Brown-Forman Corp (BF.B) 2012 Q4 法說會逐字稿

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

At this time I would like to welcome everyone to the fourth-quarter fiscal 2012 year-end conference call.

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

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions).

Thank you.

I would now like to turn the conference over to Don Berg, Executive Vice President and Chief Financial Officer.

Please go ahead, sir.

Thanks, Tiffany, and good morning, everyone.

I'd like to start this morning by introducing Jay Koval, our new Director of Investor Relations.

Jay joins us from Starwood Hotels and Resorts after leading their Investor Relations efforts since 2006.

Prior to Starwood Jay worked as an analyst on the buy side at Invesco Funds Group and the sell side at Banc of America Securities.

We're excited to have Jay as a part of Brown-Forman's team and I know he's looking forward to meeting more of you over the coming year.

So, Jay?

Thanks, Don, and good morning, everyone.

I want to thank you for joining us today for Brown-Forman's fiscal 2012 fourth-quarter earnings call.

Joining me today are Paul Varga, our President and Chief Executive Officer; Don Berg; Jane Morreau, Senior Vice President Finance.

This morning's conference call contains forward-looking statements based on our 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 fiscal 2012 fourth quarter.

The release can be found on our website under the section titled Investor Relations.

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

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

During this call we will 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 conditions and results of operations are contained in the press release.

And with that let me turn the call back over to Don for his prepared remarks.

Thanks, Jay.

On today's fourth-quarter earnings call I'd like to cover three main topics including a review of our full-year 2012 results, our preliminary outlook for fiscal 2013, and an update on our balance sheet and uses of cash.

So let me start with my first topic, a quick review of our results.

In fiscal '12 we delivered another year of strong underlying results.

Earnings per share of $3.56 were negatively impacted by foreign exchange by approximately $0.11 relative to our expectations a year ago as the dollar continued to appreciate against most other currencies.

Year-over-year EPS comparisons were also negatively impacted by $0.43 per share due to last year's sale of Hopland-based wines.

Full-year underlying net sales grew 9%, which we believe is about 1 point ahead of the industry's growth rate and an acceleration from our 4% growth in 2011 and the 1% growth rate in 2010.

This underlying sales growth also translated into underlying operating income growth of 9%.

Reported gross margins were down 1 point.

Underlying [A&P] increased in line with our sales growth.

And SG&A growth of 6% provided some leverage to the bottom line.

Our net sales growth was broad-based; each of our 12 largest markets grew with these gains powered by volumes.

But just as volumes have taken some time to accelerate post recession to current rates of growth in the high-single-digits we are increasingly confident that the pricing environment has been slowly improving driven today by improving mix and reduced discounting.

I'll talk more about the pricing environment in a minute when I get to our expectations for 2013.

But the take away is that we expect price increases to drive better balanced sales growth in fiscal '13.

We estimate that product innovation drove about 2 points of our 9% net sales growth, including our first full year of results from Jack Daniel's Tennessee Honey which depleted over 400,000 cases in the year.

We have been pleased to see what we believe is a positive halo effect on Black Label from the launch of Tennessee Honey, proving that a new product can create momentum within a trademark and actually accelerate the sales growth of the parent brand rather than cannibalize existing sales.

Jack's family of brands grew global constant currency sales 12% in the year powered by the return of market share gains in the US and continued strong interest in the brand outside of the United States.

RTD's grew sales in line with the parent brand driven by growth in Mexico, Germany, the UK and Australia.

Just as RTD's have created new opportunities for us to connect with consumers and new occasions through convenience and great flavors, Tennessee Honey has recruited new consumers to the brand including African Americans, Latinos and females.

While Gentleman Jack and Single Barrel grew well in the United States, depletions jumped over 30% outside of the US and surpassed 500,000 cases globally.

So while the powerful Jack Daniel's trademark is central to each of these line extensions, we have been diversifying our consumer mix across geographies, race, sex, socioeconomic classes and expanding into new occasions.

In vodka, Finlandia enjoyed a record year of growth with over 3.1 million cases depleted driven by strong growth in Eastern Europe and Russia.

Our family of tequila showed improving results with 13% growth for Herradura and 10% growth for New Mix.

el Jimador grew 1% despite a competitive environment in Mexico.

And in the super-premium category, Sonoma-Cutrer and Woodford Reserve grew depletions double digits as consumers increasingly trade up.

Before I move on to my second topic, I wanted to share a few of the country milestones reached in fiscal '12, demonstrating the breadth of our results across both emerging and developed markets.

Brazil and Russia's combined depletions jumped 95% to almost 600,000 cases.

Growth rates in both markets benefited from an easy comparison versus the prior year's disruption caused by a route to consumer changes we made in the prior year.

While we expect these growth rates to moderate on more normal comparisons, these strategic changes in our route to consumer platform have tended to have long-lasting impacts on growth rates.

Turkey over 25 -- grew over 25% on the heels of its recent route to consumer changes; and Mexico, where we invested in our route to consumer five years ago, was up 15%.

We all know that the headlines in Europe remain troubling with recessionary concerns and talk of additional austerity measures.

But Brown-Forman enjoyed another record year with 9% depletion growth in Europe, the UK increased total volumes almost 10% and France jumped over 15%.

Belgium, the Netherlands and the Nordic region each surpassed 100,000 cases depleted in the year, averaging growth of 20%.

Not surprisingly, countries such as Greece, Italy and Spain were down a few points year over year, but as a whole we grew well in Europe and enjoyed strong market share gains.

Given the current economic environment we expect more subdued rates of growth in fiscal '13.

