Brown-Forman Corp (BF.B) 2006 Q4 法說會逐字稿

Good morning, my name is Mary Ann and I will be your conference operator today.

At this time I would like to welcome everyone to the Brown-Forman fiscal 2006 year-end 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].

I would now like to turn the conference over to Mr. T.J.

Graven, Director of Investor Relations.

Mr. Graven, you may begin your conference.

Thank you, Mary Ann.

Good morning, everyone, and thank you for joining us today.

With me here today is Paul Varga, our President and Chief Executive Officer;

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

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

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

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

And you should not place any 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.

And earlier today we issued a press release announcing our results and this release is available on our website at www.brown-forman.com under the section titled Investor Information.

And we have listed in the press release a number of these risk factors you should consider in conjunction with our forward-looking statements.

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

During the call we'll also discuss certain non-GAAP financial measures, and these measures and the purposes for which we use them and the reasons why management believes they provide useful information to investors regarding our financial condition and results of operations are contained in the press release.

And now let me turn the call over to Paul Varga.

Good morning, everyone, and thanks for joining us.

As you've seen in our earnings release this morning, we reported excellent earnings for both the fourth quarter and our full fiscal year that ended April 30 as our brands continue to deliver strong organic growth and in the process create exceptional value for our shareholders.

These results are attributable to many groups of people.

Our shareholders and Board of Directors who support and guide us; our many partners in distribution, marketing, and production, with whom we carry out our daily work; and most of all, our talented and productive employees who put their heads and hearts each and every day and night into our shared pursuit of making Brown-Forman the best brand-building company in the industry.

We thank each and every one of them for a superb fiscal 2006.

In a few moments, Phoebe will discuss our results in much more detail, but first I would like to discuss a few recent developments and comment briefly on our FY '06 performance.

Last week the Company had the first meeting of our Board of Directors that included three new members representing the fifth generation of the family of our company founder, George Garvin Brown.

I would like to publicly acknowledge the many contributions of our outgoing family Board members, Owsley Brown Frazier, George Garvin Brown III, and Ina Brown Bond, who together contributed over 80 years of service to the shareholders of Brown-Forman.

We will miss their advice, support, and long-term perspective, but of course we very much look forward to the experiences and the perspectives of the new family Board members in helping us continue Brown-Forman's progress.

We are encouraged by the Brown family's continued dedication to the long-term growth of the Company and believe the active involvement of fifth generation family members in the business is very much linked to our stated intent to be a strong, growing, and independent company for years to come.

Second, we announced early last month some significant organizational changes.

Effective July 1, our currently separate Wines and Spirits divisions will merge into one unified beverage team.

This realignment will have the greatest impact on our U.S. organization, but we are also taking this opportunity to make changes and improvements in a number of other areas across the Company.

Our strategic intent of these changes are twofold.

To utilize the breadth and strength of our full portfolio in order to better partner with our distributors and retail customers, while at the same time deploying a high degree of focused human resources and effort behind individual brands or small groups of brands to better implement their unique models for success.

These are not mutually exclusive priorities.

Implemented side-by-side, we believe they will improve the performance of each of our brands and that of Brown-Forman as a whole.

As with most transitions of this scale, many of our people will be accepting new assignments and responsibilities.

And in some cases relocating.

However, because we are making these important changes at a time when our brands are performing well and our financial results are strong, we are forecasting that this transition will have only a minimal short-term impact on fiscal 2007 results.

Any change of this magnitude is stressful for an organization, but we plan to implement the changes carefully so as to minimize the potential for any disruption.

While we are sensitive to changes affecting our people, we are also excited about the many new opportunities for our employees and about the outlook for even stronger long-term growth for our brands in the United States.

Let me now turn to a few highlights from our recently concluded fiscal year.

While Jack Daniel's certainly continues to be the driver of our growth, what stood out most to me during FY '06 was the breadth and depth of our FY '06 performance across our portfolio and our regions.

For example, one of our most important internal metrics is depletion adjusted gross profit growth, which simply uses depletions rather than shipments as a basis for the calculation of the gross profit growth.

We believe progress on this metric over time is a true indicator of brand business health.

For our 25 established brands, excluding new products, we achieved growth in depletion adjusted gross profit on 22 of them and 2 of the 3 brands that did not actually experience growth of this metric did, however, improve performance on it.

As a whole company, we grew depletion adjusted gross profit by 11% for fiscal year 2006, giving us now 4 consecutive years of double digit growth on this important measure.

