Brown-Forman Corp (BF.B) 2007 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Brown-Forman first quarter fiscal 2007 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).

Thank you.

Mr. Graven, you may begin your conference.

Good morning, everyone.

Thanks for joining us today.

This is T.J.

Graven, the Director of Investor Relations at Brown-Forman, and with me here today are Paul Varga, our President and Chief Executive Officer;

Phoebe Wood, Executive Vice President and Chief Financial Officer; and Don Berg, Senior Vice President and Director of Corporate Finance.

I would like to remind you that this morning's conference call contains forward-looking statements based on management's current expectations.

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

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

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

The Company takes 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 results.

This release is available on our website at www.brown-forman.com under the section titled investor information.

We have listed in 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 our Form 10-K, Form 8-K and Form 10-Q reports filed with the SEC.

During the call, we'll also be talking about certain non-GAAP financial measures.

And these measures and the purpose for which management uses them and the reasons why we believe that they are useful are contained in the press release.

Now let me turn the call over to Paul Varga.

Good morning, everyone, and welcome to our call here this morning.

It certainly is a busy but very exciting time for us at Brown-Forman, with just this week earlier the announcement of our intent to purchase Casa Herradura.

Last evening, our announcement regarding our intention to explore a whole range of strategic options for Hartmann and of course our earnings release this morning.

Pulling the lens back even a little further on our first quarter, we would add to it our acquisition of Chambord and the integration of that brand into our Company.

The combination of our wines and spirits organizations was a significant impact on our route to market in the United States.

And roughly four or five weeks ago, our announcement regarding the Bolla winery negotiations with GIV and the potential that exists for us to sell that winery, but not the Bolla brand.

Phoebe will highlight the quarter one results here momentarily, but first I'd like to talk a little bit about the Casa Herradura acquisition and put it in the context of our Company's longer-term business strategy.

Let me start with the acquisition of Herradura.

We're very excited about these brands and the potential they represent for our Company's growth.

I'll start with the tequila Herradura brand itself.

In this brand, we think we will be purchasing a brand with a tremendous reputation, a brand of very high-quality, a brand with superb heritage, but also a brand that has been undermarketed in some ways, particularly in the United States.

In short, we think it's a brand with great credentials, but also great potential.

As I've reflected on it, I've thought that it's not often that a company gets a chance to buy a 136-year-old super-premium brand that's still at an early age in its life cycle.

As you can tell, we believe this brand has real upside.

El Jimador is also a wonderful brand.

It is one of the top-selling tequilas in Mexico today and it's at a price that is a premium to other industry leaders in Mexico, such as Cuervo and Sauza.

In the United States, el Jimador has been growing rapidly in recent years and it enjoys a similar price premium to Cuervo and Sauza and sells approximately for the same price as our own Jack Daniel's.

We believe this brand has upside potential too, particularly in the U.S. market.

In addition to the great brands we're purchasing, there are two other strategic aspects of this acquisition I would highlight.

One is the importance of this to Brown-Forman's furthering its international expansion.

This no doubt will give Brown-Forman a stronger presence in the important Mexican spirits market.

Additionally, this will allow Brown-Forman to be a more important participant in the growing U.S.

Hispanic spirits market, which is a segment of the U.S. that we expect to continue to grow and be more important to our Company's domestic business.

I'm thinking about Herradura and pulling the lens back a few years.

I want to reiterate a few goals, not all of them, but a couple of the goals we set for our company back around the year 2000.

One of those was to become the industry's best brand builders over some period of time.

And this ambition was dependent on us growing our brands organically and the idea was to make each of our brands better over a period of time.

And I believe as you reflect back on our earnings of the last several years, this organic development of our Company has been evident.

Most notable has been the performance of the Jack Daniel's and Southern Comfort, but the effort really does apply to all of the brands that have been in our portfolio.

A second ambition was to continue to strengthen our global distribution platform to further enable the growth we aspired for our brands.

And along the way, we looked into and implemented several new models and partnerships, most notably our successful UK cost-sharing venture with Bacardi, and I will also highlight our South African partnership with former Brown-Forman employees, who today run the Really Great Brands Company.

In some cases, we took full ownership and responsibility for the end market brand building.

Examples of this would be Australia, China, Korea, Poland and the Czech Republic.

