BEAM - NASDAQ

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

Thank you, Shannon. Good morning. Bob Probst and I would like to welcome you to our discussion of Beam's 2013 first 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 our actual results could differ materially from those currently anticipated. This presentation also includes certain non-GAAP measures that are reconciled to the most closely comparable GAAP measure in our news release and in our SEC filings, or in the supplemental information linked to the web and presentations page on our website. As we begin, I'd like to touch on 3 things: our strong start to the year, which demonstrated continued growth on growth; an update of how consistent execution of our strategy continues to deliver sustainable profitable growth; and why we're confident in our prospects for 2013 and beyond. First, I'll start to 2013. As you may recall, we got out the gate fast in 2012, and we called out last quarter that Q1 would be the toughest comparison of the year. So we're pleased with the result we delivered to start 2013 and that our brands continue to outperform. Comparable sales increased 3% despite a strong 13% increase in last year's Q1. We delivered above market growth in North America, led by our heartland United States market, and we've also continued to benefit from our sustained strength in bourbon and successful innovations across our portfolio in key markets around the world. Our brand sustained the momentum in the marketplace and accounting for puts and takes of a challenging comparison, our brands clearly [ph] outperformed our global market. While sales were in line with our expectations, we delivered better-than-expected leverage at the bottom line in the quarter. Operating income before charges and gains grew 22% against the 17% increase last year. Margins benefited from factors we called out last quarter: The timing of raw material-related costs, favorable product mix and the carryover benefit of previously implemented price increases. However, on top of that, our results further benefited from the fact that mix came in ahead of expectations, due to strong demand for our premium innovations and our high-end whiskeys led by Maker's Mark and an advertising shift to Q2 and 3. Together these factors combined to improve operating margins by 340 basis points, which is clearly not our full year run rate, particularly given the timing benefits that bolstered Q1 at the expense of future quarters. At the EPS line, diluted earnings per share before charges and gains increased 21% on top of last year's 29% increase. Even before the benefit of timing in Q1, this growth on growth reflects the strength of our portfolio, the success of our strategy and the passion of our people. We're right where we want to be at this point in 2013, and Bob will take you through the numbers and the various puts and takes in greater detail in a few moments. Second, as we discussed before, we pursue sustainable profitable long-term growth to the execution of a strategy that remains robust, consistent and effective. Creating famous brands, building winning markets and fueling our growth. Through the lens of our strategy I'll touch on a few ongoing initiatives and developments since we last spoke. Our strategy begins with creating famous brands, and our Power Brands and Rising Stars, our core premium brands, drive an ever-increasing majority of our sales. Over the past year, with the addition of Pinnacle and the divestiture of some Value Creator brands, we've reinforced our focus on building high-margin Power Brands and Rising Stars. We're continuing to invest behind these brands with nearly half of our media investment supporting targeted television advertising and a further 35% building our brands in digital media where we're increasingly being recognized for our effectiveness. Our strength in bourbon continues to serve us well. With sustained double-digit growth, bourbon remains of the fastest-growing large category in the U.S. and our investments behind our brands help drive excellent consumer demand for our flagship, Jim Beam brand, for Maker's Mark and for our industry-leading Small Batch Bourbon Collection. Consumer sell-through for our core Jim Beam White Label continued to strengthen in the quarter and was augmented by the global success of premium innovations like Devil's Cut and Red Stag. First quarter comparable sales in Maker's Mark increased 44% on sustained strong demand plus the effect of a short-lived proof change in February. As you know, we heard our consumers loud and clear, responded quickly and maintained Maker's at 90 proof. This episode reinforces that Maker's is a rare brand that can inspire this kind of intense consumer passion and I'm pleased to say that Maker's Mark brand today is as strong as ever. And given ongoing supply constraints of Maker's, we'll manage growth going forward by leveraging size mix, market mix, promotion and pricing, and we anticipate being able to sustain the healthy sales growth rate for the brand as a result. We continued to build share momentum in tequila in the quarter. We like our strong #2 premium position in the global tequila category, and given our advantage to guard a [ph] supply chain, innovations and current competitive dynamics, we feel very good about our prospects to further enhance our competitive position in this important category. Innovation is a growth driver and a strategic brand building imperative for Beam. As such, we are focusing considerable investment behind supporting our most successful innovations, some of them in their second and third years, and we launched several exciting new products in the quarter. Globally, we're launching Brooks [ph], with a borrowing equity from the mother brand and building back economic value and enhanced consumer perception. These include Hornitos Lime Shot and Sauza Sparkling Margarita in the U.S., the success of expansion of Jim Beam Honey across EMEA and Canadian Club Summer Crisp in Australia. We accelerated the launch in Q1 with some new products that were originally planned for the second quarter as the effectiveness of our innovation capabilities enabled us to move quicker than we'd previously planned. We further enhanced our commercial position around the world by executing our second strategic pillar, Building Winning Markets. Distribution alliances supported by excellent activation are critical to help build winning markets and strengthen our route-to-market capabilities and footprint. For example, in the world's most profitable market, where we held the #2 position, our mutually beneficial strategic partnership with our U.S. distributors continues to leverage our scale and bring us closer to our consumers and customers. And we amplify our scale in other markets by partnering with powerhouse organizations like Coca-Cola Amatil in Australia, for they're helping us leverage our broad portfolio of premium spirits. In the first quarter, our powerful routes-to-market helped deliver excellent growth in our key U.S., Australia and Germany markets. Our new distribution arrangement in Japan with Suntory that began in Q1 is off to a very promising start. And in emerging markets, where we aim to deliver about 1/4 of our long-term growth, our enhanced route-to-market in Mexico is really starting to click and we're also very pleased with our new route-to-market in China, where our pipeline for the year ago created a tough comparison for Courvoisier in quarter 1. In India, our internal compliance review and our repositioning program continue to make progress. Bob will discuss that and the near-term impact on results for our Teacher’s brand in a few minutes, and we remain very confident in the long-term prospects for this powerful asset. Lastly, we continue to drive operational effectiveness and efficiency deep into our organization to Fuel Our Growth, which is our third strategic imperative. While the timing of expenses and input costs can impact our numbers, the underlying initiatives we're pursuing continue to yield meaningful results. Our roll-out of lean manufacturing and our enhanced procurement program are helping us achieve annual savings in cost of goods sold and SG&A at the higher end of our 1% to 2% goal, to offset higher raw material costs and produce the rocket fuel for investment in our brands. The integration of the Pinnacle acquisition has gone very well. In the quarter, we announced that we will consolidate bottling for Pinnacle into our center of excellence in Kentucky, Frankfort, which will deliver meaningful savings when complete in Q1 next year. And Fueling Our Growth is about also enhancing our capabilities as well as driving the efficiency of our business, and we continue to make good progress in this area. From our new Global Innovation Center in Kentucky, to our world-recognized strength in brand building, to our growing capabilities in customer and supply chain management, Beam continues to build the muscle that will further strengthen our long-term competitiveness in the dynamic spirits industry. The success of our 3-point growth strategy reinforces my final point: our confidence in the future. We compete in a dynamic, profitable and growing industry, with excellent fundamental trends in developed and emerging markets. We continue to outperform our market by investing behind our portfolio of premium global brands, innovating in areas of new consumer opportunity and leveraging our enhanced routes-to-market in both our developed and emerging markets. The strength of our first quarter results and the continuing success of our strategy reinforce our confidence in Beam's prospects to keep outperforming our market and to deliver our earnings target for 2013. As indicated in our news release earlier today, we're reaffirming our full year target for diluted EPS before charges and gains to go at a high-single-digit rate. Now Bob will unpack the numbers for the quarter, discuss the performance of our 3 segments and brand groups and elaborate on our outlook. Bob?