Considering that the Company's volumetric growth over the same period is about 5%, it's evident that our Company is demonstrating strong pricing discipline, improved cost containment, and perhaps most importantly, excellent resource allocation that improves the mix of our business profitability.

Managing brands differently, whether for growth, income, or both, is a very important part of the success equation for Brown-Forman.

By managing our business as individual brand market units and working hard over time to place the right mix of A&P and SG&A resources behind each one, we believe we are able to identify the very best long-term prospects for growth and improve the performance of our full portfolio over time.

Depletions for Jack Daniel's, our most important brand, grew an impressive 8% globally for the year.

Jack is now sold in over 120 countries worldwide and the brand grew this year in more than 90 of them.

The consumer is at the heart of everything we do with the Jack Daniel's brand.

And in fact, we estimate that this was the first year in which there were over 1 billion individual consumer transactions with the brand.

Impressively, global volumes grew by over 665,000 cases this year.

In fact, if we were to create a new brand solely from the cases added through Jack Daniel's global volume growth over just the last 3 fiscal years, that mythical new brand would rank just outside of the top 50 premium spirit brands worldwide.

Or said another way, the growth alone on Jack Daniel's over the last 3 years is the equivalent of creating from scratch another 1.8 million case premium growing brand such as Remy Martin Cognac, Jameson's Irish Whiskey, or Kettle One Premium Vodka.

Southern Comfort depletions grew 5% for the second consecutive year, following 13 years of essentially flat growth.

The repositioning of the brand which has taken place over the last several years, coupled with more focused on-premise brand building attentions and healthy rates of incremental advertising are behind these solid results.

Importantly, the brand grew at 6% in its largest market, the United States, and also exhibited solid 4% growth in international markets led by Germany and another excellent year in South Africa.

Finlandia depletions grew 15% to over 2.1 million cases, led by continued growth in Poland, the brand's largest market.

Strong growth in eastern Europe has driven Finlandia to become the fifth brand in our portfolio to eclipse 2 million cases in annual depletion.

We are optimistic about the brand's prospects for continued growth in several markets around the world, including Israel, China, Russia, and the United States.

During 2006 we reversed the negative volume trends we have experienced with Fetzer over the last several years.

Volume growth has enabled us some relief from the higher costs associated with our long-term grape contracts, as we have been able to purchase more fruit at lower market rates.

While we haven't fully rectified the brand's cost issues, we are certainly encouraged by the favorable results from this past fiscal year.

Also during fiscal 2006 we made a number of improvements to our distribution infrastructure around the world.

In addition to completing the changes in western Europe that we began in fiscal 2005, we made other changes in eastern Europe and Japan designed to enhance our performance and add to our capabilities in those markets.

We also transition to 100% ownership of our Australian distribution operations, Swift & Moore, a change that we believe will contribute to the growth of our business in this important spirit and RTD market.

During this past fiscal year, we also completed the sale of Lenox and just yesterday, we concluded our acquisition of Chambord Liqueur, an excellent addition to our Super-Premium Developing portfolio and a brand that we believe has considerable growth potential.

We have been working hard for the last several years to advance our business organically, while also exploring smart additions to our portfolio of brands by acquisition and new brand developments.

The result of these efforts has been a steadily improving return on the average invested capital.

Our return on invested capital for continuing operations for the year was 21.1%.

This is substantially higher than most of our competition and represents a significant improvement from the fiscal 2002 level of 18.6%.

This year also marked our 60th consecutive year of returning cash to shareholders through our strong dividend program and our total shareholder return for the fiscal year was an excellent 36%.

Since the end of fiscal 2002, a year that included the terrorist attacks of 9/11, our market capitalization has risen nearly 75%.

During this time, we've evolved the Company into a more focused premium beverage company, by divesting an underperforming asset in Lenox; by stabilizing the performance of our wine brands which had been struggling in a challenging market; by renovating trademarks whose brand equity has essentially been dormant, bringing to life and returning to growth brands like Southern Comfort, Finlandia, and even Tuaca; by planting the seeds for future growth within our Super-Premium Developing portfolio, including the purchase of Chambord, which just concluded.

Essentially building each of these brands from small bases, consumer-by-consumer and drink-by-drink.

And above all, through consistent thoughtful brand building and fostering the consumer loyalty that has driven Jack Daniel's to become the best-selling whiskey in the world and perhaps the best-performing brand in the spirits industry.

By deploying capital well and giving shareholders the highest rate of organic growth and returns on average invested capital in this industry, we have produced these exceptional shareholder returns.

