BEAM - NASDAQ

Good morning. My name is Alicia, and I will be your conference operator today. At this time, I would like to welcome everyone to Beam's Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. Now I would like to turn to turn the call over to Matt Shattock, President and CEO of Beam. Sir, you may begin your conference.

Thank you, Alisha. Good morning. Well, first of all, I would like to welcome you to our discussion of Beam's 2012 third 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. In discussing our results, I'd like to highlight 3 things today: where we've been over our first year as a stand-alone spirits company; where we are today as an outperformer in our industry; and where we're going in the future as a pure play spirits leader. First, where we've been. A year ago, we reintroduced our company as Beam, a leading pure play spirits company with outstanding growth prospects. We established an algorithm for accelerated, profitable, long-term growth with 3 very simple objectives: outperform our global market at the top line; grow operating income faster than sales; and sustain and to grow EPS even faster at a high single-digit rate. We outlined our strategy to create famous brands, build winning markets and fuel our growth. And we expressed our confidence in how Beam was primed to accelerate profitable, long-term growth and create substantial value to shareholders as a focused spirits company with a strong foundation built on an advantaged portfolio, including our strength in Bourbon, powerful positions in our core markets and excellent prospects in emerging markets. Second, if we fast-forward to where we are today, Beam's first year has been one of great progress. Beam is growing on growth by executing a proven strategy. As a result, we've achieved strong results each quarter as a pure play company, and we're outperforming against the growth algorithm we outlined a year ago. Year-to-date, our sales have grown at about twice the rate of our global market, which we estimate is expanding a little better than 3%. In the third quarter, our comparable sales grew 4% even with a very challenging comparison to last year's result. We've grown operating income faster than sales for the third quarter and year-to-date. And our earnings have grown even faster. Diluted EPS before charges/gains grew double digits in the quarter, is up double digits for the year-to-date, and today we're reaffirming our expectation to deliver low, double-digit growth for the full year. As a result of our recent initiatives, Beam is creating shareholder value with a stronger brand portfolio, a stronger industry position and stronger earnings growth. Each of our 3 strategic priorities is driving value creation. Our investments in brand equity building are paying off, and we're delivering another year of record sales from innovations that are further strengthening our brands. As a result, we've improved our product mix and been able to take price in key categories; we've made significant improvements in our routes to market around the world; we've strengthened our #2 position in the U.S., the world's most profitable market; we're outperforming in our EMEA and APSA segments; and we're expanding rapidly in attractive, emerging markets. And we pursued an aggressive cost and efficiency agenda to offset cost headwinds and fuel our overall growth. Our manufacturing footprint, underlying cost of goods and overall organizational efficiency are in better shape as a result. And by leveraging our dynamic culture, which combines scale with agility, and our brand-building talent, we've augmented our portfolio with 3 synergy-driven acquisitions since early 2011 in the fast-growing categories of ready-to-serve cocktails, Irish Whiskey and premium vodka. At the bottom line, we overdelivered. Three months ago, we raised our earnings target for 2012 above our long-term target, while also making the strategic choice to step up brand investment double digits for a third year in a row to drive long-term value. So in delivering these results, we've said what we do, and then we did what we said. The third point I'd like to emphasize is our perspective on our future in the attractive and dynamic spirits industry. We see a lot of opportunities to invest in fast-growing categories, fast-growing new products and fast-growing markets and to translate such investments into sustainable, profitable, long-term growth. We aim to drive half of our sales growth from our Power Brands and Rising Stars in our core markets. As such, we're diverting considerable investment to growing our heartland Bourbon category through impactful equity-building communication, increased distillation capacity and liquid laydown to meet future demand and brand building innovations. We're investing in high-impact brand marketing and activation to grow our priority strategic brands. That includes devoting about 50% of our 2012 media investment to television advertising. We now have more brands on TV than ever before. We're engaging with consumers with more sophisticated use of digital communication, which is consuming more than 1/3 of our media investment. And we're investing in award-winning market activation to engage our consumers even more effectively at the point of purchase. And at the same time, we're successfully enhancing our position in developed markets while we have upside opportunity. For example, in Japan, we believe our new agreement with Suntory, the market's #1 spirits distributor, will improve the opportunity for our Bourbon brands effective in 2013. We then look to new products to deliver one quarter of our sales growth, and we're continuing to invest in innovation across our portfolio. Our stepped-up investments are supporting another record year of sales of new products, and we're pleased our innovations are selling through in the marketplace while also building equity back to our core brands, a key imperative in our borrow/build innovation strategy. And this quarter, we've opened our new Global Innovation Center in Kentucky, which we believe will be another competitive advantage for Beam as we continue to drive growth with exciting new products. Together with the new Jim Beam American Stillhouse, our new state-of-the-art visitors' experience in Clermont, Kentucky, we've made a combined $30 million investment of high-return capital investment in our heartland Bourbon category, our brands and in our future innovations. And we target a further 25% of our growth to come from emerging markets. Accordingly, we're investing in enhancing our routes to market and our capabilities in these fast-growing geographies. We're very encouraged by our growth this year in markets like China and Mexico, where we have improved our route-to-market model, as well as in countries such as Russia and Brazil, where we've invested at a high level in brand building. At the top line, all of these growth drivers, key brands in core markets, innovations in emerging markets are contributing to our sales growth. Our long-term goal is to sustainably outperform our global market at the top line, and we've substantially exceeded that goal over the past year, continuing to grow sales at 2x the growth rate of our global market, which clearly represent upside to our long-term goal. We are also laying a strong foundation for future through our third strategic priority, Fueling Our Growth. We are building world-class manufacturing capability through investment in scale manufacturing plants, such as our blending and bottling facility in Frankfort, Kentucky, which will ship more than 11 million cases this year. This is an example of investing in both the scale to drive competitive costs and the capability to enable growth through innovation. We're augmenting these efficiency benefits through the instruction of best practices across our business, such as lean manufacturing, enhanced global procurement, product design to value and efficient global shared services. And lastly, as we continue to focus on our internal growth initiatives, our confidence in the future is further enhanced by our strong balance sheet, which we believe will continue to create exciting opportunities and give us the ability to be a lead player in this dynamic industry. Against this backdrop, Beam delivered third quarter results that were better than we expected as we outperformed our global markets despite a challenging comparison to the timing of year-ago sales in North America. The sustained rapid growth of the global Bourbon category, excellent consumer response to our innovations and timing of expenses helped drive upside to our expectations. Our global growth is supported by our strength and #2 position in the United States and fast growth in key geographies around the world. We saw particularly strong growth to our global Power Brands in core markets, including our newly acquired Pinnacle Vodka, which grew 23% in its first full quarter. We continue to see very good momentum in the U.S. market where we're lapping strong year-over-year sales gains. And market outperformance in our EMEA and APSA regions clearly supported our results. We're also encouraged by the operating leverage reflected in these results coming from our focus on effective mix and price management and our efficiency agenda. Our CEO, Bob Probst, will now take a closer look at our third quarter and year-to-date performance, including the results of our 3 segments and our brand groups.