And very importantly as we announced earlier this quarter was the consolidation of our U.S.

Wines and Spirits divisions to simultaneously improve our influence with the trade and our focus on the consumer.

Now the third aspiration was to position our portfolio for improved growth and performance overall.

Important to this goal was last year's sale of our underperforming asset, Lenox.

Thankfully, we have been doing more buying than we have selling and the additions that I will highlight going back five or six years would include brands such as the superpremium Chardonnay leader Sonoma-Cutrer, our premium vodka Finlandia, two excellent high-margin liqueur brands that are unique in their own rights, such as Tuaca and Chambord, and now the superpremium brand in the Casa Herradura portfolio.

As you reflect on each of these acquisitions, you might actually find that there are common attributes.

One is that they are all in attractive growing categories, some where Brown-Forman previously did not participate.

Second, you'll find premium, superpremium and even ultrapremium pricing that offers great margins and further pricing potential.

Each of the brands we found had existing brand equity; in some cases, latent brand equity that could be leveraged for additional growth in Brown-Forman's hands.

In short, genuine upside potential.

And finally, each of these strengthened our already strong U.S. portfolio, while in the case of Finlandia and the upcoming Casa Herradura, provided platforms for our Company's international expansion.

Important, along the way, we accomplished these exciting portfolio additions without taxing our balance sheet or limiting our Company's financial flexibility.

I will note that during this time, we expanded our consistent and already healthy dividend program and also repurchased our shares to the benefit of our shareholders.

In closing, we will be always working in some way on our brand building, our distribution and our portfolio.

However, we are quite encouraged that over the last five to six years, we have evolved our company in a manner that today has us better prepared for the next 10 to 20 years.

And of course, we're proud of the fact that during the same time frame, our financial performance has been at or near the top of our industry.

That concludes my opening remarks, and I now turn it over to Phoebe for a review of the first quarter.

Thank you, Paul, and good morning, everyone.

I know you'll agree with me that we have the fiscal year off to a strong start.

The base business is strong and we've made recent changes to our portfolio that Paul put into perspective for you earlier.

So I will focus on what we have been working on in the first quarter and how some of our strategic initiatives are beginning to come through in the numbers.

The brand-building focus of the Company and the emphasis on organic growth clearly come through in volume.

Worldwide depletions for Jack Daniel's grew at mid-single digits over the past three months and double-digit internationally.

Southern Comfort volumes growth in the U.S. accelerated to double digits.

Consumer trends here are better than in many years, and that's only partially offset by softness internationally, particularly for UK and South Africa.

Finlandia had double-digit growth in central Europe and high-single-digit increases in the U.S., a strong performance.

Volume trends for Canadian Mist and Early Times were positive, offsetting declines in Bolla and Fetzer premium varietals in the U.S.

But then there were double-digit growth rates in our superpremium developing brands, especially Woodford Reserve, Sonoma-Cutrer and Appleton Rum.

Now volumes are driven by a variety of factors, including our increased level of brand-building investments, a healthy 12% increase over last year, of which 2% is due to foreign exchange.

The higher volumes, price increases, foreign exchange and distribution changes contributed to the 17% increase in net sales for the quarter.

Focusing on distribution changes only, we see an example of a long-term decision beginning to emerge in the financial results.

In Australia, we now have our own wholly-owned distribution company, which is called Brown-Forman Australia; and in Germany, we are in our third quarter of a new arrangement whereby we have more direct control over pricing.

Under these new arrangements, we recognize and record excise taxes in revenues and in cost of sales.

In this quarter, changes in these two markets contributed about $33 million to net sales, roughly 6 points of the revenue growth for the quarter.

Now another consequence of these distribution changes is that reported gross margins -- that is, if you just divide gross profit by net sales -- has declined about 40 basis points.

But if you strip out all Company-reported excise tax -- after all, it's just a pass-through tax -- and calculate the gross margin on a strict net sales basis, the gross margin improved 130 basis points to 68.7%.

So to summarize so far, depletion volumes are up on most brands in the portfolio, gross profit increases in most brands in the portfolio as we mentioned in the press release, advertising increases are healthy and net sales reflect changes in distributions that are improving our margins.