So this brings me to my second topic, our outlook for fiscal '13.

While fourth-quarter depletions accelerated slightly from the third quarter levels, we believe this is due to some inventory buy-ins in advance of our scheduled price increases this summer.

The global economy remains uncertain and hard to predict and consumer confidence is volatile, but given the strength of our brands and the momentum in our business we are expecting another strong year of growth in fiscal '13.

Underlying trends support high-single-digit sales growth in 2013 including price increases for most of our portfolio on a market-by-market basis.

For Jack Daniels we are anticipating a global average for price increases of 3% to 5% with slightly lower price hikes for the rest of the portfolio.

Consequently we do expect volume growth to moderate as we are targeting a return to a more balanced revenue model.

But overall this should result in a healthier mix of growth.

Most of the price increases we have planned should be implemented by the end of the summer and we are optimistic that our brands will be able to support the first broad-based price increase since before the 2008 recession.

We are diligently working on new innovations and line extensions, but we don't expect a new product introduction in fiscal '13 of the same magnitude as Tennessee Honey.

On Honey, we believe this brand still has a long way to go.

Total awareness of the brand today stands at 31% versus 98% for Jack Daniel's Black Label.

Remember, it was launched mainly in the US off-premise accounts and in only a few sizes, primarily the 750 and the 1 liter.

So we see some great opportunities to further expand in the on-premise and introduce new sizes in the US, as well as selectively expanding to some markets outside of the US where flavored spirits have been performing well such as the UK, Australia, South Africa, Poland and Korea.

In the United States consumer take away has remained strong after the initial launch.

So in summary, we expect Tennessee Honey to show growth in fiscal 2013 even though in the early months it will be facing more difficult comparisons with last year's pipeline fill.

While our Southern Comfort brand continued to decline in fiscal 2012, we began to see some trends move in the right direction.

In fiscal '13 we are looking to stabilize the parent brand through a new communications platform, increased spend on advertising and digital and the hiring of a new creative agency.

Product innovations such as the launch of Cherry and the continued roll out of Lime and Fiery Pepper, along with the new market introductions for these line extensions will also help drive sales in the coming year.

Moving on to margins, we have talked a lot on prior calls about the other ways we connect with our consumers beyond just straight A&P spend.

This has included value added packs, [advanced] packaging and targeted promotions all of which impacts gross margins.

These were particularly useful ways to stay relevant with consumers when much of the on-premise business moved to the off-premise.

While today we are seeing select opportunities to reinvest directly in the A&P line and shift some of these dollars from what I'll summarize generally as push activities to more pull type investments, we intend to continue to maintain our flexibility and utilize the entire P&L to invest and grow our brands.

Increasing input prices such as corn, glass, energy and label -- and labor have pressured our gross margins for several years in a row.

But it is our expectation that reported gross margins will begin to expand again in fiscal '13, particularly driven over the near term by the end of the agency relationships with the Hopland-based brands.

This arrangement generated $79 million in revenue and $0.04 of profit in fiscal 2012.

So reported gross margins will benefit going forward from the absence of this business.

Over time we would expect some gross margin improvement through price increases while we continue to invest in our brands and people.

Now turning to foreign exchange, in fiscal 13 we expect foreign-exchange will again be a headwind as the Euro, pound and Aussie dollar have dropped dramatically over the last few weeks.

We estimate that at current rates foreign exchange will negatively impact fiscal 2013 EPS by $0.11 per share.

We have incorporated this into our EPS guidance of $3.60 to $4 for fiscal '13.

In terms of sensitivity, we estimate a 10% move in the dollar in either direction would impact full-year EPS by approximately $0.17, a benefit when the dollar weakens, but a drag on reported earnings as the dollar strengthens.

Let me take a minute to talk about some seasonalization patterns for fiscal '13.

As you know, price changes can have impact on the timing of shipments, particularly when it's the first broad-based price increase in several years.

While we are doing what we can to mitigate this impact, we have already seen buy-ins in advance of our summer price increase.

These buy-ins are in line with what we had expected, but it will result in front loaded volume growth.

While it is hard to quantify the impact, we would expect volatility in our reported and our underlying results whereby first-half volumes will run well ahead of our full-year expectations and second-half volumes will slow meaningfully post buy-in.

Quarterly fluctuations aside, we are targeting full-year underlying sales growth to be up high-single-digits and we'll update you as the year progresses on the price/volume mix.

I'll now move on to my third and final topic, a brief discussion of our balance sheet and uses of cash.

Our balance sheet is in great shape with net debt of $168 million and the Company is firmly in investment-grade territory.

Our business generates prodigious cash flow, allowing us to both reinvest in future growth as well as return cash to shareholders.

Given we enjoy an industry-leading ROIC, our business typically requires limited capital reinvestment averaging roughly 2% of sales over the last decade.

We now have some larger one-time investments that will temporarily boost capital spend to over $100 million for each of the next two years.

This capital plan related to the wonderful success of the Jack Daniel's trademark as we invest in our barrel needs and distilling capacity to meet the anticipated future demand of our consumers around the world.

To be clear, we expect that these will be once in a generation investments for the Company and not a permanent change in our expected annual rate of reinvestment.

Beyond investing in our future organic growth, we remain disciplined in our approach to acquisitions.

Over time, and at the right price, we will look to acquire complementary brands that we think will do well in our hands given our long-term horizon.

To the extent that attractive acquisitions are not available, Brown-Forman has used a combination of dividends and buybacks to return excess cash to shareholders.

In fiscal '12 we returned over $400 million through dividends and buy backs.

