Earnings Transcript for BEAM - Q2 Fiscal Year 2013

Operator: Good morning, ladies and gentlemen. My name is Ryan, and I will be your conference operator today. At this time, I would like to welcome everyone to Beam's Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Matt Shattock, President and CEO of Beam. Sir, you may go ahead.

Matthew John Shattock: Thank you, Ryan. Good morning. Bob Probst and I would like to welcome you to our discussion of Beam's 2013 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 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 Webcast and Presentations page on our website. So I'd like to discuss 3 things today as we review Beam's midyear performance. One, by consistently executing our strategy, Beam continues to deliver strong results. Two, we are leveraging our agility to navigate a dynamic industry environment as we deliver our 2013 results. And three, looking ahead, our view of the strong fundamentals of the spirits industry and Beam's ability to compete within it remains unchanged. I'll unpack each of those things, starting with our results. We're pleased that in the second quarter, Beam continued to deliver in line with our targets. For the top line in the quarter, we sustained our momentum and continue to achieve our goal to outperform our global market. Comparable net sales grew 5% in Q2, which reflects strong continued underlying performance versus the market. Bob will detail the puts and takes for you shortly. At the bottom line in the quarter, diluted earnings per share, before charges and gains, increased 8% to $0.64. Through the first half of 2013, comparable net sales were up 4% and our EPS before charges and gains was up 15%. Our strategy to create famous brands, build winning markets and fuel our growth, combined with tactical agility, continues to drive these strong results. We continue to invest in the growth of our Power Brands and Rising Stars. In fact, 5 of our 7 Power Brands and 4 of our 8 Rising Stars grew sales by double digits in the quarter. We start by leveraging our unique strength on our heartland bourbon category, which, once again, this quarter, has contributed significantly to our market outperformance and our strong results. Beam is the name on our door. Bourbon remains the fastest-growing large category in the U.S., and demand for America's native spirit continues to grow rapidly around the world with plenty of headroom for growth in the global whiskey category. Our advantaged Bourbon portfolio enables us to harness the consumer demand that's driving this growth. Jim Beam is the #1 bourbon in more than 100 countries. Maker's Mark is the iconic leader in its segment. We pioneered small batch bourbon, and we've led on flavor innovation. This unparalleled breadth of portfolio enables us to cover all price points and occasions and accelerate our growth up the price ladder. And we've dedicated a significant level to both brand investment and capital expenditure to our Bourbon assets to maintain our leadership and fulfill global rising demand. We stepped up investment in high-impact advertising to support the growth of Jim Beam in key -- in the key markets like the U.S., Australia and Germany, and this investment has augmented our successful innovation initiatives across our portfolio with the likes of Jim Beam Devil's Cut and Honey variants continuing to gain traction. Now our strong growth in Bourbon has helped us more than offset challenges for brands in certain other categories, including softness in the U.S. ready-to-serve segment and more moderate growth in emerging markets. We've also invested to develop best-in-class innovation capabilities to help us drive 25% of our long-term sales growth from new products. We've exceeded that target for the first half of 2013, despite a comparison to record innovation last year, on the success of new products such as Jim Beam Honey, Canadian Club RTD products, Sauza Sparkling Margarita and new Pinnacle flavors. Innovations such as these, borrowed from our core equities and build back, enhance consumer perceptions and improve margins and mix. We're especially pleased with the momentum Jim Beam Honey is building in all major bourbon markets and the halo effect it seems to be having on the core Jim Beam brand as well. Now underpinning the performance of our brands are our strong routes-to-market that help us build winning markets. These include robust company-owned sales organizations that help us sustain our performance in markets like the U.S. and Germany, our powerful partnership with Coca-Cola Amatil in our key Australian market and our expanded alliances with key industry partners in leading spirits markets, such as in Japan with Suntory, which is already significantly boosting distribution of our bourbon brands in an important global market for whiskey. We also aim to deliver a quarter of our sales growth over the long term from emerging markets, and we plan to continue building our strength in these important geographies. So far this year, we've gained market share in somewhat softer emerging markets, like Russia and Brazil, as well as in Mexico, where our enhanced partnership with La Madrilena has brought sharper focus to our brands and substantially improved performance. We also continue to develop our presence in China and reposition our business in India, both very attractive long-term growth opportunities. A sharp focus on cost is even more important in dynamic market conditions. Our fuel for growth strategy, combined with our agility, is enabling us to capitalize on opportunities to promote efficiency and effectiveness, maintain a competitive cost structure and generate valuable savings at high-return investment. That includes savings we're generating in SG&A and procurement and initiatives, such as the ongoing relocation of bottling for Pinnacle into our center of excellence in Frankfort, Kentucky, plans for a new cost-effective distribution center, also in Kentucky, and the consolidation of certain back-office functions in our new shared services center that opened in Louisville last month. These and other initiatives help us fund our focused investments in brand building, innovation and international growth and help us offset inflationary costs. My second theme underscores Beam's agility of serving us well as we navigate a dynamic industry environment. Like other spirits players, we' got a little less from our market in the second quarter. In the U.S., the market growth rate appeared to be temporarily dipped in the quarter due to largely soft conditions in the ready-to-serve cocktails category, which was exacerbated by unseasonable weather. And as others have reported, we continue to see economies in emerging markets grow at more moderate rates, particularly impacting the cognac and scotch categories. Even so, these factors don't change our outlook going forward, and we see stable market growth for the balance of the year. For the second half, we expect our global market will grow approximately 3% with the U.S. in the range of 3% to 4%, both consistent with our long-term view. Our view of the market is underpinned by continued strong industry fundamentals, which include sustained U.S. share gains for spirits versus beer, continued premiumization, increasing global appeal of bourbon, strong consumer interest in innovation and the resilience of spirits in uneven economic conditions. Entering the back half of 2013, we expect to continue outperforming our global market at the top line to grow profits faster than sales and to deliver full year growth in EPS before charges and gains in line with both our 2013 target and our long-term goal. Again, our high single-digit 2013 target demonstrates our confidence in our strategy, our brands and our people and our agility to navigate challenges that will impact the shape of our results. Bob will discuss phasing for the remainder of the year later in the call. And our confidence is further underpinned by our strong balance sheet and capital structure. These strengths enable us today to reaffirm our target for free cash flow and announce an authorization to repurchase up to 3 million shares of our stock. And lastly, taking an even longer view, we believe our long-term prospects and our industry's fundamentals are strong. As we discussed before, this is a great consumer industry to be in with excellent returns, strong growth prospects and a track record of resilience to economic challenges. Furthermore, we like where we are and where we're going. Beam is the #4 premium spirits company in the world. We're #2 in the U.S., and we enjoy what we consider several fundamental strengths. Our position in the world's most profitable market, our strong routes-to-market, our broad portfolio with leading positions in key categories like bourbon, our innovation capabilities, our sharp focus on costs, our significant financial flexibility and the agility of a highly motivated consumer-focused team. So the effective execution of our strategy, combined with these advantages, give us confidence in Beam's prospects over the balance of the year. So now here's our CFO, Bob Probst, with a closer look at our second quarter and first half performance, including the results of our 3 segments and our brand groups, as well as the drivers behind our full year outlook. Bob?

