Brown-Forman Corporation F4Q08 (Qtr End 4/30/08) Earnings Call Transcript

Brown-Forman Corporation (NYSE:BF.B)

F4Q08 Earnings Call

June 5, 2008 10:00 am ET

Executives

T. J. Graven – Vice President of Investor Relations

Paul C. Varga – President and Chief Executive Officer

Donald C. Berg – Executive Vice President and Chief Financial Officer

Jane Morreau – Senior Vice President and Controller.

Analysts

Lauren Torres – HSBC Bank USA

Darah Massenian – JP Morgan

Doug Ayers - Bank of America

Ian Shackleton – Lehman Brothers

Judy Hong - Goldman Sachs

Thomas Russo – Gardner Russo & Gardner

Operator

Good morning. My name is Teresa and I will be your conference operator today. At this time I would like to welcome everyone to the Brown-Forman Fourth Quarter Fiscal 2008 Year End Conference Call. (Operator Instructions) I would now like to turn the call over to T. J. Graven.

T. J. Graven

Good morning everyone and thank you for joining us today. This is T. J. Graven, the Director of Investor Relations at Brown-Forman. And with me here today are Paul Varga, our President and Chief Executive Officer; Don Berg, our Executive Vice President and Chief Financial Officer; and Jane Morreau, Senior Vice President and Controller. And also joining us Ben Marmor, our incoming Investor Relations Director.

Paul will begin our call this morning with a discussion of several milestones achieved in fiscal 2008 and Don will follow with a review of our financial performance for the year and our outlook for 2009.

As always, 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 it is new information, future events, or otherwise.

This morning we issued a press release containing our fiscal 2008 results and that release can be found on our website under the section titled Investor Relations. We have listed in the press release a number of the risk factors you should consider in conjunction with our forward-looking statements. Other significant risk factors are described in our Form 10-K, Form 8-K, and Form 10-Q reports filed with the Securities and Exchange Commission.

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

With that, I will turn the call over to Paul.

Paul C. Varga

Thanks, T. J., and good morning everyone.

First, it is with great pleasure that I welcome Don Berg to this earnings call as our new Chief Financial Officer. Don is a 19-year leader at Brown-Forman who has served the company in many different capacities, including leading the corporate finance, corporate strategy, and U. S. Spirit sales and marketing teams during his tenure. Additionally, Don led the division which laid the groundwork for our expansion in the emerging international market and today we are seeing excellent brand development and profit growth in many of these exciting countries.

You will have a chance to spend some time with Don in the months ahead, if you haven’t already done so, and I am sure you will appreciate, as we do, the depth of his industry experience, his knowledge of our company, and his financial acumen.

I would also like to recognize Jane Morreau, as she has taken on expanded responsibilities for the financial management of our company. A seasoned financial executive and most recently our Controller, Jane joins Don to form the core of Brown-Forman’s finance leadership.

During the recently completed fiscal year we achieved many milestones for our brand in markets around the world. Our ability to achieve these results in fiscal 2008, given the challenging economic environment in the United States, is a testament to the broad and diverse consumer appeal of our brands globally, and to the adaptive capacity of our employees and partners throughout the world.

In a minute Don will discuss our financial results for the year, but before that I would like to share several notable milestones from fiscal year 2008.

With sales of $3.3 billion we surpassed the $3 billion mark for the first time in our company’s history. The Jack Daniel’s family of brands, incorporating Jack Daniel’s Tennessee Whiskey, Gentleman Jack, Jack Daniel’s Single Barrel, and the Jack Daniel’s & Cola ready-to-drink, measured on a drink’s equivalent basis, crossed the 10 million case mark, and all together improved volumes at an impressive 6% rate globally with reported net sales advancing 12%.

Another first for us was over 50%, 52% in fact, of our net sales came from markets outside the United States. Just five years ago less than 30% of our sales were outside the U. S., and about ten years ago the percentage was closer to 20%. This shift reflects the increasing demand for our portfolio in markets outside the U. S., the impact of acquired brands, and certainly foreign exchange. Notably, during this fiscal year, the vast majority of our net sales growth, more than 85% of it, came from markets outside the U. S.

In recent years Finlandia has been a major contributor to our international expansion. Since taking a majority stake in fiscal 2003, Brown-Forman has added more than 1 million cases to Finlandia’s annual depletion. Over 95% of this incremental volume has been in international markets. The brand continues to be a major growth [inaudible] for Brown-Forman with global depletions advancing 16% and net sales gaining 33% this past fiscal year.

Our fiscal 2008 results demonstrate an increasingly balanced and diversified growth at Brown-Forman. Brands such as Jack Daniel’s, Finlandia, the Jack Daniel’s line extension, Chambord, and the Casa Herradura brands join countries such as the U. S., U. K., Germany, Australia, Korea, India, Poland, Canada, France, Russia, Ireland, Romania, Turkey, and many countries throughout Latin America, to deliver a broad-based growth for our company.