Thanks, Matt. Before I turn to the numbers, a reminder that Q1 is our seasonally smallest sales quarter, so it's important to recognize that the impact of comparisons and quarter-to-quarter fluctuations can have an outsized impact on growth rates, positive and negative. To set the stage, a few words on our global market. We continue to see our global market growing value at approximately 3% in 2013, with particularly encouraging U.S. market performance and some mixed signals across international markets. Our assumption has been that the U.S. market will grow 3% to 4%, and it may be tracking towards the high end of that range with further strengthening price mix. We continue to assume the market in Australia will grow modestly, the German market will expand low-single digits and that trading conditions in Western Europe will remain challenging. Even so, we've seen modest improvement in Spain where declines have lessened, as well as in the U.K. Emerging markets have moderated somewhat but continue to grow collectively at a double-digit rate, with more moderate market growth in China and Brazil, but continued strong momentum in Russia, Eastern Europe and Mexico. International growth of bourbon has remained robust across both developed and emerging markets. And the industry-wide pricing environment continues to improve, albeit at a more moderate pace. Notably, the price increases we took in the first half of 2012 have been successful and we're encouraged that increases by competitors in the second half also appear to be sticking. As always, our objective is to outperform our global market. Now to the numbers. And starting at the top line, reported net sales came in at $578 million, that's up 8% from the year-ago quarter, and includes the addition of Pinnacle Vodka, which we acquired at the end of last May. On a comparable basis, which adjusts for acquisitions and divestitures and foreign exchange, our net sales grew 3% in the first quarter, driven by a very strong comparable growth for our premium and super premium Rising Star brands. As Matt indicated, we feel very good about that 3% comparable growth, especially coming on top of our 13% comparable growth in the year-ago quarter, when about half our growth came from our front-loaded new product launch calendar and route-to-market transitions. Though our Power Brands growth rate reflected lapping 19% growth in the year-ago quarter, market share and consumer takeaway trends were very encouraging. To help illustrate our sustained levels of market outperformance, we estimate factors we've previously called out adversely impacted comparable Q1 sales by a net 3 to 4 points. These factors related to last year's route-to-market enhancements in Mexico, Australia and China, and last year's front-loaded innovation launches. In the current year period, the phasing benefits, primarily stronger than anticipated shipments of Maker's Mark and accelerated new product launches, essentially offset our lower sales in India. India impacted Beam's sales in the range of 1 to 2 points. Nine-liter case volumes adjusted for RTDs [ph] were off 1%, so we delivered strong product and price mix for the quarter. Turning to operating income, OI increased 37% to $179 million, and before charges/gains was $169 million, up 22%. That's obviously significant operating leverage in the quarter and above our initial expectations. So let me walk you through the main drivers. First, gross margins expanded 150 basis points before charges/gains. Gross margins reflected the items we called out last quarter. The benefit of the timing of raw material related costs, including fiscal incentives and the carryover benefit of price increases. However, favorable mix was significantly better than expected, largely driven by the quarter's heavier than expected shipment of Maker's Mark and strong demand for premium innovations. Second, operating margins expanded even further on the benefit of lower brand investment in the quarter and containment in the growth of SG&A. Brand investment is lower as some promotions originally anticipated for late Q1 simply shifted to early Q2. So we expect marketing spend will pick up here in Q2 and in Q3. So all in, look for these timing benefits that helped Q1's operating margins to unwind over the next couple of quarters. Moving to income from continuing operations, on a reported basis, income from continuing operations was $116 million or $0.72 per diluted share, compared to $78 million or $0.49 per share for the first quarter of 2012. Q1 results included a net gain of $12 million or $0.08 per share due to a gain on sale related to divestiture of certain Value Creator brands in January and expected favorable resolution of an income tax matter. Excluding charges and gains, first quarter income from continuing operations was $104 million or $0.64 per diluted share. That's up 21% from $0.53 in the year-ago quarter. As expected, the modest deleverage at the EPS line reflects the below-the-line factors we called out 3 months ago, namely, high interest expense related to the Pinnacle acquisition and an increase in our fully diluted share count. Turning to Beam's 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, first quarter net sales in North America increased 18% to $364 million and were up 7% on a comparable basis. That growth comes on top of double-digit growth in the year ago quarter, driven partly by pipeline sale [ph] that we called out last year for new products and our enhanced route-to-market Mexico. Sales grew across North America, with the U.S. reflecting strong growth for our Power Brands and Rising Stars, including Maker's Mark, Pinnacle, Skinnygirl and our high-end whiskeys. North America sales growth benefited from some phasing that will balance out in the coming quarters, including the pull forward of innovations Matt mentioned, and a spike in demand for Maker's Mark related to the short-lived proof change. At the operating income line, OI for North America was $124 million, up 25%. North America's operating leverage benefited from the timing of raw materials related costs, favorable mix and carryover pricing. Now moving to Europe, Middle East, Africa, or EMEA. First quarter net sales in EMEA were off 2% at $106 million and up 1% on a comparable basis. We consider that a very good result against the 12% growth in the year-ago quarter, when about half of our growth came from factors we discussed last year: The timing of promotions in the travel retail channel and the timing of new product launches. Results in EMEA reflected strong sales growth in Germany and Russia, plus growth in Spain and the U.K, partly offset by lower results in the travel retail channel due to the timing of promotions on our Courvoisier brand. At the OI line, EMEA's operating income came in at $25 million, up 42%. Whereas EMEA faced a challenging comp at the sales line, the segment had an easier comp at the OI line. As you may recall, EMEA OI was off 16% in the year-ago quarter. Q1 operating income in EMEA benefited from the phasing of brand investment within the first half, as well as the absence of route-to-market streamlining expense that we pointed out adversely impacted the year-ago quarter. And concluding with results for our Asia Pacific/South America, or APSA segment, Q1 sales in APSA were $109 million, off 7% on a constant currency and comparable basis, reflecting a comparison to 16% comparable sales growth a year ago when our route-to-market enhancements drove about half of the segment's comparable sales growth. While sales in APSA were lower, we feel good about the fundamental strength of our brands and consumer takeaway trends. Our business continue to grow in Australia where we're seeing favorable share trends, and we delivered strong growth in Japan and Brazil. At the same time, we left a very strong year ago quarter partly due to our route-to-market transition in China and, as expected, saw lower results in India. In China, despite the tough comparison, we feel well-positioned with our new route-to-market to drive strong long-term growth, particularly on the back of Courvoisier. India remains a highly attractive market where we have a strong asset in Teacher's, the #1 scotch brand in India. The compliance review in India that we discussed before continues to make progress. We have made meaningful changes in protocols, procedures in personnel, we're continuing to restore our distribution in the market, and we are now back in nearly all distribution channels. As we've indicated before, we expect results in India will face challenging comparisons through the third quarter as we continue to ramp up our repositioning program. Our expectations for the India business are factored into our earnings target for 2013. In the first quarter, India reduced asset sales by 6%, overall Beam sales by 1% to 2% and EPS before charges/gains by $0.01. As a