Robert F. Probst: Thanks, Matt. Before I begin, let me note that the financial tables attached to this morning's news release contain minor revisions to prior period financial statements. The revisions address errors relating to the timing of revenue recognition for our sales of non-branded bulk spirits and principally impact the period from 2006 to 2011. Relative to 2012 and 2013, the impact in each year is about $6 million in sales and a $0.01 or less of EPS before charges/gains. The effect of these noncash adjustments on period-to-period comparisons is immaterial. More details on the revision are provided in the news release and in our 10-Q. Now I'll walk you through the numbers for the second quarter, starting at the top line. Reported net sales for Q2 came in at $637.6 million. That's up 7% from the year-ago quarter and includes the benefit of 2 incremental months of Pinnacle Vodka sales, which we began recording in June of 2012. On a comparable basis, which adjusts for foreign exchange and the impact of M&A, our net sales grew 5% in the quarter. Q2 comparable sales reflected sustained momentum for our global Power Brands led by Jim Beam. I'd also flag that the adverse timing factors we called out previously, principally the timing of Marker Mark -- Maker's Mark sales and lower results in India, adversely impacted comparable sales growth by about 3% and were essentially offset by an increase in U.S. distributor inventories. On the inventory point, distributors appear to stock inventory in anticipation of a somewhat better season than materialized, and we also saw a strong pipeline sales for our innovations. In the quarter, more than half of our comparable sales growth came from volume with about a point of benefit from targeted price increases. For the first half of 2013, reported net sales growth was 8%. On a comparable basis, first half sales were up 4%. Now turning to operating income. Operating income was $160 million for the quarter, up 27%. Reported OI growth reflected the favorable comparison to year-ago results, which included Pinnacle acquisition costs, as well as the final Fortune Brands separation costs. And before a charges/gains basis, OI was up 7% to $162.5 million. Gross margins for the quarter were slightly higher as our savings initiatives delivered ahead of our expectations and muted the impact of inflations more than anticipated. Timing of operating expenses impacted operating margins, but we continue to target SG&A to grow less than sales for the year, reflecting cost containment. On a year-to-date basis, OI before charges/gains was up 15%, benefiting from sales growth, first half gross margin expansion and the phasing of brand investment within the year. Moving to income from continuing operations. On a reported basis, income from continuing operations was $74.6 million or $0.46 per diluted share compared to $101.9 million or $0.63 per share for the second quarter of 2012. Reported net income in the quarter reflected a loss on early extinguishment of debt related to our bond repurchases that refinanced a portion of our debt at attractive rates and lowered our borrowing costs. Excluding charges and gains, second quarter income from continuing operations was $104.4 million or $0.64 per diluted share. That's up 8% from $0.59 in the prior year period, ahead of our expectations. Below-the-line leverage was driven by a tax planning initiative and favorable audit settlements that benefited results by about $0.03 per share. Through the first half of 2013, EPS before charges/gains is up 15%, enhanced by our strong first quarter earnings growth that benefited from strong sales, favorable mix and the timing of expenses. While the shape of delivering the second half will be different than the first, we are confident in delivering our full year target. Turning to Beam segment performance. I'll start with a reminder that our reported segment results under GAAP exclude charges and gains. Results, unless otherwise noted, are on a constant currency basis, which adjusts for foreign exchange, and we also present sales on a comparable basis, which, in addition to adjusting for FX, also adjusts for acquisitions and divestitures. Starting with North America. We continue to drive strong sales growth in our largest region. Second quarter sales reached $410 million, up 11%, reflecting 2 months of incremental benefit from the Pinnacle acquisition. On a comparable basis, net sales increased 6%. Comparable sales benefited from the increase in U.S. distributor inventory, which more than offset the timing of Maker's Mark sales. The top line also benefited from double-digit growth in Mexico and Canada and modest outperformance in the U.S. Bourbon, tequila and vodka led our sales increase in North America as we drove double-digit gains for Bourbon brands, Jim Beam, Knob Creek and Basil Hayden's, as well as for Sauza and Hornitos Tequila brands and for Pinnacle Vodka. North America's operating income for the quarter increased 15% to $121.6 million. Year-to-date sales in North America are up 7% on a comparable basis and reflect the benefit of some phasing that will continue to balance out in the third quarter. That includes the timing of new product launches and the heavy Q1 shipments of Maker's Mark, as well as the Q3 U.S. inventory build that will unwind. Operating income in North America is up 20% year-to-date, primarily benefiting from the timing of raw materials-related costs, favorable product mix and carryover pricing. Moving to Europe, Middle East, Africa, or EMEA. Our Q2 sales were $115 million, up 7% on a comparable basis as we outperformed our footprint across the segment and also benefited modestly from the timing of promotions in the travel retail channel, as we previously called out. Strong double-digit growth across Europe for the Jim Beam brand fueled the segment results. Jim Beam continued its strong momentum in Germany, the brand's #2 export market, on the success of the core Jim Beam product, as well as Honey, Devil's Cut and new RTD products. Jim Beam also continued its impressive share gains in the U.K. and in EMEA's emerging markets. Our portfolio also outperformed a down market in Spain. OI in EMEA was $22 million for the quarter, down 6% in constant currency, in line with our expectations as we boosted brand investment in Germany and the U.K. to support the profitable growth of Jim Beam. Year-to-date, comparable sales in EMEA are up 4% and operating income is up 16%, reflecting operating leverage and strong relative performance in first quarter OI versus the prior year. And turning to our APSA segment, Asia Pacific/South America. Q2 sales in APSA were 101 -- $110 million, off 3%. The quarterly sales decline was attributable to a 7-point adverse impact from lower sales in India as we navigated the third quarter of our program to reposition our business there. We continue to feel good about the fundamentals of our business in APSA. We gained share in Australia with Jim Beam and a sustained momentum for Canadian Club. We delivered double-digit growth in Brazil, Southeast Asia, Japan and China. Results benefited from the timing of shipments in China and a ramp-up of our enhanced distribution partnership in Japan. Operating income in APSA was off 23% for the quarter at $18 million, reflecting the timing of operating expense. Year-to-date comparable sales in APSA are off 5% and operating income is down 12%, reflecting the factors we've already discussed. Let me close our APSA discussion with a brief update on India. Amidst our compliance review in India, we're encouraged by the progress we made to put our local business in a position to capitalize on the long-term promise offered by the market. We made changes in protocols, procedures and personnel. We've largely restored our distribution in the market, and we'll be ramping up marketing activity in the coming months. In the second quarter, the commercial disruption in India related to our compliance review reduced asset sales by an estimated 7%, overall Beam sales by about 1% to 2% and EPS before charges/gains by $0.01. We recorded $2.2 million in charges in the quarter related to our investigation. As a reminder, we'll see one more difficult comparison in India in Q3 before our repositioning annualizes and comparisons ease in Q4. Turning now to the comparable sales performance of our key brands, which we present on a year-to-date basis. Comparable net sales for our Power Brands are up 4% through the first half of the year, in line with our expectations after a very challenging comparison in the first quarter. Sales of Jim Beam increased double digits in Q2, and comparable sales were up 4% for the first 6 months of the year. That's versus an 11% comparable increase in the first half of 2012, which reflected the brand's strong innovation agenda, we like the brand's momentum. Our borrow/build innovation strategy is playing out very well with Jim Beam, particularly in the U.S. and Germany, as new products such as Devil's Cut and