Thanks, Matt. I'll now go through the numbers for the third quarter. Starting at the top line, reported net sales for Q3, which excludes excise taxes, came in at $627.5 million, up 8% from the year-ago quarter. As you would expect, reported sales benefited from the addition of Pinnacle Vodka, partly offset by FX headwinds, principally driven by weakness in the euro. On a comparable basis, which adjusts for foreign exchange and the impact of M&A, our net sales grew 4%. As our sales growth rate faced a net headwind of a couple of points of one-offs, principally customer replenishment and Skinnygirl inventories in the year-ago quarter, our underlying top line momentum was even better than that rate. The sales volume once again benefited from broad based growth with strong gains for our Power Brands, the success of new products and the increasing benefit of price. For the year-to-date, reported net sales growth is 5%. As we've discussed before, our reported year-to-date sales rate reflected historic comparison due to the initial sale of inventory into our enhanced Australia distribution agreement in Q1 of 2011. On a comparable basis, our year-to-date sales are up 7%, with mid- to high, single-digit growth in each of our 3 segments. More than half of our growth in year-to-date comparable net sales has come from volume, 1/3 has come from favorable mix and the balance from price. We're pleased that we're seeing strong pull-through for our new products at the consumer level. As Matt discussed earlier, we aim to outperform our market at the top line. And at 7% year-to-date, our sales had run at roughly double the growth rate of our global market, which we continue to see growing in value slightly above 3% in 2012. That view of our global market is unchanged, and I'll touch on market dynamics as I discuss our 3 segments. Turning now to operating income, reported operating income was $162.4 million for the quarter versus $27.6 million a year ago. On a before charges/gains basis, OI was up 16% to $165 million. Our targeted price increases, favorable product mix and FX contributed to gross margin improvement. Consistent with the brand investment strategy for the balance of 2012 we outlined last quarter, brand investment growth ran ahead of top line growth, increasing 12% in the quarter. OI before charges/gains also benefited in the quarter from favorable timing of SG&A. On a year-to-date basis, OI before charges/gains is up 14%, reflecting our strong sales growth, favorable mix and price and timing of brand investments that will ramp up significantly in the fourth quarter. Moving to income from continuing operations. On a reported basis, income from continuing operations was $91.7 million, or $0.57 per diluted share, compared to a loss of $82 million or a loss of $0.53 per share for the third quarter of 2011. The year-ago number was impacted by a loss on early extinguishment of debt and separation costs associated with the split of Fortune Brands. In the current year period, reported results include Pinnacle transaction-related costs. Excluding charges and gains, third quarter income from continuing operations was $99.4 million or $0.62 per diluted share. That's up 17% from $0.53 in the third quarter of 2011. Once again, EPS benefited from our strong sales growth, gross margin leverage and significantly lower year-over-year interest expense. For the year-to-date, EPS before charges/gains is up 21%. Now turning to our 3 segments, I'll start with a reminder that our reported segment results under GAAP exclude charges and gains. We also present segment results on a constant currency basis, which adjusts for foreign exchange on a comparable basis, which adjusts for both acquisitions, divestitures and foreign exchange. Starting now with our largest segment, North America, reported third quarter sales were $380.1 million, up 13%, reflecting underlying sales growth and the addition of Pinnacle Vodka. On a comparable basis, sales increased 2%, largely reflecting the impact of the comparison issues we've called out before, namely very strong catch-up-to-demand shipments of Skinnygirl in Q3 2011, which contributed to mid-teens North America growth in the year-ago quarter, as well as second quarter buy in at Maker's Mark ahead of price increases in 2012, which pulled some sales forward out to Q3. These timing issues reduced our Q3 growth rate by about 4 points. So even before the benefit of the growth of Pinnacle Vodka, we comfortably outperformed the U.S. market, which we continue to see growing in the 3% to 4% range. At the same time, our inventories remain in very good shape. North American Q3 sales also reflected the benefit of price increases, which added 1 point to our North American sales growth. A few words on the subject of price. As we've discussed before, we led on price in the Bourbon category early in 2012. Also having acquired Pinnacle in June, price increases on our value creator economy vodka brands in the U.S. resulted in some share loss in the relatively small, mass-oriented segments of the market measured by Nielsen, accounting for about 15% of the market, which analysts track. We'll lap those economy vodka share declines in another couple of quarters. Looking at the broader spirits market, we feel very good about our overall performance, led by our Power Brands and Rising Stars, where we focus our strategic investments and continue to win even after 2 solid years of U.S. market share gains. Let me attack the brand performance in the quarter in North America. Our Power Brands and innovations led the way in North America in Q3. Jim Beam sustained its solid growth and further gains for the core Jim Beam white label product and for innovations, which continue to attract new consumers to the Bourbon category. Notably, the category sustained its strong growth despite lapping double-digit gains maker's Mark and our Knob Creek and Basil Hayden's, Rising Star brands, all grew double digits, reflecting our strong brand building activation and continued consumer