With that, I'll turn the call over to Phoebe who will share results for the full year and provide our guidance for fiscal 2007.

Well, thank you, Paul.

And good morning, everyone.

As Paul mentioned, we are pleased to report exceptional results for fiscal 2006, with earnings per share from continuing operation increasing 15% to $3.20 per share.

This 15% growth rate just happens to represent both our reported and organic growth in earnings for the full year.

However, it doesn't mean there are no differences between the two.

And we have made several adjustments to the reported earnings per share for both fiscal 2005 and 2006 to calculate the year-over-year organic growth rate.

A rate that management believes is more reflective of our ongoing business performance and therefore more meaningful to investors.

In explaining these adjustments, I'll talk you through how we adjust reported earnings from continuing operations to reporting -- reported earnings from continuing operations adjusted for unusual items to reported earnings from continuing operations adjusted for unusual items and nonorganic factors, the latter of which we refer to as organic growth.

These are all set forth in the chart in our earnings release.

In our reported results we have three unusual items that are included in the $3.20 full year diluted earnings per share for continuing operations.

First, there is an $0.11 per share net gain associated with the early termination of our distribution rights for the Glenmorangie family of brands.

Consideration received from Louis Vuitton Moet Hennessy, the new brand owner.

Second, we recognized a gain relating to changes in the ownership structure of our Australian distributor, Swift & Moore.

Swift & Moore was a 50/50 joint venture between Brown-Forman and Allied Domecq.

Following Pernod Ricard's acquisition of Allied Domecq, they sought to consolidate the distribution of their newly-acquired brands into their existing distribution infrastructure.

This resulted in the payment of the contractual exit fee to the remaining shareholder, Brown-Forman.

The net benefit of this restructuring for the full year was approximately $0.15 per share.

Note this includes about a $0.01 gain in the fourth quarter in addition to the $0.14 communicated in quarter three associated with the final acquisition adjustment.

The third unusual item included in reported results was a $0.04 per share gain on the sale of the former Jekel Winery.

While the Jekel brand is still part of our portfolio, we previously consolidated the production of these fine wines into other owned California facilities and were no longer using the Jekel facility in Monterey.

Adjusting for these three special items, we earned $2.90 per share from continuing operations.

To be clear, the adjustments I've mentioned were the same unusual items that we also excluded from the full year guidance of $2.79 to $2.85 per share that we provided in early March.

Now, looking deeper into reported earnings, we not only had some unusual items, but also some nonorganic items, specifically profits from higher estimated global trade inventories, foreign exchange effects, and lower net interest expense taxes.

First, an increase in global trade inventories contributed about $0.05 per share this year.

Just a few words on trade inventory levels, which have had a significant impact on our results over the past several quarters.

We completed fiscal 2005 with relatively low levels of global trade inventory.

Those levels rose fairly dramatically in the quarter of fiscal 2006 and were a significant contributor to our 46% reported earnings growth in that quarter.

In the last few quarters, trade inventories have trended down, but still not to the levels included in last year's reported results.

And the result changes in trade inventory levels were a contributor to this year's reported earnings growth.

We mentioned this a few quarters ago, but it's probably worth mentioning again.

In many cases, we work with our distributor partners around the world to ensure that they maintain proper, but not excessive, inventories across brands and across sizes.

Ultimately, however, given the number of distributors and importers to whom we sell around the world, we do not have control over inventory levels at either the wholesale or retail levels.

But we believe it is important to provide visibility on a quarterly basis to the impact that fluctuating trade inventory levels have on our reported results and to adjust them to more closely reflect our depletion trends.

It certainly complicates the story a bit and that is probably why many of our competitors tend to not adjust reported results for trade inventory, but we believe it's the best way to communicate our underlying business performance.

Bottom line, inventory growth was worth $0.05 last year.

Another nonorganic adjustment is for foreign exchange.

The U.S. dollar strengthened during the course of our fiscal year against our most significant currencies -- the British pound, the euro, and the Australian dollar.

The stronger dollar had a negative impact on full year earnings, but was almost entirely offset by lower net interest expense and a lower effective tax rate.

Net of the three unusual items noted previously and the nonorganic items just discussed, organic earnings per share from continuing operations were $2.87, up 15% over fiscal 2005.

Now the way we calculate the 15% organic growth just mentioned is to make sure that we're comparing apples to apples, and to do so, we adjusted fiscal 2005 reported results for a few items as follows.

This, again, is in the table in the press release.

Fiscal 2005 reported earnings per share from continuing operations were $2.77.