The annualized dividend is $1.40 per share and our share count today is down 5% from just four years ago.

So in summary, we believe that we have a resilient cash generative business model with strong growth potential.

We have used innovation, global expansion and marketing programs to build and maintain strong connections with our consumers and drive our top-line growth through volume gains.

But we believe that the current business momentum will allow us to create more value for shareholders through price increases than volume.

Pricing will allow us to better balance our top-line growth and help drive margin improvements over the long term after several years of partially absorbing cost increases and excise tax increases.

So with that, let me now turn the call over to Paul for his comments.

Thanks, Don, and good morning to everyone.

I just want to say I'm really pleased with the results we've reported this morning, where we saw our underlying sales and operating income both grow at 9% and these growth rates are a nice acceleration over the last fiscal year.

I'm also encouraged that these high-single-digit growth rates approximate our historical long-term growth rates.

As in the recent past, our growth story was an organic growth story as we derived our incremental business by developing our existing brand trademarks around the world.

And also, as in past years, the Jack Daniel's trademark led the growth of Brown-Forman.

The Jack Daniel's Black Label brand had a super year with underlying net sales advancing by 8% and again this year the brand's incremental growth was derived from a diverse group of countries around the world and this included another stellar performance in emerging markets.

Comfortably above 10 million cases globally, Jack Daniel's Black Label is one of the world's largest super premium brands by volume and this combination of very large volumes derived from a broad and diverse set of global markets sold at super premium prices makes Jack Daniel's Black Label a very rare brand indeed.

The worldwide appeal of the brand, as well as the depth of emotion and attachment it garners from an ever larger contingent of global consumers and advocates is truly remarkable.

And further, it provides the foundation for a select number of well-positioned and increasingly important trademark line extensions.

One of those line extensions, Jack Daniels Tennessee Honey, was an important contributor to FY'12 and its introduction helped propel our Company's market share growth in the United States, the world's largest and most important distilled spirits market.

FY'12 was equally impressive in my view from a qualitative and strategic standpoint as we continue to position the Company for success in the years ahead via both operating and capital investments.

These efforts and investments encompass our route to consumer, R&D, packaging, media, IT, production, supply chain and talent development to name just a few.

I believe that our strong FY'12 results, our excellent financial health that Don referenced, and our continuing prospects for growth in FY'13 and beyond were key contributors to Brown-Forman's FY'12 total shareholder return of 22%, which compared again quite favorably to the S&P 500's 5% return.

And as Don highlighted earlier, we are planning for a continuation of FY'12's high-single-digit underlying operating income growth in FY'13 while delivering it with a different balance of volume and pricing growth than we experienced in fiscal year '12.

Shifting now to our longer-term performance.

Last week we gathered some of our leadership from around the world to review FY'12, align around FY'13 and check in on the progress of our longer-term strategy which we refer to as BF (technical difficulty).

During those few days we took the opportunity to look closely at the last five years, which coincidently spanned both the difficult global economic recession of 2008 and 2009 as well as the steady recovery that we've experienced from 2010 to 2012.

We also found it helpful to contrast those five years with the five years that preceded them from 2002 to 2007 which was a period of strong global expansion and excellent results for many businesses to see how Brown-Forman had performed.

Essentially, we were testing to see how we had fared in both good times and in bad, if you will.

What we observed was that Brown-Forman's performance in the first five years from '02 to '07 resulted in an excellent five-year TSR of 13% and this compared favorably to the S&P 500's 9% TSR over the same period.

Of course things changed in the world in 2008.

Interestingly, however, Brown-Forman's five-year TSR performance that just ended in FY'12 which spanned the '07 to '12 period was 14% and that compared very favorably over the same period to the S&P 500's 1% TSR.

So over this last 10 years, broken into two five-year segments, one broadly thought of as good times and the more recent five years often described as bad times, Brown-Forman produced a consistent and excellent double-digit growth rate in total shareholder return outpacing the performance of the S&P 500 over both periods.

Knowing that we compete in an attractive industry that has consistently outpaced both the S&P 500 and Consumer Staples, we also compared our TSR over the last 10 and five years to our spirits competition and noted the Brown-Forman's total shareholder return was above the industry average for the 10 years and at the very top of the industry on the five year.

We look back at these relative multi-year performance metrics so that we can learn from what they tell us.

In this case it is a source of confidence that most of what we've been doing has fortunately been working.

The backdrops of the respective five-year periods that I referenced were quite different and accordingly we deployed some different initiatives to be successful, such as being cautious with price increases or by being more aggressive with packaging and line extension innovation which was aimed at positioning our brands for success in the growing off-premise.

At the same time we also continue to rely on some of the longer-term investments that have served the Company so well regardless of the environment, such as improving our global distribution footprint and route to consumer.

Our aim looking backward or forward is to produce consistent excellent long-term returns for shareholders.

We strive to do this by building strong and enduring brands which have multi-generational growth prospects and that yield attractive returns on invested capital over the long-term.

We found that these types of brands generate cash very efficiently and we then attempt to put that cash to excellent use by balancing well our reinvestment in the business with our desire to return some of it to shareholders to enhance long-term returns.

Don referenced the fiscal year '12 uses of cash, but I wanted to provide some insight into how we've done this over the past 10 years, considering that from 2002 to 2012 Brown-Forman generated roughly $4.6 billion in cash with virtually all of it coming from operations, but only 2% of that coming from a modest increase in net debt.

We reinvested 33% of it back into the business by increases in capital expenditures, working capital and acquisitions netted by divestitures.