reminder, India accounted for 2% of Beam's sales in 2012. In the quarter, we recorded $1.8 million in charges related to our investigation and, as previously discussed, it's premature to speculate on the final costs or any potential penalties related to this matter. All that said, we're encouraged by the strong equity the Teacher's brand has demonstrated in India despite the temporary commercial disruption there. Moving to the operating income line in APSA, the segment's OI was $22 million, off 1%. OI benefited from lower brand investment that will ramp up in the coming quarters. Now as we turn to the performance of our key brands, I'd remind you that our convention is to present comparable net sales growth rates on a year-to-date basis. Naturally, as we've said many times before, when reporting rates for a single quarter, that also happens to be the year's smallest and when lapping big numbers, you'll see some fluctuations up-and-down that do not necessarily reflect a brand's current sell-through or longer-term trajectory. Comparable sales for our Power Brands were off 2% in the quarter and in line with our expectations, as our Power Brands cycled against 19% growth in the year-ago quarter. Our comparable sales for Jim Beam were off 2% from the year-ago quarter when the brand sales were up 19%. Recall that in Q1 last year, we launched several Jim Beam innovations in key bourbon markets, including new Red Stag products in the U.S., Jim Beam Honey in Germany and Devil's Cut in Germany and Australia. We are very pleased with consumer demand trends for Jim Beam as our flavor-infused products continue to attract new consumers to the franchise and the latest consumer sell-through data underscores how the core Jim Beam White Label product had strengthened its momentum in the U.S. and Australia, the largest export market for bourbon. And we're sustaining our international expansion of Jim Beam Innovations, including Red Stag, which is now in more than 30 markets and Devil's Cut in more than 20. And late in the quarter, we began shipping Jim Beam Honey in the U.S. after encouraging performance in Germany, the U.K. and Australia. This was not a typical quarter for Maker's Mark. Comparable sales increased 44%, which we've discussed before is not a sustainable run rate. Brand sales growth rate reflected the impact of the initial announcement to reduce the brand's alcohol content as consumers stocked up on 90 proof Maker's. As we've discussed before, we have adequate supplies of Maker's to support healthy full year growth, but demand continues to outstrip supply. This is a good problem to have. We continue to invest in laying down more Maker's Mark to meet future demands, and as Matt indicated, we'll manage and maximize growth through the levers of size mix, market mix, promotions and price. Comparable net sales for Sauza were off 6% as the brand cycled against pipeline fill in Mexico due to last year's route-to-market transition. Consumer sell-through data in the U.S. indicates our innovations are helping us outperform in the competitive tequila category, including Sauza Blue, which delivered strong double-digit growth. We're also excited about our innovations in the category that enhance the lifestyle relevancy of our tequila brands, including our recent launch of Sauza Sparkling Margarita. Comparable sales for Pinnacle Vodka were 8% higher, which we see as a good result given the tough comp we called out last quarter, lapping significant distributor inventory build in the brand's last full quarter prior to its sale. Pinnacle continues to grow in both the unflavored and flavored segments, and we like our innovation program behind the brand. We continue to feel good about our target to drive double-digit growth for Pinnacle in 2013 with improved returns. And our sales organization is excited about where they can take this brand. Comparable sales at Courvoisier were off 29% against the year ago quarter when sales surged 41%, driven by the timing of travel retail promotions, new product launches and strong growth in China following our route-to-market transition. As a result, Courvoisier saw soft Q1 results in travel retail, as well as in China, which reflects the market dynamics I noted earlier. Courvoisier has set the pace in category innovation and new products like Courvoisier Emperor in China and Courvoisier Gold in the U.S., further enhance the brand's growth prospects. Canadian Club was up 8% driven by sustained strong growth in Australia. We're particularly pleased that in the quarter, our Canadian Club on-tap ready-to-serve product was recognized by our Australia distribution partner, Coca-Cola Amatil, as Grand Champion at their Annual Partner Innovation Awards. Comparable sales of Teacher's Scotch were 20% lower against 17% growth last year in line with our expectations due to the lower results in India we've already discussed. The brand's equity of consumers remains very strong in India, and Teacher’s continues to deliver very good growth in Brazil and the U.K. in the quarter. Our Rising Stars are premium brands with strong growth profiles and comparable net sales for our Rising Stars were up 20%. A few noteworthy items. Comparable sales of Skinnygirl more than doubled in the quarter, reflecting the introduction of new Skinnygirl Mojito, Moscato and White Cherry Vodka, as well as lapping the timing of shipments in the year-ago quarter. Our high-end whiskeys continue to perform very well, with strong double-digit growth for Laphroaig and Basel Hayden's. While our Kilbeggan Irish Whiskey family was lower versus a tough comparison due to distributor pipeline sales in last year's Q1, we feel the brand's new package and positioning campaign will launch the brand on a long-term growth trajectory. New premium packaging is helping increase momentum behind Hornitos Tequila, and we've extended the brand with the recent launch of Hornitos Lime Shot in the U.S. Comparable sales for our Local Jewels were off 6% and for our Value Creators were up 1%. A few final items before Matt wraps things up. 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 28.1% before charges/gains. With respect to our balance sheet, I'll remind you that we are traditionally a net cash user in the first quarter and free cash flow for Q1 was negative $67 million. For the full year, we continue to target free cash flow in the range of $300 million to $350 million, a level that will enable us to support a healthy level of strategic investment. 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. As Matt indicated earlier, we're reaffirming our 2013 earnings target to deliver high single-digit growth in diluted earnings per share before charges/gains. As a reminder, that's against our 2012 base of $2.40 per share. Our target incorporates the various puts and takes we outlined last quarter. We're assuming our net increase in raw material costs will be in the range of $35 million, reflecting the high input costs for bourbon laid down 4 to 5 years ago that we are now bottling and selling. As we have indicated previously, these incremental costs will come in quarters 2 through 4, and to largely offset these higher costs, we remain sharply focused on our Fuel for Growth efficiency agenda and are aiming for the high end of our range of 1% to 2% annual savings in COGS and SG&A. While brand investment was lower in Q1, we plan to step up brand investment and continue to expect that BI will rise at a rate in line with sales growth for the full year and come in at a highly competitive mid-teens rate as a percentage of sales. We continue to expect to benefit by an incremental $0.05 from the Pinnacle acquisition. FX has become less favorable, and we now assume, at current rates, that FX will be an approximately $2 million hit to full year OI rather than a $5 million benefit, and be relatively neutral at the top line rather than a 1% tailwind. We continue to assume no overall material new pricing in 2013, but we will continue to monitor market conditions for potential opportunities as the year progresses. And we continue to expect the 2013 tax rate in the range of 28.5%. As the year unfolds, we'll keep monitoring factors we've previously identified that could impact our outlook, adversely or favorably, including market growth rates in Western Europe and emerging economies, the potential for better than expected worldwide growth of the bourbon category, material improvement in the pricing environment and stronger-than-expected performance of innovations. Lastly, a word on phasing. As we've indicated in today's call, Q1's earnings benefited from some timing factors. The timing of higher raw material costs and brand investment was a tailwind at Q1, that will be a headwind over the balance of the year. So our EPS growth rate can be expected to moderate over the next couple of quarters. Now back to Matt for some closing comments.