passion for the premium end of the fast-growing Bourbon category. Jim Beam and Maker's Mark also benefited from the higher pricing we initiated in the U.S. Our initiative to expand the appeal of Skinnygirl, including vodka, wine and new ready-to-serve offerings, helped fuel growth on growth in the marketplace and further share gains of the brand. In its first full quarter in our portfolio, Pinnacle Vodka was our fastest-growing Power Brand, up strong double digits, driven by the growth of both the base and flavored sides of the brand. We saw very good growth in shipments for Canadian Club and Sauza as well. Moving now to the OI line, North America's operating income for the quarter came in at $105.8 million, up 14% in constant currency, benefiting from favorable price/mix as well as lower SG&A in the quarter. Year-to-date sales in our largest segment are up 7% on a comparable basis. Operating income in North America is up 14% year-to-date as innovations and premiumization drive favorable mix and as we benefit from operating leverage. As we look to the key holiday selling season in North America, we feel very good about our strong marketplace position, the health of the U.S. market and our continued outperformance. Our confidence is further enhanced by the prospects for innovations and priority brands as we substantially step up investment to continue to drive long-term value. A substantial majority of our fourth quarter brand building advertising will be focused in the U.S., our largest market, and is driven by 3 dynamics: the key holiday selling season; fueling the sustained success of brands and innovations that have traction in the marketplace; and having navigated distributor transition, ramping up marketing behind Pinnacle Vodka. We're excited about an outstanding new advertising campaign for Pinnacle that we'll roll out later this month. While these high-return brand investments will adversely impact segment OI in Q4, the impact of these investments is included in our full year earnings target. Now looking at Europe, Middle East, Africa, or EMEA, Q3 sales reached $116.5 million, up 3%, as foreign exchange headwinds reduced the segment's growth rate by 9%. On a comparable basis, EMEA sales were up 5%. Double-digit sales growth in Germany, Russia and Eastern Europe, plus modest growth in the U.K. more than offset the decline in Spain. Market outperformance and favorable price/mix tempered our sales decline in the challenging Spanish market, which continued to decline at a mid to high, single-digit rate. At the same time, the spirits market in Germany is growing solidly with Bourbon growing even faster, and emerging markets in Central and Eastern Europe and Russia continue to grow at double digits. Jim Beam grew double digits again in the quarter in EMEA. Germany, the world's #3 bourbon market, continues to be the core growth market for Jim Beam, fueled by innovations like Red Stag, Jim Beam Honey, Devil's Cut and the new Lime Splash RTD, which have all gained meaningful market share. Jim Beam also saw strong share gains in the U.K., Russia and travel retail. Double-digit growth for Courvoisier and Sourz partly driven by new solid fusions added to EMEA's results. We're pleased with the operating margin improvement we saw in EMEA in Q3. OI in the segment was $27.9 million for the quarter, an increase of 24% in constant currency, benefiting from price/mix, a bad debt expense sustained in the prior year and a onetime non-income tax settlement in the quarter. Year-to-date comparable sales in EMEA are up 5%, and operating income is up 6% in constant currency. While we're very mindful of the challenge presented by Western Europe, we're encouraged by our outperformance in EMEA and our continued development of Germany and Central and Eastern Europe as dynamic growth engines. Moving now to our APSA segment, Asia-Pacific/South America. Q3 sales in APSA grew to $130.9 million, up 7%, including a 3% headwind from FX. On a comparable basis, APSA's Q3 sales were up 10% as Jim Beam, Courvoisier, Canadian Club, Teacher's and Laphroaig all contributed to top line growth. The push of some sales from Q2 into Q3 in Australia, which we noted 3 months ago, the normalized quarterly shipments of Teacher's Scotch in Brazil benefited the quarter in APSA by a few points at the sales line. Australia anchors our presence in APSA. And as anticipated, we had a good sales quarter in a relatively flat Australian market, benefiting from both timing and innovations. Our successful innovations in the world's #2 bourbon market includes the recently introduced Devil's Cut ready-to-drinks and the continued momentum for Jim Beam Honey and Black Cherry, which are all building equity back into the core Jim Beam brand. We're also encouraged by the initial consumer demand in Australia for Jim Beam and Canadian Club ready-to-serve products in a new 5-liter keg format that launched late in the quarter. Q2 results also benefited from growth across the segment's emerging markets, including China, India and Brazil. While we're closely monitoring economic trends in emerging markets, we continue to see those markets growing at a double-digit rate. Sales also grew at double-digit rate in North Asia, where we recently announced the enhanced distribution arrangement in Japan for Suntory for our bourbon brands effective in 2013. Q3 operating income in APSA came in at $31.3 million, up 14% at level FX, reflecting timing of brand investments and favorable price/mix. Year-to-date comparable sales in APSA are up 8%, and operating income is up 11% in constant currency as broad-based growth across the segment's emerging markets has delivered growth on top of relatively stable market performance in Australia. We're pleased that we're outperforming and delivering OI growth faster than sales growth across a diversity of markets in APSA. Turning to the sales performance of our key brands, which we present on a year-to-date global basis. Our Power Brands are our biggest global growth engines, and they