Having satisfied the capital needs and opportunities of the business and not discovering any additional acquisitions that fit our criteria for long-term value creation, we returned 38% of the cash to shareholders through regular dividends, special dividends and capital distributions.

We used the remaining 29% to buy back Brown-Forman's stock at an average price of just under $40 per share.

We believe this balance of cash deployment served the business and shareholders very well over the last decade.

Looking ahead I believe our Brown-Forman 150 strategy will position the Company to continue this track record of growth and returns.

As part of that strategy we have high aspirations for both the Jack Daniel's trademark and the rest of our portfolio.

Of particular note, we've learned a lot about the global whiskey business, primarily through our experience with Jack Daniels, and we appreciate it for its global scale, premium nature, attractive margins and generally long runway for growth.

Since we aspire to be one of the leading companies in this very attractive global category we hope to apply our growing whiskey knowledge to other brands whether it be a full strength Jack Daniel's line extension such as Gentlemen Jack or Tennessee Honey, an RTD such as Jack and Cola, a totally different whiskey trademark such as Woodford Reserve, Canadian Mist, Early Times, Old Forester or Collingwood, or a brand which today doesn't exist at Brown-Forman that could be either created or acquired and against which we can apply our brand building skills just as we did with Tennessee Honey over the last year.

We're very bullish on the global whiskey category and the increasing role that American whiskeys are playing in it.

We're also quite bullish on the valuable trademarks we own that play at the premium and of vodka, tequila and liqueurs.

We believe they too continue to offer super growth potential for Brown-Forman.

In closing, let me congratulate our employees worldwide on a wonderful set of FY'12 results and thank them for the roll they've played in positioning our Company for much success in the years ahead.

We're now happy to take any questions you might have.

(Operator Instructions).

Vivien Azer, Citigroup.

My first question has to do with industry growth trends and your expectations for FY'13.

Are you expecting that this is going to be another year of marketshare gains?

And if so, kind of order of magnitude?

Well, for the industry, of course that's going to vary market by market.

But as I was referencing in my comments, we've seen such nice momentum for the area.

But we have the greatest concentration which is the whiskey, particularly the American whiskey, business.

We've talked on several calls about the growing popularity of it and we would anticipate that, for example, use in the United States is one backdrop that we could look at.

We would expect that the Bourbon and American whiskey business to continue to grow share of what is a growing US distilled spirits market.

So, we consider the momentum that exists in a key country like the United States to be at our backs.

And we don't see any reasons at this stage why that would cease.

And in Europe you mentioned that you expect your growth rates to slow.

Do you expect the industry in Europe to be up next year?

No, actually -- I think some of the numbers we've been seeing out of there is they've been soft at the distilled spirits level.

You can find pockets of categories that are doing better than others.

But it's generally been difficult footing for the industry in many of those countries, that's why I think it's noteworthy how well Brown-Forman has continued to perform in Europe.

Absolutely.

And to be sure, it helped in part by some of the route to market changes you guys have done.

Are there any new opportunities in terms of tweaking your route to market in the next year or two?

We're always looking at that.

But as it relates to a fundamental shift like the one we made in Germany, for example, a couple of years ago that has helped Brown-Forman's German business or one that we announced down in for example Turkey back in the beginning of this calendar year.

There's nothing that we have to talk about right now as it relates to fundamental changes in the route to market that -- we just don't have any information on that at this time.

It's not to say there couldn't be some, Vivien.

There are a couple of market contracts that are coming up which is when you typically will start to look at them.

But they're more in the back half of the fiscal year than the front half of the fiscal year.

Understood.

And my last question has to do with the incremental CapEx that you pointed to over the next two years.

In terms of the amount of capacity that you're bringing online, what kind of percentage increase are we talking about?

Percentages -- let me think about it -- I mean we've averaged over the last many years something in like the $50 million to $60 million CapEx range.

I think, Don, your comments were --.

Oh, no, no, in terms of the incremental capacity from a production perspective.

You [are going to do] X number of cases now and two years from now you'll be able to do Y number of cases.

Oh, I see.

Yes, it varies.

So if you look at some of the distilling capacity that we're looking at, we're designing it in a way that we can basically continue to expand in phases.

And so, I think in total over the host of a number of years you'd probably be looking at the ability to keep up with Jack Daniel's growth I think is probably the best way to say it.

It's very long-term volumetric growth rates.

That's why we refer to it as the once in a generational type investment.

Understood.

Thanks very much, you guys.

Dara Mohsenian, Morgan Stanley.

First, I just wanted to discuss the price increases in fiscal '13.

It sounds like you're comfortable that consumers are returning to trade up a bit and your portfolio's brand equity justifies the price increases.

But I also just wanted to get some more detail on what you're seeing here from a competitive standpoint and the competitive dynamics as you look out over the next year here in the marketplace.

Yes, I think, Dara, that part of it's influenced by wanting to position particularly several of our brands, Jack Daniel's being one of them, in a -- in the marketplace at the right premium positions which we would consider to be super premium position.

I think those are things you're conscious of; we are very conscious of that -- of watching that over the last several years just because of the price sensitivity we were observing around the world.

But if you just look at the premiumization trends, whether they're here in the US or some of the consumer interests into ever more premium brands in emerging markets, I just want to make sure that Jack Daniel's against that backdrop continues to be viewed for as large and as successful as it is as a very special brand.

And so, these are decisions you make along the way as well.

So, almost alongside the environment's receptiveness to it or our desire to build our margins -- any of those other important considerations as well, there is that aspect of it too that's influencing us.

Okay.

And do you expect the price premiums for your portfolio to move up relative to the category over the next year?

