Brown-Forman Corp (BF.B) 2006 Q3 法說會逐字稿

Good morning.

My name is Nicole and I will be your conference operator today.

At this time, I would like to welcome everyone to the third quarter fiscal 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Graven, you may begin your conference.

Good morning, everyone.

And thank you for joining us today.

I'm T.J.

Graven, the director of Investor Relations for Brown-Forman and with me here today is Paul Varga, our President and Chief Executive Officer;

Phoebe Wood, Executive Vice President and Chief Financial Officer; and Jane Morreau, Vice President and Controller.

Before we get started, let me 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 undo 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 quarterly results.

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

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

Other significant risk factors are described in 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 on page four of the press release.

With that let me turn it over to Paul Varga.

Good morning, everyone and thanks for joining us.

As you've likely seen in our earnings release this morning, our business remains very healthy.

And in the quarter, we continued the trend of delivering organic earnings growth that is near the top of the industry.

Before Phoebe walks you through some of the details surrounding our financials, I'm going to talk briefly about some of the factors driving our strong performance.

Depletions for our premium global portfolio which represents about 60% of overall Company volume were up 7% in the quarter and 8% for the first nine months of our fiscal year.

Jack Daniel's Tennessee Whisky led the portfolio by continuing to grow both volume and margin.

In the United States, the brand's quarterly depletion growth rate was approximately 6%, a healthy rate of growth, particularly given it's large base.

Evidence of a continuing U.S. progress can be seen in the country's control states.

While the brand ranks fifth in this representative sample of states in terms of total volume.

Our philosophy of consistent price increases coupled with this solid volume growth has enabled Jack Daniel's to become the second ranked brand in total retail sales value behind only Bicardi.

Outside of the United States, Jack Dan -- Jack Daniel's depletion growth in the quarter was in the high single digits, where continued strong growth in China, south Africa, and several markets in eastern Europe was only partially offset by lower growth rates in the United Kingdom.

We are very encouraged that the brand the last several years has sustained high single digit global depletion growth has been accomplished across a broad cross section of the world's markets.

I'm sure you can appreciate the importance of this geographic balance, not only for diversification reasons but also for the platform it establishes upon which we can develop Brown-Forman for other brands.

These positive volume trends for Jack Daniel's, coupled with steady and consistent price increases have driven strong double digit gross profit growth on a rolling twelve-month basis, each and every month for more than three years.

This excellent growth for Jack Daniel's is something we're very proud of, and of course, it remains our priority going forward.

During the quarter, Finlandia became the fifth brand in our portfolio to register rolling 12 month depletion in excess of two million cases.

Additionally, it's notable that Finlandia's growth has come in both volumes and margins.

In fact over the last 18 months the brand has added 300,000 cases to its base, while doubling it's contribution after advertising expenses.

Finlandia continues to respond very well in it's major markets, particularly developing markets like Poland and China, where we've made it a priority for additional investments.

Rounding out our premium global brands, Southern Comfort continued it's positive trajectory in the third quarter and year-to-date, propelled by solid mid single digit depletion growth in the United States.

The brand's U.S. business is very healthy, as a balanced mix of drink promotions, event marketing, and advertising are supporting above market increases in both consumer take away and pricing.

Internationally, the brand's most impressive growth market remains south Africa.

But both the U.K. and Spain are also showing growth as well.

Depletions for our mid priced regional brands were flat in the quarter and year-to-date.

Within this grouping, depletion trends continue to improve for several of our mid priced wine brands such as Fetzer, Korbel and Five Rivers, offsetting volume declines for other off premise catagory leading brands such as Canadian Mist, Early Times and Bolla.

Consumer and retail trends for these brands have not been as favorable as those we have observed for our Premium and Super-Premium brands.

While our rate of reinvestment behind these brands has appropriately been less, we have worked to improve their value through -- through re -- repackaging, thoughtful pricing and strong trade support.

While not growing at rates found elsewhere in our portfolio, these brands have accounted for other $450 million of net sales year-to-date and represent an important source of income and profits for the Company.