are where we focused the bulk of our brand investment and innovation. Comparable sales for our Power Brands are up 11% through the first 9 months. Jim Beam, our largest power brand, is up 8% year-to-date. Innovations like Devil's Cut, Red Stag and Jim Beam Honey are helping the Jim Beam franchise deliver sustained growth in the world's largest bourbon markets, the U.S., Australia and Germany, as well as in markets where bourbon is developing as a category. Sales of Maker's Mark are 23% higher for the 9 months as the brand continues to engage consumers in unique ways, leveraging its handmade attributes and benefits from higher pricing. Sauza Tequila has grown 6% on strong shipments in Mexico and a return to stellar growth in the U.S., supported by their brand's digital marketing and innovations such as Sauza Blue. Teacher's Scotch improved it's year-to-date growth rate to 7% following challenging first half comparisons in Brazil. Courvoisier is up 15% on strong demand in China, Russia and travel retail, supplemented by solid gains in the U.S., where our innovations are creating excitement and bringing new consumers to the brand. Canadian Club is up 3% on good performance in North America and Australia and the launch of new products, including the CC small batch and the brand's fruit-flavored variants. And since we acquired it in June, Pinnacle Vodka has grown 22% in a period when we navigated various distributor transitions. We see upside for Pinnacle through expanded distribution, continued innovation and enhanced brand building programs. We're on track towards achieving the synergies exceeding 20% of net sales, as identified in our acquisition case. In the marketplace, we're very encouraged by the recent launch of Pinnacle's limited-edition Pumpkin Pie Vodka, and we also began investing behind Pinnacle with an exacting new advertising campaign set to launch here in Q4. Sales for our Rising Star brands are up 7% year-to-date. That includes 19% year-to-date growth for the Skinnygirl brand, which in the third quarter cycled against significant 2011 catch-up-to-demand shipments. Skinnygirl continues to gain market share as the brand benefits from the Drink Like A Lady campaign and expansion into vodka wine and new cocktail variants. In fact, the Skinnygirl Wine collection, which is not included in the spirits market database, adds one full point of growth to Beam's total Nielsen scanner results. Year-to-date sales of our Local Jewels are off 3% due to the challenging environment in Spain, while our Value Creators, which are a meaningful provider of both scale and profit, are up 1%. Before turning it back to Matt, I'll touch on a few final items. Return on invested capital, including intangibles before charges/gains, was 7% and excluding intangibles was 23%. That's on a trailing 12-month basis. Our tax rate before charges/gains came in at 28.2% for the quarter and at 28% year-to-date. We continue to target a full year 2012 tax rate in the 27.5% to 28% range. Regarding FX, at current rates, we now see a full year headwind from currency principally due to euro weakening of approximately 2 points at the top line. And at the bottom line, we now anticipate FX to be a few cents accretive for the full year with relatively little impact in Q4. We now expect raw material cost increases for 2012 will be at the high end of our expected range of $25 million to $30 million. Our estimate is driven by 2 factors. The pull-forward of input costs as we bottle more aged spirits to meet global demand and higher input costs for vodka, which is becoming a bigger part of our business. Naturally, we're working to offset those costs with our fuel for growth initiatives, including design to value, procurement and lean manufacturing programs. Turning to free cash flow. We're generating cash, as expected, and we're continuing to target a full year earnings-to-free cash conversion rate we discussed last quarter of approximately 80%, excluding Fortune Brands separation costs. Now a few words on our business in India, which currently is a relatively small but growing market for us. As a result of our ongoing compliance processes and an internal audit of our operations in India, we have recently initiated a follow-up investigation into the way the Indian business has been conducted. You may have read about this in media reports a few weeks ago. With reviews proceeding, we're already evaluating what changes may be necessary to ensure that our Indian business operates in compliance with applicable laws and in accordance with Beam's high standards of business conduct and ethics. As our investigation is at a relatively early stage, it's premature to speculate on the duration, outcome or financial implications of this matter. What I can tell you is, India currently represents about 3% of our total annual sales and a smaller percentage of operating income. Some corrective actions we have already taken will have a near-term impact on our business in the Indian market. So our earnings target range for 2012 now incorporates an assumption of reduced activity in our India business in the fourth quarter. And over the long term, we continue to like the opportunity offered by India, where the Teacher's brand enjoys strong equity and consumer sentiment. Lastly, a couple of additional items related to the balance of the year. As we announced last quarter, we continue to expect our 2012 acquisitions will be accretive to full year earnings by a few cents per share. Including our plan to substantially upgrade brand investment in the second half, and particularly here in the fourth quarter, we still expect that brand investment as a percentage of sales will be in the range of 16.5% for the full year. And we continue to see mid-teens as a competitive rate over the long term. In summary, Beam achieved another strong quarter, and we are well positioned to deliver full year results above our long-term targets and enter 2013 with good momentum. Now back to Matt for some closing comments about our outlook.