Thank you, Bob. As we look ahead, we feel very good about Beam's growth strategy and how our teams are executing it around the world. With the success of our investments to further strengthen our premium brand equities, fuel sustained innovations and enhance our routes-to-market across developed and emerging markets, we feel very well-positioned to continue outperforming our global market in 2013 and to drive sustainable, profitable long-term growth. We're pleased with Beam's strong start to 2013, and we feel we're on track to deliver excellent full year results. Bob and I would now be pleased to respond to your questions.

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

Can you talk a little bit more about Maker's and just kind of with the releases during the quarter. Did that have some impact on demand in terms of maybe a pull forward or a pantry loading by consumers, and would that reverse next quarter or was this just kind of normal, kind of what you expected in terms of growth?

Yes, Bill, I think there's a couple of factors going on there. The underlying demand as you know for Maker's has been very strong and a bit ahead of our supply capacity. So I think we saw that in the beginning of the quarter and then there's no doubt that with the change of the proof and then the reversal of that decision, we did see a bit of a buying forward from both customers and consumers. So that took the growth rate in terms of shipments ahead of the underlying sales growth rate, which remains very healthy in the marketplace. So we won't expect to see those 44% growth rates sustained through the year. In fact, we can't support them. There is enough liquid to sustain a solid rate of growth, but we will see that temper as the quarters go by and we'll manage that demand, as we said, by pulling the various levers at our disposal, whether that be market mix, size mix, promotion or pricing.