Our Super-Premium developing brands, while representing less than 4% of total depletion are high margin brands that we believe have significant opportunities for growth around the world.

We sometimes refer to these brands such as Sonoma-Cutrer, Woodford Reserve, and Tuaca as acorn brands to appropriately depict that they have the potential to be much larger and more important brands somewhere down the road.

While these brands individually are not likely to be a major profit contributor for several years, their collective size, profitability, and growth rate are becoming more meaningful.

Consider that our premium and Super-Premium developing brand, include the premium expen -- expressions from the Jack Daniel's Family, Gentleman Jack, and Jack Daniel's Single Barrel collectively represents over one million cases annually.

These brands have high gross profit per case, upward pricing potential and are growing as a group at a healthy 12%.

For these reasons, we intend to continue to invest strongly behind them.

This fiscal year, our total A&P investment behind all brands will be more than $100- million higher than it was just four years ago.

As you would expect, the vast majority of incremental investment is behind our Premium Global portfolio of brands, most especially Jack Daniel's.

However, we spend a tremendous amount of management time and energy determining how much investment to place behind each of roughly 100 brand market combinations.

In doing so, we strive to balance growth and earnings with thoughtful and long-term investments in A&P and SG&A with the aim of sustaining the excellent results we are reporting to you today.

This diligent resource allocation balancing act has become one of our most important strategic exercises.

Alongside the resource allocation process, we are always considering what might be the most effective distribution model for our brand.

We recently completed the transition to 100% ownership of our Australian distributor, Swift & Moore, and the sale of Allied Domecq also gave us the opportunity to reevaluate many of our distribution arrangements in eastern Europe.

We are transitioning to new distributors in most of these markets, including Hungary, Romania, Bulgaria and several others.

Through the process of evaluating different options and structures, we found that with -- within each of these markets, there were several viable distribution alternatives and many capable partners.

For example, in Hungary, we will be distributing our brands through a new partnership with the local Coca-Cola bottling.

A common theme of our new arrangements and partnerships, whether in Australia, Eastern Europe, or Western Europe, is that Brown-Forman is exerting more direct influence over the in market brand building activities that we believe are most important to our long-term success.

Now let me turn the call over to Phoebe for a review of our financial results in the quarter and an update on our full-year earnings outlook.

Good morning, everyone.

And thank you, Paul.

This morning, we reported earnings from continuing operations of $0.98 per share, down 4% from the $1.02 per share earned in the prior year period.

Now given what Paul has said about the excellent health of our brands, I have some explaining to do about why we're down on a reported basis.

Therefore, I'm going to focus the majority of my comments here today on what we watch as the best indicator of our underlying business where we remove the affects of one-time and unusual items that occurred this year and last year.

Looked at in this regard, our adjusted third quarter earnings from continuing operations were $0.80 per share, up a healthy 12% from adjusted earnings of $0.72 per share in the same period last year.

Before I highlight the major drivers of the ongoing, underlying growth we achieved both in the quarter and year-to-date, I'm going to provide an overview of the unusual items that occurred both this year and last year that make comparisons of reported results difficult.

If you've read through the earnings announcement that was released this morning, you'll find a very helpful schedule on page four that reconciles reported results to adjusted results.

This supplemental schedule can also be found on our web site in the investor area.

To highlight these unusual items that distort comparisons and warrant discussion, first, recall we recognized a $0.39 per share gain in last year's third quarter relating to the sale of our shares in Glenmorangie PLC.

Additionally we recognized an $0.11 gain in the first half of the current year associated with consideration received for the termination of our distribution and marketing rights for the Glenmorangie family of brands.

Second, we recognized a one-time gain in the current quarter, that being fiscal 2006, relating to changes in our Australian distribution operation.

This distribution company, Swift &Moore was a joint venture between Brown-Forman and the former Allied Domecq.

Following Pernod Ricard's acquisition of Allied, we were notified of their intent no exit this arrangement, which triggered the payment of an exit fee resulting from our contractual agreement.

