Brown-Forman Corp (BF.B) 2007 Q3 法說會逐字稿

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

At this time, I would like to welcome everyone to the third quarter fiscal 2007 conference call.

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

After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS]

Thank you.

Mr. Graven, you may begin your conference.

Thank you.

Good morning, everyone.

Thank you for joining us today.

This is T.J.

Graven, the Director of Investor Relations at Brown-Forman.

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

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

Also joining us today by telephone is Owsley Brown, Chairman of Brown-Forman Corporation.

As always, this morning's conference call contains forward-looking statements based on management's current expectations.

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

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

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

And the Company undertakes no obligation to update any of these statements, whether due to new information, future events, or otherwise.

This morning, we issued a press release containing our results for the third quarter.

The release can be found on our website at www.brown-forman.com, under the section titled Investor Relations.

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

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

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

These measures and the reasons management believes they provide useful information to investors regarding the Company's financial condition condition and results of operation are contained in the press release.

And with that, I'll turn the call over to Owsley Brown.

Good morning, everyone.

With the announcements we made last week on the leadership transitions associated with my retirement this fall, I thought I'd take just a couple of minutes before we get into our earnings to give you a little context about the -- that goes with the board's actions and executive promotions.

These changes are the culmination of the leadership transition process begun several years ago when my business colleague Bill Street retired.

And it will be fully implemented, this process, when I reach Brown-Forman's customary retirement age for executives in September.

Simply stated, the board has elected to split my duties amongst a number of people to ensure two extremely important things.

Number one, that the Company is superbly run for many years to come for the benefit of all of the shareholders -- the public shareholders and the family shareholders alike.

And two, to recognize through appropriate actions the helpful nature of the Brown family's continuing commitment to the long-term success and independence of the Company.

On the family side, the board's election of Garvin Brown IV to take my place as the presiding Chairman of the Board of Directors will be effective at our September 27th meeting.

He will chair our board meetings and generally facilitate the variety of important activities that our strong board does.

And he'll continue in his regular job of leadership of our remarkable brand Jack Daniel's in Europe, Africa, and in Russia.

This move also continues a very important tradition of the Company of active involvement of the Brown family in board leadership.

In addition, I think it's wonderful that three other talented Brown family executives;

McCauley Brown, Campbell Brown and Marshall Farrer will take my place on three of our most important committees in management; strategic resource allocation, corporate strategy, and the executive committee.

Now, on the business side, Paul Varga's becoming Chairman and Chief Executive Officer of the Corporation reaffirms the Board's high degree of confidence in Paul's leadership of the business and makes it clear that he is the top business executive of our Company and is responsible to the Board for its overall success.

So you see that we have -- we have given one group of titles dealing with the board leadership, in the case of Garvin Brown IV as presiding Chairman of the Board of Directors and to Paul Varga, we have given the titles that are appropriate in the U.S. -- the traditional title of business leadership of Chairman and Chief Executive Officer of the Corporation.

Now, Paul will be very ably assisted in -- on the business side by a number of people, including two of our most senior executives.

James Welch, Vice Chairman of the Corporation head of Strategy and Human Resources, who will join the Board for its March meeting, ultimately taking my spot as a second senior management member on the Board.

And Phoebe Wood, our Chief Financial Officer, who is being promoted to Vice Chairman of the Corporation -- indicating that Paul, Garvin, the rest of the Board and management will increasingly rely on Phoebe's leadership skills and talents in a number of areas, but particularly in the areas of finance.

As noted in last week's announcement, Stephen E. O'Neil, a long time director, will retire as planned from the Board at the end of this coming April after many years of distinguished service, for which we're all very, very grateful.

And we're fortunate to be adding to our Board, Bill Mitchell, the Chairman and CEO of Arrow Electronics, who will begin service as independent director at our March meeting.

Our Board has asked me to continue serving as a director after I step down from executive management on September 30th.

And so I plan to play a constructive role, but as an individual board member, not as a senior executive.

This will also enable me to be readily available as a counselor to Garvin Brown in his new role as presiding Chairman of Brown-Forman's board.

So Paul, congratulations on your well-earned promotion and I now turn the call over to you.

Thank you, Owsley.

And good morning, everyone.

Hopefully you've all had a chance to review our earnings release from this morning where we reported on the strong third quarter growth of our Company.

Phoebe will discuss it in more detail here, momentarily.

Prior to that, I would like to comment very briefly on our Company's progress on a slightly long period of time.

And I'll begin with where you would expect me to begin, I hope, which is with the Jack Daniel's brand.

Jack Daniel's continues to grow very nicely.

And today, as one of the world's most valuable and healthiest distilled spirits brands in the entire world, and we feel it still has significant untapped growth potential around the world.

I thought I might provide just a couple of facts about Jack Daniel's and where it stands today.

It is rapidly approaching both the nine million case milestone and the point where the brand will generate more of its volume internationally than it does from its home U.S. market.

To place this in context, just seven years ago, the brand sold only six million cases and derived roughly 40% of its business from outside of the United States.

Therefore, over the last seven years Jack Daniel's has grown approximately one million cases in the important U.S. market while growing approximately two million cases outside the United States.

Now, in addition to the brand's volumetric progress, Jack Daniel's continues to demonstrate the capacity to sustain consistent moderate price increases around the world.

Putting it all together; we are very proud of our progress on the Jack Daniel's brand and especially appreciative of the efforts of our employees and partners who are responsible for that progress.

Now, given the importance of Jack Daniel's to Brown-Forman, it might be easy to overlook the other brand development work happening at our Company.

For example, we have five brands other than Jack Daniel's that individually are approaching or today exceed two million cases of annual depletion.