While we were less active in terms of distribution investments than in several prior years, we did make some important changes over the last year to improve our route to market and to increase our focus behind core brands in the portfolio. Examples would be the following:

During the year we announced a U. S. sales alliance with Bacardi and Rémy Cointreau for a few key U. S. states. In these markets the alliance creates a focused sales team within the U. S. distributors that will take to market the strong and complimentary portfolios of the three companies, while each of the three companies continues with their own unique and independent in-market brand building to supplement this improved distributor effort.

Also in the U. S. we evolved our organizational structure to allow for more coordinated execution of programs across the country.

And more recently we began the process of combining our brand portfolio in Mexico, where we are integrating a non-tequila Brown-Forman brand into the sales and marketing operation we acquired with Casa Herradura.

Our goal at Brown-Forman is to continually enhance shareholder value over a very long period of time. Fundamental to this is our desire to consistently produce excellent rewards for what we consider to be a moderate and acceptable level of investment risk. Our total shareholder return for the past fiscal year was 8%, assuming dividends were reinvested, which significantly outstripped the overall decline of 5% for the S&P 500 for the same period.

Looking at the same measure over three, five, and ten year periods, Brown-Forman has also outperformed the returns of the S&P 500. This is also true for even longer periods of time. As an example, for the 20-year period, Brown-Forman’s 15% total shareholder return compares quite favorably to the S&P’s 11% return. We anticipate the future sources of total shareholder return will be derived through a combination of strong, consistent, organic growth, periodic brand acquisitions, our consistent dividend program, and from time to time by share repurchases, such as the $200 million open-market purchase which we completed in fiscal 2008.

I will now turn the call over to Don for commentary on our fiscal 2008 results and our outlook for fiscal 2009.

Donald C. Berg

Thank you, Paul, and good morning everyone.

As Paul noted, fiscal 2008 results reflect exceptional international growth for our Jack Daniel’s and Finlandia brands, and our continued work to deliver outstanding shareholder value. Despite a softening global consumer environment, diluted earnings per share for continuing operations were a record $3.55, up 10% over fiscal 2007.

As Paul mentioned, more than half of our sales are now from outside the United States. So we will first talk to the continued success of our international expansion. For Jack Daniel’s depletions outside the U. S. expanded 8%, with a broad array of contributors led by solid double-digit gains in France, Russia, Poland, Romania, and Turkey. Another notable component of our strong growth internationally was the performance of Jack Daniel’s in the United Kingdom, the brand’s largest market outside the U. S., where depletions are up 6% and annual volumes are now approaching the 1 million case mark.

Leading our depletion growth in the Asia/Pacific region, in Australia the Jack Daniel’s & Cola ready-to-drink product continued to post exceptional results this fiscal year, surpassing the 2 million case mark in Australia/New Zealand combined. Very recent developments regarding the increased saturation of RTDs in Australia are likely to provide some headwinds in fiscal 2009. However, we are watching that situation closely, and while it’s early, we believe that the Jack Daniel’s franchise will retain its excellent brand health there.

As we have highlighted in recent quarters, Finlandia’s growth in Poland contributed significantly to the company’s overall growth this past year where the brand’s volume in this market surpassed both the 700,000 and the 800,000 case mark. We also experienced exceptional growth in Russia, adding well over 100,000 cases in that market.

In fiscal 2008 Finlandia was recognized by Spirits Business, a U. K.-based magazine, as the fastest growing global spirit brand. With all this momentum we continue to believe in Finlandia’s power as one of Brown-Forman’s ongoing growth engines.

Even excluding the exceptional performances in Poland and Russia, we are seeing excellent growth throughout Eastern Europe, where we experienced double-digit depletion gains for our total portfolio on the strength of our Finlandia and Jack Daniel’s brand franchises. This important part of the world has a combined population of more than 300 million people. It is about the same size as the United States and has an average GDP growth of over 6%.

We are encouraged by these successful results and we believe our route to market and brand-building infrastructure in Eastern Europe and our exceptional teams and partners there have us well positioned to continue to seize the many future growth opportunities in this region.

Finally, looking at Southern Comfort, it delivered solid gains in the U. K., South Africa, and Australia.

Now, turning to the United States, fiscal year 2008 was more of a challenge for us, though our base business is still strong and our developing brands continue to outperform the market. Jack Daniel’s U. S. depletions were slightly ahead of last year and we are encouraged by the most recent Nielsen trends for the brand. For example, in the most recent three months dollar sales for Jack Daniel’s grew 4.8%, outpacing brands like Jose Cuervo, Crown Royal, and Gray Goose, to name a few.

Balanced with a strong international growth, Jack Daniel’s global depletions were up 4% over the prior year.

Southern Comfort experienced low single-digit declines in the United States on a volumetric basis but pricing more than offset those declines, driving up sales growth to more than 1% in the period. Overall, global depletions were flat for the full year but Southern Comfort posted 6% net sales growth in fiscal 2008.