There are a couple of items to highlight in the quarter -- foreign exchange benefits and SG&A expenses.

The weakened dollar had a positive impact across the income statement -- here's where.

In sales, it accounted for 3% of the growth.

The foreign exchange effect on advertising was 2%, as I mentioned above, and the bottom-line effect was $10 million favorable to operating income.

The other item to note in this quarter was the SG&A costs.

Part of the increase was due to combining our wine and spirits sales and support organizations in the U.S. announced in May.

In addition, to support the distribution changes we've made, such as Australia and Germany, we also made incremental personnel investments due to our new arrangement.

As a result of these changes and including the U.S., this accounts for more than half of the 19% increase in SG&A for the quarter.

Over the year, we would expect that SG&A would be somewhat over our average growth rate, but much less than what we experienced through July.

Bottom line in the first quarter -- reported operating income grew 5%.

But last year, the results included the benefit of consideration we received when our distribution rights for Glenmorangie were bought out, and that was $14 million.

If you take that benefit out of last year's results and remove the $10 million effect of favorable foreign exchange this quarter, our operating income grew 10%.

That's less than last year's, but very strong and within the expectations we set last quarter.

This quarter, we did not have any inventory fluctuations compared to last year's that would distort the underlying trends, which we have had and did highlight in the past few quarters.

And cash generation remains strong -- about $400 million on a rolling 12-month basis for free cash flow through July 31.

Free cash flow is cash from operations, less capital expenditures.

So our brand-building focus and gaining more control over our distributions were key themes coming through the numbers this quarter as well as the strategy of adding to our portfolio of brands.

We completed the purchase of Chambord for approximately $250 million in cash at the end of May.

We are very excited about the opportunities for this brand and its future.

And then this week's portfolio announcement -- yesterday, we announced that we will be exploring strategic alternatives for our Hartmann business, including a possible sale.

Hartmann represented less than 2% of our sales last fiscal year.

Our strategic efforts have been focused on building our beverage business, and we have concluded that it's time to evaluate strategic options for Hartmann with the intent to have a decision reached by the end of the calendar year.

Monday, we announced our acquisition of two great brands -- Herradura and el Jimador, and associated assets and personnel.

Paul spoke about this exciting new planned addition to our portfolio.

We plan to fund the $876 million Casa Herradura transaction with cash and debt, most of which will be debt.

We will still retain excellent financial flexibility and substantial borrowing capacity, and Moody's has reaffirmed our debt rating.

This will allow us to further expand our portfolio or return cash to shareholders in an efficient manner.

The earnings impact of the Casa Herradura transaction is not included in our full-year outlook.

The acquisition of Casa Herradura will be dilutive to our earnings in fiscal 2007 by approximately $0.08 to $0.12 per share, including transition and other onetime expenses.

We expect our earnings for the year to be in the range of $3.10 to $3.30 per share, representing growth of 7% to 14% over comparable prior-year earnings.

Despite the favorable impact of foreign exchange, the Company has not changed its outlook for the remainder of this fiscal year, given the uncertainties surrounding the domestic economic environment, slightly moderating U.S. growth trends for Jack Daniel's, and the impact of lower volumes and higher costs for the Company's mid-priced wine brands.

The earnings per share range is still predicated on expectations of 10% organic growth.

This concludes our prepared remarks and we will now take your questions.

(OPERATOR INSTRUCTIONS).

Dara Mohsenian, JP Morgan.

Paul or Phoebe, I was just hoping to flesh out your reiterated 2007 guidance a bit.

It looks like your expectations are more muted in the balance of the year despite the strong result from Q1 and the FX benefit.

So I'm just trying to mesh the caution in the balance of the year versus the solid Q1 result and what's driving that.

Well, I think a number of factors, one being it's very early in the year still.

But as you note, the foreign exchange upside, we are commenting on some potential areas of caution.

I think the ones that Phoebe mentioned are -- we're alert to the fact that there is uncertainty in the U.S. economy, that the first quarter results for Jack Daniel's, although we think they are lower in terms of the reported depletion than the consumer takeaway seems to be, but it's something we're being sensitive to.

And then also I think Phoebe mentioned these wine volume and costs are -- when you combine them and given the time of the year that we are at, are basically offsetting each other.

And how has the business performed in August so far versus the Q1 results?