Okay. And then switching to tequila, I mean, maybe give an update on what you seeing in the market in terms of the agave prices and new players and how you see that playing out as we progress through this year?

Absolutely. As we said before, we do expect tequila will continue to probably tend toward being quite price competitive until that excess agave gets worked off in the industry. And that's probably going to take the next sort of 1 year, 18 months to do so. At the same time, you're probably left with seeing some continuation of some price competition in the marketplace. And certainly, we'll continue to respond to that as we see necessary. At the same time, agave and tequila is a very exciting industry and category for us, and we're going to play, it's a very long-term strength for us. We think with our brands, both in Sauza and in Hornitos, we've got great assets and our supply chain gives us an advantage. And so you'll see us continue to really focus on brand building for the long-term. So the launch of our Sauza Blue innovation last year continues to do well. The very well-known Make It campaign, which has been a real digital sensation, has just got its second iteration in the market. The new Hornitos packaging has gone out there. So we do see that the growth prospects for tequila will be trending upwards and indeed the profitability of that market will improve as we see the excess agave being worked off in the next 18 months or so. And then finally, we have some good innovations coming into the market. They haven't really been activated yet. We have launched the new Sauza Sparkling Margarita this quarter and also the Hornitos Lime Shot. So there are new news for the first time from us in a while in this tequila category.

And then last one, just on the A&P spend kind of in the quarter, I mean, was it something where you decided to kind of hold off and postpone for the rest of the year? Or was this just sales came in ahead of expectations, and now you want to reinvest some of that into the business?

Bill, it's Bob here. It really was a choice for us as we simply looked at the competitive landscape and decided that some of that spend was best placed into quarters 2 and 3 and that this decision was made in the quarter, really, was not at all related to the top line and profit impact we're seeing in the quarter. But as I reiterated in my remarks, we expect that to unwind in the balance of the year and full year to see BI growing in line with sales at that mid-teen reinvestment rate.

Your next question comes from the line of Bryan Spillane of Bank of America.

Just a couple of questions. I guess just related to the sales performance in the first quarter. First, just as I kind of reconcile the -- it looks like Rising Stars drove most of the revenue growth. Just -- was there any contribution at all from non-branded product?

Yes, Bill -- Bryan, excuse me, it's important to note, of course, a small quarter and the year-to-date, being one quarter results on a [indiscernible] level, you see a lot of choppiness, absolutely. And so what we did see, of course, was some seasonality, and particularly with Rising Stars growing very strongly, that did drive the overall performance. But at the same time, there are some non-branded sales, and particularly some sales allowance that we don't allocate to brands, that is in that number. So it's probably what you're seeing in the overall.

Any magnitude in terms of just what it would have contributed to the comp?

It's not material. Again, I would tell you not to worry about that on a year-to-date basis. You'll see that unwind for the year, it won't be material.

Okay, all right. Great. And just to get a sense for -- in North America, if you could talk a little bit more about maybe just performance by channel, kind of what you were seeing on-premise versus off-premise? And just maybe a little bit more flavor in terms of what you were seeing in terms of takeaway trends would be helpful.

Sure. I think we've talked over the past couple of quarters about the U.S. trending at the sort of 3% to 4% level. I think, what we're seeing overall is actually that number is nearer to 4%. As Bob said in his comments, we're very pleased with the performance of the U.S. market. At the sort of macro level, I would say that if you take that overall growth decomposition, you probably got about a point and a half of volume, a point of price and a point and half of mix there. That's good because of that reflects the continuation of the premiumization trend and a lot of the innovations going into the market. Specifically, to your question about channels, we're probably seeing on-premise to be a little bit more volatile. The [indiscernible] data suggests it's probably treading a little bit in bars and restaurants behind the on-premise -- the off-premise. But we are seeing still continued growth there. So that trend on the long-term continues upwards.

And was there any sort of change in the evolution of those trends during the course of the quarter, did things -- I guess we're trying to understand is to whether things might have softened a little bit, even just industry-wide, as you move through the quarter or did it appear as though trends were pretty consistent through the quarter?

I think what might be confusing some of the reads out there, are these various databases. You had a couple of less selling days, and the NAVCA data, they report volume not value, which you've got to look at. If you look at a 12-week read in Nielsen it's different to a 13, because a 13 has Easter and Christmas together. What we're seeing, we put all that into our sort of macro and model it, is that actually we're seeing good continued, sustained strength in the market. And I think one of the more pleasing things there is, that there's about a point of price, as I said, in the market, and it doesn't seem there's been any negative volume impact, so that the price increases have stuck and underlying consumer demand is good. And what's really driving the market is that it's consumer response to things like innovation and the growth of bourbon and the trading up by consumers. So for us, as brand builders, that's good news and we like that.

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

Just on a comment earlier on first quarter COGS trends reversing in the remainder of the year. Is that all cost side or is some of that pricing side as well? I'm trying to understand if there's a pricing discontinuity, I guess, in the 1Q versus the rest of the year.

No, Tim. The COGS statement, let me start there, we've said for the full year $35 million of the gross inflation number we're seeing. In fact, we saw a relatively favorable number in the first quarter as we had anticipated and highlighted to you last call. So we're going to see that unwind over the balance of the year, kind of in the range of $40 million, if I put a number to it. In terms of pricing, of course, we saw carryover price benefits in the first quarter from last year. Recall we took pricing about this time last year. So we saw 1% roughly of our value growth coming from price. So that carryover benefit is certainly in our numbers. And we'll see that, of course, go through for the year.

But we should really think about pricing and mix coming from innovation rather than specific line price increases, or how should we think about that?

