we'll get full visibility on that?

Do you think that will be in the next month or do we really got to wait until the new year?

Unless you get out and see the stores yourselves and observe it we won't get data actually 'til after the holidays where you can begin to look at what the actual sales results were, and then you can start to look at Nielsen's and speculate what actual prices were.

All of it will be directional and what I reported was more, to be honest with you, anecdotal, I mean there [was] some of it last year.

Our Company tends to honestly during this period of time compete in different ways than just lowering the price.

We think there's a lot of interest in people going into the stores during this time of year, sometimes as their only visit to retail stores because they're buying gifts and we just think it's a odd dynamic to actually go out and lower your price during that period of time.

Thanks very much, Paul.

Sure.

Thanks, Ian.

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

Phoebe, a question first on FX.

What impact did it have on the quarter and what are you expecting for the year I guess in terms of EPS impact?

Thanks for the question.

For the first half of the year no real material impact effect at all on results as a result of foreign is exchange.

Also, if you look at the full-year, we are fully hedged for the balance of the year and it is in our guidance.

That being said, last fiscal year in the second half, let's just take, for example, the Sterling rates, that was $1.85.

If you look at Sterling today, the spot rates say $1.71.

Now we're fully hedged but we're not necessarily hedged at $1.85, which is what it was last year so we will see some effect of foreign exchange in the second half, but that is reflected in our guidance because we're fully hedged.

And those hedges are through the end of your fiscal year?

Yes, of course we have are already ongoing into next fiscal year but it does go out, yes, for the full fiscal year.

Okay.

Great.

And then on the tax rate, it was, your guidance is 32.5% for the year on an effective tax rate.

I think the quarter it was about 32.8%.

So is 32.5% still the number to use for the full-year?

Yes, it is.

Okay.

And then finally for Paul, you know, your international footprint is growing and you've got this $450 million of cash sitting on the balance sheet.

Can you talk a little bit about, one, what would it take, or do you see that the potential to fill your distribution footprint with more product and would acquisitions potentially be scalable here?

And in thinking that way, how would you evaluate acquisitions in terms of return metrics, product categories, geographies, just some color on how you would view that from here?

Sure.

We do think about what our cash position is and what the best deployment of that have cash is ongoing.

I will say when we evaluate acquisitions, we tend not to put a lot of value on deploying, you know, new products and purchase brands through our existing resources.

And we think we've been extremely well served over the years by having the sufficient people to build brands, individual brands.

I mean, our experience has been, and we're witnessing it quite a bit, of course, in the United States with a lot of the serious brand development that's going on by almost single-minded entrepreneurs over the last few years, being a great reminder of it that tremendous brand development is available to those who focus.

So when we go to look at acquisitions, we will write down the incremental costs associated with building those brands not only in A&P but also in our SG&A investments.

And from time to time that probably hurts us in our evaluations of brands that may be available for sale.

But it's a lesson that we think is honest as it relates to what it takes to building the brand.

So it doesn't mean that we'll never buy another brand and take it around the world, it just means that when we do that, like we've done with Finlandia, we find we're best served by putting a real focused SG&A resources against it and some of the results we've reported here today in Poland and Czech Republic probably are great evidence of that.

I'd like to answer, Bryan, a little more broadly on just a cash issue.

Uh-huh.

I love to say cash is a CFO's best friend and we have a healthy, very healthy business, and we are actively considering what it is that we should do with cash.

You notice quite a dramatic increase in cash on our balance sheet this quarter reflecting certainly the sale of Lenox.

We're going to do everything we can invest in the business as necessary to keep this business healthy and growing.

We'll continue to look at acquisitions and just a noteworthy, just last week the Board of Directors authorized an increase in our dividends of 14.3%, and so again, the active, been looking for opportunities for to us return that cash to shareholders in the appropriate way.

Okay, great.

Thank you.

Uh-huh.

Your next question comes from Michael Bleakley with Credit Suisse First Boston.

Hi, guys.

Just a brief question again on Christmas trading, the run-up to that.

I guess we've had some questions on pricing but from a volume point of view, first of all, are you seeing that the orders in to the wholesalers have been acceptable to you?

