Earnings Transcript for BEAM - Q1 Fiscal Year 2012

Operator: Good morning. My name is Scott, and I will be your conference operator today. At this time, I would like to welcome everyone to Beam's first quarter earnings conference call. [Operator Instructions] Now I would like to turn the call over to Matt Shattock, President and CEO of Beam. Sir, you may begin your conference.

Matthew John Shattock: Thank you, Scott. Good morning. Bob Probst and I would like to welcome you to our discussion of Beam's 2012 first quarter results. And before we begin, please note that our presentation includes forward looking statements. These statements are subject to risks and uncertainties, including those listed in the cautionary language at the end of our news release, and our actual results could differ materially from those currently anticipated. This presentation also includes certain non GAAP measures that are reconciled to the most closely comparable GAAP measure in our news release or in the supplemental information linked to our Webcast and Presentations page on our website. As expected, we made a strong start to 2012, and indeed the first quarter was a little better than we anticipated, as we benefited from strong demand and excellent initial set in, the new product launches that are front loaded in 2012. Consistent with our long term goals, we once again outperformed our global market and sustained momentum for our Power Brands, led by continued gains for Jim Beam and Maker's Mark in the fast growing bourbon category. Our innovation pipeline delivered several exciting new products across categories that helped boost our sales in our seasonally smallest quarter. Once again, our comparable net sales growth was broad based across our 3 regions, and emerging markets delivered strong double digit gains. We expanded margins and delivered double digit growth in operating income and earnings per share. Our strong performance in shipments of newly introduced products helped comparable net sales increase 13% in the quarter. Operating income grew faster than sales, and diluted earnings per share before charges and gains increased 29% to $0.53. Bob will discuss our financial results in greater detail in a few moments. Our organic growth strategy is proving highly effective. As a reminder, we focused on 3 strategic pillars that put our growth vision into action