We're not going to comment on any results related to the Q2 until we do our Q2 call.

And in terms of Jack Daniel's, can you give us some more detail on the slowdown in depletions there?

I know it had a difficult comp, but reasons behind that, and also how the brand performed in on-premise versus off-premise this quarter?

Sure.

I think the overall Jack Daniel's performance is still extremely strong.

I'll note the 12-month trend for the brand is in excess of 7% worldwide, which is a very strong, robust rate on the base of volume we've got.

The U.S. quarter was light, but again, a further review of the consumer takeaway numbers would move our assessment of the Jack Daniel's business in the United States to basically mid-single digits versus the lower single digits we experienced in the first quarter.

The worldwide trend, if you pull back on this and look at it over a couple of years at just in excess of 7% is down couple of points from where we were and what we were experiencing maybe two years ago or 18 months ago.

But the more I've reflected on it, the base at the level we're at right now, a 7% growth rate for Jack Daniel's implies something the range of 500 to 600,000 cases of annualized growth, which is superb.

And so as we look at it, I mean, it is an area of U.S.

I'd call it on watch for us.

We're just trying to make sure we understand it.

And I think that the U.S. results are being probably impacted in part by the fact that Jack Daniel's is so pervasive and has such a broad, broad demography that it sources its volume.

So if a portion of the U.S. economy is impacting or people are affected by the U.S. economy, a portion of the Jack Daniel's franchise will be affected by it.

So we're seeing perhaps some of that.

And then I think we are continuing to take pricing in the United States;

I think it's an important piece, and perhaps more aggressively than we see some of our competition, who in fact we think may actually be doing more discounting.

So we've got more of a long-term view on this, and so I think all of those things might add up to some of the moderation in the U.S.

Okay.

And on-premise versus off-premise performance specifically?

Yes.

I think as we look at it, we're not seeing a big change in the distribution of the business in the on and off.

I think there has been some noted commentary about casual dining, which I think is -- those numbers are softer for the entire industry.

But when we studied the on/off split for Jack Daniel's, it's harder to get those numbers tight on a three-month basis.

But if you look at on a six or 12, you feel a little more comfortable, and we think that proportionate business is about the same.

Tim Ramey, DA Davidson.

Congratulations on a great quarter.

Couple of questions.

I'm not sure how far you're willing to go on the Herradura.

But, Phoebe, would you hazard a guess on the $0.08 to $0.12 of diluted -- how much of that would be viewed as onetime in nature, buying out the U.S. distribution contract or distribution in Mexico, and how much would be sort of true operating income dilution there?

Right.

Let me give you where I think the EPS dilution is going to come from, Tim.

It really comes from the fact that interest expense is going to be greater than operating income.

I think you need to recognize that that operating income is likely to be depressed by our increase in investment behind the brand.

And so that's clearly going to be coming through there.

The extent of that probably we will not be disclosing.

The second thing is these transition costs to which you allude; those are uncertain at this time.

We're anticipating that we have a number of things to do again, and when they fall and when we get them done I think is just unknown at this time.

And the third reason why we're expressing it is a range, Tim, is that, frankly, we don't know when the transaction is going to close.

It could be -- we are confident it will be toward the end of calendar year, but whether it's the end of November, say, or the end of December could have some big impact on that stub period and how much of it comes into us.

So therefore, we have expressed it as a range, and I think all of those are pieces that could get -- that ultimately would be reflected in the numbers as they come through once we own it.

And Paul, you have mentioned once or twice, I think, that this is a platform for growth in Mexico.

Does that imply a change in your relationship with Bacardi in Mexico?

No, not at this point.

We are assuming business as usual for right now and it really is a platform for growth for these brands before it.

But for I would say Brown-Forman overall, any time you take a more significant presence either in distribution or with brand, it gives the Company the opportunity to learn the market more and that really is more of a long-term comment that the Company will have a great opportunity as we become a more significant participant in that market to do more things.

And that can be a wide range of things, everything from line extensions to new product development to any new ideas that we're able to generate over a longer period of time.

And just one more, if I could.

The -- I understand that the Romo family has, through some trusts, a significant holding of agave production that is a source for the two brands.

Is there anything we need to know about that, or is that a potential worry?

