Earnings Transcript for BEAM - Q2 Fiscal Year 2012

Operator: Good morning. My name is Matthew, and I will be your conference call operator today. At this time, I'd like to welcome everyone to the Beam's Second Quarter Earnings Conference Call. [Operator Instructions] Thank you. Now I'd 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, Matthew. Good morning. Bob Probst and I would like to welcome you to our discussion of Beam's 2012 second quarter results. 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 in our actual SEC filings, 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 measures in our news release or in the supplemental information linked to the Webcasts and Presentations page on our website. There are 3 key messages we want to leave with you today. First, we have continued to execute our growth strategy successfully, and it's delivering results ahead of our expectations in the first half of 2012. Consistent with our long-term targets that we communicated, we are growing sales faster than our market, growing OI faster than sales and EPS faster yet. These results are being driven by our Power Brands in our priority categories and markets where our performance is being enhanced by record levels of innovation and favorable price and product mix, and our synergy-driven bolt-on acquisitions are delivering incremental growth from fast-growing emerging categories. Second, we look forward to the second half with confidence. We see resilience in our global spirits market. Uncertainty in international economies is being offset by strength in our heartland U.S. spirits market and the continued global growth in bourbon. So while we face some tough comparisons, particularly in Q3, we expect the underlying strength of our core business augmented by our acquisitions will result in continued marketplace outperformance. As a result, we are raising our EPS growth target range for this year to a low double-digit rate. Third, we are stepping up strategic investments to further enhance our prospects for long-term profitable growth. We will up-weight marketing investment in the second half behind our most exciting brands and innovations, and as always, we will do so in a disciplined returns-oriented fashion. In addition, we are accelerating investment in the capacity and liquid required to support future growth of our aged spirits, particularly for our bourbon, scotch and cognac brands. As a result and despite the inevitable challenge of lapping prior year success, we feel good about our prospects to sustain marketplace outperformance in 2013 and beyond. Now Bob will unpack our results in a few minutes, but I'd like to touch on a few highlights of our performance and our strategy in action. In the second quarter, Beam continued its momentum with results that exceeded our expectations. Comparable sales grew 5% as our portfolio continued to outperform our global market, even as we lapped a very strong year-ago quarter that was boosted by the timing of new product launches. Our strong top line results were driven by our Power Brands and Rising Stars led by Jim Beam, Maker's Mark, Skinnygirl and successful innovations across our portfolio that improved our product mix. In the quarter, profits again grew faster than sales, and earnings per share grew at a solid double-digit rate, up 16% before charges/gains, benefiting from volume growth, targeted price increases and below-the-line items that Bob will discuss later. We're encouraged by several dynamics that benefited Beam in the quarter, including record quarterly sales in new products, impactful brand activation in markets around the world and strong worldwide demand for bourbon. The Pinnacle Vodka acquisition is also off to a good start. As I said during my opening comments, we're very pleased with Beam's performance through the first half of the year. Year-to-date, our net sales were up 8% on a comparable basis, ahead of our expectations, with about 1/3 of that growth coming from new product innovations. And diluted EPS before charges/gains is up 23% through the first half. Now we aim to outperform our market in a balanced, sustainable way over the long term, targeting to achieve 50% of our growth from our Power Brands and Rising Stars in core markets, 25% of our growth from innovations and 25% from emerging markets. And we're tracking very well against those targets this year by executing our effective 3-point growth strategy