Robert F. Probst: Thanks, Matt. Before we move to the numbers, just a word on how we'll present results as we begin our first full year as a public company. As you'll recall, we presented results last year on an adjusted pro forma basis to give a clear picture of the end results as a stand alone entity during the Fortune Brands separation process. Against that phase and moving forward as a standalone public company, we'll present reported GAAP results and results on a before charges/gains basis. In addition, we'll also continue to provide segment data and comparable year to date sales growth rates for our key brands. Let me also note that the full year estimates we discuss today do not include the pending acquisition of Pinnacle Vodka. Turning to the numbers for the first quarter, which is our seasonally smallest, and starting at the top line, reported net sales came in at $533.8 million, that's up 2% from the year ago quarter. On a comparable basis, which adjusts for factors we've outlined, including the establishment of our enhanced Australian distribution agreement with CCA, our net sales grew to 13% in the first quarter, driven by double digit growth across all 3 regions. As Matt indicated, the quarter benefited from factors we called out 3 months ago, including our front loaded initial shipments of new products. We estimate that new product launches and transitions to improve route to market in APSA accounted for approximately half of our comparable Q1 sales growth. Even before these favorable impacts, our top line growth was approximately double the growth of our market. Overall, net sales continue to grow faster than volumes, which were up 9%, reflecting our strong shipments and favorable product mix. Turning to operating income. Operating income was $131 million and was $138 million before charges, both up 17%. OI grew faster than sales, as margins benefited from favorable FX and favorable product mix. OI growth also reflected this 15% increase in brand investments as well as higher year over year operating expenses for ongoing initiatives we previously called out, most notably, expansion of infrastructure in the emerging markets that began in the second half of 2011. We'll begin lapping those costs in Q3. Moving to income from continuing operations. On a reported basis, income from continuing operations was $78.4 million or $0.49 per diluted share, compared to $61.7 million or $0.39 per share for the first quarter of 2011. Excluding charges and gains, first quarter income from continuing operations was $84.4 million or $0.53 per diluted share. That's up 29% from $0.41. EPS benefited from our strong operating performance as well as lower year over year interest expense associated with our debt management initiatives, partly offset by a higher tax rate and share count. Turning to Beam's segment performance, and as a reminder, these numbers are on a before charges/gains and constant currency basis to provide comparability across our regions. Starting with North America, first quarter net sales in North America increased 13% to $310.5 million and were up 12% on a comparable basis. Sales were driven by a low double digit growth in the United States, reflecting strong growth through our Power Brands and Rising Stars, including pipeline fill for newly introduced products across categories. Once again, our bourbon brands led the way in North America with strong double digit growth driven by sustained growth from Maker's Mark and the core Jim Beam White products plus the success of our premium innovations. North America's results also benefited from the addition of Skinnygirl late in Q1 of 2011, strong sales in Canada and higher shipments in Mexico due to pipeline fill for our new distributor relationship that began January 1. The pipeline filled in Mexico into new products accounted for approximately half of the region's growth. At the operating income line, OI for North America was $98 million, up 19%. North America's OI benefited from our strong shipments in the quarter and favorable product mix. Moving to Europe, Middle East, Africa, or EMEA. First quarter net sales in EMEA were up 15% to $110.3 million and up 12% on a comparable basis. Results in EMEA reflected continued very strong performance in Germany, the world's #3 bourbon market, where our bourbon brands were at a very strong double digit rate. Along with strong growth in the travel retail channel, these results more than offset continued softness in Western Europe, particularly in Spain, where challenging economic conditions are impacting consumers. Double digit growth in EMEA for Jim Beam and Courvoisier across our successful innovations helped drive the top line. Approximately half of EMEA's sales growth was due to the timing of promotions in the travel retail channel and our front loaded calendar of innovation shipments. At the OI line, EMEA's operating income came in at $17.2 million, off [ph] 15%. OI trailed sales in EMEA due to 2 timing factors that had outsize impact in the seasonally small quarter. The timing of expenses, principally from brand investment behind new products and costs related to streamlining our distribution joint ventures in Spain and the U.K. Even so, we're very pleased with our performance in EMEA so far and we expect the region to deliver attractive results at the top and bottom line for the full year. Including these results for our Asia Pacific South America, or APSA, segment, Q1 sales in APSA were up 5% to $112.6 million, impacted by the tough comparison created by pipeline fill in the year ago quarter for our CCA distribution partnership in Australia. On a comparable basis, APSA sales were up 16% in the quarter. APSA's performance was fueled by very strong double digit growth in emerging markets, most notably India, China, Southeast Asia, Brazil, where our enhanced routes to market contributed to our growth. Exceptional performance for Teacher's and Courvoisier led these gains in emerging markets. Australia benefited from strong performance for whiskey Power Brands, led by Jim Beam, the market's #1 spirits brand, and Canadian Club, the market's fastest growing RTD brand. The transition to our route to market improvements accounted for about half of APSA's top line growth in the quarter. Operating income for APSA was $16.7 million, up 13%. OI reflected our strong volumes, partly offset by up weighted brand investments to support the new Australia Jim Beam campaign as well as our regional infrastructure investments, particularly in India, which we expect to annualize mid year. Now we turn to performance of our key brands, I'd remind you that our convention is to present growth rates on a year to date basis. Naturally, when reviewing a single quarter that also happens to be the year's smallest, there'll be see some fluctuations, both positive and negative, that do not necessarily reflect a brand's longer term trajectory. Comparable sales for our Power Brands increased 19% in the quarter, reflecting strong globalized demand and their role as platforms for innovation. The Jim Beam family was up 19% on strong demand in the world's biggest bourbon markets, the U.S., Australia and Germany, as well as timing of the launch of the new Red Stag products in the U.S., Honey in Germany and Devil's Cut in Germany and Australia. Devil's Cut has already captured meaningful share in U.S. bourbon, while backing it with new TV advertising. And Red Stag Black Cherry continues to grow at a very strong double digit rate nearly 3 years after its introduction in the U.S. market. The momentum behind Maker's Mark continued as sales for the brand increased 19%. Teacher's scotch grew 17% on continued strength in India and Brazil. Courvoisier was up 41%, driven by a double digit gain in the U.S., partly fueled by the launch of the brand Bold new expression, C; promotion timing in travel retail; and strong growth in China. Double digit gains in Australia offset soft U.S. sales to help drive Canadian Club's 7% growth. And Sauza increased 1% as pipeline fill, through our route to market transition in Mexico, offset soft performance in the competitive U.S. tequila category. Our Rising Stars are premium brands with strong growth profiles, and sales for our Rising Stars were up 16%. We're bullish on our super premium Rising Star bourbons. Double digit growth for Basil Hayden's bourbon, intensified brand investment behind the brand, which we believe can be the next breakout success from our small batch bourbon collection. Meanwhile, timing impacted sales of Knob Creek, as the brand lapped the launch in the year ago quarter of Knob Creek Single Barrel Reserve. We also saw very strong percentage gains for Skinnygirl, [indiscernible] against the brand's final pre acquisition quarter. We're continuing to build the Skinnygirl brand with new products, including vodka and wine, that bring the brand's premium low calorie value proposition to new categories that are large and relevant to targeted consumers. Pucker Vodka continued to perform very well as an organic growth play and intensely flavored vodka. Pucker's growth rate reflected lap against launch late in Q1 at 2011. We've also just expanded the brand with its fifth and sixth flavors in the U.S. Our very successful Sourz franchise continues to gain share in the U.K., and we're excited about our Sourz Fusions ready to drink offerings in that market. While first quarter sales of Laphroaig and Cruzan were adversely impacted by timing of shipments, we feel very good about the growth trajectory in both these brands. Lower sales of our Local Jewels, principally due to the challenging Spain market, were partly offset by modestly higher sales of our value creators, things that enhanced our distribution scale and helped drive economic value. A few final items before Matt wraps things up. Adjusted return on investment capital including intangibles before charges/gains came in at 7%, and excluding intangibles was 23%. As a reminder, that's on a trailing 12 month basis. Interest expense excluding the Pinnacle acquisition is tracking more toward $100 million for the full year rather than the roughly $105 million we mentioned last quarter. Our tax rate for the quarter came in at 28.2% before charges/gains. I'd highlight we expect this is our high for the year, given tax planning that will benefit future quarters. That said, while we came into the year forecasting a tax rate in the range of 27%, given the strength of bourbon and our performance in the U.S., we're now looking at tax rate in the 27.5% to 28% range. Our diluted share count ended the quarter at approximately $160.5 million, increasing largely as a result of our higher stock price. In summary, looking at the billable line items for the full year, we expect a higher tax rate and share count to approximately offset favorable interest expense. Even so, our strong operating performance and marketplace momentum bring forth our confidence in our full year earnings target. Turning to free cash. I'll start with one housekeeping item. With regard to the separation of Fortune Brands, we expect the remaining separation of related cash payments of about $30 million to be complete around mid year. As a reminder, these payments are excluded from our free cash conversion target. For the first quarter, free cash flow was negative $56 million, comparable to the year ago quarter. I'd highlight that we're traditionally a net cash user in the first quarter. With regard to the full year, we continue to target a free cash conversion rate in the range of 90%. As we look ahead, Beam continues to operate from a position of financial strength in terms of our P&L and balance sheet. Now back to Matt for some closing comments about our outlook.