Jim Beam Honey borrow equity from the core brand and build back higher margins and consumer interest. After its initial success in Germany, the U.K. and Australia, Jim Beam Honey is off to an excellent start in the U.S., and we're very encouraged by U.S. consumer demand for the core Jim Beam White Label. We're also pleased that in the quarter, our marketing team earned a prestigious global EFFIE award for our brand-building efforts behind Jim Beam Devil's Cut, which is already sold in more than 20 markets around the world. After first quarter of explosive shipment growth, as we indicated, sales of Maker's Mark moderated in Q2 as we lap the year-ago customer buy-in ahead of price increases and due to the brand's supply constraints. Comparable sales of Maker's Mark were up 18% at midyear. The brand's health remains as strong as ever, and we continue to expect that Maker's will deliver healthy full year growth. Sauza Tequila had a strong quarter as innovations like Sauza Blue and Sauza Sparkling Margarita added to the brand growth. Comparable sales for Sauza were up 5% through Q2. Comparable sales of Pinnacle Vodka were 13% higher at midyear, in line with our expectations for double-digit growth for the full year. We've continued to cycle exciting new innovations into the Pinnacle flavor line, and we're especially encouraged by the momentum we're seeing for Pinnacle's core unflavored variants, which recently earned top honors in one of the world's most prestigious blind-tasting competitions, beating out more than 100 other vodkas and underscoring the brand's excellent quality credentials. I'd also note that Pinnacle continues to track well against our $0.05 per share incremental accretion target for our 2012 acquisitions or $0.10 total accretion for 2013. Canadian Club's comparable sales were 17% higher at midyear, benefiting from continued excellent performance in Australia and a comparison against 2% lower sales in the year-ago period. CC has become a major success story in Australia, where it's successfully competing for beer occasions with RTD and on-tap products. We're especially proud that Canadian Club is the first new brand in a decade to enter the ranks of Australia's top 10 RTD brands. In fact, CC is now the #5 dark spirit RTD in Australia. Sales of Courvoisier increased double digits in the quarter and were off 10% year-to-date as the brand cycles against 21% growth in the first half of 2012. The brand has continued to do well in U.K. and Russia, but will still face headwinds related to China, in line with other cognac producers as we've seen a reduction in gift-giving in that market. Comparable sales for Teacher's Scotch were off 17% as the impact of commercial disruption in India more than offset gains in Brazil and the U.K. Comparable net sales for our Rising Star brands were flat for the 6 months. A few call outs. The Skinnygirl family was off 23%, reflecting the softness in the RTS segment we discussed, as well as a very challenging comparison to last year's results when comparable sales were up 81% at midyear. To help energize the brand in the RTS cocktail segment, we're cycling in new innovations. We're also broadening the shoulders of Skinnygirl to the substantially larger vodka and wine categories, which now account for about 40% of the brand's retail sales. Three of our super premium whiskeys, Laphroaig, Knob Creek and Basil Hayden's were all up double digits. Likewise, our investments to build our super premium Hornitos Tequila brand has paid off in 12% year-to-date growth. Cruzan Rum was 10% higher on the success of new products and its distinctive Don't Hurry digital media campaign. Comparable sales of our Kilbeggan Irish Whiskey family were off 26%, impacted by comparison to strong first half shipments last year when sales were up 71% at midyear. We're encouraged by the strong consumption trends following the relaunch of Kilbeggan with its new packaging and brand communications, as well as our expansion of distribution, and we're targeting our Irish whiskey brands to be up double digits for the year. Comparable sales for our Sourz brand were off 11% against double-digit growth, driven by innovations in the year-ago period, and we're pleased with the brand's positioning and encouraging signs in new European markets. Year-to-date comparable sales of our Local Jewels were off 4% while our Value Creators are 1% higher. A few final items before Matt closes things out. Adjusted return on invested capital before charges/gains came in at 7%, including intangibles, and excluding intangibles was 24%. That's on a trailing 12-month basis. Our tax rate for the quarter came in at 24.1% before charges/gains, enhanced by a tax planning benefit. As a result, we're now targeting a full year tax rate in the range of 27.5%. That's versus our prior estimate in the range of 28.5%. Looking at our balance sheet. We're continuing to target free cash flow for the year in the range of $300 million to $350 million, a level that will enable us to support further investment in production capacity for spirits to support long-term growth. And consistent with our approach to capital allocation, we, today, announced that our board has authorized a standing share repurchase plan for the buyback of up to 3 million shares of Beam's stock. This authorization reflects the strength of Beam's balance sheet and capital structure, having reduced debt following the Pinnacle acquisition, and enables us to consider share repurchases among other uses of cash as we evaluate our highest-return uses of our free cash flow. At midyear, our net debt-to-EBITDA ratio stands at 2.7x compared to 3.6x a year ago. Now looking at the full year. We continue to target to outperform our global market at the top line and grow operating income before charges/gains faster than sales. At the EPS line, we now expect EPS before charges/gains to grow modestly faster than operating profits. And as Matt indicated earlier, we're reaffirming our target to deliver high single-digit EPS growth before charges/gains, consistent with our long-term goal. While our earnings target remains the same, let me touch on the shape of delivery we currently anticipate in the second half. At the top line, we expect sustained strong consumer demand for our brands, but we anticipate the unwind of the U.S. inventory build, and the tough comparison in India will temper our sales growth in Q3. As we highlighted last quarter, we continue to expect a substantial operating margin benefit from Q1 to unwind in Q2 and Q3, more of the impact will now be concentrated in Q3. We expect gross margins in Q3 will dip due to the confluence of several adverse timing items, most notably the impact of our raw material-related cost headwinds of approximately $35 million to $40 million, adverse foreign exchange and the mix and leverage impact of destocking in North America. Lastly, margin unwind in Q3 also includes a 1 percentage point adverse impact from the tough comparison in EMEA we called out last year. Due to the phasing of brand-building activity, we expect growth in brand investment will run ahead of sales growth in the second half. While timing within the second and third quarters will result in lower year-over-year Q3 EPS, we expect strong growth in Q4. For the full year, we believe the net effect of the pricing environment is favorable, and we now expect a point of benefit from pricing overall in 2013, the same level we achieved last year. This will be driven by a couple of factors. First, given sustained strong global growth of the premium whiskey category, we're now implementing selective price increases in premium whiskey, especially bourbon. We expect this will be partially offset by targeted promotions in white spirits, where category growth is a little softer. Net, we see a benefit for the year from pricing and that assumes no material change in white spirits category dynamics. Consistent with our prior view, we anticipate largely offsetting higher raw material-related costs by achieving the high end of our fuel for growth target to reduce COGS and SG&A by 1% to 2%. In line with our growth algorithm, we continue to expect brand investment to rise in line with sales over the full year and operating expense to grow slower than sales. We expect modest below-the-line leverage with a tough comparison in other income and expense and a rising share count largely offsetting the benefit of lower tax rate and reduced interest expense. Regarding foreign exchange, as a result of recent strengthening of the U.S. dollar, we're now looking at FX to be approximately a 1-point headwind at the top line rather than neutral. At the OI line, we now expect a $10 million headwind for the year. Recall that we originally expected FX to be a $5 million OI tailwind in 2013. The adverse year-on-year impact of $0.05 at the EPS line will fall almost entirely in the second half of 2013 and is factored into our reaffirmed full year earnings target. Now back to Matt for some closing comments.