Are you seeing that sort of I guess uptick you might expect running into the Christmas season?

But the second thing is, I guess an awful lot of these wholesalers are also becoming more efficient.

Are you getting any changes in terms of the way they are ordering, coming into the critical holiday season?

Are they ordering later, or are they, is there still some sort of same ordering pattern as we've seen before?

Michael, pretty much the same honestly, in terms of their patterns.

I think over long periods of time, you'd see lower inventory levels with distributors on particularly on the larger, more stable brands and companies.

But I don't know that, you know, ever studied it closely enough to note that it's occurring at holidays.

I would think in a growing business that has a lot of consumer interest right now in the U.S. that people are, because of the competitive nature of wanting to garner space and promotional activity that people would not risk wanting to have lower inventories.

You tend to watch these inventory levels at different times of the year so you can actually get more smooth, you know, metrics that don't, you know, deal with the build-up before a big holiday season or a price increase or something along those lines and then you study them.

I would say that on the larger brands, we have seen just slightly lower days of inventory at the distributor level over longer periods of time.

And as it relates to sort of the orders, I would say they're business is as usual heading to the holidays season and reflective of the basic performance of our brands and our Company.

You're seeing basically continuation of the trend year-to-date going into the Christmas season?

Yes, you know, one of the things we always debate around here and I just don't know that we ever get the answer quite correct, when does the holidays actually begin in the United States?

It always seemingly starts earlier and earlier where shows and trade shows start in September.

And so, you know, there are a lot of influences to the ordering patterns of individual brands.

And I just, I don't have enough information to actually tell you whether it's a little stronger right now or a little weaker compared to what we would expect.

Great.

And that's very helpful, thank you.

Thanks, Michael.

Your next question comes from Corey Horsch with Credit Suisse First Boston.

Good morning, everybody.

Hi, Corey.

Hi, Corey.

I just had a question on some of the M&A activity that's gone on in the U.S. whether or not as those brands switch hands or switch distribution houses, if you've seen any kind of dislocation in the market if that represents an opportunity for your brands and how you might be taking advantage that?

And then secondly, with the super premium whiskey and bourbon market continuing to show pretty robust growth, have you made any changes to how you're positioning Jack Daniel's given that historically it's been a price leader but now you're kind of a new price [inaudible] merging above it, just how you're reacting to some of those changes?

Thanks.

Sure.

On the short-term disruption of distribution chains in the United States we're not seeing a lot that would impact our business.

If anything we consider it to be an opportunity for us to stay focused on what we think we do best and keep the people who help us with our business, our distributor partners focused as well.

There's always a lot of noise around who's going to be representing who, and actually I think that's a long-term benefit for Brown-Forman is the consistency of some of the relationships we have and the steady focus we bring to marketing in marketplace.

So right now, I mean, I don't think that it's driving additional share, but I do think, if I had to say over longer periods of time, I think we've got benefit out of it in the fact that other people are integrating new portfolios or worried about distributor changes, because we have gone through distributor changes ourselves and we know how disruptive they can be for a short amount of time, and so in the U.S. we're appreciative of the fact that we've been consistent with a lot of our partnerships and hopefully benefit from it long-term.

On the super premium whiskey front, your question is a really good one because years ago we talked at length about the development of a super premium whiskey category, even going back to the days of single malt when they started to gain steam in the United States.

And one of the things we committed ourselves to that we've kept doing is actually increasing the price of Jack Daniel's, so that brands and categories, the segments of the category would not develop so significantly and minimalize the value of Jack Daniel's.

And I think our track record on price increases on Jack Daniel's and adding value to the brand consistently and investing behind it really speak for themselves over longer periods of time.

We also have taken the leadership role in that segment you referenced.

If I think about 10 or 15 years ago, we had very little in that segment, and today between Woodford Reserve, Jack Daniel's Single Barrel and Gentleman Jack, we have approximately 250,000 cases of very super premium whiskey brands in that market.

So we think we're doing a lot, and we continue to dedicate more resources to those super premium brands without taking them away interest Jack Daniel's which would be I think a big mistake.

Great, that's helpful.

Thanks a lot.

Thank you.