I think we are very comfortable with what we've learned through this process relating to our access to supply of agave.

I think we're very comfortable.

Ann Gurkin, Davenport.

Just wondering if you can talk a little bit about the tequila category outlook in the U.S. -- what are you seeing for pricing?

Is it a little more rational this year versus maybe last year?

Well, I think you do have to look at it year by year, and of course it is influenced by the supply/demand dynamics if you look at it over a longer period of time.

But it really has been a very solid arena for pricing.

If you just reflect back on it, there is a significant growth in this premium, superpremium, even we've been using the term ultrapremium segment of this category.

Of course, it's very well know that in the United States, Patron has been expanding very rapidly, but a lot of the players that are being sold at above the $25 price point are doing quite well.

And actually, we think it's a source of upside, particularly for Herradura, because it has been more flattish over the last several years and we think it can participate in some of the expansion that the rest of the segment is experiencing.

So we think -- there's always room when you have brands that are priced up at this level to take moderate price increases.

You tend to have less price-sensitive consumption going on.

But I don't think any -- at least in our assumptions, that we need to do major price repositioning as we from time to time have done with some of our other brands.

I'd like to just add one thing, Ann.

Quoting from Adam's Liquor Handbook 2006, I just read the -- spirit -- and they are talking about tequila, rose 9% last year to 9 million 9-liter cases, the highest percent gain among all spirits categories with the exception of the small volume Irish category.

That's just to give you some color as to how strong it is in the U.S.

Do you see that high-single-digit growth rate continuing for the whole category?

It's hard to forecast it, but I will say that we do expect that the premium end of it, the premium and superpremium end of it, would continue to grow faster than the category as a whole.

And then secondly, in your press release referencing this acquisition, I guess you alluded that maybe the margins would be in the range of Brown-Forman's overall margins, operating margins.

I guess that surprised me a little bit.

I thought the margins should be higher than that.

And I guess can you help me with that?

Well, I think it's pretty straightforward.

I think there's a lot that we will learn as we get in and as we move toward close to figure out the brand-building models for these.

But at this point, we really are assuming going forward that the margins are what we approximated in the release.

So does that approximation reflect the necessary investment spending?

Sure.

I think it's investment -- it is costs, it is SG&A, A&P, it's the whole income statement as reflected in that comment.

Thomas Rousseau, Gardner, Rousseau and Gardner.

Good luck with your acquisition announced.

I had some questions on Jack Daniel's and tequila, but they have been addressed.

If you step back and look at the history of Mexico, when Allied-Lyons announced the acquisition of Pedro Domecq, I think it happened -- I think they came to terms three weeks before the massive collapse on the peso in the early 1990s.

And it seems like Mexican sellers seem to have good timing.

So to what extent with the election controversy smoldering on in Mexico City and just in general, to what extent have you filtered this acquisition through a political risk measure, and what's your thought on both currency exposure and also political risk?

I will take the political risk, Tom, and I will let Phoebe maybe address the currency exposure.

We spent a lot of time in our upfront valuation of this assessing the environment in Mexico and concluded that, yes, it is a riskier environment for sure than, say, doing business in the United States today, but versus a decade ago or so that there was more stability, and on a variety of fronts we thought.

But I don't mean to imply that we don't go into this with our eyes wide open, that this like a lot of environments we've gone into around the world, going back even 12 to 15 years when we started our advancing markets where it can't be a source of -- it's something that we should be sensitive to, be conservative about in our planning, for sure, but also not avoid going into exciting spirits markets as a result of it.

And we think that it has helped us considerably in places like China.

It's beginning to help us in Russia and other places in Eastern Europe.

So I think we took that basic philosophical approach to this acquisition and the future of our company in Mexico in general.

So I do think though what you're saying, there's ways we try to reflect it and we try to do it by being realistic about our expectations going forward.

Does that help?

Yes, no, very good.

Thanks.

With regard to foreign exchange, Tom, once we are into this acquisition a little bit more, we'll have a good understanding of how those cash flows are going to be.

Certainly, we're going to have a lot of costs that are denominated in pesos, we'll have revenue denominated in pesos and how offsetting they may be to each other, we'll find out.

But there is a significant amount of dollar sales as we're talking about the growth of these two brands in the U.S. market.