Matthew John Shattock: Thank you, Bob. We're encouraged by the strength of our first quarter results and our continued performance against our market. Our momentum is carrying into the second quarter, which is already off to a strong start. As a reminder, second quarter results were factored against our 2011 innovations that launched principally in Q2 last year. The strength of our first quarter and our continued momentum reinforce our confidence in our 2012 earnings target. Given that it is still early in the year, we're currently maintaining our targets to deliver high single digit growth and diluted EPS before charges and gains for 2012. Beam is benefiting from strong worldwide demand for bourbon and the successful innovations, and we continue to expect that our global spirits market will grow value in the range of 3%. As the year progresses, we'll closely monitor the macroeconomic environment, consumer demand for our latest innovations, growth from the global bourbon market and the potential for improvement in the pricing environment across categories. Lastly, a few words about how we deploy capital. As we've said many times before, we foresee a disciplined capital allocation process that is returns driven. The first part of our use of cash is to build the brands we have, and you've seen that we continue to invest behind high return organic growth initiatives. Next, we evaluate the returns offered by potential bolt on acquisitions versus share repurchases. As you saw just last week, we're making an excellent high return synergy driven bolt on acquisition in Pinnacle Vodka. Pinnacle is a great strategic fit to Beam. It's a large and very fast growing brand that has already become the fourth largest imported vodka brand in the U.S. with volume expected to exceed to 3 million cases in 2012. According to Impact Magazine, Pinnacle was the fastest growing of the world's top 100 premium spirits brands in 2011. Pinnacle gives us a strong and expecting growth platform in the sweet spot of the attractive vodka category. One third of all drinks are made with vodka in North America. The category is growing faster than total spirits, and the flavors are driving the majority of the growth. Pinnacle is a strongly differentiated premium brand that gives it significant advantages in the growing vodka category. It has substantial strength in both the flavored and unflavored segments. It has a high quality brand image and attributes, both an attractive premium price point, which consumers love, and it's well positioned to capitalize on the long term favorable trends in spirits with its strength at the core of the category's growth. But it's also a bolt on rooted in higher cost synergies that we're confident will exceed 20% of the brand's net sales. At the top line, we see significant opportunities to leverage our brand building, innovation and distribution strengths to take Pinnacle to the next level. And at the bottom line, we see substantial cost synergies by leveraging our scale in SG&A, supply chain procurement and our distribution partnership. We believe once again we bought well. Our extensive consumer research indicates excellent future prospects for vodka category and the dynamics supporting Pinnacle's growth. Given the exceptional growth profile of Pinnacle, our substantial synergies and the transaction's double digit internal rates of return, which is substantial in excess of our double digit risk adjusted cost of capital, the multiple of paying stacks up very well against other transactions in this space. We expect the acquisition will be accretive in the first full year, adding $0.05 to $0.10 per share in 2013 and higher accretion in 2014 and beyond. And let me also underscore that post transaction, Beam will continue to maintain a strong capital structure. And finally, I would like to note that the integration of our recent acquisitions, Skinnygirl and Cooley, have gone very smoothly even as we kept firmly focused on driving strong organic results. I'm already gearing up to integrate Pinnacle Vodka into our business when the transaction closes this quarter. Bob and I would now be pleased to respond to your questions. Thank you.