Once again, if you would like to ask a question, please press star then the number one on your telephone keypad.

Your next question comes from Chong Ming Kang with Gabelli and Company.

Hi, how are you?

Good morning.

I know that you guys, well, congratulations first off, but you guys have seen double-digit growth across a number of your international markets and I realize that it's not a huge market but you guys saw double-digit growth in Japan and I was under the impression that that was kind of a weak whiskey/spirits market.

I was wondering what you guys were seeing over there?

In Japan, there's been quite a bit of macroeconomic news about Japan actually initially bottoming out.

They've had a little bit of good news on the economic front.

Probably more important to us, though, had been a new arrangement we crafted with our long-term partner there, Suntori, in the last year which dedicated more resources on the ground to building our brand in the on-premise, and trying to, I mean, really recognizing it still is one of the great bourbon markets in the world.

And you get outside the United States you don't see a large presence of American whiskey in a lot of places and this is one of them.

And we've long been one of the leading brands there and aren't going to give up.

And I'll tell you, our Company has had a long history of working hard through stall points and it happened years ago on Jack Daniel's in the United States and we dedicated ourselves to getting the brand growing again.

It's actually, of course, occurring today.

Same thing happened in Australia years ago.

And we're seeing the benefits of continuing to stay focused on finding new ways to grow the brand and to revitalize it.

And I would put today's performance on Japan as the beginning of those efforts and similarly, we've been working hard in Germany, which is one of our older international markets, where we are beginning to see good progress as well.

Great, thanks.

Thank you for your question.

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

Hi.

Just a follow-up, Phoebe.

At what point do we expect to see the inventory deloading stop or where can we start to model shipments and consumption equaling each other?

We've worked really hard on this inventory to be transparent because it was so high in the first quarter.

In the second quarter they've certainly come down to sort of, almost, what I'll call almost normal situation.

We are going to probably have fluctuations in our inventory all the time because we don't control what those orders are going to be.

We do make our best estimate, we take our depletions and then we forecast what the inventory is going to be and, you know, we're forecasting that we're, we generally like to reduce about one day in the U.S. and keep flat outside the U.S.

And that's generally what we base all these things on.

But from any month-to-month, season-to-season we are going to have that kind of, I don't know if it's seasonality, but it certainly is a cyclicality in our inventories, and what we're trying to do, Bryan, is just be as transparent about it as possible because so many different things, whether it's a distributor change or whether or not it's a holiday season coming up, or whether or not price increase, whatever, there's just so many things that can affect it and so it's hard to predict although we can tell you our general strategy is in the U.S. to reduce about a day inventory per year.

So your expectations in your guidance and what's in the back half of your fiscal year, you're expecting to see more or further reduction of inventories?

One day in the U.S. to pull down and flat outside the U.S.

Okay, okay.

All right, thanks.

Yes.

Your next question comes from Thomas Russo with Gardner Russo.

Good morning.

A question on eastern Europe in general total trading and then Finlandia in Poland in particular.

Could you update on those?

And then also, well, I'll start with that one.

Okay.

Thanks, Tom, nice to hear from you.

Thank you.

Tom, in eastern Europe in general, we are, one of the things that is influencing some of our work there today is actually, I think we've referenced this before, that in some of the countries where we are still in very early stage of development, we had been partners with Allied Domecq, so a number of the countries that are directly affected by the sale of Allied Domecq happen to be in eastern Europe and so we are working on new distribution strategies basically and finding lots of nice alternatives that we think will build our brand businesses over the long-time.

I do think while a lot of times when we talk about eastern Europe we reference Finlandia, in a lot of these markets Jack Daniel's is doing really well.

Great.

Places like Romania and in other markets it's still an early stage of development but Jack Daniel's is doing very well in a number of these markets.

Hungary, some of them.

Now Finlandia has particularly traction in many of those markets but also unusually good strength right now in Poland on the heels of our acquisition of Finlandia, the ownership of our own distribution company in Poland, and we have, what I think, done a nice job of pricing the brand at the premium level to the market but at the right level where the consumer responds to it has been excellent and we've continued to put resources, we've extended the brand in flavors there, and just continued to be a very hot brand in the Polish market.