Matthew John Shattock: Thank you, Bob. Beam entered the second half of 2013 in a strong competitive position. We believe our agility in a dynamic global market will serve us well as we continuously create value. The industry's fundamentals remain strong, and we believe Beam is well positioned to continue top-tier performance. In summary, we feel good about Beam's prospects. Our broad portfolio of premium brands, innovation capabilities, strength in bourbon and strong global routes-to-market, combined with consistent execution of our strategy, give us confidence that we will gain market share globally in 2013 and deliver sustainable, profitable long-term growth. Bob and I would now be pleased to respond to your questions.

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

William B. Chappell: Just a couple -- just quick questions. I guess, one, is there any way to kind of quantify what Honey has done in the U.S. in terms of consumer takeaway, or did it have a meaningful impact on the quarter in terms of sell-in?

Matthew John Shattock: Yes, Bill. That is more pertinent to the second part of your question. The sell-in has been very strong. We're continuing to grow distribution on Honey. In the channels where it's gained distribution, we're very encouraged by the early signs of rate of sale. So we're not seeing its full potential impact on our share in the market. But I will say that based upon very strong performance we've seen in its launch markets, Germany then Australia, and the early signals from some of the data we have, it's doing well. And it's certainly being sold in very well and has contributed to some of that pipe that Bob mentioned in his prepared remarks.

William B. Chappell: So is it fully distributed in the U.S. in all the channels, and have you turned on marketing, I mean, in full board behind it?

Matthew John Shattock: Yes, it's on its way. We will continue doing that through -- as we come to the second into the third quarter, and you will see the back part of the year is when we already begin activating the brand off of a strong distribution base. You will see good retail activation where it's distributed, and then we will turn to the consumer later in the year.