There have been many questions recently about the possible trading down in the United States in light of the recent economic slow-down. While volume growth rates for super premium brands in the industry are certainly not as high as they have been over the last several years, we continue to experience solid double-digit depletion growth for several of our super premium price developing brands, including Bonterra, Gentleman Jack, and Woodford Reserve. Each of these brands reported global net sales gains of at least 20%. In addition, Tuaca, Sonoma-Cutrer, and Chambord continue to register solid depletion gains. For us, these are encouraging statistics regarding the continued strength and consumer appeal of super premium brands in the United States, where nearly 80% of the combined appeasance for these brands were generated.

Now let me spend a few minutes just talking about acquisitions. Most of you probably know that Brown-Forman has a long history of success with acquisitions. In fact, most of the brands in our portfolio were acquired over the years, most notably Jack Daniel’s and Southern Comfort. More recently, we have used acquisitions as a way to take advantage of evolving consumer patterns.

Over the last ten years we have moved into high-end Chardonnay with Sonoma-Cutrer, premium vodka with Finlandia, and super premium brands that are easily mixed, like Tuaca and Chambord. In fiscal 2008, all together, these brands, led by Finlandia, contributed more than 10% of our net sales and nearly 15% of our net sales growth. And as I mentioned earlier, have continued to grow faster than Brown-Forman’s average growth rate.

As a continuation of our acquisition strategy, we made an investment in Tequila with the purchase of Casa Herradura in late fiscal 2007. Importantly, I am happy to report that we achieved our fiscal 2008 plan. In accomplishing this, we experienced better than anticipated results with el Jimador in the United States and lower than anticipated integration expenses.

As you would expect with a year of transition there were a lot of moving pieces, some of which offset the positives I just mentioned. In particular, the performance of our tequila brands in Mexico fell below our expectations due primarily to competitive pressures in that market. Additionally, we spend a good portion of the year reducing inventory levels in the wholesale channel. Now, with reasonable inventory levels in Mexico and our newly implemented trade practices we believe we have a solid foundation from which to build this business.

We also made excellent progress during the year with our el Jimador ready-to-drink brand extension, New Mix, which is the category leader in the Mexican market and continues to outperform the competition.

Our tequila operation is a complex business, one with excellent growth prospects, but also some near-term challenges, particularly in Mexico, due to the current agave access. Having said that, we continue to be very excited about the future for the Casa Herradura brands and our intent is to make tequila one of our great growth vehicles over the next 20 years.

With the transition largely behind us, our fiscal 2009 plan takes another positive step in that directions.

Now turning to our full year results that we released earlier this morning, reported operating income for the company was $685 million, an increase of 14% over last year. Adjusting for a weaker U. S. dollar, acquisitions for comparable periods, and the absence of a gain on the sale of linear assets last year, underlying operating income grew a healthy 8%.

The other thing in the press release issued this morning, we’ve included Schedule A which reconciles reported growth to underlying growth for various line items in the P&L. This schedule also discusses the reasons that we believe that these measures are useful to investors.

Net sales in fiscal 2008 grew by $476 million, or 17%, to $3.3 billion while underlying net sales grew 6% for the year.

Reported gross profit increased $214 million, or 14% year-over-year, and underlying gross profit advanced 6% for the year.

Advertising & promotion investments increased $54 million, or 15%, in fiscal 2008. The weaker U. S. dollar contributed 4% of this growth and incremental advertising for recently acquired brands accounted for 5%. Underlying growth in advertising & promotion investments was in line with our underlying revenue and gross profit growth of 6% and is consistent with our long history of investing in our brands.

Throughout the year we worked to optimize our allocation of resources, particularly with advertising & promotional investments, directing our spending to areas that we believe are the most relevant to the consumer in today’s economic environment. For example, efforts to expand our in-store presence have received incremental attention and resources.

We continue to maintain a balance between investing in brand-building programs, which have the potential to generate a more near-term consumer response, and investing for long-term awareness, such as image-building methods like advertising and event marketing.

Selling, general & administrative investments were up $56 million, or 10%, on a reported basis. 6% of this increase was related to our fiscal 2007 acquisitions and 1% of the increase was due to the weaker U. S. dollar. Adjusting for these, the underlying increase in SG&A was 3%. I believe the leverage the past several years of significant incremental investments in SG&A in support of our global route-to-market efforts contributed to our operating income growth for the year.

Our effective tax rate of 31.7% for fiscal 2008 was in line with our fiscal 2007 effective rate.

Cash flow from operations for the full year was $534 million. We used this cash to repurchase $223 million of our stock. We paid dividends of $158 million and we funded capital expenditures of $53 million.

In March of this year, our $350 million 3% bonds matured. We refinanced this under our commercial paper program, during one of the most difficult liquidity periods in recent memory, and we took advantage of the lower floating-rate environment. Our average commercial paper rate was 2.25% at year end. We are pleased we have maintained our high investment grade credit rating amidst the backdrop of the current credit environment.

As in the past, we plan to continue to use our strong cash flows to invest behind our exceptional portfolio, repay debt, seek complimentary acquisitions, and evaluate opportunities to return cash to our shareholders.

A few brief comments on our fourth quarter. The sources of growth for the fourth quarter were consistent with the drivers of the full year results. These factors, coupled with the operating expense leverage, driven mainly by a decline in SG&A investments in the quarter, drove fourth quarter underlying operating income up 12% over the prior-year period.