Partially offsetting the gain was the loss of gross profits associated with a change in timing of revenue recognition for shipments to this now wholly owned operation.

The net effect of these items is approximately $0.14 per share favorable in this year's third quarter.

A third one-time item during the quarter was a gain of approximately $0.04 from the sale of former Jekel Winery.

While the Jekel brand continues with our full support, this winery, located in Monterey, California, was closed in 2004 and production was moved to our Fetzer facility.

Finally, as we have done in the past, we have adjusted our reported results to remove the impact on earnings from, one, fluctuating levels of distributor inventories which were relatively high at the end of January, two, the impact of a strengthening U.S. dollar, and three, net changes to interest and tax expense.

We do want to provide clarity on how these adjustments affect the individual line items of Brown-Forman profit and loss,and we've detailed them for you in the third quarter earnings release, page 4.

The remainder of my comments this morning will focus on adjusted results, which we use as an indication of the underlying or organic growth in our business.

If any of these items or adjustments are not clear, we'll address your questions in the Q&A portion of this call.

Now to the third quarter results.

Adjusted net sales from continuing operations were up 10% in the quarter, with 3% growth in the United States, 18% in Europe, and 29% in the rest of the world.

This strong, underlying growth came primarily from our Premium Global brand portfolio, which increased net sales 14% in the quarter.

Net sales for our Super-Premium developing brand portfolio, while a small percentage of the total, saw an improvement of 30% in the period, while our mid priced regional portfolio sales declined 2%.

Adjusting gross profit grew 13%, driven by solid growth for Jack Daniel's, Finlandia, and Fetzer.

Advertising expenses were up 15% on a constant dollar basis, primarily due to continued investments in our Premium Global portfolio.

SG&A expenses grew 7% in the quarter on an adjusted basis.

This number also excludes both a true up of incentive compensation in the prior year of approximately $5 million, and incremental expenses associated with changes in our distribution network in a number of markets around the world.

Putting all of these metrics together in the third quarter, topline improvement was driven by volume and price increases in our Premium Global portfolio.

This was only partially offset by increases in advertising investment and higher levels of SG&A spending, resulting in impressive underlying adjusted operating income growth of 13% in the quarter.

Now looking at year-to-date results.

For the first nine months of the fiscal year, adjusted net sales grew 9%, or $162 million to $1.9 billion.

Strong year-to-date results in Europe contributed 40% of the total growth, with the remaining 60% growth coming about equally from the United States and all other international markets.

Adjusted gross profit of $1 billion was up 13%.

Approximately half of the increase was driven by price increases, favorable mix, and cost improvements, with the remainder driven by volume gains, most notably for Jack Daniel's, Southern Comfort, and Finlandia.

Healthy advertising investments of $247 million on a constant dollar basis were up 16% while SG&A increased 8%.

In summary, through the first nine months of the fiscal year, adjusted operating income grew 15%.

While adjusted earnings per share improved 14%.

Through the first nine months of this fiscal year, cash flow from operations totalled $243 million.

After capital expenditures of $34 million and dividends totaling $94 million, our free cash flow was approximately $115 million.

Cash and equivalence, plus investments in short-term securities at the end of the period totalled $596 million, as a result our net debt position was approximately $5 million.

Given our net debt position and our favorable outlook for the continued growth of this business, the question is inevitable, what are our priorities for the use of this cash flow?

Rather than wait for your questions, I'll tell you that we immediately plan to pay off $250 million of debt due in March related to our 2003 share repurchase.

Furthermore, we intend to continue to invest behind our brands and their continued health, both through incremental investments in advertising and SG&A to support our organic growth, and through capital investments designed both to expand our capacity and so add efficiency to our distillery and warehousing operations.

Second, we are actively pursuing growing our business through acquisitions.

We continue to evaluate acquisition opportunities frequently and have the financial capacity to pursue them in a meaningful way.