And then also just over the last few months can you describe the competitive environment and any changes you've seen in the US and Europe in particular?

Yes, I think, Dara, as always the answer on whether the premium position will improve -- I think in some markets you have to look at it as to where you're positioned at any point in time.

I think, absolutely, our premium position will improve to the extent we go up either faster or more than some of our competition and that, in some cases, will be the intent.

We actually also think that if you just look at this maybe on a rolling 12- or 24-month basis as to what the activity is out there in the marketplace as it relates to how much people are discounting, how many front-line FOB increases, where the shifts in the business are in terms of the retail outlets, what sizes are being sold.

There are a lot of influences to what the consumer is experiencing in terms of what they pay in the marketplace.

But it continues to be an off-premise driven market and therefore you do have much more sensitivity to price and I just think the environment generally has improved.

And when you have the -- when you compare like this last year, the last two years to the prior year or two years and when you actually also think about the category that we're competing in, the fact that it has so much momentum should give you encouragement as well.

And a lot of that momentum is being generated at prices above some of our brands, so all of that is encouraging I think and so it adds up to us feeling better this year than we would have felt a year ago.

Okay.

And then can you highlight if you're seeing any pressure in Western Europe post the quarter in May or June?

Your business obviously seems to be doing pretty well, but have you seen any impact on the category itself or even your portfolio?

And then on the other hand, it looks like we're off to a very good start in the US this year in the alcohol category, particularly in the on-premise channel with the strong weather.

Do you think you're seeing a more sustainable rebound in the US consumer beyond that favorable weather?

And your thoughts on the US consumer here?

Sure, I'll start with Europe.

I think most recently in Europe we have -- as Paul kind of alluded to earlier, we have been seeing spirits overall under I think some greater pressure.

As far as our business goes, generally if you look out over it, we had been taking share in most of the European markets.

It's gotten a little bit noisy of late because of some of the price increases that we had already started implementing over there, particularly in the UK and France.

And so, in terms of the buy-ins that we were seeing and working through all those buy-ins and then starting to see a reaction at the consumer level with new prices and what have you, it's kind of hard to see -- penetrate through all that to see exactly how the brands are directly reacting with what's going on in the overall spirits market.

But generally what we've been seeing is similar to what we've been seeing more recently in terms of pressure on the spirits business, but market share improvement for Brown-Forman.

Yes, and by the way, those European price changes for us were associated with excise taxes, so those are very different consumer responses and retail responses you see there versus ones where we're fundamentally taking price on our own accord, not associated with excise taxes.

Shifting to the US, I mean I can only cite through the syndicated data I've had a chance to look at which is through about the end of our fiscal year, to be honest.

And so -- but all the signs that we've been talking about in that data continued on through that period.

And the most encouraging number I saw that was just on a dollar basis was that the spirits business generally seemed to advance on a dollar basis by about [3%] for the last 12 months.

And just using the Bourbon category as a surrogate for the American whiskey, it was up just shy of [7%].

So that was the continuation of the momentum.

We get really mixed reports on your reference to the on-premise/off- premise.

We hear at a lot of things anecdotally and observe some things that encourage us.

Then you look at some of the reports, for example, the NABCA data or something for signs of that showing up.

And some of it is not being as reinforced.

We also look at, of course, the public company casual dining reports and some of the things that they talk about, so we really see a mixed picture on that.

And we see most of the growth continuing right now to be pushed along by the off-premise segment.

Okay.

That's helpful, thanks.

Judy Hong, Goldman Sachs.

First, just in terms of your margin outlook, so it sounds like you are saying high single-digit sales and high single-digit operating profit growth.

I am not sure you are embedding some sort of margin expansion.

You have talked about on the gross margin side some benefit as you and the agency relationship, but can you just talk about what you are expecting on the commodity side?

And then on the marketing line, I think [Diaja] talked about stepping up their spending pretty meaningfully.

So just how you are thinking about marketing spending in fiscal 2013?

Yes, so on the margin side, the wine agency business that we've talked about represents probably around a 1 point improvement that we would anticipate seeing it next year.

And then with the price increases being ahead of what we would anticipate being cost increases, we should see a little bit of improvement there as well, as the price increases start to take their full effect through the fiscal year.

On the spending, we've been historically very consistent about the spending behind our brands.

I think you can continue to expect that next year in terms of our spending growth increasing fairly much in line with what we're seeing in terms of sales growth increases.

With probably A&P being a bit ahead of SG&A investment as it was in the FY'12 results.

Okay.

So that would imply the operating income growth exceeding the sales growth in 2011 -- in 2013?

Right now you [can pretty much] -- I mean, there is rounding --.

There is rounding; I think -- you're more in line I think, yes.

But when you round it all they're pretty close in line.

But yes, you might see a little bit at the operating income line versus the sales line.

But right now it kind of all rounds to 9%.

And of course it remains to be seen, I think.

An important consideration in this is what sort of responses we get of course to the new pricing that we're putting into the marketplace.

And then you've got this, what I think is an important consideration for our Company which is the combination of the year two phenomenon for Jack Daniel's Tennessee Honey in the United States recycling against such a successful introduction potentially offset by the success we may be able to achieve by expanding it into international markets.

So, can you give us some more color around that?

Because clearly you are going into other markets outside the US and then you've got the on premise expansion on Honey.

So sizing up that opportunity -- phasing -- in terms of the expansion, why not go more aggressive in expanding in other markets?

How are you thinking about just the phasing of the expansion?