Yes, I think that's very much the way to think about that. As I've said, if you gave you that sort of macro for the market where there's about a point of price and a point of market mix, we're pleased. We're actually outperforming on the mix line and that does reflect the focus on the Power Brands and Rising Stars, and the fact that our innovation is very much not just tied on those brands but it's at the premium ends of each of those segments they compete in. So you're exactly right, it will be more mix than it will be price-driven as we go through the year.

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

Just following up on the last question. I guess, I'm still a little bit unclear just in terms of -- in the first quarter you have 340 basis points of operating margin expansion. You called out, I guess, 3 factors. Can you just give us some breakdown of how much of the 3 factors, kind of price mix, the brand investment timing and the COGS favorability, how much of that contributed to the first quarter? And, then, I guess, I'm just a little bit unclear just in terms of why we wouldn't see some of those benefits still kind of carry through if you're going to get still positive mix. I guess, you still have the acquisition synergies from the Pinnacle acquisition. So just a little bit better understanding on the margin phasing.

Sure. Okay. Well, as you say, we had significant operating margin increase in 340 basis points. Roughly half of that is gross margin and the other half is lower brand investment. So let me take you through those in turn. Gross margin expansion of 150 basis points, a number of things in there. There's timing of raw material costs, as I just highlighted, is an important part of that, and that really is timing. And mix, significantly better-than-expected, some of which is Maker's Mark. And as we just discussed, that, of course, is going to be a timing issue as well, given a limited supply. But some of that simply being strong performance of our innovations, in particular, which is encouraging and would be a full year benefit, certainly. The brand investment piece is lower in the quarter, obviously, just a timing issue there. As I said, we expect that to pick up in the balance of the year and full year basis, to grow in line with sales. So net-net, if you step back we expect that 340 basis point improvement to unwind in the next couple of quarters. On a full year basis, we said operating income is going to grow faster than sales. By definition, therefore, we expect operating margin accretion and also into spinning [ph] some gross margin accretion. So to your point, we feel good about the full year guidance with the first-year start, but there are certainly some important timing factors within it.

Okay, and then just on the pricing side, I know it's not included in your full year guidance, but you certainly did call out the opportunity for pricing. So what are some of the milestones that you would be kind of watching over the next few months to sort of gauge your comfort level around further pricing as you go out throughout the year?

Yes, I need you to -- I think, as we've said before, if we step back, obviously, there was a long hiatus, 3 years, without any pricing. And we stepped forward in the first half of last year and took pricing, as we said in February. We saw other major players increase their prices in the second half. So that's the background, and we're not assuming any for the balance of the year. We are, so far, encouraged by the consumer response and the fact that pricing is stark and, certainly, if we look at areas, and I mentioned one there, Maker's Mark, we'll continue to look very closely at how we pull the right levers there to manage and maximize the growth of that brand. And certainly, overall, in bourbon and brand spirits, we'll continue to look for opportunities. On the other hand, there are price-competitive segments in white spirits. I mentioned some comments just now in tequila, certain areas of vodka as well. So you net that out, we are not assuming anything, if we see continued and sustained double-digit growth in bourbon, if we see our innovations really sticking, the other factors Bob mentioned as potential upsides, that will provide a different environment as well as a competitive dynamic, which we would look to and we would think about that later in the year potentially.

More of a sustained momentum, would you need to see acceleration to give you comfort? But it's just -- the way I understand it, from your comment, it's more just sustained momentum on bourbon and innovation kind of working.

That is the macro level, yes. And frankly then, the competitive is in the individual category dynamics and we are seeing a number of -- you got to look at it on a category by category, segment by segment basis, and in some of those instances, I gave the case in tequila. If we see aggressive price competition because of that level of agave is still there, we'll protect our turf and use promotions appropriately to do that. If that -- on a local market basis, we see a number of different factors, so really we've got to be tactically quite deft as well as looking at the bigger strategic picture.

Your next question comes from the line of Vivien Azer of Citigroup.

More of a philosophical question for you. Over the last couple of months, we have seen vodka start to lose share. And while I recognize the growth in spirits, generally, is so good that this is not a zero sum game, what's your outlook in terms of share shifts between brown spirits and white spirits?

Well certainly if we look at the underlying growth of the bourbon category as exciting, it's the #3 category and potentially will become the #2 category going forward, so we see that as being a very good underlying trend. And we've seen that trend expand, through things like flavor innovation, into U.S. whiskey and now the Canadian segment. So I think that all is well. When it comes to vodka, I mean, whilst you might have seen a little bit of slowing down, the trend, if you look at it on a 52-week basis, it's still growing ahead of the category. And I think, within that -- the dynamic we're looking at there, which I think is a fundamental one, is around flavor. It was amazing. Just 5 years ago, just 1 in 10 cases of vodka was a flavored vodka. It's now 1 in 6. And we're seeing that segment grow at a double-digit rate. And certainly, the performance we're seeing from Pinnacle, both in the unflavored and flavored segments, suggest there is still good growth there. And as we step back, with 1 in 3 drinks in North America coming from vodka, we think that's going to continue to be a very important dynamic segment and one where -- if we innovate, if we brand support, if we execute well, there is plenty of growth prospects to come.

And within that, if you look in the U.S., Vivien, the economy vodka sector, the lower-priced segment is really dragging down the overall. We obviously disposed of some of those brands in the first quarter. As we look at the more premium products that we play in, that is growing very nicely.

Understood. And just circling back on the pricing opportunity, looking ahead. I'm curious, as you sit here today, whether any of your hesitation around leading on price again this year stems from anything that you've seen from the consumer in the first quarter? Certainly another alcoholic beverage category as we've heard that volumes are pressured because of the higher payroll tax or gas prices, is that something that you're kind of keeping in the back of your mind?

Well, we're actually quite encouraged, as I said, because the consumer response is reflecting the fact that, generally, pricing has stuck and volume growth has held up, as I said. In the North America perspective, in a market growing round numbers, 4%, there's a point and a half of volume there and there is this continuation of premiumization and up trading reflected in the mix. So there hasn't been a negative impact that we can see from the data. We'll continue to monitor it very closely. And as I said, look at those individual segments and market by market dynamics before taking any further views as to whether there's more opportunity.