William B. Chappell: Okay. And then just switching to kind of the commentary on stepping up promotions on white spirits and some of the lag there. Is that mainly tequila, or are you seeing a weakening in kind of the vodka market? I mean, how do you look at that kind of split in terms of your spend behind brands?

Matthew John Shattock: Yes. I think there's a couple of perspectives there. You talked about tequila. Clearly, in tequila, we continue to see an excess of supply over demand. That's allowed other players into the market. And as that inventory continues to be burnt off, you will see promotional activity taking place. I think that will go for another sort of 12 to 24 months. And then those people like us that have their own integrated supply chain and a secure supply will take advantage. So you'll see some more promotional activity in that period. We'll also participate in that, as appropriate, to look after our share. And then going forward, over the medium term, we'll see that supply/demand come into balance, and that will favor those like us with integrated supply chains. In vodka, you're seeing a market that continues to be robust. But clearly, there is a quite a bit of promotion going on in that market, but it continues to be 1 in 3 drinks of our important market. I think, overall, what this reflects is that the price dynamics in the white spirit market and the competitive dynamics there reflect solid performance in the context of an overall strong spirits category. But clearly, the move towards brand spirits and the strength we're seeing particularly in markets like bourbon and premium whiskeys is really where all the action is. And that's the environment where we've seen more pricing opportunity, and we've taken select price increases, as Bob has said, in our premium whiskeys.

Operator: Your next question comes from the line of Mark Swartzberg from Stifel.

Mark D. Swartzberg: I guess following on Bill's question. You mentioned one of the reasons your distributor inventories are a little higher here at the end of 2Q is because of comparatively weak level of takeaway and -- in a generally healthy category. But could you give us some idea, from a depletions or consumer perspective, what kind of slowdown magnitude you think happened for the larger spirits category overall? And then within that, can you give us a little more color on that distinction between brown and white spirits?

Matthew John Shattock: Yes, certainly. Let me just give you little bit of a perspective on the overall category. And let me step back, because obviously, we look at this on a sort of very much over the long term and integrated basis. And fundamentally, the headline, as I said in the prepared remarks, is we see a fundamentally steady market as we analyze the various data points available to us. As we said in Q1, we saw a global market trending towards 3% value with the U.S. tracking more towards 4%, based upon the strong U.S. candidates we're seeing. As we've come into the second quarter, we're seeing that market temper due to a couple of factors. In the U.S., we're seeing a softer ready-to-serve category. That's certainly been exacerbated by the weather, and it appears that, that sort of category softness helped trim the U.S. market growth to low single digits during the second quarter. And if you look at the sort of composition of that market in the second quarter, we saw some volume go from slightly positive to negative. And most of that, I think, is probably due to ready-to-serve and then about a point of price, which have sort of flattened to that level, and a couple of points of mix. Global level, as we said coming into the year, we saw the emerging markets growing at double digit. We said on our last call we saw that moderating a bit, and certainly, that trend has continued through the second quarter. So really, we see those impacts as being relatively temporary as we cycle through what is a very seasonal ready-to-serve market. And we go through to the back half of the year, we see the fundamentals of the market being pretty much intact on the core drivers that really are the sort of long-term industry fundamentals, like premiumization, the share gain from beer and solid growth from innovation continuing and taking us back to a market that we see growing pretty solidly at the 3% level, but at sort of 3% to 4% market growth in the U.S. Does that answer your question? Bob, I don't know if you want to provide additional color on the brown versus white spirits.

Robert F. Probst: Yes. What I'd add, in addition to the market, is to reinforce that the emerging markets we saw softening a bit in terms of the growth rate in the first quarter, that's continued here in the second quarter. Obviously, in the back half of the year, we expect some gradual improvement there, but not immediate. In terms of white versus brown, just to pick on that question, we're certainly seeing the strength of the brown spirits more broadly, and of course, we like that. 60% of our portfolio is brown spirits. And within that, of course, the strength in bourbon is fantastic with our Bourbon portfolio as 1/3 of our business. White spirits is still a huge space. So we're not in any way discounting vodka. It's still 1 in 3 drinks in the U.S., still plenty of opportunity there. Similarly, we really like tequila. It's a mainstay of our portfolio, the dynamics we see in the medium and long term there. So the dynamics here of a shift towards brown, we think, is fantastically fundamentally, and the overall dynamics of spirits winning share of throat, we think, is benefiting the category overall.

Mark D. Swartzberg: That's very helpful. And if I could ask 2 follow-ups, specifically relating to white spirits here in North America in light of what you just said. One is, are you saying that the white spirits vodka, tequila, everything combined, gin -- are you saying that they did not slow down, that the slowdown overall for spirits was entirely driven by ready-to-serve, or was there also an element of the white spirit slowing down? That's one question. And then two, Diageo announced comparatively high price increases on some of their lower-end white spirits, the Gordon's and Popov specifically. What do you think of that, not so much those increases themselves, rather the opportunity to take comparatively high increases on some of the lower-end brands to encourage trading up in the white spirits segment?

Matthew John Shattock: I'm not -- get the first part of your question there. But certainly, the predominant driver we see in the dip in the market in the second quarter came from ready-to-serve. But relatively speaking, as Bob said, brown spirits grew faster than white. And you saw a little bit of a tempering, but I wouldn't say a dramatic change in the underlying growth of the white spirits market. As it pertains to pricing, we certainly see that there is a range of price points across the market and various elasticities. Certainly, at the bottom end, it's a more price-competitive environment. And you've seen us manage our portfolio. We made some selected disposals of parts of our portfolio in the year, and certainly, we managed the revenue there very closely. But that is certainly a more competitive pricing environment at that part of the market.

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

Judy E. Hong: First, just in terms of your -- in the second quarter, the impact from pricing and mix. I'm not sure if you quantified it. So can you give us the color there? And then for the full year outlook, as you think about that 1% pricing, does that imply the back half accelerates more from a rate increase perspective? I'm just trying to understand sort of the price mix in the second quarter and then that incremental pricing in the back half, how that plays into the overall pricing and mix in the back half.