Those brands are Southern Comfort, Finlandia Vodka, Fetzer, Canadian Mist, and Jack Daniel's & Cola.

Combined, they account for nearly 11 million cases of annual volume.

And over the last 12 months, these brands have collectively grown at an impressive 8% rate.

More impressively, the combined gross profit for this grouping grew at more than double that 8% rate over the same time period.

Now, in addition to the work we are doing on behalf of these already large brands, we're also working very hard on our smaller, more developmental brands, such as;

Woodford Reserve, Sonoma-Cutrer, Tuaca Liqueur, Gentleman Jack, and Bonterra wines, to name just a few.

These brands are drawing a strong double-digit growth rates and collectively account for over one million cases of annual volume with very attractive gross profits per case.

Carrying out this work very well, over extended periods of time, is how we're able to report the strong results we are today.

And is also one of the reasons why our Company's 16% total shareholder return over the last five years far exceeds the 7% growth rate of the S&P 500 on a same metric over the same period of time.

Now let me turn the call over to Phoebe, where she will go through the Q3 earnings.

Good morning, everyone.

This morning we reported earnings per share from continuing operations of $0.90 for the third quarter of our 2007 fiscal year.

While reported earnings were down 8% compared to the same prior year period, last year's third quarter included a net gain from changes in our Australian distribution operation of $0.14 per share and a gain in the sale of our formal Jekel winery assets of $0.04 per share.

Excluding those and a few items this year that net to zero, including favorable foreign exchange, the impact of lower trade inventories, and acquisition-related expenses; earnings per share in the quarter grew 12%.

These results are very strong, reflecting a slight acceleration in the quarterly growth of our business, an outstanding global holiday selling season and continued strength in the global market for premium beverage alcohol brands.

The 12% underlying earnings growth in the quarter brings our year-to-date underlying growth from 9% through the first six months of the fiscal year to 10% through January.

These excellent results continue to reflect volume and profit gains globally for Jack Daniel's, Southern Comfort, and Finlandia, and continued exceptional growth behind the Jack Daniel's & Cola ready-to-drink brands in Australia.

Revenues were up 20% for the quarter, although the weaker U.S. dollar accounted for about four points the revenue growth, as export sales of our U.S. made brands continued to benefit from favorable foreign exchange trends.

Six points of our reported growth are due to structural changes in our distribution model in Australia.

Brown-Forman Australia is now responsible for the collection and remittance of excise taxes in these markets, increasing revenues.

On an underlying basis, revenues grew approximately 9% in the quarter.

Gross profit was up 17% for the quarter.

A weaker U.S. dollar contributed approximately four points of the growth and changes in distribution added another three points of growth.

On an organic basis, gross profit improved a healthy 10% in the quarter.

Advertising expenses increased 11% in the quarter.

The weaker U.S. dollar contributed about three points to this growth.

The remaining growth reflects increases in investments behind Jack Daniel's and several of our developing brands.

SG&A expenses were up 14%, due in part to transition expenses associated with the Casa Herradura transaction and higher investments in the Company's route-to-market strategy in certain international markets, particularly Australia.

We also monitor how the level of trade inventories is affecting our results.

Results in the current quarter were negatively affected by a year-over-year decline in trade inventories.

Our full year guidance reflects our expectations for some additional reductions in the fourth quarter of this fiscal year as we continue to work with our distributor partners to improve the efficiency of the supply chain.

Looking now at the performance of our brands.

Jack Daniel's global depletion grew at a mid single-digit rate in the quarter.

Volumes in the U.S., now over 4.7 million cases on a 12-month rolling basis, grew in the low single digits, while the brand grew at a double-digit rate outside of the U.S.

In the UK, the brand's second largest market, growth was very strong in the quarter, particularly in light of the difficult market conditions, which have been noted by us and other companies in the beverage alcohol industry.

There continues to be a shift from on-premise to off-premise consumption in this market and our selling efforts and promotional plans have been adjusted accordingly.

In several other key international markets such as Germany, South Africa, France, Australia, and Japan, Jack Daniel's recorded double digit volume gains in the quarter.

Global volumes for Southern Comfort, following two consecutive fiscal years of 5% growth, continued to post solid mid single-digit gains in the quarter behind healthy growth in the UK and south Africa.

Finlandia volumes grew at a double-digit rate, fueled by continued gains in Poland.

We're very pleased to be reporting for the first time on two new brands in Brown-Forman's portfolio;

Herradura and El Jimador.

We added these brands as part of the purchase of Casa Herradura on January 18th for $776 million.

As you would expect, there's much excitement around the Company surrounding the addition of these brands to our portfolio.

Along with that excitement, of course, comes the hard work to integrate the brands into our operations.

We're developing brand-building plans and strategies, integrating back office functions, such as accounting and financial reporting processes and information systems, beginning to understand the management of agave, introducing the Herradura employees to the rigors of being a publicly-traded company, and working through the ownership change in the Mexican distribution operations.

Since we completed this acquisition, we have incurred expenses with the integration work and more is expected to occur over the balance of this year and into the next fiscal year.

These expenses are considered to be one-time in nature.

More than half of the expected dilution in fiscal 2007, and slightly less than half of the expected dilution in fiscal 2008 earnings per share, is attributal to integration costs.

And the expense is incurred to acquire the distribution rights in the U.S.

This shows up as a non-cash amortization over the next five years of the purchase of these distribution rights to the Herradura brand in the U.S. of about $0.03 to $0.04 per share per year.

We are spending this money now because we believe the successful and rapid incorporation of the Casa Herradura brand and business into Brown-Forman's is critical to ensure that we realize and maximize the results generated from the Company's investment behind these fine brands.