Third, the Company has a strong track record of returning capital to shareholders in efficient ways, and we expect that to continue.

The most consistent expression of this is our dividend program.

In January, we announced a healthy 14% increase in our dividends.

This is the 60th consecutive year that we've paid a dividend and our third consecutive year with a double digit percentage increase.

Our return on invested capital for contin -- continuing operations was approximately 22%.

This reflects a significant improvement over a year ago.

Now to the outlook.

Based on our strong third quarter results, we are increasing our fiscal year 2006 full-year outlook from continuing operations.

We now anticipate earnings will be in the range of $2.79 to $2.85 per share, up from the $2.73 to $2.79 earnings guidance we provided in late November.

Please note that our revised outlook as before, excludes one-time gains, including number one, net benefits from the early termination of the Company's distribution rights to the Glenmorangie family of brands.

Two, the net affect of the restructuring of the Company's Australian distributor -- distributor -- excuse me -- , and three, the sale of winery property in California.

In the revised earnings outlook, I'm comparing our new range to prior year earnings of $2.42 per share, which has been adjusted to exclude two items, one, the gain and sale of Glenmorangie shares, and two, a plan trade inventory reduction related to the strategic distribution changes in Europe.

This revised full year guidance implies a range of earnings from continuing operations for the fourth quarter of $0.48 to $0.54 per share versus adjusted prior year earnings of $0.54 per share.

Our fourth quarter outlook anticipates significant reductions in global trade inventory levels, incremental brand investments, the expected unfavorable impact of a stronger U.S. dollar, and continued incremental investments in SG&A in several countries in Europe, Australia, and Japan.

While we are focused on our fiscal year, we note that in calendar year 2005, our shareholders earned a 45% total shareholder return, based on reinvested dividends and increased share price.

In closing, our focus is on keeping our business very healthy.

Our underlying or organic rate of growth was strong in the quarter and year-to-date, and we're encouraged by the overall outlook for our business globally.

Now Paul, Jane, T.J. and I will be glad to answer any questions that you may have.

[ OPERATOR INSTRUCTIONS] Tim Ramey, D.A.

Davidson & Co.

Congratulations, another awesome quarter.

Thank you, Tim.

That's -- that's quite a performance in the spirits business and yet you're really guiding to it down 4Q, it sounds like, Phoebe.

Is this all about the unfavorable FX and the planned inventory draw drown, or is there some organic weakness in the 4Q that we should be aware of?

It is only those two things, Tim.

Okay so organics should -- depletion growth should continue in mid to high single digits type of thing?

Yes, indeed.

Okay, Great.

You you mentioned that you continued to evaluate acq -- acquisitions, can you characterize those in any way?

I know you're not going to give us specifics, but are they more on the spirits side, somewhat on the wine side?

It seems like your prior comments or historic comments of sort of boxing out wine as an area of acquisition growth has left you with limited opportunities there.

I'll start and I think Paul will add in here.

Tim, we tend to -- we have not been a Company that has said -- that has looked at our portfolio and said, gee, we don't have a particular kind of category.

We don't have a gin, or a tequila, whatever.

We haven't -- we have not looked at it that way, we've looked at the quality of the brand.

And so that can be a spirits brand, it can be a wine brand.

And you have to look at how that brand would perform.

And so for example, if you look at the acquisition of Sonoma-Cutrer, it has attributes that are very attractive to us.

We -- and so I just think that it's not necessarily -- you can't differentiate it by wine versus spirits, nor can you differentiate it by category.

We look for a quality of a brand and what that brand will do in our hands.

And so when we look at acquisition opportunities and we look at those things that are out there, that's really how we think about them and begin our evaluation of them.

And Tim, I'll add that I think that similar to our statements before, we would be biased toward more spirit acquisitions still, we just have done a -- we just think that when we find brands that we think will do particularly well in our hands, we -- we do a great job with them.

And some of the results that we're reporting today around Finlandia would, to give you an example of that, our profile doesn't take a lot to figure out.

We've been more individual brand buyers than buyers of corporations.