Robert F. Probst: Okay, Judy. I highlighted the second quarter as we break down our 5% comp sales growth, a little more than 3% of that was volume. So it's principally volume, a point of price and the balance was mix. If we look at the half again, a point contribution from price. And similarly, as we look at last year, we had about a point of price. So as we think about the full year, getting a point of price, knowing we have carryover, of course, that's now lapped, it is a value pricing in the back half and targeted new pricing, particularly in brown spirits, to enable us to get that point in the back half into the full year. So therefore, as we step back and decompose our full year revenue, mix is certainly going to continue to be really important part of that, with innovation, borrow/build, in particular, and the strength of bourbon price contributing a point and the balance being volume.

Judy E. Hong: Okay. And then on the -- on your comment about pricing, that you're taking more on the brown side and the premium whiskey side that -- offsetting that is the increased promotions on the white. So can you talk about the magnitude in terms of the pricing that you're taking on the whiskey side? So just to get a sense of is that closer to mid-single and then getting offset by the higher promotions, or just sort of the color around how much you're taking on the brown.

Matthew John Shattock: Yes. Let me -- Judy, it's Matt. Let me give you a bit of color there. I think that the focus on brown spirits is very much in premium whiskey, particularly bourbon. And we're taking sort of low to mid single-digit price increases in brands such as Maker's Mark and our super premium small batch brands, like Knob Creek and Basil Hayden's. And we talked before about using price amongst other leaders -- levers for Maker's Mark in order to balance our demand and supply. I think the other aspect in brown that I would point to, because it's very important, Bob talked about the impact of mix and, I referred to it in my previous comments, the power of mix in the market. Jim Beam is a great case in point. We're getting price there through our borrow/build innovations. So innovations such as Devil's Cut, Jacob's Ghost, Red Stag, which, still 4 years after being launched, continues to grow by giving us high price points and are more accretive through the P&L. So we're getting price through mix at that level of the portfolio. So hopefully, that gives you a bit of color on those particular dynamics.

Judy E. Hong: Yes, that's helpful. And then just lastly on the -- some of the puts and takes in terms of thinking about the comparable sales number in the back half. Bob, so you've got the inventory benefit in the second quarter, about 3 points, that gets reversed I think in the third quarter. Is there any additional Maker's Mark cord in addition to sort of that inventory destocking you're expecting in the back half? Or is that really -- that plus and then the India disruption is really the only drag that we should be thinking about in the third quarter?

Robert F. Probst: Yes. The principal items I'd focus on are the unwind of the U.S. distributor inventory and India, which we really point out as a tough comp again in Q3. Obviously, the Maker's growing at 18% year-to-date. We're not going to have that kind of full year run rate. So we'll see that soften in the back half. Obviously, full year, we're, again, looking for strong underlying healthy growth there, but you will see an impact for the half. But the principal impact for the third quarter, in particular, are India and the unwind of U.S. inventory.

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

Ann H. Gurkin: Just want to return to the discussion about depletions. Is it fair to assume in the second half, you look for the depletions to better match shipments? Is that a fair assumption?

Robert F. Probst: Once that -- have to unwind for shipment to be below depletions to unwind the inventory in the third quarter, in particular, balancing out, of course, for the half, as you say. So getting back in line for the half of the year.

Ann H. Gurkin: Fair enough, great. And then can you just review capacity needs and where we are in terms of adding capacity for Bourbon particularly?

Matthew John Shattock: Yes, Ann. I think we continue to see good performance in terms of our ability to match demand with supply. We've said on our last call that we have some -- probably over the last 5 years, about half of our capital investments has been put into the Bourbon portfolio, increasing both distillation and warehousing capacity. We've got the tightness, as we said, in brands like Maker's. And we're -- we can sustain good strong growth there, but we have to sort of balance that with the levers we've previously mentioned. But I think one of the strengths we have is not just the capacity we've invested, but also the breadth of our portfolio. We've got a very, very strong and advanced portfolio in Bourbon, and therefore, that allows us to use that portfolio to match demand with supply. So we have a good supply of bourbon going forward. We anticipate -- we've been anticipating strong growth for the next several years, and we've been investing accordingly.

Ann H. Gurkin: Okay. And then are they any changes in the opportunities for growing Bourbon penetration in Latin America? Can you just comment on the prospects in that market?

Matthew John Shattock: Yes. It's early days in Latin America. But what's very encouraging is that we see a very robust whiskey market, and clearly, whiskey, in the form of scotch, is growing well there. We obviously are fortunate to have the #2 position with Teacher's in that market. And in the long term, we see very good prospects in Brazil and India and other high whiskey consumption emerging markets for Americas native spirit. We think the taste profile, as well as the imagery of bourbon, will go very well in the long term in those markets.

Ann H. Gurkin: So no change for the opportunities in that market?

Matthew John Shattock: No. We still see it there, and it's something we will look to. As I said, our first priority is building out the Teacher's brand, but seeding out the Jim Beam brand and bourbon in the medium to long term is a clear priority for us. So no change there.

Ann H. Gurkin: Fabulous. And I just got to ask about consolidation opportunities globally. Do you still see opportunities for the entire spirits industry to consolidate globally?

Matthew John Shattock: Well, obviously, it's an unconsolidated industry. We certainly do see opportunities at 2 levels really. The first is, obviously, we've taken advantage of some great opportunities with tactical bolt-on acquisitions, and we continue to believe that we can play a leadership role in the industry and that our investors are well served by us as a standalone business. But equally, given the amount of the industry's assets are in private, family and other hands, we think alliances will play an equal partner role to acquisition in driving the growth in the industry. And certainly, the alliances we've formed, we've talked about Coca-Cola Amatil. We've talked about our new relationship with Suntory and others, we think that's a very good avenue, alongside conventional M&A, to drive sustained growth in what is -- remains a very dynamic and exciting industry.