As we mentioned in our outlook provided at the end of the last quarter, we expected a reduction in our tax rate for the fourth quarter. But it was even lower than anticipated at that time, based on the timing of an effective settlement of a tax uncertainty in the quarter. For fiscal 2009 we expect a higher effective tax rate, driven primarily by the absence of the fourth quarter tax settlement benefit. Our forecast for this rate is between 32.4%-33% for the full year.

Now turning to our fiscal 2009 outlook. Building on the excellent 2008 results, our fiscal 2009 outlook incorporates expectations for continued solid international growth and in the U. S. improving trends for both Jack Daniel’s and Southern Comfort, along with healthy growth from the Casa Herradura brands. Additionally, anticipated increases in raw material and fuel costs, as well as continued leverage from prior U. S. [inaudible] investments, are incorporated in our 3%-10% operating growth expectations for the year.

This outlook also reflects our expectations for a higher effective tax rate, the benefits from the fiscal 2008 share repurchase, and lower interest expense.

Putting it all together we expect diluted earnings per share to fall within a range of $3.73-$3.98 representing a growth of 5%-12%.

That concludes our prepared remarks. Paul, Jane, and I are now happy to answer any questions anyone might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Lauren Torres with HSBC.

Lauren Torres – HSBC Bank USA

I am not sure if you touched upon this in your prepared remarks, but I was hoping you could just give us a sense of some of your fourth quarter trends, particularly behind Jack Daniel’s and Southern Comfort. Are we seeing more of a slow down here, a little bit better improvement, much of the same? Just to give us a sense of how some of these trends are going in the U. S., that would be helpful.

Paul C. Varga

Lauren, I think that the fourth quarter, given the international which continued to be strong. I think Don mentioned we reported 8% for the full year on all international markets. The U. S. was, maybe the thing I would cite the most is the U. S. Nielsen’s, which I think really obviously focus on the off-premise, where we were able to see through the course of the last three months some nice improvements in a channel where we’ve been starting to focus since late last year. So we’ve begun to see some improvements there on the Jack Daniel’s brand. Southern Comfort about the same.

Lauren Torres – HSBC Bank USA

Okay. And if I can also ask about some of your expenses in the quarter. It seems like SG&A, as you mentioned, you were able to pull back a bit there. I was just curious, looking at the fiscal 2009, how we should think about some of these expenses? Is it ongoing or was it just a little bit of belt-tightening in the quarter that we may not see in fiscal 2009?

Jane Morreau

As we mentioned in the third quarter conference call, we were expecting to have some leverage, which you did see come through in this fourth quarter. It is some general belt-tightening that you saw. Like everybody is probably doing, too, with the difficult economy and so forth that is being experienced in the U. S., so less meetings, less travel, things of that nature. We do expect to have continued leverage next year, in fiscal 2009, so you expect to see not exactly the same trends but certainly low increases.

Paul C. Varga

Lauren, particularly associated with some of the distribution investments we’ve been making in prior years. We just haven’t had as many opportunities to make those long-term investments in distribution infrastructure last year and as we look at this year we’re not seeing it as well. There’s a few sporadic examples but not like some of the investments we’ve been making in prior years. So that’s a part of the source of this leverage as well.

Lauren Torres – HSBC Bank USA

And if I could just lastly ask about advertising, also along the same lines? In light of some tough conditions here in the U. S. is that somewhere you may think about pulling back or are you still pretty dedicated as far as the investment spend we’ve seen in the past carrying through this year.

Jane Morreau

Yes. Lauren, I think what you’re going to see, you’ve seen an aggregate number and we’re not pulling back in advertising for next year. As we have typically done historically, we have spent in line with our revenue growth and we will continue to do that.

More importantly, where we’re looking to invest is in many different avenues. In other words, we may be shifting money to markets that are more responsive to the incremental spend, we may be shifting money from more consumer responsive advertising types of things.

So, you ‘re going to see that but you’re going to see that our advertising plan for next year is in line with what our revenue growth is projected to be.

Paul C. Varga

Yes, I think that the best example of it is some of these more rapidly growing international markets, I mean, we’re continuing to spend nicely behind them, particularly at the A&P level, but also some SG&A.

Whereas places like the U. S., I think we talked about over the last two calls, where we’ve really shifted the focus particularly from on-premise to off-premise because of some of the shift we have seen at the consumer level.

So those are examples, some of it being the story being deep down into I think a combination of brand market units is the way we think about it, where you really want to fuel the ones that are not having some of the economic conditions that the U. S. is, and some places, particularly Finlandia, Jack Daniel’s and a lot of these international markets, a lot of these developing brands continuing to get very nice investments behind them.

And we’re just trying to be appropriate to what we’re seeing out there in the environment right now.

Operator

Your next question comes from Darah Massenian with JP Morgan.

Darah Massenian – JP Morgan

I know you guys just answered this on SG&A but I just wanted to follow up on that for a minute because the SG&A was leveraged really strongly in the quarter, down slightly year-over-year despite the 7% adjusted sales growth. So is it just some belt-tightening there and cutting back on some discretionary expenses or is there specific cost savings programs you guys have put into place? I just wanted to get a little more clarity on exacting what was driving that.