Operator: [Operator Instructions] Your first question comes from the line of Bill Chappell from SunTrust.

William B. Chappell: Just one question and one follow up. I guess on the quarter on the pipeline fill, can you just kind of give us an idea how that compared versus pipeline fill and kind of new product launches a year ago quarter and how tough or easy a comparison that would be? And then on just the follow up question, I'll just put it all in one. A little more on Pinnacle, obviously, the easy thing to look at is this is a fad and that the flavored vodka is, maybe, we're hitting the innings of growth. Can you give us a little more color on what you did to get comfortable that we're not there?

Matthew John Shattock: Okay. Thanks for those questions. So why don't you take the first one. I'll talk about Pinnacle.

Robert F. Probst: Sure. Thanks, Bill. In terms of the pipeline fill, this year versus last year, it seems we highlighted it in our remarks, this year our new product shipments are front end loaded in Q1 in particular. We highlighted about half of our comparable growth in this quarter was down due to timing of that innovation. And in prior year, it was largely second quarter. So we see the lapping of that, obviously, as we move into the second quarter. So this year Q1, last year Q2, in terms of new product launches.

Matthew John Shattock: And to your question on Pinnacle. We do a lot of very extensive research and analysis on this, and believe, we've got a very attractive asset in a very attractive category. It is worth stepping back and reminding what I said in my comments, that vodka is a very large category. It's about a third of all drinks at occasions in the U.S. And indeed, if you talk about the flavor trend, about 90% of the growth in the vodka is being occupied by flavors over the past several years. But that's a 20 year trend. I mean, there's a long term growth towards flavor in alcohol beverages, and we see that continuing to be a key driver of the vodka space. What's great about this brand is that we've got scale in both the unflavored and flavored parts of the category. We expect it to exceed 3 million cases this year. That's about 4% share of the market, so there is headroom for growth. Yet it's the #4 import. And so, on the one hand you've got a brand that's rooted over the past 10 years in a very strong unflavored platform well in excess of 1 million cases. In fact, it's still the fastest growing unflavored vodka import in the U.S. And at the same time, it's really been at the heart of driving the approach towards innovation through flavors and finding a very unique way to do that through fun, innovative flavors positioned in a very interesting and relevant way to adult consumption. And certainly that's given 2 barrels of a gun, which fire very well, and we see continued growth for those, actually, going forward. I think that our ability to add to that growth is going to be driven by a number of things. Beam's ability to build a great brand here, our brand building skills, our flavor expertise, our innovation skills and, in fact, our distribution skills. But of course, it's also an acquisition that's fundamentally driven by a very, very disciplined about growth and returns and it's rooted in some very high cost synergies, and as I said in my comments, they amount to about 20% of ongoing net sales. So overall, we've done a lot of work, the more we look to this, the more we got to like and know this brand. And the more we got to know and like the opportunity we have with it, we think we're operating in a greater space for the future and we've got a brand that's really operating at the sweet spot of not just the current but the future drivers of the vodka category's growth trajectory.