Thank you, Bob. Our continued strong performance, the health of the global spirits market and robust demand for bourbon together reinforce our confidence in the strategy we discussed 3 months ago to increase investments in the second half of 2012 to support long-term growth. We're executing this strategy by stepping our brand equity building investment by a double-digit rate for the third consecutive year in 2012 and accelerating the laydown of more aged spirits to support future demand. As Bob indicated, consistent with the plans we outlined 3 months ago, the lion's share of these increased strategic investments will come in the fourth quarter. In fact, we anticipate that our fourth quarter brand investment will be more than 20% higher than last year as we seek to further enhance our brand equities and fuel successful high-return advertising in the key holiday selling season, particularly in priority categories like Bourbon and core markets like the United States. While the timing of this increased investment will likely cause fourth quarter earnings to be down versus the prior year, we believe these are the right investments for the long-term momentum of our business. And we are able to make these investments even while reaffirming our targets for Beam's targeted EPS before charges/gains to grow at a low double-digit rate for the full year. We like our continued marketplace momentum as we continue to deliver growth on top of growth, and we expect to enter 2013 on a strong position. We will discuss our earnings outlook for the year ahead next quarter. Beam has now reported full -- 4 full quarters as a pure play company. And the opportunity we saw in becoming a stand-alone spirits business is even more compelling today than it was a year ago. We're meeting or exceeding the targets we established. Beam is creating value with a stronger portfolio, a stronger industry position and stronger earnings growth, and we're going from strength to strength, investing for the future as we aim to deliver sustainable, profitable, long-term growth. Bob and I will now be pleased to respond to your questions.