Including in this figure was a $0.40 per share gain associated with the sale of an equity stake in Glenmorangie plc.

And earnings from this sale and distribution of the Glenmorangie family of brands last year.

Also comparatively low levels of global trade inventory lowered fiscal 2005 earnings by about $0.10 per share.

About half of those were directly related to changes we made to our distribution structure in Europe and the other half related to lower inventory levels in the U.S.

In addition, we recorded an impairment charge associated with our investment in a small Mexican tequila company.

Adjusting for these items, our fiscal 2005 base or organic earnings approximately $2.50 per share.

So then comparing our base 2005 earnings of $2.50 per share to our fiscal 2006 organic earnings per share of $2.87, organic earnings grew 15%.

What accounts for this outstanding performance?

Growth across our brand portfolio and geographies was again very strong.

Net sales in fiscal 2006 grew by over $200 million or 10% to $2.4 billion.

Net sales for our Global Premium brands, which represented approximately 70% of total sales, grew 15% behind exceptional performance for Jack Daniel's.

Our Mid-Priced regional brands, which account for approximately 25% of total sales, declined by 3%.

As volume and margin improvement for several of our wine and spirit brands was offset by declines from Bolla and the absence of sales associated with low carbohydrate wines introduced last year.

Net sales for our Super Premium Developing brands grew 22% on strong growth in Sonoma-Cutrer, Tuaca, and Woodford Reserve.

Gross profit grew $151 million or 13% for the year driven by higher volumes and price increases for Jack Daniel's, Finlandia, and Southern Comfort.

Also we continued to make significant advertising investments behind our brands, led by healthy increases for our Premium Global brands.

Our commitment to making very thoughtful decisions about where we invest our money is undoubtedly contributing to our growth in volumes and gross profit.

Advertising expenses were up 10% on a reported basis for fiscal 2006.

However, adjusting for the absence of the Glenmorangie family and the impact of stronger U.S. dollar, underlying brand investment was up a more robust 12%.

This substantial increase follows 11% growth in fiscal 2005 and 15% in fiscal 2004.

And again demonstrates the favorable prospects we see for our premium brands in all corners of the world.

SG&A expenses increased $50 million, up 12% for the full year, due in part to structural changes to our distribution models around the world.

The transition to full ownership of our Australian distribution company and new distribution arrangements in key markets in continental Europe contributed to the growth in SG&A.

There we have made increased SG&A investments in order to take more direct responsibility of important brand-building activities.

Although these new arrangements provide incremental gross profit through new margin terms, in many cases not enough to immediately offset the initial incremental SG&A investment; however, these investments are consistent with our belief, which is grounded in past experience in other markets, that having more direct influence over our brands will yield long-term returns in excess of the cost.

Putting it all together, fiscal 2006 was the 16th consecutive year of record operating income from continuing operations.

Operating income from continuing operations grew 26% on a reported basis.

The same items that I detailed earlier in order to determine underlying EPS growth also affect underlying operating income growth.

Higher trade inventory levels contributed about 5 points of this growth.

The exit fee from Allied Pernod for Swift & Moore contributed 4 points, consideration received from the termination of our distribution rights to Glenmorangie contributed another 3 points of the growth.

And the gain on sale Jekel Winery accounted for another point of growth.

Adjusting for these items and adding back roughly 3 points of growth to offset the impact to profits from the stronger U.S. dollar, underlying operating income grew a very healthy 16%.

Cash flow from operations for the corporation is $244 million for the full year.

Cash flow from operations plus approximately $200 million in proceeds from the sale of Lenox contributed to the growth in our cash position from $295 million at the end of fiscal 2005 to $475 million as of April 30th, 2006.

In addition to adding to our healthy cash balances, we retired approximately $250 million of debt associated with our 2003 share repurchase and $30 million in medium term notes.

We invested 52 million in capital expenditures and paid dividends of $128 million, a 15% increase over total 2005 dividends.

Over the last few weeks of fiscal 2006, we repatriated approximately $280 million of foreign earnings at a very favorable tax rate under the U.S.

Homeland Investment Act.

The opportunity to take advantage of this expired at the end of the fiscal year for us.

The net cash effect of this transaction was zero, as an increase in commercial paper balances was offset by a corresponding increase in our cash and cash equivalents balance.

Our priorities for the use of our cash remain unchanged.

We plan to make capital investments as appropriate behind our existing business and would anticipate total capital spending on property, plant, and equipment for fiscal 2007 to be in the range of $65 to 75 million.