Donald C. Berg

That’s really all it reflects, is some of the belt-tightening that we’ve been doing around the corporation and we’ve got some various programs around that in place in terms of expectations around T&E and what have you. But there wasn’t anything specific that would have driven that in the particular quarter. And a lot of those programs that were put in place were put in place not only for the rest of 2008 but for all of 2009 as well.

Darah Massenian – JP Morgan

Okay. And as you look out to 2009 do you think the SG&A leverage versus revenue growth, is that more similar to the full year 2008 type of numbers you guys posted or is it more in line with Q4’s run rate?

Donald C. Berg

We’re hoping that it will be slightly better than what you saw for the full year.

Paul C. Varga

One thing on this point, just as we go along, I hate to take it back well before this fiscal year, but we were making really significant investments in the basically our international, but also our U. S. distribution infrastructure over the last five our six years. And one form of, the way I think of it is almost like a synergy for us, is over time to be able to be able to get some leverage out of the income statement. Particularly as you look down at the SG&A line.

So, we don’t know what opportunities will unfold in the future for future investment because there’s still a lot of possibilities for us, but we made a serious set of investments in very key markets for us over a period of five our six years. Some of it’s timing, we just haven’t had as many opportunities, but over time, I think we’ll make, well, we’ll still make investments, of course, in our distribution infrastructure. It may not be at the rates we were making back in the early 2000s.

Darah Massenian – JP Morgan

And given the commentary on acquisitions in the prepared remarks, as well as the share repurchases recently, Paul, maybe you can give us an update on your cash flow priorities at this point and specifically where acquisitions and repurchases fit in.

Paul C. Varga

The same as sort of Don outlined in his remarks, it’s sort of the core priorities we always have. Of course, we’ve got debt right now that we’re paying down. We do have capital. It’s not in any significant way different than our historical investments in capital. The addition of Casa Herradura, we have some capital requirements there over the next couple of years. We suspect we’ll be putting in a little bit of additional capital. Jack Daniel’s is still growing so that requires incremental investments in capital. I think Don and I both talked about the dividend program and we will be continuing to look for share repurchase opportunities just as we did during fiscal year 2008.

I think we both, at some point in our comments, mentioned periodic brand acquisitions. I mean, we are really pleased as we look back here over the last few years, and it was directly stated in Don’s opening remarks about the performance of the brands we’ve been purchasing and how they are adding to Brown-Forman’s growth rate, so we will continue to look for the right opportunities to get brands that can not only do well in our hands, but also help us with our continuing growth.

Donald C. Berg

I think, too, as we look at a pretty high level of debt capacity, we will continue to keep that as acquisitions come available. A lot of the acquisition side of things is more based upon when a seller wants to sell than when a buyer wants to buy and so we’ll keep all of that in mind as we continue to think about our capital structure and our cash flows and where we see opportunities to continue to deliver cash back to the shareholders, we’ll do it.

Paul C. Varga

Yes, the one thing, too, that was evident in Don’s comments, were that the places where we’ve made what we consider these successful acquisitions were in areas where Brown-Forman had not been particularly participating. And that goes from a brand portfolio and, as well sometimes, from a geographic skew. And so Finlandia is wonderful example of that being a premium vodka and giving us, I think as said it was this year, 95% of its incremental growth coming outside the U. S. Same thing with premium liqueurs, premium Chardonnay. So we’ll be looking for things that help round us out.

Darah Massenian – JP Morgan

In terms of 2009 guidance, can you guys give us a sense or quantify the benefit you’re expecting from currency and also the pressure you’re expecting from grain costs?

Jane Morreau

In terms of the currency, there is very little if any right now that is better than our guidance in terms of good news or bad news.

In terms of grain costs, if you’re focusing singularly on that line item alone, we’re estimating, at this point in time of course, corn prices continue to go up but at this point in time that singular item is about $15 million.

However, what we often will do when we think about this because there is rising costs all over the place with fuel costs and it hits you throughout your supply chain. We’ve got various things that can offset or mitigate that, from price increases to hedging the actual corn to different programs we’ve got going on. Paul mentioned some of them, some capital investments to improve our costs, to a number of initiatives that we have underway, at our bottling and distillery, maturation process to look at efficiencies and to mitigate some of these rising costs.

Darah Massenian – JP Morgan

And following up on currency, are you guys using current exchange rates in your guidance or are you assuming there’s not much benefit from currency in 2009 versus 2008?

Jane Morreau

We’re not assuming much benefit, not at the current rate.

Darah Massenian – JP Morgan

I guess I’m surprised to hear that because for the full year, the average, I would generally expect a weaker dollar to benefit you guys, based on your regional mix and where exchange rates are today you don’t expect much benefit from currency.