[Operator Instructions] Your first question comes from the line of Judy Hong from Goldman Sachs.

First, just in terms of your sales in the third quarter, so comp sales up 4%. Clearly, we had some comparison issues and some of the timing issues. But if you just kind of think about the underlying growth rate, can you just quantify for us what you think the underlying growth rate was, how much was volume versus price/mix in the third quarter? And then just reconciling -- and I know that Nielsen, obviously, just captures very limited volume for you guys, but just in terms of the data, we have seen some slowdown in terms of some of your brands. So maybe you can just kind of reconcile how much of that is you think pricing driven, or anything else that you're seeing kind of in the marketplace.

Judy, let me ask Bob to comment a little bit about the numbers, and then I'll come back to talk a little bit about the market perspective.

Sure, Judy. Well, we agree Q3 was a good quarter for the top line at 4% comparable. We highlighted a couple of points of year-on-year comparable challenges due to the Skinnygirl comp in prior year. So as you unpack that number, we mentioned that we had an increasing contribution from price. And so on a year-to-date basis, and indeed in the quarter, a little over a point of that growth is price. I would say roughly 1/3 of it was mix, and the balance volume. So we are seeing increasing that price coming through. And as you know, in bourbon in particular, that is sticking. And the benefit of mix remains. I'd highlight the mix benefit in the quarter was muted to some degree by Pinnacle, which is, in the short run, going to be dilutive from a margin percentage point of view until we bring it fully into our distribution supply chain and get the synergies that we've -- we've committed to. So net-net, we feel good about that, and you see the gross margin drop, too, in the quarter, indeed on a year-to-date with the gross margin accretion that demonstrates the price/mix benefit we've seen.

Let me then take the second part of your question, Judy, and tell a little bit about North America and the lens through which we look at that. Obviously, we saw very strong growth in North America last year at about the 8% level, probably coming down to sort of nearer 7% or 7% in the first half but still exceeding our long-term target in the second half of the year. As Bob said in his prepared comments, we're probably seeing an underlying growth of about 6%. And we're very pleased about that because it's lapping year-on-year growth. So we're getting growth on growth. And the quality of that growth is also strong. It's all been from brand building innovation, and we've seen that reflected in the fact that we've got sort of industry-leading pricing going on, very strong mix. And as Bob said, that's dropping through to the bottom line. Certainly, if you look at the performance through the lens of the Nielsen-tracked channels, certainly those tracked by analysts, it's roughly at about 15% of the market. That is a channel that tends to exaggerate some of the distortions. I'll give you an example that we referred to in our comments. In vodka, we now have a strategic vodka brand in the form of Pinnacle. And as result, we are now ensuring that our economy vodka brands in the U.S. will fill that value creator role and that we will have seen in Nielsen that prices go up, that volume come back. But that's clearly giving it a better result at the bottom line. That's probably costing us 1 to 2 points of Nielsen-recorded sales as we go through this period. It will probably lap through to the next couple of quarters. But underlying, if we step back and look at the broader market, look at all channels on and off premise across all of the various reported measures, we're very pleased with our performance. We are continuing, as I said, to exceed our sort of targeted outperformance. And really, that's dependent upon really leveraging our portfolio strategy, focusing on our big Power Brands and our core categories, and ensuring the focus on investments behind the asset that we believe will create long-term shareholder value.

Okay, that's helpful. Just following up on that, Matt, just on the Beam specifically, the brand Jim Beam. Can you just talk about your pricing versus your competitors? And again, just sort of looking at Nielsen, it does look like your pricing is up more than your competitors, and I'm just wondering how you're thinking about or what sort of elasticity you're seeing. And is this, do you think, also just more unique to the measured channel data? And if you take an all-channel view, is pricing sort of in line with your competitors and the volume impact is not as what we see in this data?

Well, we were certainly very happy we achieved our outperformance by being the leader on price. As you know, we took Bourbon pricing in the first quarter, and those prices have stopped. We took about 3% on Jim Beam, 5%-plus on Maker's Mark and other parts of our portfolio. So certainly, as Bob said, you'll see that reflected in the fact that we are the leader in price and in mix in terms of revenue in the recorded data. We've seen the announcement of significant headline prices coming through from some of our competitors. We're not seeing those come through Nielsen. As we said in our last call, it does take time for these to come through, sometimes up to 3 to 6 months. So we're going to watch those prices carefully, obviously, in the upcoming holiday selling season. We'll see if they materialize. And that will clearly have an impact on how we think about pricing as a lever as we go in 2013.

And your next question comes from the line of Bill Chappell from SunTrust.

I just wanted to dig a little bit more on Pinnacle. Just when I look at the 23% rate, I mean, obviously, that's slower than years past off of a smaller base. But would you expect, with some of the investments, that to reaccelerate? And then also in terms of the margins, when should we start to see the benefits of you layering on your distribution?