Including the construction of several new barrel warehouses in Lynchburg, home of Jack Daniel's.

We intend to seek additional opportunities to grow our business through acquisition.

As an aside, we close on the acquisition of Chambord Liqueur yesterday, funding this $255 million purchase from existing cash.

Finally, we evaluate opportunities to return cash to our shareholders where appropriate in a tax efficient manner.

Now turning to our outlook for fiscal 2007, we currently anticipate that fiscal 2007 earnings from continuing operations will be in the range of $3.10 to $3.30 per share.

This represents growth of 7 to 14% over fiscal 2006's $2.90 per share.

Please note that our expected full-year growth is moderated by an expected increase in the Company's effective tax rate, a small diluted effect attributable to the acquisition of Chambord and a greater number of shares outstanding, and finally, higher expected costs for several of our wine brands.

We're optimistic about our prospects of the future given the current trends in the market, but we're also cautious about some potential short-term disruption we may encounter due to the recently announced organizational changes.

That concludes our prepared remarks.

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

[OPERATOR INSTRUCTIONS].

Tim Ramey, D.A. Davidson.

Good morning, and congratulations.

Thank you, Tim.

The repatriation of the foreign earnings, did that have an effect of raising the tax rate in the 4Q?

It usually does in other companies.

It did not because we had a reserve for that.

Okay.

In the prior -- there was no change.

Okay.

Your tax rate's been volatile and you're again giving us guidance for higher tax rate.

Can you give us some sense of confidence in why we should -- why we should bite this time on that guidance?

The -- we hear you.

We have been affected in fiscal 2006 by a number of events, which were almost -- well, which were impossible to predict, which really lowered our tax rate in a lot of capital gains treatment, so that is probably one of the very biggest changes.

So, for example, when we received the money from the Swift & Moore, it was capital gains treatment.

Jekel Winery, we had capital gains treatment.

Glenmorangie sale, capital gains treatment.

So because of that, you -- we had those -- what I'll just call -- I want to call them unusual, but sort of one-time events treated at a capital gains rate that affected it.

Some other things you just can't anticipate when certain events -- if you've, for example, put in a tax reserve and the event occurs or doesn't occur, it's an event.

It's not something that you can control what that would be.

We try to provide, Tim, the very best guidance we can.

We do think that the tax rate will be between 32.5 to 33% for fiscal '07.

And if there is some event, it could be different from that.

But that's what our best thinking is at this time.

And just one more, please.

What is your thinking about the impact of FX on '07?

You know we are -- we use hedging program to try to mitigate results of foreign exchange one way or the other.

And given what's happened to the dollar at the moment, you might see a little bit of upside that could come through.

We are -- we've done a fair amount of hedging -- but so you have a little -- we have a little bit of upside there.

I wouldn't call it a great deal of upside going into it.

But as I look at it today with the amount of hedging that we have in place and what's happening to the dollar, I saying that there might be a little bit of an upside for '07.

Thank you so much.

You bet.

Dara Mohsenian, J.P. Morgan.

Good morning, guys.

Good morning, Dara.

Phoebe, just to double check on the inventory side in Q4.

It looks like you did not see much of an impact from inventory changes, so the draw down you had expected in Q4 just did not to materialize?

Is that correct?

Correct.

Correct.

All right.

Does that mean we should see an inventory draw down going forward, and is that -- is any changes there factored into the '07 EPS guidance?

I don't know that we're going to necessarily see a draw down in the first quarter.

We have -- some of the distribution changes in Europe have caused us to sort of have a different look -- or have a different level of inventory than we previously had.

And so we're trying to really work through those and work through some supply chain issues to make sure that we minimize those as we can.

What -- we ourselves sometimes are -- don't have the visibility to exactly what -- we don't have the visibility to predict it, necessarily, and so what we thought would happen doesn't necessarily happen although we worked very hard on our supply chain.

What we are doing is we're trying to disclose it so that you don't mistake it for organic growth when it is simply a change in inventory level.

Okay.

And can you give us an update on your business in China in terms of performance this year and growth opportunities going forward and perhaps the size of the business at this point?

Sure.

I'll talk about that.

China's one of our more exciting growth markets.

Jack Daniel's rolled right past 100,000 cases in the market during the fiscal year and ended the year approximately 125,000 cases.

There are a handful, maybe 6 or 8 premium distilled spirits doing very well there, and we're one of them.

Also during the year really over the last 18 months we've been a little more active in establishing Finlandia out in that market, to the point where it's up to about 25,000 cases or so.