Tom, I went to Warsaw this summer, and looked pretty intensively at the market there in Poland, and, you know, Finlandia has a premium in terms of pricing, and certainly nothing like the United States, but it is a premium position, you know, within Poland and is a very strong brand there with lots of historical ties so it's a very nice presence there, and--

We've been able to raise price in the last year which helps too.

Indeed, indeed.

Wonderful.

Thank you.

And then generally, thank you, Paul, what pressure, if any in markets are you seeing from possible price competition among the scotch, the premium scotch brands potentially impacting your pricing practices on Jack Daniel's in those markets?

I think we will continue, I think perhaps forever because the standard scotch business is very competitive market and in many places is not growing.

So one of the tools deployed is to reduce price.

Yes.

And I mean, Spain was famous for it for a while.

It doesn't happen as much as in the United States but you will see it in markets where Jack Daniel's has a presence.

Uh-huh.

And honestly our approach to that is that it may have a share impact on us, a small share impact, but we just don't believe it's in the best interest of our brand to reduce the prices down to that level or even to the level that would make it attractive for a consumer because we think it devalues the brand long-term, and we're just competing perhaps on a different, you know, set of criteria in those markets.

And it may, I guess there are instances where they go very deep where it could temporarily disrupt your volumetric performance that we certainly haven't seen it in the last couple of fiscal years.

Thank you, Paul.

Sure.

Thanks, Tom.

Your next question comes from Tim Ramey with D.A. Davidson.

Just to follow-up on acquisitions, Phoebe, versus your 450 million in cash, I thought someone else might ask whether you were involved with Vincor or not or whether that's something that you're actually looking at?

Any comment there?

Tim, I can answer that.

There was some, obviously when Constellation's pursuit of Vincor there was a lot of noise in the investment community about who might else be involved in the pursuit of that and I mean, I think almost every single large company or mid-size and large company was probably approached.

And while we don't comment directly on acquisitions, I'll just tell you that in general, right now, we're not looking aggressively at wine acquisitions.

We've commented on that before.

We'll be very, very thoughtful and prudent as it relates to any investments we make on the acquisition front, but we've been more biased toward the investigation of spirits opportunity as you all are aware over the last few years.

Great.

And just to follow-on on Finlandia too, good job there with the volume growth.

Should we be concerned about margin dilution to the overall corporation as that brand gets bigger or are your margins also quite good there?

The margins actually differ quite a bit depending upon [inaudible] the U.S. whether you're talking about Europe.

I'm thinking about eastern Europe.

Eastern Europe.

You know, I think on the margin, they might be, you know, but it's not significant enough for it to be something that on which we would, you know, that would cause us to change anything.

The other thing too, is that this is a Company that really believes in taking prices as the market allows it and as your whole product, that's product positioning, it's competition, it's a number of things that go into how we think about pricing our products.

And so we are as active and disciplined in the pricing of Finlandia around the world as any product.

And so, therefore, I just don't just see us having a long margin erosion.

I mean we just don't have that approach to it.

But Tim, one fact is that our volumetrically, we're getting more volume incrementally from Jack Daniel's than we are with Finlandia, and so if that helps answer the question.

There could be, I mean if Finlandia got exceptionally large some day way down in the future, it's lower price position in general for us, and particularly over in eastern Europe versus the prices of Jack Daniel's, in those regions you would see a weighted average lower gross profit per case or a margin, but at the Company in general, Jack Daniel's continues to volumetrically grow faster than Finlandia.

If you think about our, just the volumes, Jack Daniel's at 8 million cases per year, Finlandia now just hitting that 2 million case, we have Southern Comfort over 2 million, we have Canadian Mist at a couple million, we have Fetzer wines at a couple of million, just to kind of give you a perspective.

So I think directionally you're right on the margin but it's not a material kind of affect.

Terrific.

Thank you.

Thanks, Tim.

At this time there are no further questions.

Mr. Graven, are there any closing remarks?

Thank everyone for joining this conference call.

We certainly hope you have a healthy and happy holiday season and that you celebrate with some of our brands, of course.

Thank you.

Thank you all.

Thank you.

This concludes today's conference.

You may now disconnect.