Jane Morreau

If I were to look at today’s log rates, there is some upside to that, but again you said it right. You’re looking at the pound, in terms of, you’ve got to look at the full year, and where the pound was last year versus this year, it’s actually our largest exposed currency. So you’ve got to take that into consideration and look at the whole P&L. I mean, again, if the currency rates and Euro and so forth continue to weaken, of course, there will be more benefit. At this time it’s not significant and in our guidance it’s not significant.

Operator

Your next question comes from Doug Ayers with Bank of America.

Doug Ayers - Bank of America

Just a follow-up on Darah’s question on guidance. It seems like you gave a pretty wide range for guidance this year, wider than you’ve given in the past. It seems like you have pretty good visibility on costs, SG&A, advertising, tax rate, foreign exchange. Is the wider range due to your volume expectation, or what’s driving the wide range this year?

Paul C. Varga

I think the general thing is just the general uncertainty out there in the environment. A traditional range at this time, when we provided guidance, is about a $0.20 range. I think this year’s is about $0.25. And it’s off a higher base so on a percentage basis it’s not that different but we just thought it was wise, really, in the environment we’re in, because I think just not in the United States, but all over the world, we’re amidst a sort of transitional and uncertain times.

And we’re just like anybody else, we’re trying to see how it unfolds so we thought, particularly with a 12 months guidance we would give ourselves some flexibility.

Doug Ayers - Bank of America

And what does guidance incorporate for pricing in the U. S. and international?

Donald C. Berg

Our plans are to continue to take price increases in fiscal 2009 consistent to what we have in past years. At least at the shelf. And then, particularly in the United States, depending upon how we see the competitive levels throughout the year, we’ll make adjustments to our discounting programs in terms of how frequent or how deep we’ll go.

Essentially what we’ve talked about in the past, as we’ve come into the U. S. downturn and things have gotten more competitive, we’ve had to get more competitive at the pricing level.

But at least in terms of at the shelf, we’ll continue to take the same kind of price increases and continue to build our brands consistently the way we have historically.

Paul C. Varga

Particularly in an environment where the costs are high.

Doug Ayers - Bank of America

What are you looking for the U. S. spirits industry buying growth? Are you expecting the industry to remain stable, or increase or slow a little bit next year?

Donald C. Berg

Yes. As we’ve thought about going out in fiscal 2009, we’ve seen a little bit of stability and if you look at the overall distilled spirits numbers you can see in the data, if you compare this year versus last year, there’s not a lot of change. It’s right there right around the 3% level. We’re anticipating that that is going to continue over the course of fiscal 2009.

Operator

Your next question comes from Ian Shackleton with Lehman Brothers.

Ian Shackleton – Lehman Brothers

It strikes me that the tone of today’s call is very different to what we saw in Q2 and Q3. There’s a much more positive tone. I can see that Q4 seems to commend the international business. But having said that, is your view of the U. S. spirits market perhaps less pessimistic than a few months back?

Paul C. Varga

I think a lot of the conversation we were having back in Q2 and Q3 was focused on Jack Daniel’s and I would say, in terms of the work that we’ve been doing since that time on Jack Daniel’s and some of the results we’ve been seeing, and you literally have to look at it market by market, but certainly the response we’ve been seeing to the activities in the United States on Jack Daniel’s has us more encouraged than we might have been back six months ago.

Even though the environment, to be honest with you, is still quite challenging out there. But I think our effort has been better and as a result we’ve seen just better results.

I think it’s a different story in the U. S. on Southern Comfort. We’re trailing on Southern Comfort in terms of getting the brand positioned and worked and promoted and merchandised in the way that we want, but I think that will come as well.

The international continues to be the driver of the company’s growth right now. I tried to list as many markets as I could where we’ve seen great growth and I think we’ve had some differing results than many of the competitors, some of which is because we’re in an earlier stage of our development still in many of these markets.

But there’s no doubt that Jack Daniel’s and Finlandia, and it’s really the Jack Daniel’s family, have really been doing very well in the international markets and so we’re going to continue to put investments behind that to try to drive the growth of the company.

Ian Shackleton – Lehman Brothers

I was just wondering as well, where there are some recent developments, particularly the change in ownership of the Absolut brand and possibly therma pricing for that brand. You know, it gives you more confidence, for example, around the whole vodka category, I mean for the Finlandia going forward. Do you actually have more optimism on pricing in categories like vodka, looking forward to your fiscal 2009?

Paul C. Varga

We have been increasing the price condition of Finlandia pretty steadily over the last couple of years. Our growth rate from Finlandia relative to Absolut has been superior the last couple of year. And again, it was off a smaller base but we have the number one position in many of the important vodka countries, particularly throughout Eastern Europe.

So there was a lot of activity over the last 18 months, we were able to see competitive activity around Absolut that kind of disrupts the market, as people were working really hard to sell the Absolut brand in markets. It’s settling down I would say and they’re about to go into the transition period themselves.

All we tried to do with Finlandia is really stay focused in the priority countries, not only taking the price up, but also really moving the brand into new areas of distribution. We’ve added flavors. But the consumer take-away underneath the Finlandia brand has been excellent. The volumes have been driving the growth more so than the pricing.