And we have built our infrastructure there of local Chinese sales and marketing professionals who are really building the brand from scratch.

And one slight difference in maybe the way we're approaching that market is we really are maybe doing it in different accounts than many of our competition.

Certainly early on we were, but we are very much a part of what's going on in China as a company, and very excited about the growth rates somewhere in the 60 to 70% growth rate over the last 12 months, so very exciting market.

And one we're investing in appropriately.

Okay.

Can you give us a sense for any geographic expansion over the next couple of years and where you guys stand geographically?

Sure.

I mean, one of the things -- the work we've done is in our last 3 to 4 years, 5 years of SG&A investment are building this -- I just call it a more, more -- basically a distribution infrastructure that we can more directly influence and that we participate in more.

We do it often times in partnership with many people, but we certainly are exerting more influence.

And in doing so, we're finding all kind of opportunities for building Jack Daniel's more aggressively, expanding Southern Comfort or Finlandia or other brands in the portfolio.

A great example is the one I just gave you in China, but the flip of it would be Finlandia's strength in Poland where it is a very large brand, 450,000 case brand.

And on the back end of that, we are developing Jack Daniel's in Poland where it's almost up to 30,000 cases and growing rapidly in that market.

And so the brands can actually work well together to develop each other where we get some develop on one of the particular brands.

But as you go across -- I mentioned in my comments -- how broad the good performance was for the Company, not only across the portfolio, but the regions, there're just some amazing things that over the last 10 years we've been able to do.

I mean, in emerging Eastern Europe markets, Jack Daniel's is almost 300,000 cases now and growing at about 25%.

We had exciting performance in Mexico over the last 18 months.

We're very encouraged by even places like Romania, Jack Daniel's has gone over 50,000 cases and growing really fast.

So in addition to all these emerging markets, one of the things that gave us, I think, a lot of excitement over the last year, was it was really the first year that two of our older established markets at the same time returned to growth and that was Germany and Japan.

So I think in terms of geographic expansion, we're trying to get Jack Daniel's developed right now in over 100 countries and it's doing very well.

Finlandia's already in a very large part of the world and was when we bought it.

But we're trying to build it in a very healthy manner from the base it had.

So I don't think there's a lot of new markets where we have to go and establish a new distribution infrastructure in order to build the brands more aggressively.

Okay.

Great.

And then last, Phoebe, I think you referenced higher wine costs in fiscal 2007 in your comments.

Why is that?

Part of it, I think, is -- it's contracts.

That we -- I mean we certainly have that in there.

We also have -- I think it's just -- it's the mix of what the wine is and what -- which brands we're going to have.

How how we're sourcing into the brands that we have.

I think that we're also -- when you look at the mix of our wine portfolio, you have a mix of California and Australia, and from a different -- from different sources around the world.

And so I think that's a piece of it.

But we're still -- we still have those long-term contracts in wine and I think we still feel a part of that.

This year we have had lower wine costs, which have really been a part of volume, I think volume has really helped that.

I don't think we're anticipating the same levels of volume for next year --

Part of it -- part of it is that in this last year verses prior years where a brand like Fetzer, where a lot of those grape contracts are are associated, when you can grow the volumes as aggressively as we grew them versus the last couple of years, you actually see the real benefit in your cost of sales.

We have to cycle now on Fetzer against all of those positive numbers.

And when you start to really do it, it gets hard to forecast as aggressive a growth rate, so then you don't know if you're going to be able to go into the open market and actually get the lower cost juice.

So year-to-year, you'll see, I think, potentially higher cost.

But we always work to try to -- I mean, that brand has been a real challenge for the last five years and we've actually -- this past year was the first year we saw some light at the end of the tunnel on the cost.

And we're going to be working like crazy to continue to get cost advantage on Fetzer and Bolla.

I think Paul makes a great point, that it's a comparison against our good performance this year.

This year we definitely had improved performance in the wine, and cycling against that's just going to be harder, so we cite it for that reason.

Okay.

That's helpful, thanks.

Yes, thank you.

Bryan Spillane, Banc of America.

Hey, good morning.

Hi, Bryan.

Couple questions.

First on the -- on the inventory issue, just -- did you take a price increase recently, and did that have any impact on buying patterns?

I think we take a price increase virtually every day somewhere in the world.

I mean it's just we -- they're so widespread today we are implementing size-by-size, market-by-market these price increases.

But I think some of it really is particularly related to Jack Daniel's and Southern Comfort.