And so I don't know, you just always are basically waiting for those opportunities to unfold in front of you before you evaluate each one of them.

We're going to remain alert to acquisitions.

I personally feel like we look at a lot more acquisitions than you may think.

And I'll just tell you that I don't see there being a scarcity of opportunities over the next few years.

Thank you very much.

Bryan Spillane, Banc of America

Hey, good morning.

Good morning, Brian.

A couple of questions, first, Phoebe, just -- if I look at the -- the income -- the P&L for the quarter and I look at the other income line, there's a $32 million benefit, and I'm assuming that there is $18 million of that is the -- or is the sale of the winery and also the gain on the distribution transition in Australia.

What was the rest?

Brian, this is Jane Morreau, how are you today?

Good, how are you?

Good.

Let me tell you the pieces of that.

We had a gain on the sale of the Jekel winery that's included in there, that amounts to roughly $5 million.

And the other component of that is a roughly $25 million consideration cash that we received as part of the exit fee that Pernod paid for pulling out the Allied brand.

So those are the two components and that's the big swing you're seeing in there.

Okay, how does that reconcile with the $14 million adjustment that you're making in the operating income line?

Yes, that's a great question.

What we had was a couple of other things going on.

The primary factor was that in the quarter, because we're now, effective February 1st, own the distribution 100% ourselves, we did not recognize revenues similar to different other transactions that we've had where we've changed and where we've become the 100% owner of the distribution.

So what we did was we didn't recognize revenues, corresponding gross profits for the third quarter, and that brought that consideration down.

Okay.

It's reflected in our trade inventory reduction.

Okay, so it's a net -- that's the net number?

Correct.

It is the net number.

Okay.

Great.

Thanks.

That's very helpful.

And then a question on -- on -- on inventories.

Jack Daniel's sales depletions continue to -- to grow at a -- at a high rate.

Are we in a position -- are we getting close to a position where -- where you won't have enough inventory?

No, we're in good shape.

We -- we, for a long time, actually, have always known that the economics of selling Jack were much greater than the costs of making it, so we've always made sure, particularly with Jack Daniel's we had enough on hand.

Okay.

And then, finally, Paul, just, if you're thinking about acquisition opportunities, how important would it be to have a brand that you can leverage globally as opposed to one that where -- where the real opportunity might be in the U.S. or -- or in limited geography?

You would certainly give it extra points in your consideration, at least I would.

And I think that -- that those are the most desirable brands.

Actually, what's really interesting is that versus, I'd say, 10 or 12 years ago at Brown-Forman, where the opportunity would have exited to get a brand that you could either do a good job from an existing base or build a new base in international markets, we're today in a much better position to go expand a new trademark or to build on a new trademark, because we've enabled ourselves with a lot of the distribution events that have occurred, really, over a long period of time.

We've been talking quite a bit about some of these that have occurred in the last 18 months to two years, but it's been a long term evolution.

And so it really helps us, when we go to evaluate brands, that we can now say, hey, there might be an opportunity in three or four more markets than we'd originally envisioned because we have a platform there on which we can build it.

And then finally, just one last question, Paul.

In terms of, you made the mention in Hungary that -- that your -- you've -- you've -- you've contracted with a Coke bottler there, are there any other markets where you're doing that?

And if you can just talk a little bit more about the nature of that relationship?

Sure.

No, there aren't any other markets where they're acting in that specific regard, but in a variety of markets around the world, we'll look for opportunities to basically bring Jack Daniel's and Coke-Cola together in a merchandising format.

It is very specific market-to-market and opportunity-to-opportunity.

And oftentimes, we think that it works particularly well in the on premise environment where you can co promote the brands.

And then we're also beginning to see there have been some spotted examples of being able to co stack them on display, for example, in some markets.

But all in all, we just remain alert where it's -- it's smart to work together and where the consumer actually might enjoy our product in that form.

But it is not a highly formal and structured relationship in the way that many alliances may be.

Okay, great.