Robert F. Probst: Thanks, Matt. I'll get right to the numbers for the second quarter, starting at the top line. Reported net sales for Q2 came in at $595.5 million. That's up 4% from the year-ago quarter. FX headwinds of 3% more than offset the incremental sales benefits of acquisitions in the quarter. On a comparable basis, which adjusts for foreign exchange and the impact of M&A, our net sales grew 5% in the quarter with particular strength in North America against a challenging comparison to the year-ago quarter. For the first half of 2012, reported net sales growth was 3%. Reported first half sales reflected the distorted comparisons treated by the initial sales inventory into our enhanced Australia distribution agreement in Q1 of 2011. On a comparable basis, our sales are up 8% through the first half. New products drove about 1/3 of our year-to-date sales growth. Given we launched the lion's share of our 2012 innovations in the first half, we'll focus on supporting those new products in the second half. Volume contributed 3/4 of first half sales growth, with the balance driven by product mix and price. Turning to operating income. Operating income was $125.7 million for the quarter, up 5%. On a before charges/gains basis, OI was up 9% to $151.6 million. Our operating income benefited from gross margin leverage resulting from targeted price increase and favorable product mix, as well as the timing of year-over-year brand investment. Operating expense ran ahead of inflation, reflecting the infrastructure builds in emerging markets that we've previously discussed. On a year-to-date basis, OI before charges/gains is up 13%, again benefiting from sales strength, gross margin expansion and timing of brand investment. Moving to income from continuing operations. On a reported basis, income from continuing operations was $101.3 million or $0.63 per diluted share compared to $62.4 million or $0.40 per share for the second quarter of 2011. Reported results include the final Fortune Brands separation costs as well as Pinnacle transaction-related costs and a favorable tax settlement. Excluding charges and gains, second quarter income from continuing operations was $93.6 million or $0.58 per diluted share. That's up 16% from $0.50 in the prior year period. EPS benefited from strong top line growth, our gross margin leverage and significantly lower year-over-year interest expense. EPS also benefited approximately $0.03 from the impact of FX and JV earnings down in other income, offset by a higher year-over-year tax rate and share count. Through the first half of 2012, EPS before charges/gains is up 23%. That reflects a very good operating result coupled with the same below-the-line factors that benefited the quarter. Now turning to our 3 segments, which we present on a before charges/gains and constant currency basis. And starting with North America. We've had a very successful second quarter and first half in our largest region. Second quarter sales reached $373.4 million. On a comparable basis, sales increased 8%, reflecting broad-based growth in the U.S., Canada and Mexico. We're very pleased with this performance, especially coming against a challenging comparison we previously highlighted. Our strong top line performance in North America was above our expectations as our record quarterly sell-in for new products and buy-in for Maker's Mark ahead of price increases enhanced our results. We like the consumer sell-through we're seeing for our innovations, and our distributor inventories are in good shape. Strong growth for our Power Brands and Rising Stars, led by Jim Beam, Maker's Mark and Skinnygirl, fueled North America's Q2 results. Once again, our industry-leading bourbon portfolio delivered excellent growth, including the very strong shipments for Maker's Mark as well as growth for the core Jim Beam White product and the benefit of our innovations. Strong gains for the Skinnygirl franchise in the U.S. and Canada, including sell-in for the new vodka, wine and ready-to-serve products, also benefited results. Our impactful brand communication helped fuel strong growth for Sauza Tequila. North America's operating income for the quarter increased 10% to $104.2 million. Year-to-date sales in our largest segment are up 10% on a comparable basis. That growth rate benefited a few points from the Maker's Mark buy-in in Q2 and our Mexico route-to-market change in Q1. Even before those factors, our sales approximately doubled the growth rate of the market. Operating income in North America is up 14% year-to-date as favorable mix from innovations and premiumization, coupled with fixed-cost leverage, benefited both the quarter and the half. We feel good about where we are at midyear in North America and our prospects to continue outperforming. Moving to Europe, Middle East, Africa or EMEA. Our Q2 sales were $123.8 million. Following a very fast start in Q1, sales were up 1% on a comparable basis. Strong double-digit gains in Germany, Russia and travel retail more than offset challenges in Spain and adverse impact of the timing of non-branded sales in the year-ago quarter. Double-digit growth for Jim Beam, Sauza and Sourz, including the benefit of new products, helped drive our quarterly performance in EMEA. OI in EMEA was $26.3 million for the quarter, up 7%, benefiting from the timing of BI with lower brand investment in Q2 following up-weighted BI in Q1. Year-to-date comparable sales in EMEA are up 5%. And operating income is off 3%, reflecting 2 factors we called out in Q1

Matthew John Shattock: Thank you, Bob. Beam enters the back half of 2012 with confidence. As we've already mentioned, given Beam's year-to-date performance, including the impact of factors we've previously communicated could impact our outlook, namely, the strength of the global bourbon category and our sustained marketplace momentum, we're raising our 2012 earnings target. We're now targeting diluted earnings per share before charges/gains to grow at a low double-digit rate, up from our previous target range of high single digits. Our updated target assumes our global spirits market grows slightly above 3% for 2012 and that macroeconomic conditions do not deteriorate significantly. Even as we cautiously monitor trends in the global economy, including the eurozone and growth rates in emerging markets, we'll also seek to capitalize on factors that could favorably impact our expectations, including consumer demand for our latest innovations, continued strong growth in the global bourbon market and the performance of the newly acquired Pinnacle brand. So looking at the balance of the year, even with some global economic uncertainty and as we face challenging sales and EPS comparisons, particularly in the third quarter, we feel good about Beam's overall prospects. Bob and I would now be pleased to respond to your questions.