They're both growing and Jack Daniel's particularly growing everywhere, and the economics of selling Jack Daniel's are so much better than running short of it if you're a distributor or retailer, that all of them are making sure that they're supporting the brand and have sufficient stock.

So it's one -- I think it's one of the attributes you find in a hot brand or a rapidly growing brand.

And so it's harder to forecast.

But I can't peg it to any specific individual price increase, and just to give you a little color on what the volumetrics were.

I think -- I think the statistic is correct that year-over-year, the volumetric increase in inventories for Jack Daniel's was about 45,000 cases in terms of total cases verses days.

And for a growing brand, it's not that dramatic an increase.

Okay.

So it's reasonable to think with that growth rate you're not going to -- you may not have a material draw down in wholesale or inventories next year.

Of course.

I mean, these guys are all forecasting it on days, and so any time you break down the days you're looking ahead by the amount of days to see what you're going to sell.

So as the brand continues to roll a series of individual forecasts out there by our distributors as to what those inventory levels are.

Okay.

And, Paul, on the reorganization, can you just describe a little bit more fully how that changes the way that you're going to face your customers?

Are you going to be selling wine and spirits on one sales call, for instance?

Yes, but it's a little -- we for sure are.

I mean, part of this is -- our company in the U.S. -- wine and spirits market in the United States is about 5% share, and so you split it up into components and run it separately, you don't get the benefit of even the 5% share you've got when you get in and start working with distributors or retailers.

So where it makes sense, we think to use the influence that's available from aggregating your portfolio, which we think is in the trade channels of distributors and retailers.

We -- we're going to pull the whole thing together and coordinate it and use that influence.

And just to give you all a little background, we do that today on the retail side.

We've been working with the national accounts of the United States in a -- as a full portfolio for several years.

So the big change on this is pulling it together at our distributor level.

And to be quite honest, our people have worked around our organizational structures to coordinate some of this in the past.

So I don't know that it's that dramatic a change in the way that our distributors think about Brown-Forman.

We're just going to think be over time doing it better by pulling the whole portfolio together in the trade channels.

As important, though, to that is that by reallocating the resources and how we approach the U.S. market, it enables us to put in place around the country a lot of what we'll call brand specialists or brand ambassadors who can go to work every day in many instances outside the trade channels, creating public relations or working to activate a NASCAR event on Jack Daniel's or working to do what you and I might consider more consumer marketing end market.

And we think that's a real advantage and a real solid deployment of our human resources in addition to A&P.

So it's really intended to do both of those things simultaneously.

All right.

Thanks.

Thank you, Bryan.

[OPERATOR INSTRUCTIONS].

Carol Lintz, Fortis.

Nice quarter and a nice year, very happy with it.

I have two questions.

First of all, would you -- in the earnings that reported by Campari, they specifically mention how wonderful their business is with Jack Daniel's and other Brown-Forman brands on the Italian market.

I mean, they really led their earnings release with that comment.

Could you give us a little color on that?

And my second -- oh, okay.

And then I'll give you my second question.

Go ahead -- go ahead and do the second question then I'll comment.

My second question is with the Chambord acquisition, what assets did you get in addition to the brand?

Okay.

On the Campari commentary related to Jack Daniel's in Italy, I think the explanation for that has to be that a year ago they didn't represent Jack Daniel's or any of Brown-Forman's brands in Italy and this past year for them they did.

So it's that one-time infusion of those distribution profits associated with the first year of representing of a new brand.

And the year was actually for -- verses prior years, a transitional year, I call it.

A lot of inventory fluctuations and some of the transitional issues that occur when you switch from one distributor or partner to another.

And so for -- we really -- it takes us sometimes a couple of years to actually read what's going on down at the consumer level in the market.

But I think that has to be the reason for Campari's commentary related to Jack Daniel's, and it doesn't surprise me that it's significant for them.

And we thank them for it.

Yes, and we thank them for their work on it.

The second piece is the Chambord.

It's a very clean acquisition.

I mean, the -- we do -- obviously the biggest piece is the trademark.

But we also get the production operations and related buildings and on property in France with it.

It's not a huge operation, it's a pretty small operation for what is today a developing brand.

We also, of course, take on I think something like 20 employees as part of it.

But all-in-all, a very clean and relatively small acquisition.

We were very pleased about it and pleased it's closed.

Oh, yes.

I think this has a lot of possibilities.

Can you use that -- those assets in France as a launching pad toward -- in your business?

Or to expand the brand, build the number of SKUs?

Not really.

It wasn't in our thinking about it, and it really is a dedicated manufacturing and blending operation for Chambord.