Thanks, guys, good quarter.

Thank you.

Alec Patterson, Dresdner RCM Global

Yes, good morning.

Good morning.

Phoebe, I guess a question for you regarding the supplemental schedule and, not to take anything away from a very strong results, but -- and this may seem like splitting hairs a bit.

I'm trying to understand the adjustment you made, for example, to earnings per share, where you added back $0.04 for foreign exchange, where I could see to doing that, to give a sense of what the growth rate would be in constant currency, but in terms of your full-year guidance, are you suggesting that we should be using the $0.80 as part of that four quarter summation to your full year guidance?

Yes, what we -- what we wanted the lay out here -- when we look backwards, we tried to take form exchange into account.

So we really try to lay out exactly what was the impact of foreign exchange so we made the comparisons very clear to look at organic.

Going forward, as we gave our guidance, we needed to include, we felt, the full-year look with foreign exchange in it.

So the way to think about that is that indeed, we would take the three months, including all our experience year-to-date, our actual experience year-to-date on foreign exchange, and then our projections of what that's going to be for the full year and that is embedded in our guidance.

Does that help you?

Well I guess I'm just trying to -- I'm sorry to be sort of stuck on this.

But if -- if I think about an adjustment on foreign exchange, it's usually to try to give me a sense of what a constant currency impact would be on a growth rate.

So the 12% in earnings per share growth rate reflects a constant currency growth rate.

Correct?

It does, exactly right.

We have taken that out as we have looked historically.

That's correct.

You're absolutely correct.

Okay.

So did you lower last year's number, or did you add $0.04 to get to $0.80 this year and in reality in today's translation dollars it's $0.76.

I'm not -- I -- we want to make sure that we understand your question.

And I think that I don't want to [look] to have the schedule mess us up here.

I'm [thinking] a risk of that.

So let me see if I start again.

If we look historically at either the three months or the nine months and we look at the foreign exchange effect on earnings per share, you see it's $0.04 and $0.05.

Do you see that?

Yes.

So when we have looked historically, and when we look back, we try to put everything on constant dollar basis, so that the earnings per share, adjusted earnings per share three months at 12 and nine months at 14, that's constant currency that is taking out all the one-time kinds of events, what we think of as noise.

Okay.

So when we look historically, that's indeed what we do.

When we have given earnings guidance now, for the full year on what that is going to be, we have made a projection about what the impact of foreign exchange is going to be in the fourth quarter to come up with that new guidance.

Because we don't -- we don't know what it's going to be, so it's obviously uncertain.

Can I jump in too?

Let me -- let me see if I can jump in as well.

Phoebe's exactly right.

What we're do -- we're doing two different things here, so the schedule you're looking at, we try to provide underlying basis and growth is in the earnings release.

What we're -- what we've given to you guys for our full-year outlook does not strip out FX, does not strip out what we think trade inventory levels and so forth will be.

As Paul alluded to earlier, and Phoebe alluded to earlier, that's when we have certain assumptions baked into our full-year forecast for those factors.

That's embedded in our full-year earnings outlook of 279 to 285.

Does that help?

Maybe I better take this offline because it -- that's not -- I --

Okay, we can do that.

We'll help you.

We don't -- we're trying -- our schedule was intended to be helpful, not to be confusing.

Yes, I know, I know.

And I'm sorry to make too much of it.

Okay.

Thanks, Alec.

Ann Gurkin, Davenport & Company

Good morning.

Just a couple things.

As you plan for this year can you talk about how you're going to advertise your brands, do you think you'll use more TV versus print?

Or on-premise or -- can you talk a little about that?

Yes, the marketing mix, as we look over the next 18 months, I don't see any dramatic shift in it.

Probably the largest shift we made over the last two years was really the NASCAR investment where, in that -- because of the significance of that investment, which you end up doing a shifting a little bit toward lifestyle marketing.

But the programs that are serving us well today are just, what we think are an optimal mix of media and, where we think it's appropriate to be advertising if the markets are ready for it.