Ian Shackleton – Lehman Brothers

If you look at that table showing depletion versus sale, the one brand where you’ve effectively got a negative net sales per case is on Fetzer. I guess really the question is are you obviously seeing better pricing coming through in wine as we go into fiscal 2009?

Paul C. Varga

Can you repeat that question? I missed the middle piece of it.

Ian Shackleton – Lehman Brothers

Fetzer, you’ve actually got constant currency sales growth less than volume growth so it’s clear there pricing isn’t too robust. And my question was is as you look further out into fiscal 2009 are you more confident of seeing better pricing there?

Paul C. Varga

That is one of the most competitive segments of the category and we will play that literally market by market. Even though there was a slight difference between the constant currency and the volume, I think that’s probably more a geographic mix than it is any price reductions on the brand. We’ve seen relatively stable, anything from moderate increases in the price of Fetzer and it’s really been a brand that we’ve worked hard to stabilize over the last couple of years so we were quite proud of the volumetric growth we’ve seen these last 24-36 months.

Operator

Your next question comes from Judy Hong with Goldman Sachs.

Judy Hong - Goldman Sachs

I am hoping you can give a little more granularity into the competitive dynamics for Jack Daniel’s in the U. S. What are you seeing in terms of the promotional activity from your competitors and whether you feel that some of the price increases you’re planning may have to be reinvested back into promotional spending?

Donald C. Berg

When you look at what’s going on in the U. S. it’s hard to get just one general answer because there’s a lot of different activities going on in different markets depending upon how hard the economic situation is and what have you. There is no doubt in some pretty large markets we’ve seen some pretty competitive pricing out there.

It’s not unusual to see some of the major competitors within Jack Daniel’s competitive set getting pretty far below the normal price differences you see with the brand. And in those markets it’s where we’ve stepped up some more of our competitiveness in terms of pricing. In other areas of the country you’re not seeing it as much. So it really ends up becoming much more of a market-by-market basis.

When you look at the Nielsen numbers you can go through and see where the volumes are coming from and how much price discounting is going on and all of that, and it has definitely become more competitive.

Judy Hong - Goldman Sachs

So when you talk about 2009 and your expectation for Jack Daniel’s improved trends to continue into 2009, what is embedded in that expectation as far the promotional level is concerned?

Paul C. Varga

I’m not sure what you mean by the promotional level. The thing we would cite is we are attempting and have been encouraged by these recent results, to drive the net sales of Jack Daniel’s at a higher rate during FY2009. So it’s not to simply take the volumes up and lay in a number of higher discounts per case, and that’s where we were so encouraged, I think, is we started to look into these more quarterly consumer take-away numbers where we saw the proportion of our net sales dollars, we have what we considered to be a very healthy contribution coming from both pricing and volume and some of our key competitors had a different mix of that.

And so we’re going to play this channel by channel and market by market. I think the key thing that has occurred in the last three to six months for us was the increased focus we put on off-premise merchandising promotion and effort to try to get the results, and we expect that to continue.

But if what you’re trying to get to is are we going to have significantly deeper discounts to drive volume market share, the answer is no.

Donald C. Berg

Just to pick up a little more on that. Basically, our approach on this whole thing is if you look at Jack Daniel’s, we have a very broad consumer base. And to the extent that we have consumers within our base that are getting hit harder in these economics times, we will try to give them opportunities to be able to enjoy Jack Daniel’s and its franchise.

To the extent that we have competitors getting into market share wars and getting into a fight to the bottom, that’s not a game we’re going to play in. And so we’re going to just take a look at it on a market-by-market basis and kind of judge what we think is going on out there and what we thing we need to do.

But to Paul’s point, our intentions are to stay focused on the top line and top sales growth.

Judy Hong - Goldman Sachs

Can you give us a little more color in terms of what’s happening in the on-premise channel. This is the channel we hear a lot of challenges from lower restaurant and bar sales and I’m just wondering what’s going on from a broader on-premise perspective, and specific to your brand in the on-premise channel.

Donald C. Berg

In looking at some of our most recent information in the on-premise, we are still seeing declines at the on-premise level and we’re seeing that they more than offset at the off-premise level.

Just looking at some of the things you see in the general press about what’s going on with some of the casual dining, clearly people are continuing to stay home more. I think we are seeing more of this consumer behavior where people will start out at somebody’s house and having a few drinks before going to the on-premise and you’re seeing some of that dynamic hit as well. And our expectations are that we will probably continue to see that during the course of the next year.

Paul C. Varga

One other factor that will be interesting to see how it unfolds is that some of the softness in the on-premise actually began around this time last year so we begin to cycle some of the U. S. on-premise softness to see if it flattens and stabilizes or if it continues. That’s still left to be seen. But this period of on-premise softness isn’t recent, it’s been going on for the better part of a year.

Judy Hong - Goldman Sachs

On commodities, I know you’ve given us some quantification as to grain cost pressure for next year. Do you have any expectations for glass costs?

Jane Morreau

Glass costs we’re expecting, for us, just to be more in the inflationary range at this point. We actually have a contract on our glass costs that puts us more in an inflationary range.