And so that certainly is going to be a piece of it.

The management of foreign exchange will be important to us.

The actual acquisition price is in dollars, and we will just -- [mostly] -- I mean, we do not face any foreign exchange risk, so to speak, as part of the transaction.

But we will clearly be watching those flows of dollars that we've built in both natural and market-related hedges so that we protect that investment well.

A couple of questions on the brands that you've highlighted in the annual report.

Woodford Reserve you suggest has now crossed over 80,000.

What is the continuing growth rate if you see it continue up this now higher base, you start to see it meaningfully impact margins?

Southern Comfort is the same way in South Africa now that it's over 85,000.

Do you see both of those having a chance to continue to grow at the rates that they've been growing off these now higher bases?

Sure.

I think we are optimistic about the future for both of them.

I think they're a little different, and in an important way.

Southern Comfort, it doesn't have any aging requirements, so the ability to expand it more rapidly in my view is easier.

If you happen to get some great momentum going, whether it's in South Africa or even in the United States as it's growing today, you can supply it beautifully.

It's a little more difficult with brands that have aged inventory requirements because you have to make those assessments well in advance.

So I will say that we still are very bullish about Woodford's long-term potential, not just here, but as American whiskey and bourbon take root in international markets as well.

And so going forward, sure, off low bases, you have very exciting growth rates.

But I think our growth rates for Woodford Reserve in the 20 to 25 to 30% range at this stage of development still pretty early, still expanding distribution and getting lots of initial trial, are pretty good growth rates.

Great.

And lastly on Finlandia, congratulations on that continued volume growth -- I guess 15 million -- or 15% up to over 2 million cases.

At what point do you start to see pricing and margin come through that 80% of the volume that's non-U.S.?

Well, I think it's very, Tom, based on -- because it's a very broadly distributed global bland.

So some of it is influenced of course by things like foreign exchange.

But I would say that -- I think you are aware of this -- that the pricing on the brand internationally and the premium segment development internationally is not at the same pricing level as it is in the United States.

We have been able -- it's been very important and helpful to us to advance our price positions in Eastern Europe moderately over the last couple of years, and that helps the gross profit contribution of those brands.

I think a more important contributor to Finlandia going forward will be when we can get more A&P leverage, because in these early years, we've been investing significantly behind the brand to develop it and because vodka is just very competitive.

But as the brand gets a consumer franchise, we think you have the ability, at least on a percentage basis, to put more of that money toward the bottom line.

Bryan Spillane, Banc of America Securities.

Just two quick questions.

One, Phoebe, if you can comment on wholesaler inventories.

I guess at least your depletion growth in the first quarter for Jack Daniel's in the U.S. implies maybe there were some wholesaler inventory drawdown.

But if you could just talk about that just more broadly and whether your guidance for the year assumes that you will see some drawdown of wholesaler inventories.

And then Paul, just quickly, if you can talk about the competitive dynamic between Jack Daniel's, Crown Royal and Jim Beam, if that has changed at all more recently.

It seems like Crown Royal especially has been a bit more aggressive.

Okay, I will go ahead and take the competitive question first.

I think the environment is extremely competitive in the United States because it's so robust.

And increasingly, all of the companies are investing in the United States and I think getting a little bit more dependent on the U.S. for profit growth.

As it relates to Jim Beam, Crown Royal and other whiskey brands, we are not seeing a significant shift in, say, market share between the three brands.

I would call it a very consistent pattern where Jack Daniel's is continuing to grow at significantly higher rates than Jim Beam off a very high base, and Crown Royal has been outperforming on a percentage basis Jack Daniel's in terms of growth for some time off of a lower base.

And when we look at those ratios, we haven't seen those change considerably.

I will say over longer periods of time, this is particularly true of Crown Royal, that the price differential which was quite considerable years ago, whereas Crown Royal had a larger premium to Jack Daniel's in terms of price, has been narrowed considerably.

And you are always looking at different price points relative to shelf and discounting and ad pricing and it varies market by market.

But as a general statement over a longer period of time, Jack Daniel's and Crown Royal have gravitated to more closer pricing to another.

On the inventory, the question that you raised, there was a drawdown of inventory of Jack Daniel's in the U.S.