Well, I mean first is just the appreciation we have for any line extension we do on Jack Daniel's even though it's been very successful in the United States and it's the dynamics, particularly the flavored whiskey and flavored brown spirit expansion that was occurring in the United States' distilled spirits market against which Jack Daniel's Honey entered was a very important consideration for us.

And then when you begin to take it outside the United States you want to see what other sources of growth exist for Tennessee Honey's introduction.

And with Jack Daniels we just always tend to go a bit slower, I think very appropriately so, because you want to learn market by market what might work and where a new entrant like Tennessee Honey might actually source its volume.

You want to pay great attention to the potential for cannibalization.

I think by paying great attention to it in the United States we actually struck a beautiful balance with the way we entered the market and what we've been able to accomplish there and we just want to do that everywhere we take it as we assess its potential.

So I think there's a number of factors to consider.

Actually the number of markets we're going into around the world have been asking for Tennessee Honey for a while.

So we know there's a demand to call at least from our people and from a lot at their customers to try Jack Daniel's Tennessee Honey.

So we're going to call this maybe a phased roll out based on the learning we get, now first and foremost from the US but also in the new markets we're entering.

Okay.

And then just lastly on Finlandia, you've seen the brand improving in terms of the trend in the last two or three quarters.

Just wondering how you're thinking about that brand at this point both internationally and then your effort to really expand the brand in the US as well.

So, a lot of Finlandia's growth has been driven throughout the Central and Eastern European markets and particularly Russia.

Poland is its largest market.

As a market overall it's continued to be a difficult market generally, but Finlandia has been performing particularly well there.

So from everything we've seen we would anticipate seeing continued nice growth there.

Russia is the one that was probably the big story this last year and it was going against pretty soft comps because it did suffer a little bit in the transition in our distribution change a year ago, but it's got some very nice momentum there.

And we're very excited about what the possibilities are there.

I think in the United States our approach has really been more broadly based than just looking at Finlandia.

There was quite a bit of innovation that was brought out last year and the last couple of years with the Little Black Dress vodka and with the Chambord vodka and we're continuing to work with Finlandia both in terms of its quality positioning, but also through some of the flavor profiles there that we're developing.

And so, I would say that in the US we're really looking at a more broader-based vodka category approach than just kind of looking at it specifically through the lens of just Finlandia.

But, Judy, I would add we do have an enormous amount of innovation going on around Finlandia and the vodka category right now.

It's just an exciting time in the Company.

Within Finlandia I'd cite we launched a ready-to-drink format in Mexico in the past 12 months, Finlandia Frost, which we are pretty encouraged by its year one results.

We just launched in the first part of this calendar year in Poland a new flavor extension that's a spiced vodka which we have some hopes for.

Globally we've rolled out what we consider to be an improved package for Finlandia that it has made its way into distribution slowly around the world which we think can contribute positively to some of the sales trends.

And even very super-premium entry into select number of markets with the brand Finlandia Platinum.

So there's a number of different things we've been doing to round out the overall Finlandia brand approach.

And then Don mentioned a number of these other ones which also include a really little brand that we bought in the past year, Maximus, which we've restaged for launch here in -- re-launch in FY'13 over in Poland that we hope will give us a boost in that country as well.

Okay great.

Thank you very much.

Lauren Torres, HSBC.

I think you did mention that you expect this year your price increases to cover your cost increases.

Just trying to get some clarity on what you are seeing with respect to whether it be ingredient packaging or fuel costs, if you have relatively good visibility that with the pricing actions you have in place that you could offset all of these increases, particularly if they get stronger or they start to increase more as the year progresses?

I think right now our view on a lot of the input costs are that they'll continue to increase.

But our expectation is that they would increase at a lesser rate than what we saw throughout fiscal 2012.

And then as we look at those expectations compared to our planned price increases, that the price increases would more than cover what we're expecting in terms of the inflationary effects on the input costs.

And any threat to this year with respect to excise tax?

Because I know you've faced some of that over the last few years.

Is there anything within the next year that's of concern on the excise tax side?

Well, I mean you're always concerned on the excise tax side.

In the US if you want to start there, anytime anyone starts thinking about any kind of broad-based tax reform or the need for additional revenues -- for the most part it hasn't been brought up as part of that dialogue.

But you're always vigilant about watching it and doing what you can to ensure that all of the great work that the industry has been doing from a responsibility standpoint, the people recognize it and that an excise tax increase in the US is really a tax on the overall hospitality industry.

And I think those messages have really been quite effective up to now in really kind of keeping excise tax increases in the US at bay.

But as governments get hungry you can never just be quite sure.

Outside the US, and we've seen a number of markets over the last several years where excise taxes have come into play most recently in the UK and France.

Australia automatically takes excise tax increases along the lines of inflation twice a year; we'll continue to see that.

So, it's out there.

But I think as we sit here looking out today we don't see anything that would be particularly new or different from just kind of the general level or atmosphere that we've been seeing over the last couple of years.

Okay.

And if I could just lastly ask, again on the pricing side, and I guess as a follow-up to comments you made to a previous question.

Have you seen, with respect to your competitors, them start -- I mean is this something that we need to wait closer to the head of the summer to see most of the bigger players take these increases?

Or you have good confidence now going into the summer that it's going to be an industry wide effort on the pricing side?

I think kind of coming back to a little bit of what we talked about before, if you think about in the US -- and again, looking at some of the syndicated data -- you have seen some improvement in the price mix.

I think earlier in this calendar year we were thinking that some of the pricing improvements we were seeing were really more less promotional and what have you as opposed to at the shelf.

Anecdotally we're starting to hear some things at the shelf.