Yes, well, let me just give you a couple of prospectives on Pinnacle. Obviously, we've had the brand now for about 5 months. And the good news is the integration is progressing very rapidly, and we remain as excited today as we did when we got it, particularly as it still only got about a 4% share of the overall vodka category. We've been in a period of transition over that period. We probably changed about 60% of the distribution of that brand in terms of distributors, and all of the brand's volume has been impacted by being in new selling hands. And so we've seen a little bit of the slowdown in the consumer momentum in the recorded channels despite having a very solid 22% growth since we've owned the brand. Going forward now, it's a time where we really do bring to bear the leverage that we talked about in the acquisition case, both in terms of cost and revenue. On the revenue line, clearly from the distribution point of view, we want to drive broader and deeper distribution through our line distributors. We certainly want to now, as Bob said in his comments, activate the brand. We think the biggest opportunity for Pinnacle is awareness. That awareness will then drive into consumption. On November 19, we break a very exciting new advertising campaign, a quite high weight for Pinnacle, and we'll continue innovating. Bob referred to our first innovation in this brand. It's well known for exciting adult flavors, and that's Pumpkin Pie, which anecdotally is doing very well. So we should see that enhance the brand's performance as we go forward through the rest of this year but certainly into 2013. Clearly, the cost synergies will come a little later. We're certainly very much committed to those. And all the work we've done since acquiring the brand says that, that 20% cost synergy number is there, but, obviously, we will manage that as we go through the integration process and achieve those as time goes by. Net-net, the sort of guidance we gave 5 months ago in terms of that plus Cooley being about $0.05 to $0.10 accretive next year, holds in terms of our overall calculations going forward.

Okay, great. And then just, Bob, maybe can you give us a little more color on India and just kind of what the exact impact would be, or where we would see it in the December quarter and then going forward after that?

Well, we certainly didn't see much impact in Q3. And while we do anticipate a near-term impact to the result in India, it's not going to disrupt their delivery of 2012. That's included in our outlook for the year. And obviously, we'll address 2013 when we report fourth quarter results. But I think the important thing to keep in mind here is that India represents about 3% of our sales, a smaller percentage of operating income. And we certainly continue to believe it's an attractive market, that we're confident in our future prospects there. So I'd say that's where we are.

And your next question comes from the line of Bryan Spillane from Bank of America Merrill Lynch.

So 2 questions. I guess one, just -- and both are follow-ups. First, in terms of gross margins. The gross margins were very good this quarter and a pleasant surprise. And I guess, Bob, by -- I infer from your comments that at least part of that gross margin expansion was related to some of the pricing flowing through. So I guess if it just was related to gross margins, A, is that true? Or was there anything else that contributed unusually to gross margin? And then beyond that, if we get into a better rhythm in the industry of seeing some price increases in the industry, is there a potential for more gross margin expansion as we look out into '13 and '14?

Okay, Brian. Well, we certainly like the gross margin we've seen so far. Year-to-date, we're up about 90 basis points on margin. And in fact, price is an important part of that. It impacted our growth year-to-date, which I think is the best measure of where we are. About half of that growth is coming from volume, 1/3 from mix and about 1/5 or one point from price. And that's principally driven by the U.S. in Bourbon in particular, as we talked about. That mix benefit is very much also coming from innovation, as we've talked about. Our borrow/build mantra is such that we put out there the rule that new innovations are going to be accretive, and we see that coming through offset in part by Pinnacle, as I already mentioned. I think the other point that is affecting the gross margin percentage is FX. We do have a significant euro headwind on the top line because of our significant euro cost base. So you don't see that flowing through gross margin. And so that is a gross margin percentage tailwind that we've seen year-to-date. If we look forward in Q4, in particular, there will be some margin erosion, and part of that is seasonal. Q4 is typically lower given the mix of business, which is bigger outside, larger outside the U.S. than in the U.S., which is our most profitable market as a percentage of the total. The other point I'd highlight is that the cost that I highlighted, the $25 million to $30 million raw material-related costs, will hit in the fourth quarter disproportionately. And those things will together result in some margin erosion in Q4 relative to where we've been. But that said, stepping back for the full year, I feel good about our gross margin and believe it will be accretive for the full year. To your point on looking forward, obviously a little early to speculate. But obviously, if the pricing actually coming back into the business and to the industry continues, that certainly will be a tailwind for us next year.

Okay. And if I could just sneak one more in? Just on Pinnacle, I just wanted to make sure I did this correctly. The -- did Pinnacle add about $40 million worth of revenue in the quarter? And I think that's the calculation. And if that's true, just is there anything unusual about the Pinnacle revenues? I'm trying to get an understanding of whether that's a good run rate right now, or whether there was something unusual in the shipping patterns that we should consider as we're trying to figure out how to model Pinnacle in the forward quarters.

It's close to the number. And I'd say it's not a highly seasonal business, so reasonable. Look, it added about one point to our comp growth for the quarter, so I think it's a reasonable number to use.

Okay. And nothing unusual in the shipment patterns that we should consider, in terms of trying to use that as a basis of run rate going forward?