Operator: [Operator Instructions] Your first question comes from the line of Bryan Spillane with Bank of America.

Bryan D. Spillane: Matt, if you could talk a bit about the -- your outlook for -- the 3% growth outlook for the spirits market. Can you talk a little bit about, first, just geographically where you see the upgrade, so where the improvement is relative to what your, I guess, "going into the year" expectations were? And then second, if you could just give a little bit of color in terms of product categories. Do you see the upside coming from bourbon versus maybe some of the other categories?

Matthew John Shattock: Thanks, Bryan. I'll try to get into those. As I said, we're already calling up slightly above our previous estimate of 3%. It's really a 2-part story. We're seeing the U.S. growing strength. We're probably seeing a 3% to 4% growth rate there versus the 3% previously. And internationally, we are seeing a softer Europe and, as I said, keeping a watchful eye on the growth rates in emerging markets. If I just unpack that a little bit just to get at the tenor of your question, I think, in the U.S., some of the underlying drivers, premiumization, return to health in the entrees and some continued share steal from beer, are driving it. And to your point on categories, we're seeing bourbon, Irish and ready-to-serve sustaining growth, which is encouraging given we had a strong performance in those categories last year, and also encouraged by the fact that the largest segment, vodka, which is 1 in 3 drinks, is continuing to show ahead-of-market growth rates. If you dig into that in the U.S., and I usually talk about this, I think about 1/2 of the volume this year is coming from -- 1/2 of the growth is coming from volume, about 1/3 from mix and then less than 50 basis points from price. We're encouraged. We're probably ahead of the market on those 3 measures. And we're obviously pleased that we're growing share almost at twice the rate of that market. So we see a market in the U.S. which is trending well. The international market is more of a mixed bag. If you look at the developed markets, economies like Australia are quite challenged, and consumer confidence there is low, and so that market is relatively flat. Germany, the third biggest bourbon market in the world, showing very, very good growth in the market, up mid-single digit. And obviously, as I said, markets like Spain remain challenged and are decelerating in terms of their size, and we're seeing a sort of high -- mid- to high-single-digit rate of decline in that market. The emerging markets are maintaining their growth for us. We don't see any change there. We're keeping a cautious eye on the rate of growth there and the comments certainly surrounding slowdowns in GDP in some of those big economies and how that might trickle into our space. But so far, we’ve not seen anything. So overall, I would give you those comments. If I could just make one sort of small sort of health warning as well on the overall explanation of the market

Bryan D. Spillane: Yes, that's a great overview. And just as a follow-up, I just want to make sure I understood. Do I infer from your comment that the 1% that you're expecting for pricing this year is sort of in line with what you think the market -- you're not expecting that your -- your contribution from pricing isn't much different from what you're expecting the market to have?

Matthew John Shattock: Yes, well, let’s just -- because that’s an important comment. Let me let Bob just unpack because that isn't quite the case. Let Bob just sort of give you a little bit of sense of that.

Robert F. Probst: Yes, Bryan, last quarter, I'm sure you remember, we highlighted that pricing would be an upside to us if we saw some price come back to the market. And we led in the U.S. and took some price increases in bourbon, low- to mid-single digits, against brands like Jim Beam and Maker's Mark. And I'm pleased to report those price increases are sticking, and we're starting to see some signs of improvement in the overall pricing environment in the market, particularly in bourbon. Of course, we're going to monitor that closely and see if the competitors' actions will stick or not. But as a result, we are forecasting a point of our sales growth for the year, contributed by pricing, which is now in our outlook. If there are additional price that came in the market, I would suggest that's likely more a benefit of -- to 2013 than '12, just giving timing for the lag effect of pricing to actually hit to the market. But we're feeling good about what we're seeing right now.

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

William B. Chappell: I guess, first on the -- kind of looking to the guidance on the accretion from some of your recent acquisitions. Is that more greater synergies you're seeing from Pinnacle than originally expected, faster growth? And then how does that change kind of your accretion outlook going into next year?