You know from our press release on January 18th that the purchase price was adjusted between the announcement of the deal in August and the closing of the transaction in January.

A major factor in the $100 million reduction of the purchase price was to reflect a softening of the business during the last half of calendar 2006 in Mexico for the El Jimador brand.

The El Jimador brand is one of the largest brands of tequila in Mexico, which is the second largest tequila market in the world.

While there was some softness experienced, the brand is getting our full attention in this important market.

Additionally, we're actively working through the transition in the important U.S. market, where we see tremendous category momentum and brand potential for both Herradura and El Jimador.

Now turning our focus to the balance sheet and the statement of cash flow.

You'll notice there have been some significant changes in the composition of our balance sheet when compared to April 2006.

Since then, we have spent more than $1 billion in two acquisitions;

Chambord and Casa Herradura.

The purchase price is reflected in higher assets.

Inventory has grown due to the Blue Agave now reflected there, fixed assets are higher related to the production and distribution operations in Mexico, and intangible assets, including the brand names and goodwill, increased.

Through the first nine months of the fiscal year, cash flow from operations totaled $278 million.

After capital expenditures of $39 million and dividends of $106 million, free cash flow before acquisitions was approximately $133 million.

Acquisitions of both Chambord and Herradura, again, totaled slightly over $1 billion and were funded through the issuance of commercial paper and cash on hand.

It's our intention to replace the commercial paper issued with a more permanent facility before the end of the fiscal year.

It's likely to include some [inaudible] denominated debt.

Turning now to our outlook.

Based on continued strong underlying growth trends, the Company is narrowing the range of its full year earnings outlook to $2 -- excuse me $3.20 to $3.30 per share.

This outlook includes an $0.08 per share gain from the sale of the Company's Italian winery and represents forecasted growth of 10% to 14% over adjusted prior year earnings of $2.90 per share.

The revised outlook anticipates in the fourth quarter of the fiscal year; an expected higher tax rate verses the prior period, modest further increases in foreign exchange benefit, further increases in spending behind the Company's premium global brands, higher grain costs, and expected further reductions in global distributor inventory levels.

As previously communicated, the Company projects the acquisition of Casa Herradura, which closed on January 18th, 2007 to be dilutive earnings for this fiscal call year in the range of $0.14 to $0.18 per share, which includes the $0.02 reported in the third quarter.

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

[OPERATOR INSTRUCTIONS] Your first question comes from Lauren Torres of HSBC.

Good morning.

Hi, Lauren.

I was hoping you could talk a little bit more about Jack Daniel's trends in the U.S., particularly in this quarter.

We saw the brand grow, I think, around a low single-digit rate in the first quarter and return to the mid single-digit rate in the second quarter.

And now we're seeing back low single-digit growth in the U.S.

I just wanted to get a sense of what you're thinking with that brand?

Are we seeing somewhat of a level of inconsistency here or a slowdown?

Well, you definitely revealed the pattern that we've experienced this year.

I think the way we try to look at it is over -- little longer periods of time, sort of look at rolling six and 12 month trends to try to get some insight.

I think -- there's no doubt that versus, say two fiscal years ago at this time, where Jack Daniel's would have been up in the higher than the mid single-digits, say 6% plus, we've been seeing things more in the 3s and 4s and 5s these last 12 months or so.

We think there's a lot of stuff going on in the U.S. that helped contribute to that.

But we still think that the brand's growth rate in the sort of mid single digits to -- for sustained period of time, is what we're looking at for Jack Daniel's worldwide.

And I would think that the U.S., while it's slightly below that right now, will continue to contribute to the Company's growth.

Okay.

So you're not seeing anything unusual as far as -- it's more of a comparison issue than anything else?

Well, there's comparison -- I think it's -- clearly, if you're getting into the factors explaining what's going on, I think the U.S. market -- it's just very competitive on, not only investment levels, but I'd say also in pricing levels today.

And as big as Jack Daniel's is, it interacts with virtually every large leading brand, because the Jack Daniel's brand is so big.

I think that's one of the contributing factors.

And it gets exacerbated a little bit when we continue on, as we plan to do, with our moderate price increases, if other people are taking their prices down.

So you'll see some softening there, whether it's in the promotional and advertising efforts, the retail environment, or in some of the consumer take-away trends that you sometimes see reported through in this country, NABCA data.

But that -- I think that would be the largest contributor to it.

It isn't anything that goes to fundamental health of Jack Daniel's or a lower investment posture on Jack Daniel's or anything like that.

Okay --

Excuse me, Lauren.

This is Phoebe, I think if you notice that the total distilled spirits rate of growth in the United States has been moderating.

I think -- that's just an industry trend that's quite noticeable.

And you can see that coming through in the Jack Daniel's numbers, as well.

A little bit, yes.

It's just noticeable.

But total spirits overall is not growing at the same rate that it did a couple of years ago.

Okay.

Thank you.

Your next question comes from of Dara Mohsenian of JPMorgan.

Morning.

Hi, Dara.

First, Phoebe, I was hoping for some details.

Can you give us the inventory and receivables impact from Herradura in the quarter?

I'm going to turn that to Jane -- and she's got it, Dara.

Okay.

Yes, what you'll see on the balance sheet is -- you'll see about $99 million for receivables as our opening balance sheet and about $140 million for inventories, of which about $70 to $75 of it is agave.

Okay.

Great, that's helpful.

And then Phoebe, can you give us a sense for the impact from higher grain costs in the quarter?

What percent of your COGS grain costs are?

And how we should think about the impact going forward?