Now, obviously, we don't give specific guidance on individual brands. But I'd tell you, as you've got a distributor transition, you're moving stock into distributors' warehouses and systems. So I would just sort of say certainly there's some start-up in that, and I think we'll sort of update you on a broader level going forward.

[Operator Instructions] And your next question comes from the line of Ann Gurkin from Davenport.

I'm curious, as you look out into 2013, how you're thinking about the North America market. As we face continued economic challenges, stressed consumers, potential fiscal cliff, I'm curious as to how you think about the overall spirits category growth and, within that, the opportunity to price or to maintain current price points.

Well, as we look at the performance of the U.S. market -- and we certainly see -- have a very similar view to that, which we expressed in the last call. And really, we're seeing overall tracking across all channels and all measures at about the 3% to 4% final level, and that's our expectation for the go-forward view. The drivers of that: I think sustained strength driven by the cocktail culture; a little bit of share steal still from some other categories; premiumization clearly continues to come back, if you look at the composition of the growth that's favoring the more premium brands; and ongoing health of the entrée. Within that, clearly we're pleased about the growth of Bourbon within that. We're seeing double-digit growth on growth in the category. And in fact, Bourbon is now the #3 segment. So I think that has been a good growth driver and is underwritten by a number of the trends you've seen, and then other segments, such as RTS, the Vodka Irish, all providing to that. And certainly, we're also seeing the composition of that growth being originally balanced, so probably about half of the growth is coming from volume, 1/4 from mix, and then probably 50 to 100 bps of price in there. And obviously, we're pleased by the fact we're slightly ahead of the market on those measures. So I'd say going forward, obviously, we all keep a close eye in all markets on the impact of the economy and some of the consumer drivers. But our view at the moment is that we see a pretty consistent level of growth and a reasonably healthy underlying market.

And in terms of pricing, do you see that sustainable where you are right now?

Well, as I said, we're the leader on pricing, and we have some -- been pleased about the fact that our prices have stuck. We heard announcements of competitors taking prices. We'll see how those actually come now through in the tracked channel data. And obviously, the upcoming holiday selling season will be a key period when we can look at that. We'll digest that information and see how that plays out in 2013.

And your final question comes from line of Ken Perkins from Morningstar.

And just following up on that, I'm just curious, if you can give us a sense for how you see the competitive environment evolving in some of your more challenged markets such as Spain, and if you've seen any category become more aggressive and how you plan to manage that growth in 2013.

Well, clearly, if we take a market like Spain, Ken, it is a challenged market. We had said last time, we continue to see a market that is down mid to high single digits. One of the benefits of our portfolio in a market like Spain is the fact we have our Local Jewels. Brands like DYC Whisky and Larios Gin have a very strong local affinity. They have good price points. And certainly, we're very encouraged by the fact that we are increasing our share in what is a very challenging market and continue to battle well there. There's also channel demand dynamics going on in a market like Spain. So it's a -- atypically, it's actually a preponderantly on-premise market. And so we're now seeing a growth in the off-premise and certainly our ability to service that growth and put the right route-to-market coverage in that market. And we've got a strong route-to-market with our JV with the Edrington Group there as a case in point. So yes, it's challenging. We don't expect growth. We get our growth in EMEA further East, as Bob said, in markets like Germany due to the emerging markets, essentially, as in Europe and Russia. But relative to the competition, to your question, we feel good about our performance in Spain and very proud of the way our team is executing.

That's helpful. And then just one follow-up. I noticed that the year-to-date comparable sales for Pucker declined in the third quarter, I believe. Pretty positive growth in the second quarter. So I'm wondering just how much of that might be from comp issues versus inventory levels, or how much of that might be coming from the increasing emphasis on brands like Pinnacle. Just any color on that would be great.

Yes, and I think You've got a bit of both in your supposition there. We're certainly seeing a brand that is cycling against the performance we've had a year ago from that brand. But also the fact that going forward, whilst Pucker remains an exciting and strong brand and we're confident of its performance and certainly it's measured channel performance is encouraging, Pinnacle will now be the key strategic asset in this area. And I'm sure Pucker will continue to play a supporting role in what is still a very dynamic, flavored vodka segment.

And we have no further questions at this time. I would now like to turn the call back over to Mr. Shattock for closing remarks.

Well, just in conclusion, can I just say that I know many of you who listened to us today who are in New York or the new Jersey area, and we certainly appreciate you joining us amidst the damage and the disruption inflicted by Hurricane Sandy. The thoughts of the Beam team are with all those impacted this week, including our customers, restaurant, bar and store owners, our sales force and certainly our shareholders. And we'll be supporting the ongoing relief efforts to the American Red Cross. But in conclusion, thank you very much for joining us. We look forward to speaking with you again in early February to review our fourth quarter and full year results and talk about our outlook for 2013. Thank you.