Judy Hong - Goldman Sachs

In terms of the U. K. market, following the duty increase in March, are you seeing any negative impact from that tax increase?

Paul C. Varga

Not yet.

Judy Hong - Goldman Sachs

Is your guidance expecting some softness as a result of the duty increase?

Paul C. Varga

No.

Operator

Your next question comes from Thomas Russo with Gardner Russo & Gardner.

Thomas Russo – Gardner Russo & Gardner

The Jack Daniel’s depletions, especially in the international markets, what carry-through do you see? What’s the health of those markets? And Judy just mentioned England in particular, where I was delighted to see you crossed the 1 million case threshold, what’s the drive in that growth in an otherwise sluggish market?

Paul C. Varga

We’re thrilled, as well, with our U. K. performance. Tom, just to clarify, we’re just short of a million but expect to cross soon.

I think we’ve really bucked the trend in the U. K. It’s been a pretty challenging overall spirits environment there for the last year, year and a half, for a large variety of reasons which have been out in the press. So I think a big piece of it is we have been there for a long time, it’s one of the strongest countries for us just in terms of the depth of the brand equity. We’re skewed very heavily to the on-premise in terms of our business and we just continue to be one of the dominant distilled spirit brands in the U. K. and have plans to continue to grow it.

I cited so many countries as we went through because we were please with the breadth of where Jack Daniel’s is really developing and it’s really all over the globe. And when you report a single fiscal year you are going to have a few markets that are up more than others and some that actually it might have a soft year, but what struck us this year was just the extreme diversity of the appeal of Jack Daniel’s.

Even off some of these smaller bases and places like India where the company and the brand to grow. We saw good growth this year coming back in Korea and out in North Asia. Of course, everyone has been talking about Eastern Europe and in Eastern Europe we’re doing really well. Not all small bases anymore on Jack Daniel’s. We’re really encouraged.

It’s also the first year we’ve seen a significant step up in the business down in Latin America as well. So we’ve got some hopes for down there down the road, as well.

It was a broad-base year for the growth of Jack Daniel’s and in addition to just the volumetric gains we posted it was just also the confidence it gave us that there is still a lot growth ahead.

Thomas Russo – Gardner Russo & Gardner

Links to run on. Paul, you made a comment which was the benefit of your adaptive capacity of your employees and your partners and then you talked about two specific partnering events. One was Mexico for the [inaudible] non-Jack portfolio and then the U. S.’ partnering with Rémy and with Bacardi. I’m curious about both those endeavors.

Paul C. Varga

I’ll start with Mexico. We were partnered with Bacardi down there on the non-tequila brands we had for the last several years and we did a nice job. We made the investment down there, we wanted ample time to integrate the business before we took on the responsibility of building the other Brown-Forman brands so about a year was right. So we’re making that transition literally as we speak.

And we just think it would be a great platform from which we can put increased focus behind Jack Daniels and Finlandia, Southern Comfort, some of our other brands. And just like we’ve seen in other markets where we’ve done this, most recently Poland, you do get a great benefit when you’re able to apply your own people’s focus behind the brand. So that’s our hope down in Mexico.

In the U. S. it really was to provide some stability for not only ourselves, but also for our key distributor partners, by bringing together three independent companies who had similar philosophies in terms of brand building, to form a division within a couple of these U. S. distributor partners and then get to work. So we can bring very complimentary and strong portfolio so we can go out and compete even more effectively against some of the key competitors that are larger than us.

And so on paper, when we started to talk about it, it became appealing to all three of the companies. We are still in the early stages of its implementation. The New York market was the first market we did it and so we’ll be paying close attention to how it works in New York as we think about doing this in other markets.

Thomas Russo – Gardner Russo & Gardner

Presumably in New York the distributors who now see all three of your products will have more clout in markets.

Paul C. Varga

Absolutely. And if the idea would be both in the on-premise and off-premise channels, to be able to use the whole portfolio to go in and have more influence with the retail environment. And remember, also, it won’t be the sole effort on behalf of each of the companies’ brands. We will continue to supplement that effort with Brown-Forman’s regular brand building in the New York market.

Thomas Russo – Gardner Russo & Gardner

And just to confirm, in Mexico you will have Jack in your portfolio that goes down through the Herradura channel?

Paul C. Varga

Absolutely. As well as Finlandia and other Brown-Forman brands.

Operator

There are no further questions at this time.

T. J. Graven

For those of you who are New York-based and plan to attend the Belmont, we encourage you to enjoy it with [inaudible]. We are proud to have the opportunity for Woodford’s sponsor to be the official bourbon of the Belmont.

And for those of you who I haven’t spoken to over the last few weeks, I will moving into a new role at Brown-Forman, leading our technology organization and initiatives and while I’m looking forward to this opportunity I will certainly miss working closely with you all.

Ben Marmor is the name of the new Director of Investor Relations, effective June 1, and he and I will be working very closely for the next several weeks on transition items and to give Ben a chance to meet many of you.

So thanks for joining us today on the call and we will be available this afternoon to take any follow-up questions you have.

Operator

This concludes today’s conference call. You may now disconnect.

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