I'd be happy to.

Some perspective; if you look about a year ago May, corn was about $2.50 a bushel.

And this month it's $4.20 a bushel, so it's nearly double what it was.

The impact for the first half of our fiscal year was $0.015 to $0.02 per share; very similar in the second half because we have hedges in place.

We're looking ahead, we think it may be as much as double as that.

When you look at the COGS for our whiskey, the single largest ingredient is the barrel.

And it's the wood and all of the things that go into that, what I'll call the raw materials it's sort of awkward -- ingredients to say it that way.

About half of it comes from a grain.

And so the grain, especially the corn, really has an impact.

But that's a modest cost relative to the cost of that barrel.

And so -- we just give you that kind of flavor.

This year it's been -- most $0.03 to $0.04.

Next year could be double because we don't have the same hedges in place we did this year.

Okay.

Do you anticipate moving the needle on price increases a bit more to offset that?

Or is that something you just have to swallow, basically?

Well, we have a consistent pattern of increasing prices over time on our brands, following the important idea of our founder, [inaudible] that's Jack Daniel's founder, by the way.

And so we have a pattern of that and would continue to do -- would continue to have price increases.

Those price increases, clearly are -- in this case will be covering some additional cost of goods sold, and particularly this year in the whiskey, in ways that it hasn't really for a long time.

So we're -- but I just want to give you that perspective in terms of how important we think that price increases are generally, but in particular, we've got a specific reason for it this year.

Just wanted to -- some of the -- we put everything in the mix when we look at how much to take a particular price increase, literally by market and by size.

And if your raw material costs are going up, it certainly impacts your thinking on, just like inflation or just along the lines of competitive pricing; you have to put that in the mix.

And you also very much look at the price positioning, the brand in general.

Are you trying to make some progress on that in general over a long period of time?

So all those factors go into it.

We also, when we have cost increases, on one component we really do go look for other ways to get costs down on other ones to help absorb it.

We'll look at all of that.

And as we come up with our FY '08 guidance in the next several months, we'll try to provide a little more color on that.

Okay.

That's helpful.

And then, Paul, in which international markets do you have distribution contracts coming up over the next year or so?

And over the last few years, clearly, you've benefited from taking greater hold of distribution in a lot of international markets.

Where do we currently stand in that process?

Do you think there's still a lot of opportunity left there?

Or have we probably already seen most of the benefits from that experienced already?

Well, you've been following our history on it for the largest markets -- many of the largest markets.

We have done distribution moves or altered our relationship with partners over the last five or six years.

The one that's forthcoming within the next year is one of our longest relationships and partnerships, which is Japan.

And we're at work on that right now.

And beyond that, I think, we're a couple of years out on some of our most significant relationships and contracts.

A lot of those are in western Europe and involves Bacardi and other companies, as well.

So I think we're a couple years down the road on those.

I think, verses the prior couple of years where we've had a constant activity on that front, we think it's slowing down some here in the last year or two.

Okay.

Thank you.

Sure.

Thanks.

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

Good morning, congratulations.

Hi, Tim.

Phoebe, last quarter you mentioned that you had hedged some of your FX.

And now we're getting a benefit again.

Can you help us understand what's going on there and what might be the future impacts?

Indeed.

We use a variety of hedging techniques.

Fewer forwards than, say options and callers.

We try to preserve the up side for -- by essentially buying a floor for ourselves.

So therefore, we have preserved the up side.

And that's coming through for us.

We think we've got a little bit more up side, just based on all of the hedges that are in place.

A little bit more -- that's included in our guidance for the balance of fiscal '07.

We also have a hedging program that is in place across more than just any fiscal year.

So we're actively hedging out the cash flow that we see coming in for fiscal '08.

And that is that we do not have wild swings and gyrations, but as a general philosophy, we will tend to be buying a floor and keeping -- and maybe giving up a little --

-- part of the up side --

-- and giving away some of the up side, but keeping some of the up side, as well.

That's why you keep seeing it coming through.

Got it.

And Paul, you were mentioning distribution contracts.

I think Bacardi has the distribution in Mexico; how long does that contract have to run?

And is there a thought of giving that -- your brands to the Herradura agency team?

It goes a couple years still.

And we remain committed to work -- and that's really for -- prior to the acquisition, the brands that were in place, which is Jack Daniel's and Finlandia, primarily.

And so we remain committed to working with Bacardi through that contract.

Great.

And then, you mentioned -- I think it scared some folks that Jack Daniel's had some counterfeiting in China on the last quarter.

Can you talk about the performance in China and whether that was a continuing issue for you?

Yes, it still continues to be an issue.

I think there has just been the same factors associated with the second quarter call, where it's just been very competitive amongst, really a small set, maybe a dozen or so brands in that market.

I'd say the consumerism piece of it remains very exciting and something we're going to continue to invest behind.

But because of the -- I'd say it's the combination of competition and then counterfeiting and a little bit of other competitive activity; we've seen that market soften for us these last six months.

Thanks very much.

Sure.

Your next question comes from Ann Gurkin of Davenport.

Good morning.

Hi, Ann.

If we could start with the tequila category in the U.S.; you said there was tremendous momentum?

Can we talk a little bit about pricing?

What are you seeing for pricing for tequila?

I think that -- I think it varies, certainly, by price segment.

Down at the very lowest level, you don't see as much upward pricing potential as you do at the very highest level.

I think the -- the brands that occupy the price points between say $15 and $20 are also finding a lot of competitiveness there, where you're seeing quite a bit of discounting, and I'd say, price competition.

And even if they're taking price increases, you sometimes see them dealing them back.