And then mixed in with a good balance of on-premise promoting, lifestyle marketing, and retail promoting.

Okay.

And then, from understanding, one of your competitors might pull back a little bit on pricing this year.

Can you talk about your pricing strategy?

Same as always.

We think -- we look at it brand by brand and market by market and the brands we think have the opportunity to advance their prices and have upward pricing mobility, we can try to do that on a very steady, consistent, and what I would call moderate basis for some.

For Southern Comfort, for example in the United States, we're continuing to reposition that brand, so pricing, you would expect to be higher than normal moderate sort of inflationary type price increases.

So we're not seeing anything that would hesitate -- make us hesitate in advancing prices.

And then, as you've reworked distributors, particularly in Europe, can you talk about how your inventory levels are?

Well, that's -- that's one of the things that is, I would call it in part of our difficulty in the forecasting around inventory levels.

Where you have distributor changes, it takes a while to get into a pattern.

And I believe we will actually have, in one of their smaller markets, we will have some of this revenue recognition impact in a couple of these eastern European markets, all be it on a smaller basis than say Australia or U.K. before it.

But smaller markets tend to carry a little bit more inventory, probably consistent with our international distributor inventory levels.

But they're not -- they're not out of control in any way.

And we're trying to keep up with good growth rates that there are on both Jack Daniel's and Finlandia.

Thank you.

[OPERATOR INSTRUCTIONS] Corey Horsch Credit Suisse First Boston

Hi, Corey.

I just had a question given the growing importance of your international business and how you continue to kind of diversify your markets.

With all the distributor changes you've made, where do you -- your kind of blended international margins stand in relation to the domestic margins and given all the shifts we've seen at the -- at the distributor level, are there opportunities for further, kind of step function changes that we've seen in international markets, or -- or is it now more like the U.S. market where it's a function of just kind of growing the Premium brands and getting margin ex -- expansion that way?

And then finally, as -- as the premium-ness of your portfolio internationally continues to grow, what are the levels of reinvestment that -- that you're having the see?

Is it continuing to basically reinvestigation reinvest -- is there -- is there potential at any point in the near future to leverage the market line, I guess is what I'm trying to ask?

Okay.

One of the amazing things about, particularly, Jack Daniel's is it's -- it's commonality of not only brand presentation, but also in many examples, margin as well.

And some of these international markets where we've made changes, we -- we have had the benefit of picking up additional distributor margin.

Of course, we are oftentimes reinvesting at least a portion of it back into the business to try to -- to make it grow to our expectations.

Certainly, Corey versus five years ago or ten years ago, there are fewer opportunities for us to make that sort of step change as you refer to it.

But there are still a lot of markets around the world where there -- we're in partnership.

And we tend to look at these things market by market over time to see if there's a smart move or basic structural change that is an opportunity for us to pick up more margin and to exert more influence over the direct brand building.

But you study that over time and o -- over a long period of time, clearly, there will be less opportunities for us to -- to take the margins up as meaningfully as we have in some of these markets where we've made the change.

Having -- and then your second question was basically about whether or not the levels of reinvestment there would continue to rise.

And I think it -- it literally depends market by market on what we -- we see out in front -- out in the years in front of us.

I think in places like China, for example, where we're experiencing a lot of success, we clearly would have a different expectation of bottom line profits than we would in -- in some other markets.

Western Europe is, we've been there longer, so our level of reinvestment is probably on, say a percentage of gross, higher than say the United States.

And over time, you might expect to get a little bit of leverage out of that, but we're not particularly focused right now on trying to get a lot of leverage out of our operating expenses.

And the reason is because our model is really working well for us, and we just see a lot of opportunity out there that we can continue to reinvest for the long term.

And actually think because we thought this way maybe six to ten years ago, it's one of the reasons we're reporting the results we are here this quarter and have been this year.

Appreciate the clarity.

Thanks.

Thank you, Corey.

Tim Ramey, D.A.

Davidson & Co.

If there's time, I will jump in.