Robert F. Probst: Well, Bill, it's a -- the good news about Pinnacle is it’s off to a very good start, in particular. The integration is proceeding very well. And as we discussed in our prepared remarks, the vodka category and the Pinnacle brand within that category continue to perform very well. So though it's early days, we're as enthusiastic as ever on the Pinnacle deal. And indeed, as we've had now a couple of months to own the brand and look at how it's performing, we've changed our guidance, to your point, from neutral for the year to a few cents accretive. And why? Well, it starts with the top line. We're seeing the continued double-digit top line growth. We're going to fuel that with stepped-up brand investment. We also had our bond offering to fund that -- the deal, as you know, and investors show great interest in the inaugural bond offering, which gave us some benefit. That said, we're going to have some transition costs to ensure the integration goes smoothly. So net-net-net, we believe that's going to contribute a few cents to the year. As we think about 2013, to the other part of your question, it's still early days. Obviously, we've had the brand for just a couple of months. So we're staying with the expectation of $0.05 to $0.10 of EPS growth. Of course, we'll carefully calibrate that throughout the year as we get more experience with the brand and progress further on the integration.

William B. Chappell: Great. And then just looking at the other kind of initiatives in terms of stepped-up marketing in the back half. I mean, I understand why that is, but is that getting you into a kind of a new normal level? Or is this more just kind of short-termed-up to push out some of these new launches? And then on the capacity, is there any way -- or would you be willing to quantify kind of what this does in terms of adding capacity to certain lines?

Matthew John Shattock: Let me have a go at that for you, Bill. I think, in terms of the marketing investment, we’d sort of guide to say that we'll probably see an additional 50 to 100 basis points of marketing this year to the growth rate last year -- to the rate of spend and reinvestment last year, which is at 15.8%. And to your point, it's very much the latter of your hypothesis there

Operator: Your next question comes from the line of Dara Mohsenian with Morgan Stanley.

Dara W. Mohsenian: I was hoping for a bit more clarity on the situation in Europe. Did you see any slowdown in the business towards the end of Q2 or so far in Q3? And is any of that Spain weakness spreading? And then also in EMEA, were the revenue results in the quarter in line with what you guys originally expected?

Matthew John Shattock: Yes, the market in Europe is really, I think, as I've said before, a sort of west-to-east story. Certainly, there is an increase in the rate of decline in the Spanish market. We're seeing that go to a sort of mid- to high-single digit rate of decline. And as I said, relative to that, we're pleased with our performance in that market. I'd point to the U.K. as being a market that's relatively flat but not in decline at this stage. However, as you go further east, we are encouraged by the fact that we've got good growth in a very large market such as Germany. We're seeing a continuation of mid-single-digit growth in the German market, and our sales there are up significantly as bourbon and other international brands take share from local spirits. And certainty, that trend is extended as we go into Eastern Europe, some of the Central and Eastern European markets like Poland and Czech, et cetera. And we're seeing sort of certainly good growth in Russia, as I said, along with the other BRICS. We'll keep a weather eye on the GDP in that particular market. But overall, I wouldn't point to a spread of the concerns, to your specific question, in Spain to other markets, but we're keeping a watchful eye on how that plays out. The good news about that EMEA for us is it's a balance both in terms of [indiscernible].

Robert F. Probst: I'd add that the result in the quarter, from the top line, of 1 was really largely a function of this timing of non-branded sale in the year-ago quarter. If you look at the year-to-date 5% up comparable performance in EMEA, we think that's a pretty good number, pretty representative of how that business is performing, as Matt is mentioning, driven by Germany and some of the Central and Eastern European markets. So 5% for us in that context is a strong outperformance.

Dara W. Mohsenian: Okay. And then also in the U.S. and the on-premise channel, can you give us a bit of an update there? It looks like it's holding up well, but I'd love any commentary from you guys on how it's performing.

Matthew John Shattock: Yes, I think it's sort of a steady sort of return. We're certainly seeing a return to the sort of growth rates that we'd seen before, but I think, in absolute terms, it's got a little way to go yet to get back to its previous level, but the indication is that it's going well. And I think you're seeing that as well in some of the premiumization trends I mentioned in the marketplace. A lot of that takes place in the on-premise and some of the seeding of the higher-end brands, the single barrels, the higher fruits, et cetera. It's taking place there. So I would say it's not a big discontinuity, but there seems to be an underlying improvement, which is encouraging.