Operator: Your next question comes from the line of Judy Hong from Goldman Sachs.

Judy E. Hong: Just on the Jim Beam trademark. So the acceleration to 19% in Q1, first, was all of that acceleration also just related to, kind of, the pipeline fill, because it seems like 2011, you had 7% and accelerating to 19%. I'm not sure if the underlying growth is also accelerating to some extent. And if I just compare that versus the measured channel data, and granted that's a relatively small channel for you, it seems like there is a pretty big difference here, and some of that is international driven. But I'm just wondering if you could maybe talk about Jim Beam trademark and just kind of that more at the underlying level and what you're seeing as it relates to the sell through on some of the innovations. So we understand that the impact in the pipeline fill. But what are you seeing just in terms of the sell throughs on some of the innovations as well?

Robert F. Probst: I'll start on that, Judy. You already pointed that 19% growth in Jim Beam in one quarter is not the trend line we should look at. And that's certainly is shrouded by new product launches in the quarter. We highlighted, for example, new flavors on Red Stag, the successful Devil's Cut. Clearly, those are that pipeline fill is having a benefit to the brands. I would highlight, though, if you look at the longer term trend, we're very pleased with what we're seeing, starting with the core Jim Beam White brand, as we highlighted, is in growth. And the innovations are really complementary, both on a top line but also on a mix basis. We're seeing great traction in particular on Devil's Cut, as we mentioned, and the Red Stag, which is now in year 3 of its target launch and continues to drive very strong double digit growth. So the Beam family, overall, growing very, very well with these and new product innovations just launched,and I think we'll continue to drive that acceleration.

Judy E. Hong: Okay. And then on the pricing side, so you talked about taking some pricing on Bourbon. If you could just quantify how much pricing, and if you've actually seen in Q1 what pricing or mix benefit was. And then I know you've talked about just gradual improvement on the pricing environment in the U.S., maybe just update us on where you see pricing heading as you get into the rest of the year.

Matthew John Shattock: Yes, certainly. We've taken pricing at the low single digit rate in bourbon and a couple of key brands, Jim Beam and Maker's Mark. And those have been slight increases which have gone through, but we're certainly not seeing any evidence of broader pricing taking place in the category or in the overall spirits category as a whole.

Judy E. Hong: So in the quarter of the 13%, would you say the single digit was kind of pricing and then you had additional benefit from mix as well?

Matthew John Shattock: Yes, Judy, of the 13%, which we highlighted global volume was 9%, the balances mix were really seeing very limited pricing impacts on the overall top line and modest increases, as Matt mentioned. We have not seen a change, really, in the pricing environment, because that would suggest more wide and broadscale price increases.

Matthew John Shattock: And if you look at the overall category, again, take the North America view as we look at the aggregate cost of [indiscernible] we would once again see our market growing about 3% with about half of the growth coming from positive mix with premiumization, as Bob said, and the other half coming from volume. That's the sort of overall category picture we're seeing.

Operator: Your next question comes from the line of Ian Shackleton from Nomura.

Ian Shackleton: A couple of questions on some of the key P&L lines. Advertising and marketing still has a very big number this time. I think you have been suggesting that perhaps you saw re basing. Is that something we should expect to continue moving up as we go through this year? And on the COGS line, I mean that's a decline, but I think that's probably influenced by the Australian accounting change. Sales for you are still flagging increased COGS across the business for the full year. If you could just clarify that.

Robert F. Probst: Can you clarify that first the brand investments you said, I couldn't hear you.

Ian Shackleton: Advertising and marketing up 15%.

Robert F. Probst: I'll take that. We'll start with brand investments. Certainly there's some fluctuations quarter to quarter. As we mentioned on the call in February, due to the increases in [indiscernible] in prior years, we're at that 16% level for the year. We think that's a reasonable target. You'll see differences from that quarter to quarter and, indeed, in Q1, so our seasonally smallest quarter, you see a small low reinvestment rate, relatively speaking. Higher than last year. But you do mention, up 15%. A good part of that increase is associated with the timing of the product launches, and therefore, reflect an increased growth rate in the quarter. For the whole year, as I said, we continue to see in the 15% range. That's a reasonable assumption as a reinvestment rate. From a cost perspective, we highlighted quantity and raw material related cost increases of about $25 million to $30 million. And our fuel for growth initiatives that Matt highlighted in the call clearly don't offset that. So think about gross margins, we expect see gross margin improvement, really, driven by the top of the P&L methods for premiumization and innovation that we talked about.