But my guess is we're going to be seeing more of it later into the summer than what you're currently seeing right now.

I also would add that this stuff is always very dependent on some combination of -- because I think you asked your question along the lines of is it industry wide or will we see all the companies.

It literally -- it's just worth always remembering this, that it happens brand by brand and actually some categories may have better opportunity to increase prices than other categories.

Some countries because of the skew of their -- I always feel like it's influenced greatly by the skew of the business toward either the on- or the off-premise.

All of those have an influence on the degree to which people are willing to take price and then the receptiveness that the market has to it.

But I would say that worldwide the whiskey category broadly would have more pricing opportunity these days as we view it than the vodka category as just a generalization, I mean that's just something I observe.

And markets that have a very strong skew of the business to the on premise have less price sensitivity generally than those that have enormous off premise businesses.

So you're going to want to look at it market by market, category by category.

It really helps when you have a brand like we do, like Jack Daniel's, that has the consumer and retail strength that it does to be able to act almost in some regards as a leader as it relates to pricing.

Okay, thank you.

Tim Ramey, D.A. Davidson.

Would you just remind me of the TTB regulation?

For you to label something Tennessee Whiskey has it got to be 100% Tennessee Whiskey or is there some allowance for blending within that --?

No, there's a genuine standard of identity associated with Tennessee Whiskey that actually was very smart on Mr. Jack Daniel's part years ago to make it.

The thing that it hinges on is the charcoal mellowing process that is associated very much with the Tennessee Whiskey making -- Tennessee Whiskey method.

So, yes, there's a very definitive standard of identity for Tennessee Whiskey.

Okay.

And you -- and it's 100% standard effective?

Yes.

I mean that does really speak to your need to add some barrel warehouses.

I suppose you can't just go out into the market and fire blend.

And since we're only a year, 18 months into this phenomenon on whiskey, but clearly the supply chain wasn't built to handle the rates of growth that we've enjoyed.

You're going to moderate that a little bit by taking pricing.

But just from a big picture standpoint could you give us some thoughts on where you think we are in terms of that big picture supply/demand balance?

What's in the warehouses and what can come to market versus where the demand goes?

Sure.

You had I guess a handful of observations in there.

I think that as it relates to the last one, of course we watch all this closely, but our current plans estimate that supplies will be adequate to meet our forecasts for demand.

In this year of course -- and almost every year, Tim, the demand forecast is always the uncertain variable in that equation.

Things we'll be paying particular attention to in FY'13 will be things we've already mentioned -- the marketplace's reaction to our price increases, but also just the reception to the global expansion of Tennessee Honey.

Both of those will naturally influence the aggregate forecasted demand for Jack Daniel's.

But the things we announced this morning in Don's commentary about expanding generally so we can meet the long-term hopes and expectations we've got for the Jack Daniel's brand I think are very encouraging as it relates to just the continuing growth runway we see for Jack.

And reinforced even more so by the fact of the stuff I talked about which is how well the Company and the brand held up during the difficult times of the last five years and the responsiveness of line extension activity.

One thing we -- I mean I think is a real unique potential advantage of American whiskeys is that when you think about the two axis, one being price and one being flavor, that I really do observe around the world that these American whiskeys span and have the ability to extend themselves up and down a price spectrum so you can get premiumization for example through super-premium and ultra-premium line extensions.

Additionally, and unlike some other whiskeys, what we've observed is that on the RTD side and on the flavored whiskey side, in many ways the American whiskey taste profile lends itself to mixability.

So in my view it opens up all kinds of expansion possibilities.

If you just look back over our last five years of performance, at various times we've been referencing the wonderful growth of Gentleman Jack, the -- in this past year the contributions from Tennessee Honey, for a few years in there referencing Australia and the global expansion of our RTD's, it's been a pretty comprehensive trademark performance.

And all the while Jack Daniel's Black Label continuing to march on.

So all of that is really the encouraging point that we're making about the excitement around American whiskey and us owning the leading brand trademark in it.

So I think it adds up to why would you expand to accommodate more of that.

Absolutely.

Hey, thanks so much.

Ian Shackleton, Nomura.

My first question was that you set quite a wide EPS range.

And I know you often do this at the beginning of the year, but it is a wide range.

And yet you've given us quite precise guidance on both sales and EBIT.

And I guess my question really around that is are you building a kind of cushion there for further FX moves?

Because frankly if you're going to meet your sales and EBIT guidance you're going to be at the top end of your current range, certainly not the bottom end it strikes me, currency being where it is at the moment.

Ian, we have this discussion at the beginning of every fiscal year in terms of how broadly to set that range.

And we win more broadly kind of in the 2009 time frame just because of all the uncertainly that we saw in the marketplace.

And I think as we sat here this year looking out at fiscal 2013, with everything that was going on in the Eurozone and the site, the important of that area to our business and then seeing more recently what has been going on in terms of increased volatility in currencies, not just the euro, but also with the pound and the Aussie dollar, we just felt that it was prudent for us at this point in time at the beginning of our fiscal year to continue to take a little bit more of a cautious approach to the guidance.

Plus along the lines with some of the things we talked about earlier in terms of after going for a number of years with no price increases, coming out with the price increases and not really being entirely sure how all that is going to be received in the marketplace.

So you had all that.

And then you also -- coming into the second year of Honey and the importance that that had to our business last year.

And while overall we anticipate that full-year we'll see growth on that brand, it's a little bit uncharted territory at this juncture.

Okay, thanks.

Just coming back on the pricing comments you made before.

I mean are there certain categories where you accept it's going to be difficult for you to move price?

And I guess we think particularly about the [vodka category] in the US.