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

Judy E. Hong: First, just going back to the pricing comment. I'm just wondering, just given the competitor commentary, I think, around performance that they expect to take, Jack Daniel's pricing up 3% to 5% this summer. So to me, the 1% for the year just sounds a little bit more modest. So can you just reconcile sort of what you're seeing maybe in certain categories from a pricing perspective and how you sort of roll off up that kind of 1% for the full year?

Matthew John Shattock: Certainly. I think, if you look at the market overall, Judy, if I take North America, so far to date, you're seeing less than 50 basis points of price in the market. And obviously, we're ahead of that because we were the first people to go. Our pricing was very much focused in bourbon. We took low- to mid-single-digit price increases in our core brands there, the Makers and the Beams of the world. We're certainly hearing that people are intending to price. We've not seen that actually come into the marketplace yet. And obviously, we'll be very watchful to see if competitors' actions stick or if they actually promote or deal back those increases, which has happened in the past. So it's going to take some time to come through, and I'm sure we'll see that and learn more about that as we go through the third quarter. And clearly, given pricing, as Bob said, has a lagged effect, I suspect that we won't see any opportunities arising from those moves if they indeed take place until we get to 2013. In the meantime, our focus has been on bourbon. In North America, we've taken select pricing in scotch and cognac in certain international markets. And the net of those is that we'll have a full year benefit of about 1% of -- at the top line. And as I said, we'll keep an open mind and an eye to how we see things playing out in 2013.

Judy E. Hong: Okay. And then on Maker's Mark. So I think you had called out that Q2 sales may have benefited a bit in terms of the buy-in ahead of the pricing. So first, can you quantify that? And then secondly, if I heard you correctly, you think that growth will moderate a little bit in the back half, so I'm just wondering, what's kind of driving that view for Maker's Mark?

Robert F. Probst: Okay. Well, let me just -- let me start with the question kind of for the North America segment. In the quarter and in the half and indeed if you look at the half for the business in North America, it's comparable growth, up 10%, which is obviously quite significant relative to roughly a 3% market. We highlighted, we think, a few points of that growth are contributed by Maker's Mark and the Mexico transition we've talked about before. So even before those items, we're performing at nearly double that 3% growth rate. In terms of the Maker's Mark question, it's really a function of the explosive growth rate we've had year-to-date. So if you look at the Nielsen data, for example, the brand continues to grow in the 20%-plus rate. And therefore, for us to manage supply and ensure that we have that double-digit growth over the long term, we will see the second half growth rate abating. And so still, for the year, very healthy double digits, but abating in the second half for the brand.

Operator: Your next question comes from the line of Tim Ramey with D.A. Davidson.

Timothy S. Ramey: Did you say what you thought the working capital investment might look like in terms of the new barreled goods going into these warehouses and how that might kind of leg in over a multiyear period?

Robert F. Probst: We didn't break that specifically out. We mentioned we had $45 million of incremental investment relative to our plans coming into the year. That's really comprised of 2 things. One is capital, which is effectively the warehousing distillation capacity that we've highlighted. The other is inventory lay-down, so liquid lay-down. If I were to break that $45 million down, it's roughly 1/2 and 1/2 between the 2. The impact of that for 2013, some of that, of course, will spill over into 2013 as we add capacity. And it's important to note, at the same time, we continue to drive and focus on driving balance sheet efficiency, driving an ROIC improvement over time. And so not only do we have investment, we're also trying to drive efficiency at the same time.

Timothy S. Ramey: Okay. But I mean, with that -- the base of that aged goods account being somewhere in the $1.3 billion range or something like that, we shouldn't count on that having a large move or expect that to have a large move? It should be more incremental?

Robert F. Probst: Yes, I would describe it as incremental.

Timothy S. Ramey: Okay. And then with respect to the Jim Beam price increase, was there any sort of a buy-in that would have accrued to that brand?

Robert F. Probst: There wasn't anything significant on that brand.

Operator: [Operator Instructions] Your next question comes from the line of Vivien Azer with Citi.

Vivien Azer: I wanted to follow up on the Jim Beam question. It seemed that you didn't have a buy-in in the first quarter. The deceleration that we saw in the top line in the second quarter kind of matches up with what we saw in Nielsen x Washington state AOC where it looks like your volumes really responded quite a lot actually to the pricing. Can you talk about kind of the price elasticity around that brand?