Whereas the brands that you've -- I think you'd realistically expect this, the brands up at above $30 a bottle, $35, even $40 a bottle, have not only tremendous margins going in, but a little bit more upward pricing potential.

So you put through a price increase for this year?

Excuse me?

Have you put through a price increase for this year?

Literally, we just got the brand that we acquired from Casa Herradura and so we're in the process of establishing baseline price structures and trying to understand it.

I think we're more likely to have new pricing activity that relates to FY '08 and beyond.

We will look at opportunities for pricing, though on our other tequila brands that were within our portfolio.

Okay.

And can we just review capital spending for '07 and '08?

Sure, I'd be happy to handle that.

Typically, we have spent capital sort of $50 to $55 million.

I think year-to-date, we're at $39, I think is the number that I quoted.

And so I don't see really any changes in that trend.

We might come in slightly under for the year, but that's pretty even.

What we don't really have a good handle on is how much the Casa Herradura capital demands are going to be.

You can probably look at sort of the $10 million a year, but that is a guess.

Incremental.

Incremental, yes.

But I just don't know that yet.

And I could be wrong by $5 million either direction, just to give you an idea.

We need to go in there and make sure that we understand just quite what needs to be done.

But it remains fairly modest, I would say at that sort of $50 to $60 million level per year.

But they do -- that business will have more ongoing capital requirements than, say our previous acquisitions, that would have been like Finlandia, Tuaca, Chambord -- we wouldn't have forecasted having large capital -- ongoing capital commitments with those.

But with this one, because of the supply chain that we purchase with it, we will.

Okay.

And then switching back to the U.S., also with Jack Daniel's; do you think you can deliver low single digits depletion growth in '08, given a moderating U.S. liquor market?

Yes, I think there's still a debate -- let me comment on the moderating U.S. liquor market.

I think a lot of attention gets placed on what we saw on the growth rate in the U.S. -- this is a distilled spirits comment and not a wine comment -- between say September -- ending September and ending December to January.

But if you pull the lens back and look back over the last 12 months for -- just the business that I've seen ending January, they're all in the high three single digits going back the last couple of years.

I think there definitely was a moderation throughout the holiday period, and maybe even into January a little bit, verses what we were seeing in the mid to high 4% -- almost 5% growth rate in the U.S. and what we're seeing now, sort of rolling 12 month trends just below 4%.

I -- well on that level, it's moderated.

If you could look back over the last several years, the business has been growing at about -- just below 4%.

I don't have any less enthusiasm for the U.S. volumetric market.

I think where it's become more competitive is really in the pricing.

Everyone has recognized how attractive this market is for many of our competitors who are not getting the growth in places like Europe or other places.

This is their growth market.

And so we're seeing a lot more competition for market share.

And I think that actually is one of the reasons why Jack Daniel's has seen its trend moderate some.

But as it relates to getting something like 3% growth going forward, I would feel confident that we would, at least, be trying to get that.

Great.

And I just have to ask if you would care to comment on the potential or your interest in Absolut, given that you have a vodka brand?

No.

Got to try.

Thanks for that.

Thanks for the question.

We don't often comment, as you know, on -- try to speculate on acquisitions.

But the one thing I would say about that potential acquisition that's out there and that people are looking at, it always seems that everyone wonders whether or not there will ever be another acquisition, and boy is that one.

That's a wonderful brand that I'm sure will get the interest of a lot of people in the industry.

Great.

Thanks very much.

Thanks, Ann.

Your next question comes from Andrew Sawyer of Goldman Sachs.

Hello.

I just had a couple of quick questions.

First, back in January when you reduced the purchase price on Herradura, you kind of alluded to some fundamental issues with the brand in Mexico.

I was wondering if you could elaborate a little bit on what you've learned as you dug in the first five or six weeks you've taken ownership?

I think just -- generally, what we're trying to do is to really understand the -- once you get in and have ownership, you can start to look at everything, from the programming schedules for the brand, the trading patterns, all of the -- the pricing, you start to look at how the brand basically is commercialized in Mexico.

So we're learning all of that.

And we had some understanding of that as we were going through the closing period and doing our due diligence.

I think the biggest reason is that the -- just the shortest is -- is the profitability associated with El Jimador in Mexico look to be lower through the course of 2006 than we had anticipated -- or that had been in our assumptions.

So we went to work trying to understand it and were able to come to terms with the family who was selling it that it warranted a purchase price adjustment.

What was the issue on the profitability level?

What were they doing that was different than what you thought before?

Lower volumes was one of the contributing things.

And also some lower margins in a -- in part of that you can actually go then, to start to work on when you actually buy the brand, but I'd say the combination of both lower volumes and lower margins.

Second, Estee Lauder announced the leveraged buy back this morning and we saw Dean Foods announce something like that last week.

I was kind of wondering how you guys are evaluating, perhaps being a little more aggressive with your balance sheet, verses maintaining some acquisition flexibility?

And if the change in your role to become Chairman as opposed to a family chairman has any impact on that?

I'll take the first part and I'll let Paul answer the second part.

It's really a question of use of one's balance sheet and how one thinks about cash and being friendly to the shareholders.

I've noticed, with great interest, what some of the other publicly traded firms have done sort of almost replicating what they might do in a private equity or go private, almost, transaction.

Brown-Forman has always been very thoughtful about doing those kinds of things that are in the shareholders' best interest.

We continue to evaluate the use of our balance sheet.

At the moment, we have spent $1 billion over the last nine months, we think very effectively, in planning for the long-term growth of this Company.

And we -- we believe that those kinds of investments are very, very sound.