Or are you more optimistic that you're able to move really across the board now?

As I've said, I think it's more market by market.

I mean like for example, we find that in a place like Poland right now where we have a great position in the vodka market but it's still very competitive.

And so, our confidence to move on -- I'll just use this as an example -- on Jack Daniel's for example in the United States relative to Finlandia in Poland, we would have higher confidence just because of the competitive dynamics.

So it isn't a wholesale comment that every brand in every market should have almost blind confidence to move.

And so we try not to make blanket statements like that and decisions along those lines.

We really want our people studying it closely and making the right judgments.

And at times we make those incorrectly too of course.

I mean, you might hope that the market can bear some of it.

We've actually in the past few years had these tests that we've watched where we've taken the opportunity to either hold price or do some promotional pricing that hasn't stimulated the response we wanted.

And then accordingly you study that, adjust and you don't do it anymore, you try something different.

And so, I think the pricing volume equation at Brown-Forman is probably no different than a lot of other companies who are trying to figure this out as you go along and you look at a lot of factors.

But there's just no doubt that for the largest bulk of our business, which is in behind Jack Daniels in our whiskey business, that our confidence is better today in a handful of markets for sure and in many markets just based on the momentums we've seen building over the last 24 months.

Just one final question.

The [least with] a dispute settlement, [not in terms of] which market that is, I [don't know] if you can give a little bit more clarity on that.

This doesn't really affect anything going forward; this is really just updating the historic numbers for a more like for like basis, is that correct?

Yes, I mean, it was just a one-off issue.

It related to customs item.

And it wasn't in fiscal -- it's really a comparison issue, it was in fiscal 2011, not fiscal 2012.

Okay, so there was no impact when we think about FY'13 going forward is there?

Right.

No.

That's very useful, thank you.

Thomas Russo, Gardner Russo & Gardner.

Congratulations.

For Don -- Don, when you talked about the ForEx impact, to what extent are you modeling in any pressure on retail price in local markets as the value of your product in markets where the currency weakens is higher by virtue of just the currency alone?

Or is it mainly the translation effect that you bring back when you say there's a $0.17 per share impact?

Is it mainly translation or are you actually building in some question about affordability?

No, it's all translation.

And then, Don, when you talked about the gross margin and you made the observation that you invested when the consumer went off premise in packaging and then sort of the promotional stuff that has shelf impact and that burdened gross margin.

To what extent does the improvement in gross margin that you forecast a bit reflect the shift back from packaging more to A&P in terms of your product investment?

Yes, it's in there a little bit, but then there's also -- you're seeing it showing up then the A&P line and that's mostly around the value added packaging side of it where we're reducing value added packaging next year.

To the extent that we saw additional increases in our cost of goods as a result of improved packaging, which can tend to have increased mold costs and what have you, those are pretty much -- continue to be built in the cost of goods line.

And for the most part for most of those package changes now you pretty much have a good year-over-year year comparison.

I'd say so, yes.

Okay, good.

And then, Paul, to what extent has age started to play a role in your premiumization and how are you positioned in the Tennessee market for offering increasing age if the consumers seem willing to follow that variable up in price as much as they seem to in the Scotch whiskey category?

A little bit, but it hasn't really been, Tom, as I think you may have heard from us before, that the American whiskey making traditions -- I mean just because of climate and a number of -- the fact that in a new barrel versus a used barrel, I mean they just really haven't been an age denominated business proposition for Most of the Bourbons or American whiskeys.

There are a lot, of course as you cite, out in -- particularly in the international markets where the age stratification can be important.

We found other ways to do it.

I mean, I've found -- there's -- actually one of our competitors -- one of our largest global whiskey competitors, they've chosen to do it more by color.

We've always done it in a variety of different ways.

And so we try actually in our trade story, in our conversations with people, it's an ongoing education for us to talk about how we bottle to what we call maturity.

So we want appropriate maturity in the bottle and not necessarily some definitive age.

So we try and we use various techniques to market our American whiskey brands relative to, in most instances it's Scotch, that are the brands that are using the age statements, but a lot of them -- a lot of non-American whiskeys will use it.

But I mean we found over the passage of time, as you can just see from Jack Daniels, which isn't an age denominated product, it's not driven by that, that you can be wildly successful if you focus on the right things.

Paul, I'd actually talk a little bit about Woodford Reserve's Double Oak as a creative way of premiumizing --

Go-ahead.

I mean, I don't know if you've seen it yet, Tom, or not.

It's a line extension off of Woodford Reserve where basically we take a fully mature whiskey and then put it back into a new barrel again for a few months of additional aging and it just gives it some really interesting character and smoothness.

And it's still very early in its initial launch, but the kind of anecdotal things that you hear; it's really quite encouraging in terms of the consumer response that we're hearing.

It's just one example of how you can be creative in the Bourbon category.

The other emerging trend I would observe amongst particularly a number of the Scotch competition out there is less of a reliance on a definitive age statement.

If you look at particularly some channels like travel retail, it could be influenced a bit by supply limitations in some regard.

But you're just seeing a lot more branding and marketing on some of the SKUs and expressions that are at very high price points that really aren't marketed on the basis of an age statement.

So we're even seeing a lot of the brands in categories that traditionally have used it back off of it a little bit.

Yes, I agree.

Thank you for the answers.

There are no further questions at this time.

Presenters, do you have any closing remarks?

Thank you, Tiffany.

That concludes our fourth-quarter earnings call.

Thank you for joining us today and if you have any additional questions please feel free to reach out to us.

Thank you all.

Thank you.

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