Matthew John Shattock: Yes, certainly. We are very encouraged with what we're seeing. Actually, our bourbon business has held up very well despite the pricing. I mean, we're still seeing double-digit growth in the category. And in our read, we're seeing -- we're holding and, in fact, slightly gaining share. So we're encouraged. We're not seeing any negative impacts there. The brands are doing well. And I think the combination of good brand health, innovation and equity is taking us to the right place there. So obviously, we are pleased because our pricing started in the first quarter, and as we get to the midyear, it's held up well. If you're taking perhaps a broader view of the overall Nielsen there, the place where certainly we take a pragmatic view is just in some of our Value Creator brands and our Local Jewels. I mean, they're there, as you know, strategically to generate cash and to drive the scale of the business. And certainly in those instances, you’ll have seen value going ahead of volume as we optimized the cash and the profit out of those assets. But in our core heartland, our Power Brands and Rising Stars, we're not seeing any elasticity, and we're actually very pleased with our share performance.

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

Ian Shackleton: You're clearly still getting very good momentum out of the Beam brand with the plus 12 on revenues. I just wonder whether you could give a bit more granularity of what's driving that. To what extent Red Stag is still driving out perhaps into new markets, and Honey? And I assume ready-to-drink is probably fairly flattish because of the situation in Australia at the moment.

Matthew John Shattock: Yes, Ian. I mean, Jim Beam, as you said, had a very good start to the year. And what’s encouraging is its broad spread. We're seeing the global growth of bourbon doing very well. And it's a combination of factors. We're seeing innovation create premiumization within the brand. That's taking place with the flavors we've rolled out, Red Stag and Honey, to a number of markets and got great traction. But what's encouraging to us is this is actually built on the base of a strong Jim Beam White performance, which is encouraging. At the same time, we're also doing other innovations. So for example, Devil's Cut, which again increases and goes up the price ladder, has brought -- provided accretion to the brand at the top as well as the middle of the P&L. And so overall, that's been a good move for us. So it's broad-based in terms of geography, and it's broad-based in terms of having a core heartland doing well, as well as the innovations continuing to drive accretion to the brands' profitability and overall sales momentum.

Ian Shackleton: And if I could just ask a supplement around distribution. You talked about slimming down distribution in Spain and the U.K. I'd love to get a bit more detail. And you also referred to route-to-market change in Brazil, which I wasn't aware about.

Robert F. Probst: The comments on Spain, Ian, is we're streamlining the cost structure and JV in U.K. As you know, we have joint ventures in those 2 markets. Those really are cost rationalization and streamlining the organization to a degree. It didn't have an impact on distribution. It was really a cost issue as we look at those mature markets.

Ian Shackleton: And Brazil?

Robert F. Probst: And in terms of Brazil, yes, we have renegotiated our third brand distributor in Brazil which is Pernod. And as a result of that, we have much more, I would call it, normalized shipments this year than we had last year in terms of our shipments, particularly of Teacher’s into Brazil. But you see, on a year-over-year basis, particularly in Q2, an impact of that, as we said, for the brand, for Teacher’s. And for Brazil, indeed for the full year, we expect to be back to double-digit growth.

Ian Shackleton: But just to be clear

Robert F. Probst: Correct.

Ian Shackleton: Great. And just one final question. You talked obviously a lot about Pinnacle starting well. Where are you with Cooley? How is that looking sort of 6 months on?

Matthew John Shattock: Cooley is very encouraging. We've got the integration underway. We're doing a lot of work to drive distribution in the market in North America. We're doing a lot of work to get the brand positioning and activation right. Probably our biggest priority at the moment is in EMEA, in Germany where there is a strong Irish market and where we're putting a lot of focus on driving that brand there. So I think I said before, this is a -- this will be a steadier, longer-term build in a very exciting category. But we like the asset we have. We're very pleased with the quality of the brand, the quality of the liquid. And we see -- do see in the long term good prospects for particularly Kilbeggan, which is very much the flagship within that portfolio.

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

Ann H. Gurkin: I wanted to follow on with Sauza Tequila. And if you could comment on what to expect in the second half and really kind of what's the biggest driver in that improvement.

Matthew John Shattock: You mean second half specifically related to tequila or overall for the business, Ann?

Ann H. Gurkin: Right, related to tequila, right.