However, overall inventory worldwide on all brands, if you include all of that, there's no impact at all on our year-over-year earnings.

So I just to -- if your question is -- are we going to see a reduction or a hit to earnings?

The answer is no.

Okay, so your guidance basically assumes that your shipments will equal your depletions for the year?

Yes.

Yes.

Bryan, let me add one thing on that.

I know you're probably remembering, which we are as well, that several of these last few quarters we were expecting adjustments to this.

And in the end, one of the things we're beginning to speculate on is that with all the distribution changes we've made and the wonderful growth Jack Daniel's is experiencing in such a broad base, that we may just be at new inventory levels for this brand for its growth expectations in the future.

Inventory takes a natural seasonal shift anyway, and so we would expect that.

It's just when we see abnormal changes from year to year, we try to highlight them.

Colin Santana, Banc of America Securities.

Just one question.

Do you expect to term out a portion of the debt used to acquire Herradura?

I'm sorry -- you need to repeat the question.

I'd like to know if you guys plan to term out a portion of the debt used to acquire Herradura?

Okay.

As we announced earlier, the acquisition of Herradura will be a combination of cash and debt.

The lion's share of that is going to be new debt.

It is very possible that we could term out that debt, but those decisions have not yet been made.

Tim Ramey, DA Davidson.

Thanks for the follow-up.

When the Lenox business was sold, it certainly improved returns and growth rates -- or apparent returns and growth rates on the whole Company.

Is the returns on Hartmann or the growth of Hartmann enough so that when we take that out as a discontinued op, it will move the needle?

I don't think it will move the needle, Tim.

Lenox was a pretty substantial sized business.

And Hartmann, Hartmann's revenues last year as reported in the annual report is $32 million.

And I don't think that we would consider that, which is less than 2% of our overall sales, as being material, nor was any contribution to profit.

So I don't think you'll see any change in the needle should a decision be made about -- we're looking at what to do about Hartmann.

But one way or the other --

It also represents a smaller percentage of our invested capital, too.

It's not a large -- or a part of our invested capital.

As was Lenox.

I assume that it doesn't even meet the threshold of needing to do a restatement.

Is that correct?

That is correct.

Okay.

And is there an actual change in your view on FX hedging, or did we just get lucky this quarter?

There's no change in our view on hedging.

We actively use hedging in our company, but we're also subject to the vagaries of the U.S. dollar and its fluctuations.

Last year, there was certainly a negative effect on us because of foreign exchange.

This quarter, we've had a very positive effect on foreign exchange, and we actively use hedges and we are hedged largely -- in our main three currencies that we have exposure to, we are largely hedged for the balance of the year.

I don't know if you will do this, but do you have a boiled-down volume number for the entire spirits business that you'd be willing to give for the quarter?

I don't think we report it, so I would be estimating what it is because we tend to look at it in all its components.

We are such a brand-oriented company that we tend to think about it that way.

(OPERATOR INSTRUCTIONS).

Patrick Stowe, Priority Capital.

Most of my questions have been answered, but maybe a few quick ones, mostly on the guidance.

I'm wondering, given the FX benefit in the quarter, does the full-year outlook contemplate any further FX benefits?

It does have some modest foreign exchange benefits built into that number.

We have no -- I will just say we have no downside, and we would expect that we could have some additional, maybe a few more pennies of upside in our -- and that's built into our earnings outlook for the full year.

And is that outlook for you guys, is that any different than it was the last time you provided this guidance, or were you considering that kind of couple pennies FX benefit at that time, too?

Well, when we gave the guidance a quarter ago, we did not know that we would have the benefit that we had in foreign exchange, so you're right in pointing out that this guidance is different in that we have some foreign exchange positives built in already in the first quarter.

But it's also, as we noted both in our release and in commentary earlier, the reason that you would not see improved guidance because of that is because of the things we cited related to -- just some of the -- the earliness in the year, the uncertainty surrounding some of the U.S. economy components and these wine volume and costs that are just given us enough caution right now that we're sticking with guidance.

I guess that was kind of -- I was going to ask for a little more detail on that because it seems like you continue to envision I guess kind of 10%-ish organic top line growth and what seems to be improving gross margins.

And I guess the difference for the remainder of the year would be the caution that you have and have mentioned, and just what I guess is some above-average SG&A increases.