And we're certainly continuing to see spirits gaining share, at the expense of beer, for example. So the fundamental underlying strengths of spirits, of innovation, premiumization, versatility, et cetera, we've talked about before, continues to drive the spirits category overall.

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

Two questions, one on emerging markets and then back here to the U.S. You called out some emerging markets continuing to be healthy, some slowing down a bit. Could you do a bit of a compare and contrast for us, in terms of the environment, generally, economically? And for spirits in Brazil versus Mexico? And then I think the Jim Beam brand is being introduced in India, can you speak to your outlook for that brand in that market?

Certainly. Let me step back. As we said in our comments, I think, you've heard other commentary that overall there's been a little bit of a slowing of the general emerging market picture. We're still seeing double-digit growth in the aggregate. But specifically, a comment, certainly the economy in Brazil and the level of GDP growth there has put a little bit of pressure on the market. We're still very pleased, by the way, with our performance of the Teacher's brand in that market. It's a strong #2 in the scotch segment there and we'll continue to execute well, and that's as an example of what we do see in the long term, good prospect, as we say, in a lot of our emerging markets. To go in, in this instance, with scotch as the local preference and the long-term outlook of Bourbon there, clearly, with some of the changes we're making to our model in India at the moment, the execution of the Beam launch will be probably a step back from our previous plans, but in the long term, I think it remains encouraging. And as you say, on the positive side, you look at the Mexico market, I mean, we did change our route-to-market there a year ago and consolidated all of our brands under one roof, with our partner, La Madrilena. They are doing great job for us. But there's no doubt the market there is healthy and I think that does reflect the macro strength of the overall Mexican economy and the good strength in GDP that we see coming forward. Another example there would be Russia. We're very pleased with the performance in Russia this year. The overall conversion pieces from a lot of emerging markets of local spirits into international seems to be continuing there and across both of our cognac, tequila and our whiskey brands, we're seeing good fundamental growth. So it varies market by market and I suspect there is some tie-in to the local economic factors there but, in general, whilst there is some slowing down, as we've heard from other places, we're still seeing healthy double-digit growth in those markets. And they need to account for about 25% of our growth going forward, as we've said.

In India, how's Jim Beam looking in that market?

As I said, it's -- in the long term, I think, a great prospect for us on the back of an excellent position we have there in Teacher's, but given some of the change that we're putting into our model there, that initiative will be one that we'll probably pause on a little better as we get the new model really working, get Teacher’s really flying and we'll be bringing Jim Beam at a future point into that market.

Got it. And Brazil, we heard Anheuser Busch, InBev and AmBev talk about an environment that's -- where the government's going to become more counter-inflationary. We've seen some of that evidenced by the way policymakers have been behaving. What do you think that means for kind of the larger kind of consumer picture, as we stare out beyond the quarter and kind of try to think about the next few years?

I think, in general, as I said, in all these markets, there is -- there's a relationship between the performance of the western spirits category and the overall health of the economy and the availability of cash consumers. I think, the benefit from us is that we started some of these markets from a strong but relatively small position, and fundamentally, our underlying growth should not be interrupted by that. We will be agile and respond to local economic and consumer conditions. But through that, we do see that the underlying prospects that for western spirits, as I've said, the great big pool of local spirits and the opportunity to convert some of towards international spirits as being a trend that was. And maybe some short-term interruptions along the way for the economic cycles, the fundamental trend look set and we think the long-term prospects are very good.

That's great. Okay. Finally, just coming back to the U.S., could you give us a bit more of a report card, specifically on the White Label, specifically on the Jim Beam brand? And how it's doing from a share perspective? And what you think the opportunity there for that brand, including the pricing opportunity for that brand here in the U.S.?

Yes, we're certainly very encouraged by Jim Beam and, as you say, if you look at the base of the brand, the Jim Beam White, we've seen some of the best growth we've seen in several years over the past year, and that reflects the fact that the overall brand health is good. And as you know, we did take price last year. It's first time in several years we've taken price and we set [ph] price in the bourbon category and that price seems to be sticking and the volume holding up well. And of course, on that platform then, our strategy then, as we said, was borrow Bill's strategy, borrowing from the equity of Jim Beam White, launching exciting new innovations with higher price points and even higher margins. So, for example, after the launch in 2009, Red Stag is still blazing a trail, the recent launch of Devil's Cut, which you may have seen on television, is doing well, really well, for us. So we're building a strong brand for Jim Beam, overall. But I think the most important factor is that we're very pleased with the base of White [ph] is looking strong.

Your next question comes from the line of Kevin Dreyer of Gabelli Asset Management.

Just curious on Maker's, in terms of the leverage you said you can pull to manage the growth and make sure that supply and demand are in balance, I didn't hear anything about advertising activity. Why wouldn't you ratchet back on that to prevent having to go on allocation or anything?

Yes, absolutely, Kevin. I think it's important that we look at all the levers. But at the end of the day, one of the things we've said from the get-go is that bourbon is a heartland category for us and within that, Maker's is a very strategic brand. And in fact, over half of our CapEx over the first 5 years has been going into bourbon, and we told you last year with the ramping up of some of our CapEx plans there that the lion's share of that will be going into distillation and warehousing for the Maker's brand. So we've really got to ready ourselves for that capacity coming on. So we want to make sure the equity remains strong, and we build that relationship with the core as well as potential new customers of the brand. But as part of the overall mix, we'll do that in an intelligent way. And if we can pull, perhaps the more tactical levers, the size mix, the market mix, the promotional strategy and, obviously, pricing against making sure that we maintain a good long-term effort, we think that's the right balance. But obviously, we'll have to see how that pans out, because we have, as you point out in your question, generated very good demand for, I think, what has been an excellent piece of positioning, communication for Maker's.