Matthew John Shattock: Yes, I think we -- as I've said before, tequila long-term is going to be a very attractive global category. It's very important to us. But we face this dissipation of an excess of supply versus demand, and we’ve said before, we think that will even out but probably that's more in sort of '13 and beyond than it is this year. What's encouraging, as you said, is that we are seeing some growth come back to the market, and we're getting some traction. And I think, from our point of view, it is a reflection of really deciding that we're going to shift towards brand building rather than price battling. And so the example I gave of Sauza where the positioning around talking to women, the girls night in, this exciting viral piece of digital that we did, Make It With A Fireman, has really been extraordinary in terms of its reach. The innovation of Sauza Blue have all helped sort of really bring that sort of focus on brand rather than just trading. Hornitos, you'll see in the tables, it's a little bit behind in terms of factory. We're actually quite encouraged by Hornitos. The consumption data is trending in the right way. We've got new a TV ad. And in fact, we've got some exciting packaging launches coming in the back half of the year, and so I think some of our distributors are holding off a bit in anticipation of that. And 100 Años, which obviously is a smaller brand but very important because it really does talk to Hispanic consumers both in the U.S. and Mexico. And although it's early days in Mexico, our launch of RTD down there is doing well. So I would just see steady performance in tequila, as I said. And I think the trend will be gradual, but it will head in the right direction as we go through this year into '13.

Ann H. Gurkin: That's great. And then as we think about the whole company for '13, is there any reason, anything that would prevent Beam from delivering against its long-term growth strategy?

Robert F. Probst: Yes, well, it's obviously a little premature for us to forecast 2013. As you know, we'll do that officially in February. That said, we feel very good about the momentum of the business. Certainly, the Power Brands, Rising Stars, our innovation engine, the acquisitions that we've done and the balanced growth that we're seeing are all very encouraging. Of course, we've got a few things we're also looking at. The record level of innovation that we had in the first half is going to make for another challenging top line. We certainly have some visibility into our commodity cost base. I mentioned in the prepared remarks that corn doesn't affect us for 2012 because of FIFO, but indeed, we will have some cost increases on commodities in 2013, kind of in the $5 million to $10 million range. So we're obviously going to have to continue our aggressive fuel for growth campaign to help mitigate that. But our start point at the end of the day is going to be our long-term goal and our long-term algorithm, which we've laid out as outperforming our markets in the top line, growing OI even faster than sales, EPS faster still, and that high-single-digit EPS target is always going to be the start point as we think about planning.

Operator: And your last question comes from the line of Ken Perkins with Morningstar.

Kenneth Perkins: I'm just wondering if you can walk us through what sort of incremental CapEx you expect beyond 2012. And then my second question just relates to -- some of your spirits competitors have recently announced expansions in production capacity as well, so I'm wondering if you have any concerns about supply outpacing demand over the next few years as the -- these aged spirits come to the market.

Robert F. Probst: In terms of capital, Ken, we've indicated that we're going to have about 6% of sales as our capital investment. That's above our 5% long-term target in 2012 in particular because of the incremental investments we're making. I will see that spilling over into 2013, I think, 6% next year. Again, as we continue that capacity expansion, it's going to be a good number. Don't forget, in that number for us is cooperage as well. Our barrels, we treat as BP [ph] of capital, that's roughly a couple of points of that. So not only do you have the capacity expansion in that number, you have the incremental lay-down, incremental barrels for more inventory.

Matthew John Shattock: I think, in terms of your question about the supply coming on in the industry, it is a reflection of, I think, a belief that those core brand spirits markets, as we said, scotch and cognac and bourbon, represent good, sustainable long-term opportunities. And what's encouraging, I think, to support that and allay that concern is in the heartland markets, the North Americas and the Germanys of the world, we're seeing continued growth and expansion. But then that's going to be supported by the growth in the emerging markets. And certainly, if you look to the growth in the future in the southern hemisphere and the BRIC countries, you see brand spirits as being the basis on which see the western spirits industry taking its growth going forward, and I think that does represent a sustainable growth prospect for us all.

Operator: We have no further questions at this time. I'll turn the call over to Mr. Matt Shattock for any closing remarks.

Matthew John Shattock: Well, thank you very much again for joining us. We're certainly pleased with our first half results, and the people at Beam look forward to continuing to execute our strategy as we aim to deliver double-digit earnings growth for the full year. We'll join you again in November to discuss our third quarter results. Thank you.

Operator: Thank you for participating in today's Second Quarter Earnings Conference Call. This call will be available for replay beginning at 1 p.m. Eastern today through 11