Is that --

On the SG&A side, it was very heavy as we reported here in this first quarter, but we would expect that to moderate actually in the second half of the year and on average for the full fiscal year to be just slightly higher than our historical rate.

And we've incorporated that into the forecast.

I think that the offset to foreign exchange you're talking about is just some of this uncertainty and just a very important piece in any spirit and wine company's business at this holiday season, and we aren't even into that -- the thrust of that season yet.

I would also just like to clarify, Patrick, I think you said we're looking at top line organic growth of 10%.

We're also looking at organic growth of 10% operating income, just to clarify that.

Okay, but when I kind of pencil in the numbers, and obviously excluding the dilution from the acquisition for the last three quarters of the year just comparing year-over-year, it looks like the growth is more like kind of low-single digits versus a 10% number.

Am I missing something in the math there?

It sounds like you are to me.

I mean, I don't know how you're doing your reconciliation.

Certainly, you can reach out for T.J.

Graven, if you just work with him. (multiple speakers).

Sure.

I will just follow up.

I appreciate the time.

Good luck to you.

Thomas Rousseau, Gardner, Rousseau and Gardner.

On the invitation to ask more questions, I couldn't resist.

Paul, can you just provide some color within the dramatic continued growth internationally for Jack Daniel's, some sort of regional analysis, maybe with an eye towards Asia and China, and then just in general what markets may have helped fuel that sharp growth abroad?

Sure.

I wish I had a bunch of new news for you, but I've got what I would consider to be a continuation of our historical good news on this front.

It really is -- I mean, when I go across the world, the European numbers for Jack Daniel's continue to be strong.

And I'll tell you, it's a big help to be another year into some of our new distribution arrangements in Europe.

A year ago, there was just a lot of transition going on with either new arrangements or new partners.

And so I think we're in a better place today and we're certainly investing in both people and brand expense to support our expectations of growth in Europe.

And it continues as you go sort of from the top of Europe all the way down to South Africa, is the way we tend a look at it.

We continue to grow at double-digit rates there and see -- still receive continued opportunities.

That's why we're continuing to invest.

And then as you move east toward Asia, again, it's much of the same story.

We're very encouraged by what we're seeing in China, Korea, Thailand, Taiwan.

The North Asia business continues to be off a small base, I'll admit, to be very much a developing brand in Jack Daniel's.

On the tail of it, we are also beginning in a place like China to expand Finlandia as well, which is I think a great sign for our Company.

So while we have talked a little bit today about the U.S. and some of the quarterly performance, when you really look at it on a longer-range basis, Jack Daniel's continues at a solid and almost unabated double-digit growth rate overseas.

And that cluster at the end, the Asian China, Korea, Taiwan and Thailand, small base -- what would that amount to by now?

Are you over -- are you at 5% of global volumes, are you at 2% of global volumes in terms of those regions?

Well, let me give you a couple of examples because regions aren't so bad to disclose.

But I'll tell you, examples like that business adding up to in excess of, say, 0.25 million cases on Jack Daniel's, whereas just 10 or 12 years ago, it was virtually nothing.

And I think I recall on an earlier earnings release talking about the Eastern European business, which it was virtually nothing 10 or 12 years ago, which today, when you pull it all together, is doing approximately the same amount of volumes in some of the (multiple speakers) markets.

So I mean, one of the things that we think is very positive about Jack Daniel's geographic diversity is we've got a lot of markets now that are moving through milestones like 25,000 cases and 50,000 cases, and it's not all coming from one channel or one key country.

And so this is the result of a lot of broad-based, hard work on the brand for the last 15 years.

That's what you showed in the annual about something like Southern Comfort in South Africa at 85.

Once you get those milestones met, I suspect that it can accelerate from there.

It can.

And Tom, I must admit, I was expecting a question as to whether or not we had any plans for our new tequila brands in NASCAR, so I'm glad you didn't ask that.

At this time, there are no further questions.

Mr. Graven, are there any closing remarks?

No, Jodi, that wraps it up.

Thank you, everyone, for participating, and have a good Labor Day holiday.

Thank you all.

Thank you.

This concludes today's Brown-Forman first quarter fiscal 2007 conference call.

You may now disconnect.