Matthew John Shattock: And my add to that would be that as we go forward, we said its our [indiscernible] far from the market and our profits far from ourselves [indiscernible] lovely brand investment, and you'll see us do that from time to time. But at the same time, we'll take opportunities we see to fuel our growth, and if we see intelligent opportunities to invest, our first use of cash is in the organic growth of this business, and that's certainly what we're pursuing, and if we see an opportunity to fuel our growth, we'll double down in that regard.

Operator: Your next question comes from the line of Vivian Azer from Citigroup.

Vivien Azer: I wanted to circle back on pricing. It makes sense to me that your competitors aren't really taking a ton of pricing, and if you're not seeing pricing globally, you wouldn't necessarily, perhaps, lead pricing, certainly, not across all of your brands. But I'm wondering as you think about the pricing opportunity going forward, how do you think about the price elasticities around your brands and your category combinations, particularly in the U.S? And do you think about the pricing you took on tequila? That's a challenged category, and then you saw that show up in the volumes. How does Beam stack up in terms of the price elasticity versus Maker's Mark or across a category like the Sauza?

Matthew John Shattock: The [indiscernible] is not a hugely priced, elastic category. And you have to look at it on brand by brand and segment by segment basis. And so I'll give an example of a bourbon. We've taken select price increase on Jim Beam and Maker's Mark. We think the brands can stand it, we think the health is good, we're investing in innovation and ground support, and that's we are ahead of the market when it comes to you point to tequila, clearly, we've said [indiscernible] tequila is an oversupplied market, and that supply/demand equilibrium will probably come back in '13. In the meantime, we are citing some big year ago pricing promotions, which had a bit of an impact on our consumption, but it doesn't in any way impede our belief in this category, it's a key category for us, and we'll continue to invest in our brands and invest in the long run there, because as I said, we've got a very good set of assets both in terms of our brands and our supply chain. So overall, I think we look at our investments and our pricing together, and we do it in a way in order to sort of drive sustainable profit growth, and that is the only criteria we use when we look at the pricing environment.

Vivien Azer: Understood. And just as a follow up on bourbon, I agree with you, I think the outlook for the category looks good. I think it's reasonable to expect a deceleration. But given the sustained health of the category, as we think about your barreled inventory and the pockets of growth you're seeing, you called out Basil Hayden as a potential opportunity there. How much flexibility do you have with your aged inventory kind of moving across brands and keep on aging some inventory and move it, kind of, up market, if you will?

Robert F. Probst: I can assure you that supply/demand discussions are once we had a lot with the operators and with our operations team. As we stand, we feel good that we're in balance in bourbon as a general statement. Despite the very positive growth, we believe we can supply that. And of course, we are always looking at the levers we have should we continue to see several digit growth in bourbon on things like price. And the brand health, the momentum of the brand together with the situation in the market. With the Maker's Mark pricing that we've mentioned we've taken, as one good example where price is a lever we will go to when we see that kind of explosive growth.

Operator: Your next question comes from the line of Ann Gurkin from Davenport.

Ann H. Gurkin: I was impressed by the improvement in operating margin for the quarter. Is that something that's sustainable for the year or is that reflecting timing of inventory?

Robert F. Probst: Yes, Ann. We do expect to see operating margin improvements for the full year as we did in the first quarter. As I mentioned, the gross margin accretion is certainly part of that in leveraging our fixed costs to get to an operating income that's growing faster than sales and thereby, by definition, operating margin improvement is something that we are calling out the full year. As we said many times before, though, for us with the kind of margins we have, 30% to 31% EBITDA type margins, we're very focused on continuing to drive that top line and the margins will follow. But for the year, we expect to see accretion.

Ann H. Gurkin: I also saw you that you filed a mix shelf. Can you comment on that, the use of that potential mix shelf?

Matthew John Shattock: That was just a standard renewal. There's really nothing to highlight there, just an administrative matter.

Operator: [Operator Instructions] Your next question comes from the line of Ken Perkins from MorningStar.

Kenneth Perkins: Just regarding Pinnacle Vodka, what international markets do you plan rolling these in to, and I guess specifically, what kind of opportunity do you see in Russia and possibly Eastern Europe for that brand.