Right. And I think that the "Proofgate" might have actually helped you out with consumer awareness. One other question, small brand, but Kilbeggan looks like a big number down. What's going on there?

Yes, Kilbeggan was up 73% last year and that was really as we filled the pipeline. So year-on-year it suffered a little bit. We just actually completed the relaunch and there's some pipe fill going on there as well year-on-year. So we have a very, very attractive new pack and a really tremendous piece of positioning around the concept of Ireland's Best Kept Secret. We've also acquired the 2 Gingers business, which is now part of the Kilbeggan family. So fundamentally, we think the transfer to the Irish segment, that's where Kilbeggan within that is good, and you see, look at the consumption data that's going to reflect to you that, that brand is growing out, and growing out slightly ahead of the market. So that's really just a question of a small volume base with, as Bob said, year-on-year distortions really make any optics look a little bit funny.

Your next question comes from the line of Caroline Levy from CLSA.

This is Michael Levy for Caroline. Just looking at Pinnacle, wanted to understand how the 8% growth in the quarter compared to any of your internal projections, and then what that looks like for the rest of the year.

Yes, Michael. We feel good about the first quarter at 8%. We'd highlighted this, so it can be the hardest comp for us as we were lapping, year ago, the last quarter under the prior owner's control. And so there was some distributor inventory build there. As we think about the top line for Pinnacle for the full year, we reinforced our commitment and our confidence in the ability to drive double-digit. And that is both on the strength of flavored and unflavored. It's important to note that we're seeing both of those guns firing well on a really strong unflavored foundation and really nice performance across the flavor portfolio. We're feeling good on the top line and then the synergy realization is certainly coming through, giving us that $0.10 overall, $0.05 incremental on EPS contribution for the year. So we're right where we want to be.

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

I'm really keen to get a little bit more of a feel for what is going on in EMEA and I think the tone we've got from you on some of those markets like Germany, U.K. and even Spain is probably a little bit more positive than we've heard elsewhere. If I can just talk a little bit about the drivers there, volume, supply versus mix, of what is actually generating a bit of growth in that region.

Sure. Well, if we think our 1% comp growth is quite a good result against the 12% growth in prior year, and as we look across the markets, we saw, again, very strong performance in Germany, which continues to be the engine of growth for us in the EMEA region. Similarly, Russia has been a fantastic market for us, really for Power Brands that we're focused on there, and all doing very, very well. And similarly, some of the emerging markets in Central and Eastern Europe. At the same time, we have seen some improvement in Spain. That is an improvement from -- if you call that market that's sort of down high-single digits to one that's sort of mid-single -- down mid-single digits, but nonetheless, an improvement. And at the same time, in the U.K., a market that's relatively flattish, but against which we're really performing well. So some of those tougher Western European markets continue to be tough. Within that context we're doing well, and that really is the Germanys, the Russias and the Central and Eastern Europes, that's driving the portfolio in EMEA. We did have a bit of an unusual situation in travel retail, which is housed within the EMEA business overall, which had some timing factors, really, between this year and last year that affected the quarter negatively. But if you adjust for those, if you look at underlying growth in EMEA, we're feeling very good that, that growth is strong and well ahead of the market.

Yes. And I think, the only other comment I'd add is that one of the great features of that, on an EMEA-wide basis, is the strength of the bourbon category, and within that, the Jim Beam brand. Our team there doing an excellent job with it, and that's across a number of markets that we're seeing good strength. Not just in Germany, but the U.K.s, the Russia's of the world. So our category brand position, in that part of the world, is certainly an advantage.

And perhaps useful if we talked a little bit about the Pinnacle acquisition. If we think about Cooley's, where are you on that? I mean, in terms of where you thought you would be a year or more on?

Yes. As I said and answered to the previous question, Ian, I think we are in a good place. We've spent that time -- we've said this will be steady and long-term build in this very important whiskey segment, and we are very excited about it. We've got a great asset, and we think it gives us a great opportunity. We've just launched the Kilbeggan brand in its new guise. So there's a new pack and design. There is a very, I think, powerful new positioning around Ireland's best-kept secret. As I said, the optics of the numbers can be misleading. They were down a lot this quarter, they were up 73% a year ago. So that we shouldn't pay too much attention to that. At the end of the day, we're looking at how it's performing in the market, and it's doing well. It's from a small base, so it's not the size of a Pinnacle acquisition, but we like the Irish category and we like the asset we've purchased.

And our final question today comes from the line of John Faucher of JPMorgan.

This is Peter Grom on for John Faucher. We just want to ask a question about what's driving the consumer or what's behind that -- driving the consumer behavior, the trade up at the high end, is it moving from consumers moving up or is it moving in from other brown spirits?

Are you talking -- you're talking about bourbon there specifically, are you?

Yes.

Yes, I think, you're seeing a number of factors. I think there is an overall, as we said -- against the overall bourbon performance, there's some fundamental drivers in that category. And certainly the underlying trend of premiumization, there is headroom for opportunity. But for a better premiumization and price realizations, you go up our brand ladder, we're seeing growth accelerate, and the overall story of authenticity there. But we're also seeing, to your question the opportunity for new consumers to come into bourbon. The best example there is flavored bourbon. When Red Stag launched back in 2009, it brought new consumers, primarily females, into the category. They participated in flavored bourbon at twice the rate they do on the base brand spirit. So you put those sort of macro drivers in some of the opportunity we've seen in innovation, and that's been great. And of course, overall, as Bob was mentioning earlier, you're seeing bourbon gain share of spirits, and spirits overall gain share from the market, particularly from beer. And so that's helping that trend as well.

At this time, I will turn the call back to Mr. Matt Shattock.

Well, on behalf of our worldwide Beam team, thank you again for joining us. We're off to a strong start to the year and we look forward to speaking with you again in early August to review our second quarter results. Thank you very much.