Just that you -- you mentioned in your release that Fetzer/Bolla were flat.

There wasn't any mention of Korbel, how it might have done through the holiday period.

Is there any color commentary on the big mid priced brands in wine, and hope of those continuing to improve with sort of a rising tide?

Or how would you characterize those businesses?

Well, I think as we did in the remarks, they are -- they're really important brands to our -- our annual operating income and to our, I'll just call it, our base sides.

They tend to be market leaders, they're perform slightly differently, when you look at them brand by brand, but as a group, they're sort of flattish.

You're exactly right.

Some are up a couple of points and recovering Fetzer, you saw a little more discussion about it.

As we have it's price position in the -- in the right place, we're really encouraged by sort of Nielsen results, which are double digit growth and seem to be outperforming it's competitive set.

And so we're encouraged by that.

But that price segment in wine and it carries over to Bolla as well is very competitive and so we are -- we just have what we call realistic expectations about how much they'll advance our profits.

We're working -- we really are working very hard to improve the overall performance.

And I would actually say that one of the reasons we're pre -- we've be able to report the results we are is that where in prior years or quarters wine performance or some of the popular price brand performance was a partial drag on -- on earnings growth.

Today, there's more stability or even in the profit level a slight growth.

And so that really helps the overall topline.

And in related to your Korbel question, I'd say they had a solid holiday period.

November was very different than December, but maybe slightly up for the -- for the couple of months.

So a lot of it depends on how long you consider the holiday period to be.

If it goes all the way back to October, is it November, December.

But all in all, I think they're performing at a very, sort of solid manner consistent with our expectations and levels of investment behind them.

Thank you.

Thanks.

Tim.

Todd Duvick, Banc of America Securities

Yes good morning.

Question for you on the -- on the fixed income side.

You have a $250 million note that matures in two weeks.

And it looks like you have adequate cash reserves on hand to pay that off.

Can you tell me about your plans, ifyou're looking to refinance that or just pay it off and continue to hold adequate liquidity for acquisitions going forward, or kind of speak broadly about your financial policy going forward?

Okay.

Sure.

Thank you for the question.

We have, between short-term investments and cash, almost $600 million right now.

And we will use $250 million of that to pay off our bond that we have due in early March.

That was part of our 2003 share re investment -- share repurchase program that we borrowed to do that.

We have great financial flexibility.

Not only do we have cash on hand, but we have a tremendous amount of borrowing capacity, which we will use for those opportunities which may come to us.

So, just to repeat just a little bit what I said earlier.

When we look at our cash situation, we say, first we'll pay down the debt that's coming due in a couple of weeks.

We're going to continue to invest behind our brands.

We're going to look actively for acquisition opportunities using both cash and our very strong balance sheet to do what we need to.

And we -- fourth, we have a very solid history of looking at efficient ways for us to return capital and cash to shareholders, most evident of that is dividends.

And so, the main point of all of that, I think is to say that we're going to use our financial ability for growth of the Company and for returning cash to shareholders.

Those are really how we think about it.

At the risk of sounding dense on my part, just to be clear, you're not looking to come to market in the fixed income market anytime soon?

We have no plans to come to the fixed income market anytime soon.

That being said, one never knows what opportunities might arise out there that would give you reason to tap into the financial market.

But we don't manage our balance sheet by saying, we need a certain amount of debt, or looking at certain financial ratios.

We tend to look at ours on a need -- we borrow on an as-needed basis.

And with our very strong cash flow, we have been able to do that quite successfully.

Excellent, thank you very much.

You bet.

At this time, there is no further questions.

Mr. Graven, are there any closing remarks?

Okay.

Nicole.

No, thank you very much for the questions and thank everybody for dialing in today.

As usual I'll be around after the call today, if you guys have any more questions, feel -- feel free to give us a call.

With that, we'll sign off.

Thank you.

Thank you,.

Thank you all.

Thank you, this concludes today's third quarter fiscal 2006 earnings conference call.

You may now disconnect.