Matthew John Shattock: Ken, we've very much have looked at this, and the case we've together is focused on the core market in North America, and the Sauza returns and growth that we talked about are not predicated on international expansion. But obviously, it's a very brand and it's got a lot of relevance. If we look at the some of the broader trends in the overall spirits industry towards flavor and some of the dynamics that are taking place in vodka, we're seeing the early green shoots of those dynamics occur in other markets. And certainly, as we integrate and absorb this brand, it's an opportunity for upside against the movements [indiscernible] in front of ourselves in the market.

Kenneth Perkins: Okay, and just with respect to premiumization, I know it continues in the spirit space, but are there any country that you're seeing that trend plateauing or possibly reversing, or is it pretty solid across the board.

Matthew John Shattock: What we're seeing is a very pretty consistent trend. As I said in my early remarks, one of the questions, if you look at the North American market, we are probably seeing half of the markets growth coming from volume and half of it probably coming from price mix. I suppose if there was one place where you would look for that trend not being the case, it would be a market like Spain and Western Europe, where you've got a very challenged economy and the market is down, sort of, mid to high single digit. The great opportunity and benefit for us there is our Local Jewels, DYC Whiskey and Larios Gin, our brands that really can break [ph] that because they actually great value. And in fact, we're putting a lot of emphasis and effort now into the off trade as well as the traditional on trade in that market to make sure we get the value proposition right in what is obviously a difficult environment for the consumer.

Operator: Your next question comes from the line of Bill Chappell from SunTrust.

William B. Chappell: Just a follow up maybe talk about the European trends in Spain or Germany and kind of what you saw throughout the quarter. I mean, did things deteriorate as we went from January to even to April? Are they just kind of staying on the bottom? And what are your expectations for the rest of the year baked into the guidance?

Robert F. Probst: Yes, well let me talk a little bit about EMEA at the broad level. I do think the underlying trends that we've talked about, and I think this idea that you look from West to Eastern Europe, and certainly the market in Spain, has got a little worse as we've come into 2012. We anticipated that in our planning, given the state of the economy. The U.K. market, I think, is a relatively flat market in terms of overall consumption. What's encouraging, however, is we don't see any change, and indeed, we see enhanced strength in markets like Germany. I know it's a focus for a lot of companies. But what's exciting for us is whiskey and, incidentally, bourbon is growing very well there. We're delighted of our performance in Germany, it really is a core market for us now. And as you see, the investments we've made there have really, I think, served us well. And as I said in my prepared remarks, as you go further east from there, through some of the Central, Eastern European markets through to Russia, which is part of our EMEA footprint, we see continued growth in that market at the double digit level. And of course, we're starting to also explore opportunities in Middle East and Africa, et cetera, for further growth. So it is a balance, and in a nutshell, yes, there's some challenges in Western Europe, we watch that very closely. We'll continue to invest in that market and make sure that we get the equation right. But overall, we're impressed with the EMEA's performance, and we do believe we will continue to outperform our peer group in that part of the world.

Robert F. Probst: [indiscernible] On a full year basis, we said that we think the market overall is going the grow 3%. We continue to see that as the range, so as we think about our full year guidance, that really hasn't changed from where we were in February.

William B. Chappell: Okay. And then just a follow up on tequila, I mean, are there any signs that, that market is kind of stabilizing on a supply standpoint or will that take multiple quarters?

Robert F. Probst: Yes. I think I would, sort of, certainly not anticipate that, that equilibrium could be arrived at in 2012. However, as we go into 2013, we look ahead and we've got a reasonably [indiscernible] means of looking at the future supply demand dynamics. That's when I think we'll see things come into balance, and I think that will play well for the overall value of the category. And certainly our ability to then leverage our sort of extended supply chain, which we think is an advantage, then to keep doing what we're doing now, which is building our brands. I mean, we're advertising Hornitos on television as of this week. We're doing some tremendously exciting work on digital with the Sauza brands, so we're playing the long game there. We think that those dynamics will serve us well at our overall economic leve,l, but probably I would expect that to be more in '13 than '12.

Operator: There are no further questions at this time. Mr. Shattock, I turn the call back over to you.

Matthew John Shattock: Thank you, Scott. Well thank you, everybody, for joining us. We're pleased with our strong start to 2012. I will keep you posted on the completion of the Pinnacle transaction, and we'll join you again in early August to discuss our second quarter results. Thank you.

Operator: Thank you for participating in today's Beam's First Quarter Earnings Conference Call. This call will be available for replay beginning at 1