At the same time -- and they use, then, the financial capacity of Brown-Forman and its great cash generation.

At the same time, we are open and alert to the kinds of things that are out there.

We just talked about how many times acquisition opportunities come up over the course of any given decade.

If you look back 10 years, the number of brands that have changed hands in our industry is phenomenal.

And so you think of a strategic buyer, such as we are, and how important that can be.

So we do have -- we recognize we have a strong balance sheet, we have employed $1 billion of it.

We're open and alert to those kind of ways in which we can return cash in a very tax effective, tax friendly way to our shareholders.

And I note that other companies are doing quite aggressive things in terms of their balance sheet.

I just -- I note that without making any comment about what we might do, except I know that we have made a pretty aggressive step in the last year with $1 billion of acquisitions, which we think will grow this Company for decades to come.

I'll just answer -- we are always looking at both of those; the amount of valuation, both possible acquisitions or opportunities to do things with the balance sheet are constant exercise of the Company.

And I'll just tell you that any change in title doesn't change the way that I think about it or approach it.

Really -- sort of always believe you should think like an owner.

And I feel like all of us who work at the Company, not just me, try to think about it that way, from the viewpoint of doing really well for shareholders and for all stake holders of Brown-Forman.

I would try to apply that same philosophy to the work going forward.

Kind of a shifting gears here; turning to the UK, I think -- I would imagine most of us were surprised by the strong bounce back we saw in Jack Daniel's in the quarter, particularly from what we've heard from other companies.

I was kind of wondering if you could put some context on the third quarter relative to the second quarter; whether there was some timing issues that may have caused one to look much stronger than the other?

And also, any impacts on the actions you guys might have taken to help drive the recovery there?

I'll be happy to give some clarification.

I think it's best to get rolling averages here, because I think you could have some timing kinds of effects.

We had a very -- we had an excellent holiday selling season in the UK.

I think just that our promotional efforts and our activities were really resonating with consumers differentially than with our competition.

I think we have to look to the UK team and applaud the UK team for what they did there.

On the other hand, I think if you look longer term and stretch it out, do some kind of 12 month rolling; you get overall effect.

Jack Daniel's, which is a -- in the UK, is the second largest market, a very strong market for us.

Jack Daniel's -- throughout Europe, there's different stages of life cycles than there is in the U.S.

And you have a combination of difference in life cycle, and you've got, also, foreign exchange.

Let's not forget that piece of it.

And then, I think some very good brand building and promotional skills by our team there.

The other thing that really occuring, philosophically, by our group in the UK is, you have to recall that for the last decade or more, almost the entire effort of Jack Daniel's has been focused on the on-premise channel.

And at the size of the brand today and the importance, particularly during the holiday season, we've become increasingly focused on making sure our brands are presented really well in the off-premise.

Not to take away from the on-premise, but in addition to, particularly during the key transactional periods when people are buying during the holidays.

I think we've stepped up our effort, in terms of off-premise promotion and presence here in the last few months, as well.

Maybe just one final question, sorry to take up so much time.

Phoebe, just a clarification, when you said -- on the ongoing basis from Herradura in '07, slightly more than half is one-time in '08, slightly less than half is one-time; is that correct?

That is correct.

Well, thank you very much, guys.

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

Hey, good morning, and congratulations, Paul and Phoebe, on the new appointments.

Thank you.

Thanks, Bryan.

Hi.

A couple of quick questions.

First, Phoebe, did I hear right?

It was $99 million of increase in accounts receivable just related to Herradura?

Yes, Bryan, just -- this is Jane.

Hey, Jane.

And just to clarify on the receivables, there's actually customer receivables in there and then there are some tax receivables in there too.

And I'll split those in about half.

If you're thinking about how much are customer type of receivables.

Okay.

So when I think about -- if Herradura sales are roughly $200 million annually, you've got about $50 million of outstanding customer receivables; is that the way to think about it?

Roughly, although there were some twists too, I guess -- what we assumed as receivables and what we didn't, contractually.

But yes --.

Is it right to suggest that maybe there's a little bit of inventory?

Just thinking about -- that's about a quarter a year sales, I guess.

Is there a little bit of excess inventory out in the trade, at this point, that has to be worked down?

Indeed, indeed.

Absolutely.

Okay.

Which is customary in Mexico in this time frame, as well, post the holidays.

And then -- okay.

That's helpful.

And then, just in the UK, as you shift, Paul, from more -- I guess to more of an off-premise focus; what impact do you think that will have on pricing for Jack Daniel's -- how do you protect the price integrity of Jack Daniel's, given how brutal the price competition is in the off trade in the UK?

The same way we've been doing it in other markets where it's occurred, I think.

It is you just have to resist the temptation, when you're trying -- I wouldn't say it's a shift in focus as much as it is an addition.

We continue, even in markets where most of the business -- 70%, for example, of the business may be in off-premise -- you still want to have a disproportionate amount of your effort going toward the on-premise activity.

And I think the key is, while trying to do an excellent brand building effort that is non-discount related in the off-premise, to make sure that it doesn't detract from the work you're doing in the on-premise or in the market at large.

I think you just have to go in with that mind set and philosophy and execute it very well.

And there are times where you will have to take the hit on a market share -- volumetric market share, not maybe a dollar, but a volumetric market share when the competition intensifies in the off-premise.

And we've been dealing with some of that, more or less, for the last 20 years on Jack Daniel's.

And you just have to have a really good long-term view as you look at it, so that you can keep Jack Daniel's advancing, in terms of positioning and image.

And then just one last question.

One of your competitors has talked a bit about a scotch/whiskey shortage.

And I guess two things to -- how that may or may not relate to you.