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

Ian Shackleton: How should we think about the buyback? Is this saying that we're not sure there are going to be opportunities going forward, or is it really just saying we're not sure and if we don't see opportunities next few quarters, it is something we will trigger?

Robert F. Probst: Yes, thanks for the question, Ian. The first question, I guess, is why now and the important key to note for share buyback's why now is the deleverage that we've driven here over the last year following the Pinnacle acquisition. We've always said we have a very consistent and disciplined approach to our capital allocation, that's returns based, starts with organic investment opportunities, but then looks at return opportunities on share buybacks versus acquisitions, all the while being mindful the desire for a solid investment-grade capital structure over the long term. We believe, therefore, that having a share authorization now, in light of the deleverage, gives us the club in our bag to be able to approach share buybacks, really for the first time. But it has to be, of course, evaluated in the context of the alternatives we have, and we think we've got good opportunities both organically and inorganically. So we will constantly be reviewing our alternatives here, but this really gives us the option now to go to the market and buy shares when it makes sense for us.

Ian Shackleton: Okay. But let me just follow-up on the ready-to-serve you talked about earlier. What is behind the weakness that's come into the market, and how do you change that and get Skinnygirl moving again?

Matthew John Shattock: Yes, and I'll give you a couple of thoughts on that. Clearly, that -- I think there's a couple of factors that have gone there. The first is we're cycling against pretty explosive growth of the category in the Skinnygirl brand. We reported last year, at the end of the first half, that sales of Skinnygirl were up 80% plus, and that was really based upon a very rapid build of awareness, our own brand-building efforts and our partnership with Bethenny Frankel, the use of our distribution model to drive the products out there and a lot of innovation. We put lot of innovations, both in cocktails, but also in the adjacent segments of vodka and wine. So we're cycling against that. That cycling is coincident with a very poor summer weather season, and the seasonality of ready-to-serve is particularly high. It's one of the highest of the industry. And because, also, it's an impulse purchase item, it's probably 2 to 3x more sensitive to impulse purchase than another segments of the spirits. If the weather's not there, we won't get the display. So there's a sort of convergence of factors there, which would cause it to go down year-on-year. Looking forward, the prospects, I think, remains strong, and what we will do is continue to build this brand. We have a very, I think, unique position in the market. Skinnygirl is a brand that coalesces around a white space which is kind of really controlled cocktails for women. It has a very loyal core group of consumers, and we also have a great partner in Bethenny Frankel. She'll be coming to the airways again with a big new daytime talk show in the fall. We're going to continue bringing relevant innovation. We're launching -- we're going from blends to veraisons in the wine area for example. So we're continuing to bring news and excitement. And then this brand, as I said, it's fundamental dynamics are very much sort of -- is almost like a sort of CPG brand. It requires very good focus display of merchandising, constant news and engagement with consumers. And so focusing on the consumers and shoppers that are in the channel and assets will be the name of the game going forward. So we think it's a great asset. And going forward, we still see good prospects to Skinnygirl.

Ian Shackleton: And just one final quick one -- also, the restatement that Bob talked about earlier just raised the question of just how big bulk sales of profit have been, perhaps last year? Can you give us any idea of that?

Robert F. Probst: Sure, Ian. And just to be clear, it was a revision not a restatement, an important difference. But just to step back, what is -- what are bulk sales -- it's common industry practice to sell unbranded aged brown spirits. It's principally for us, Canadian and cognac, other industry players. It's pretty volatile quarter-to-quarter. Historically, they've accounted for about 3% of our net sales. So it's obviously not a core part of our business, rather a supply tool in the industry.

Ian Shackleton: So 3% of net sales, and presume they're probably even less of -- than it did.

Robert F. Probst: Yes. The margins are lower than average, absolutely.

Operator: [Operator Instructions] Your next question comes from the line of Caroline Levy from CLSA. Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division Would like to just ask if you could dive in a little deeper into what's going on in India. And you lap the initial decline in the fourth quarter, but do you expect a slow build to positive sales growth there? And how do you see this business looking, 1, 2, 3 years out?

Matthew John Shattock: Thanks, Caroline. Yes. As we said, we are continuing to lap that impact, as Bob said, in the quarter. It's probably about 7-point headwind for the APSA region and 1 to 2 points for Beam. We've done a lot of very encouraging work and made a lot of progress to reposition our business for the future. So we've implemented a lot of new protocols and made some leadership changes. And then more recently, we've largely restored our distribution in the market, and we'll be ramping up our promotional activity in the coming months. So as you point out, we do expect the comps to be difficult through the third quarter and then turn positive as we go into Q4. But in the long term, we see India as still a very attractive long-term opportunity for us. We still have and we've been extremely pleased by the resilience of the Teacher's brand equity through the changes that we've been implementing. It remains the leading scotch in India, and the long-term opportunity in that market is very strong. It's a clear priority for us. We have a great team on the ground. We have a great business model with an integrated supply chain and a route to market. And we think the prospects in the long term remain good, and we're laying down the foundations to fulfill that. So you -- specific to your question, we'll see a gradual ramp as we go forward. We're going to do that in a very controlled and steady way. But over the long run, we remain very enthusiastic, as we always have been, about the prospects for India and our assets within it. Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division And then back to ready-to-serve, the Lime-A-Ritas and Straw-Ber-Ritas and whatever else might be coming from beer, is that definitely not what you think is driving the Skinnygirl issue? And as a follow-on from that, you've said spirits continue to take share from -- certainly from beer, I guess. I'm not sure about versus wine. But if you could talk specifically to whether you're seeing any activity on shelf space, either on or off premise to sort of confirm that, that trend continues?