Most of the products that we sell in Europe, particularly in France, are in some form imported, made in their original country of origin whether it's Finland or Italy, or in Southern Comfort's case, there's a couple of places around the world.

Jack Daniel's, of course, Tennessee.

So it's not a -- we don't see a lot of synergies out of that operation.

Thank you very much.

Sure.

Thank you.

Dara Mohsenian, J.P. Morgan.

Hi.

Can you give us a sense for on-premise verses off-premise results in the U.S. in Q4, and have you seen any change in the performance gap between those two channels over the last couple of quarters verses the last few years?

Not really.

Certainly on a quarterly basis.

If you stretch it back over 2006, that called a -- this will be an anecdotal comment, not one that's based on a review of NABCA data or anything like that.

But I would call it a continuation of the real solid trends that we've been seeing in both channels.

I mean, I know qualitatively in conversation with some of our distributors, they continue to think that the restaurant market, the bar market continues to be very good for spirit.

So I don't -- I haven't observed or heard anything that would lead me to believe that there's a slow down in the on-premise or that there is anything that's of a huge significance at the consumer level affecting the off-premise.

Okay.

Thanks.

Thank you.

Tim Ramey, D.A. Davidson.

Just a couple of quick follow-ons.

One on Sonoma-Cutrer.

I know that was ramping up to much higher production.

Do you anticipate that being a significant source of growth in '07 verses '06?

Certainly.

I mean, we've got, I think -- we grew the brand up to short of 0.25 million cases, I think.

But a very, very solid year, we got all sorts of new ideas and plans that we would be implementing on behalf of the brand, really over the next couple of years, but would expect to continue to grow Sonoma-Cutrer pretty -- pretty aggressively.

But what we consider also a really -- I mean, I'd call it a really respectful way to how the brand has been developed around the United States.

It's a predominantly on-premise brand.

We think there's great opportunities to get into the right places in the off-premise in the right way.

But also to expand it in the right on-premise accounts and also in building it further, I think we'll improve the velocity of the brand in the accounts that it's already in.

So it is a real gem, we think in the long-term plans of Brown-Forman.

And just one for Phoebe.

You mentioned a continued focus on acquisitions and maybe it was you or Don Grimes said we look at a lot more things than you probably think we look at.

Would you say this is still a target-rich environment or less so?

I think it is a -- very much of a target-rich environment.

I think that we have talked publicly about how many brand owners have come to us and how many outreaches that we have done and it's still quite -- it's vigorous and a very healthy environment for the transactions within.

If you think about spirits first.

In the spirits sectors there are thousands of brands.

And we focus -- tend to focus on sort of the impact, 100 of impact, 50, something like that.

But there are so many of them.

And to think about the consumer proposition and how the brands that you're building now could factor in to 10 and 20 years from now, it's getting that right, as well as being really savvy about brands that you think could do really well in Brown-Forman's hands.

So we are also looking for those kinds of things.

If you look at wine, its proliferation, I think, almost in wine that's almost a separate category unto itself in terms of what might happen there.

But in the spirit side, it's -- I would say it's target-rich.

We are very disciplined buyers and we are thoughtful -- very thoughtful and careful, rigorous, analytical, about what brands will do and how they will perform and how they will return good shareholder -- well, good returns to our shareholders.

So we do not look at size as important for size's sake.

We instead look at how that brand might really perform within Brown-Forman and what our great people here can do in terms of building those brands.

Tim, one other thing that I -- always have been observing on just how much level of activity is actually going on, as long as I can remember people have been referring to the latest acquisition as the last possibility.

And that's been going on at least for 19 years that I've been at Brown-Forman.

And one gauge I use is to see how busy our corporate development is and I know we've been promising them a slow down for about 6 years and it hasn't happened yet.

So one of the ways -- I mean, that really is a way to look at it.

There just is always really interesting stuff in this industry, particularly when it's growing at the rate that it is.

And potential sellers see the multiples being paid.

There's always going to be something to investigate.

Thank you.

Sure.

Thanks.

Thank you.

At this time, there are no further questions.

We'll close out today's conference by turning the call back to Mr. T.J.

Graven for closing remarks.

Thank you, Mary Ann.

I think that wraps it up.

If there are any follow up items, of course, feel free to contact us for the rest of the day.

And with that, we'll sign off.

Have a great day, thank you.

Thank you, all.

Thank you.

Thank you, this concludes today's Brown-Forman fiscal 2006 year-end conference call.

You may now disconnect.