One, where you stand in terms of your inventory, looking out over the next three or five years, I guess, for Jack Daniel's?

And -- so where inventory is, relative to demand trends and whether or not there's adequate inventories?

And then the second is, my sense of what could happen with the scotch/whiskey market is that you'll see more inventory held longer and put into longer age product so -- with the idea that you're going to sell more of the higher priced product than the lower price.

Assuming that happens, is there an opportunity for Jack Daniel's to kind of be viewed as a substitute?

In the case of a transition like that in the scotch/whiskey market?

Sure, to the extent -- the one thing that happens there, is if they've got it a genuine shortfall -- and I haven't seen that kind of data.

On the surface, it would seem to improve the potential for scotch/whiskey pricing to go up, which would be a -- you would think a real help for a brand like Jack Daniel's.

But I think the second part of your question, which deals with the ability to substitute Jack, that's what we've largely been seeing over the last 15 years, where Jack Daniel's has been taking share in international markets away from scotch/whiskey brands.

I think that, either their price is going up significantly or there being a shortage, would only give greater potential there.

And remember too, on our supply situation, we are -- it's one of the great real benefits of -- really Tennessee whiskey and bourbon, where we just do not spend as much time in the barrel as the scotch/whiskeys do.

We spend far less type in the barrel.

So for us, the potential for forecasting that go out anywhere from eight and 10 and 12 and 15 and 18 years; we just don't have that sort of exposure.

And we were expecting, given the investment levels we were making on Jack Daniel's and some of our other whiskey brands of the Company as well, to see the brands progress.

So we went into a higher production mode several years ago and are in good shape today.

Interestingly enough, I think we possess one of the leading indicators, and that is used barrel sales.

Because as we dump the barrels of Jack Daniel's, those barrels have primarily two destinations.

One to Scotland and the scotch/whiskey, where they fit in the wonderful used Jack Daniel's barrels to make wonderful scotch/whiskey.

Or two, they go to Wal-Mart as planters.

And so --- with very happy plants.

Just kidding.

To be clear; we do see that there has been an increase in demand from the scotch/whiskey makers for Jack Daniel's barrels.

Usually for rum and tequila, as well.

That's right, thank you.

Our leading indicator that we have would confirm what you've heard from other people.

I was afraid you were going to say the leading indicator was going to be my end consumption.

There you go.

There you go.

Thanks, guys.

Thanks.

Your next question comes from Thomas Russo of Gardner, Russo & Gardner.

Well, first I would -- if you can hear this call, I'd like to thank Owsley for his years of careful stewardship and for delivering Brown-Forman in such fine health to the new team, both at the board level and the operating level.

Thank you, Tom.

Appreciate it very much.

You're welcome.

Tom, that's terrific.

You're welcome.

I also wondered -- I worry, Paul, that you may have kept my call to the last because of the flaming finish of the Brown-Forman car at NASCAR Daytona.

I hope you get maximum mileage out of that spectacular effort at the end.

Tom, we were looking for a way to get additional exposure, and boy, did we find it.

And we crossed the finish line, too.

Well done, and certainly in a very photogenic fashion.

I just hope the '07 was broadly seen.

Question for Paul about the United Kingdom.

Do you sense that there's anything left in the pressure in that market towards drink/drive legislation or the no smoking in pubs, as it might have affected the demand; so that some of the on-premise slowdown may be temporary, due to changing factors?

Or do you sense that it's a more permanent to off-premise?

Yes, I think the answer -- often times as these policy changes that are intended to fundamentally alter social behavior -- they end up being a combination of both.

You end up getting an early initial reaction and then it'll settle into a pattern -- I'd call it more -- a more moderate reaction.

I think we're already at the stage where we've definitely seen a reaction there in the on-premise as a result of some of the regulatory and policy changes that are going on there.

You would expect it to moderate, I think, over time.

But some level of it -- our experience has been, sticks around as, I think, intended by some of the social policy, for quite a bit of time.

Has there been any regulatory efforts to try to restrict your opportunity to drive volume on-premise through promotional activity?

What do you mean by that?

Well, maybe -- no, you can't sponsor nights -- or whatever you might have wanted to do with signage or for sponsorship on-premise.

Have you been restricted in the United Kingdom?

Or maybe even in other markets, from an adult only, on-premise marketing push that's helped build so many brands over time.

Yes, not much.

The amazing thing about Jack Daniel's in the UK is that a lot of it -- we definitely supported it -- and it was a standard brand, literally, on the optic, which is a limited brands of distribution on display in the UK pub.

Jack Daniel's has really grown there on, I'd say efforts predominantly done at the marketplace at large, the consumer then pulled through the on-premise accounts.

We would provide, I'd call baseline level of promotional support where it made sense.

But a lot of the activity was work that was going on in the market at large that ultimately culminated in the pubs and bars and restaurants.

And so it -- I wouldn't say we're particularly exposed on that.

Thank you.

And lastly in the UK, if -- competitors describe the ruthless price competition through private label at retail, mainly the main supermarket chains.

Have you seen any of that start to surface in premium spirits yet, in those same channels and the consumer drawing away from the branded products?

Particularly, in the UK where it's been so ugly in wine?

At the price level we're at, Tom, we just aren't -- private labels aren't a good substitute for what we sell.

And it really isn't.

I think there's a little to-be-continuing efforts with strength of some of the retail customers around the world.

But as it relates to Jack Daniel's or Southern Comfort, you could see, I think, maybe as you get into lower price brands at Brown-Forman, but particularly those two, we haven't seen anything at all.

And I wouldn't expect to.

Wonderful.