Matthew John Shattock: Yes. I can't give you the specific numbers on the interface between ready-to-serve and the innovations that are coming from the beer industry. There might be some overlap. But I think, probably, the Skinnygirl target is a little more discrete and different from some of those products, and therefore, I think the factors we pointed to more to do with the cycling of our own success and the weather there. I think it really did affect, broad scale, the overall ready-to-serve category, which seem to be the one to point to there, and that will be the basis of our response on that front. And sorry, can you tell me the second part of your question again, please? Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division Yes. Just in terms of shelf space, retailers and on-premise accounts. You've said that spirits are continuing to take share of the category, but you're seeing beer and craft and everybody fighting furiously for shelf space. Can you still point to evidence that the spirits gains are continuing? Is there any sign of beer actually getting any shelf space back?

Matthew John Shattock: We don't see that. I think what the retailers will do and continue to do is to allocate shelf space against opportunity. We've now seen it. We saw it again in 2012. Our data still suggests that spirits have got about a 34% share of overall alcoholic beverages, and that's sort of 50 bps per year gain over the past decade continues. So I think our customers will allocate shelf space accordingly. You then get off shelf -- and I think back to your comment on ready-to-serve and other impulse items, that's the key driver in driving your performance at the space. It actually remains the other key variable. But I don't see evidence, at the moment, that there is an infringement on the spirit shelf space or these other types of product. Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division Great. And then just finally moving to China. Do you see any relief from this trend against conspicuous consumption, or do you see it getting worse? What have you observed in the Chinese marketplace?

Matthew John Shattock: Well, certainly, along with, I think, a lot of other comments that have been made in this regard, the combination of perhaps a more modest economic expansion in China, combined with challenges that have reduced the level of gift-giving, have had an impact, and we've seen that sort of, I think, across a number of the players in the industry in the second quarter. Going forward, we think the market will come back, and we think the long-term prospects for premium western spirits in that market remain strong. It's a relatively small market for us. We resort our route to market. We have a very strong partner in ASIAEURO, and we're very pleased with how that's going. So we have -- we're less influenced by those macro factors than our ability to establish the right routes to market with a right offer. But our view going forward is that the environment and the market will return to a steady level of growth as we go through the second half of the year.

Operator: Your next question comes from the line of Vivien Azer from Citi.

Vivien Azer: Just as to go back quickly on the pricing. You called out a couple of your premium bourbon brands. I just wanted to clarify, is Jim Beam included as one of the brands you plan to take pricing on?

Matthew John Shattock: Jim Beam led on pricing a year ago and, as I said on my comments, increases this year and more focused on our premium whiskey, so our small batch bourbons, Maker's Mark. And we're getting the improvement in revenue from Jim Beam from mix. So the innovations are driving that up, and that is more the contributor there for the Jim Beam brand.

Vivien Azer: Perfect. That makes a lot of sense to me. In terms of Jim Beam's mix, can you give us a sense of where the brand stands in terms of the composition of the portfolio? How big of a contributor is the core White Label versus your premium line extensions, either Devil's Cut or flavors? And how has that tracked over the last 2 years?

Matthew John Shattock: We're continuing to see -- and I think very encouraging for us. We've seen a very good turnaround in the base Jim Beam White Label. We track about -- that's the foundation stone of brand. It's a very important, it's a very premium brand in the marketplace, and we think that is the bedrock of the brand's growth. And it really has been very encouraging to see, and we'll continue to see, improvement in those trends. And then on top of that, and I won't break out the numbers specifically, but certainly, if you look at the market overall, probably half of the growth in the bourbon market in the past year or 2 has come from flavored bourbon. Red Stag led the way there, and it's done very well. Other entrants have come in. Our launch of Jim Beam Honey to the earlier question is showing good prospects. So it's a balance between a solid base, but then a lot of incremental growth and revenue and profitability coming from innovations, particularly focused on flavors, as well as other expressions such as Devil's Cut.

Vivien Azer: Terrific. And my last question has to do with the U.S. spirits category. Can you comment at all on on-premise trends versus off-premise? Kind of where you're seeing on-premise in its entirety and then from a brown spirit versus white spirits perspective, please?

Matthew John Shattock: Yes. On-premise has been a bit of a mixed bag, and we've seen -- and I think in number of other comments you've heard from people who reported some mixed performance in on-premise. So that has probably been another factor that's been a little bit less stable in the second quarter. In terms of the segment performance, there's no doubt that this sort of focal point and this excitement around brand spirit is very much taking place in the on-premise and is a key driver of it, so the conversation around Bourbon -- I take a brand in our portfolio, such as Basil Hayden's, which Bob pointed to as having very strong results, that is a brand that is living with millennial consumers in the on-premise and is doing very well for us, so a little bit of conversation taking place around bourbon in that channel.

Operator: Your last question comes from the line of Tom Mullarkey from Morningstar.

Thomas Mullarkey: I was wondering if you're seeing any increased competition from the burgeoning craft distillers in the United States. And specifically, I would speculate that the craft distillers, if they are increasing competition, it'd be more in the white spirits rather than the aged brown spirits. Curious how you're tracking that space.

Robert F. Probst: Yes, Tom. We're certainly seeing activity in craft, not surprisingly, as you think about spirits generally, being behind other categories in that regard, and we are seeing that within brown spirits. And in bourbon, for example, in particular, we really drove that revolution with our small batch collection, but we are seeing others come in and they obviously see the opportunity. Now that said, the barriers to entry are high. You need to have maturing inventory, sheds, distillation capacity and so on. So it is difficult to get into that industry to really have a true bourbon, but we are seeing folks come in. At the end of the day, given our portfolio and our presence in bourbon, we welcome that. The more news that comes to the category, the better for us given our portfolio. So we think that's a good thing.

Operator: I would now like to turn the call back over to Matt.

Matthew John Shattock: Well, thank you very much for joining us. We'll join you again in early November to discuss our third quarter results.

Operator: Thank you for your participation in today's conference call. Ladies and gentlemen, a replay of today's call will be available starting today, August 8 at 1 p.m. Eastern Time and will be available until August 12, 2013. The conference ID number for this replay is 18591712 and the dial-in number is (855) 859-2056 or the international number at (404) 537-3406. This concludes today's conference call. You may now disconnect.