And then Phoebe, on the comment, which was so interesting with cost of goods sold, that barrel is your most expensive.

Do you end up using a net number to pass through the income statement, sort of cost of new barrels less recovery from sale forward to Wal-Mart for planters or wherever else they go?

And then accrue over the bottles produced during that year?

How do you actually accrue for those expenses?

We put the full cost of that new American oak-toasted barrel in cost of goods sold.

Yes.

And any proceeds from it --

Shows up in other income.

We don't allocate it back.

Because there's some years where there is very little demand for this.

I see.

Usually, we just put it through 100% in the new barrel costs go through in Jack.

Okay.

Great, Phoebe.

And then, as you expressed the cost of goods sold impact this year, it sounds like the full year impact through hedging might only have been $0.04.

Correct -- of corn.

Is it then that you think next year, on this higher base, will have another $0.04 of incremental impact?

Or would next year conceivably be a full adverse $0.08 compared to this past year?

Not that I tend to focus on earnings per share, but I'm curious about how it will cycle.

It's going to be $0.08 next year if we -- if prices stay where they are and -- that's the big assumption in there.

If you took today's prices and forecast that out for next year, that would be a full year, on-hedged effect.

And that would not include any other efforts we're doing at the Company to try to offset it, Tom.

That's a clean, on the grain cost alone.

Thank you, both.

Congratulations.

Thank you, Tom.

We have a follow-up question from the line of Tim Ramey of D.A. Davidson.

Thanks for taking the follow-up.

Paul, on the El Jimador brand, would you describe that as true slowdown in business trends?

Or was it just a misunderstanding of the baseline level through the due diligence process?

I think a combination of -- sort of selling the brand into the trade above its consumer take-away level at the time.

And then in addition, because of some of the competitiveness of the Mexican market, a actual slowdown in the consumer take-away of the brand, as well.

A combination really of the both; that it would have had higher inventories than its consumer take-away rate and its consumer take-away rate declining somewhat.

Okay.

And the $0.02 that hit the third quarter, would that be described as one-timey type stuff or operating diultion?

It's hard to believe that there could have been much operating dilution in just a couple of weeks.

There really wasn't -- this is Jane -- there really wasn't any operating dilution in the quarters.

Primarily made up, therefore, of two things; which is the transition, one-time expenses that you alluded to, as well as the incremental interest.

Okay.

13 days of interest expense.

Terrific.

Thank you.

Thank you, Tim.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Lauren Torres of HSBC.

Just a quick question on global inventory levels.

I know you mentioned a further reduction in the fourth quarter, but can you just give us a sense of where we are in this process?

Yes, sure.

Where we are in the process is, we've made a good deal of headway in the third quarter.

It's hard to predict these things, as you know, but we think that we're pretty close, internationally, to getting back to our target levels.

And there's some more things we want to obviously do in the U.S. and work with our suppliers and distributors in the U.S. to get levels to what we consider to be more in line with optimal supply chain.

So there's still some more work there.

Do we have a time frame on the U.S., as far as getting it to a preferable level?

U.S. is in pretty good shape.

I think -- this is supply chain work that you keep working on all the time.

We have put in our guidance that several more days of inventory will be taken out.

Most of that is oriented toward international, where we're working on really shortening the supply chain.

Those are efforts that we talked about last quarter that we're going to keep talking about this quarter, too.

But it's something that we talk about.

What we try to do is we try to provide visibility to it so that you know how much of our results are due to inventory changes --

Fluxation.

-- as opposed to what's happening at the consumer level.

That's why we talk about it.

Lauren, a couple of calls ago, I forget when when it was -- I'd spend a little bit of time on.

The statistic we use internally -- call it the depletion adjusted gross profit, which is really a key metric for us.

And one of the things that it does is it really smooths out and eliminates the impact of the -- field inventory levels.

And so we try to look at that -- and from time to time, we'll provide the long-term measures on that for you so you can get a feel for it.

But you're only as good on these inventories as your forecast.

And when you see a brand jump up real quick or go down real quick -- the example being, here in this year, the one that has changed direction a little on us has been China.

And so you can imagine, as we sent product over into China originally, the shipments that went in there, we probably sent in more.

That happens to be a market where we ship to ourself.

It provides an of example of what happens when there's a quick change -- a change in the trend line of a particular brand in a market.

And so, one of the reasons we try to give all this visibility to it is you can understand it the way we try and understand it.

Okay.

And if I could ask just one more question -- with regard -- I know you don't give brand by brand performance on a quarterly basis, but you really didn't touch much upon your mid-priced brands, particularly your wine business.

If you could give us any sense of any improvements with those brands?

Yes, actually the -- those brands -- the mid-priced Fetzer had a -- what I would consider to be a very nice holiday period.

And trying to think if I add back in January, I think it had a nice January, as well.

One of the brands, it's an agency brand, that is very important to us during the holiday season is Korbel champagnes.

And they had a very nice period, as well.

The Bolla brand, I think, was continuing to struggle volumetrically.

But actually was beginning to -- but we started to see signs that it's improving its volume trend.

And then Canadian Mist, which is the other large one, has been going through some price repositioning.

And so the volumes are all sort of in the 3% to 5% range.

But we're trying -- they were expected declines, as we've been trying to we position the brand upward, in terms of price.

It's a good question because they're very important to our cash flows and are good sized brands.

And they're doing pretty well.

Okay.

Thanks.

Sure.

Thank you.

At this time, there are no further questions.

Mr. Graven, are there any closing remarks?

There are no closing remarks.

Thank you, everyone, for joining us and have a great day.

Thank you.

This concludes today's conference call, you may now disconnect.