Beam Therapeutics Inc. (BEAM) Q3 2011 Earnings Report, Transcript and Summary

Good morning. My name is Beth, 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] 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, Beth. Good morning. Our CFO, Bob Probst, and I want to welcome you to our discussion of Beam's 2011 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 our actual results could differ materially from those 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 presentation page in our website. And as this is the final quarter result under the formal Fortune Brands structure, while we will touch on results, including all the business units, we'll focus on adjusted pro forma results of Beam as a stand-alone spirits business. Beam is off to a strong start as a stand-alone pure-play spirits company and before we get into the details of our strategy and performance, let me take a moment to recap the long-term goals we've set for this new business. Our goal at the top line is to grow sales faster than our markets, which we see expanding at a low to mid single-digit rate over the long term. We want to grow operating income faster than sales while targeting our long-term EPS to grow at a high single-digit annual rate and we aim to continue delivering strong cash flow and improving ROIC. As we consider these goals in our 2011 performance, we like where we are. Our comparable sales grew 12% in the third quarter and are up 10% year-to-date. At the OI line, Q3 operating income increased 4%, trailing our sales growth rate largely due to our strong double-digit increase in brand investment but ahead of our 2011 expectations. We delivered EPS growth of 13% in the quarter, benefiting partly from lower year-over-year interest expense resulting from debt reduction and we're now tracking towards the high end of our full-year earnings target range of high single-digit growth in adjusted pro forma EPS. And we continue to strengthen our balance sheet as we're on track for a year-end free cash flow conversion rate of 90% or better and a net debt to EBITDA ratio of 2.5x. Now looking closer at the third quarter. Beam delivered record third quarter sales that grew faster than our markets. We outperformed at the top line on strong global growth for our Power Brands, Rising Stars and successful new products. The quarter also benefited from a couple of one-off factors in the U.S. and Australia. In the U.S., our customers are finally able to build normal stocks of Skinnygirl as supply caught up with demand during the peak margarita season, thereby delivering a onetime benefit to the quarter. In Australia, our new distribution model with Coca-Cola, Amatil, moved our sales from an agency relationship to a distributor model, which effectively brought some sales from the high-volume fourth quarter into Q3. Even before these timing benefits and the acquisition of Skinnygirl, we continue to outperform our low-single-digit market. Our investments in brand building and innovation continued to pay off in the quarter. Our Power Brands grew 11%, benefiting from very strong performance from some of our biggest assets such as Jim Beam, Teacher's and Courvoisier. Our Rising Star brands are sharply higher, led by continued strong growth from the Skinnygirl acquisition, which once again added to our overall share gain in the quarter as what has sustained double-digit growth to super premium brands such as Knob Creek Bourbon and Laphroaig Scotch. As anticipated, growth in the third quarter operating income was tempered by our increase of more than 20% in brand investment plus start-up costs related to new products. Beginning here in the fourth quarter, increases in brand investment were moderate to a rate more in-line with sales growth. Bob will take you through the numbers in more detail in a moment. But first I want to underscore how invigorated and passionate the worldwide Beam team is as we begin life as a stand-alone spirits company. We put together an organization that's built to win in the marketplace. It's a team that blends tremendous spirits industry experience with high performing talent from consumer packaged goods around the world. Together, our 3200 colleagues are highly committed to creating long-term value for shareholders. Fortune Brands completed the separation of its businesses on October 3 without a hitch. On October 4, Fortune Brands became known as Beam and began trading as a pure-play spirits company. As we discussed in our road show in September, a series of deliberate strategic decisions and investments over the past 6 years have positioned Beam very well for success as a stand-alone spirits company. First, in 2005 to '07, we transformed our portfolio doubling in size and we've added 11 of our top 14 brands in just the past 6 years. From 2008 to '09, we enhanced our reach to market, establishing a global distribution structure based on fully owned sales organizations and strategic partnerships, all of which brought us closer to our customers and consumers. And as a result we now directly control organizations responsible for 75% of our sales, up from just 8%. And finally, in 2010, '11, we turbocharged our brand building investment, boosting spend about 30% focused behind our Power Brands and Rising Stars to support impact for brand communication and new product innovations. On top of this strong foundation, our confidence in the future is underpinned by powerful competitive strength. We believe we have a unique combination of scale with agility that gives us a distinct competitive advantage. By that, I mean we have the size to compete in key categories in markets as well as the speed of an organization that's entrepreneurial, focused and fast on its feet. This combination of strength allows us to seize opportunities and leverage them into meaningful growth initiatives. So these advantages and investments combined with our strategy focused on our 3 priorities are creating famous brands, building winning markets and fueling our growth are helping us outperform in the marketplace and a prime ingredient to accelerate profitable long-term growth. Let me now touch on each of these strategic initiatives and briefly discuss how they are being executed to enhance our performance. Creating famous brands starts with building our core brand equities, principally for our Power Brands and Rising Stars. To strengthen our brands and their connection with consumers, we invest in impactful brand of communication. And as a result of our marketing success, we're driving strong growth in key categories such as bourbon by leveraging our broad and deep portfolio in this exciting growth category. On a comparable sales basis year-to-date, global Jim Beam brand sales are up 7%. Maker's Mark is up 10%, and we're growing our bourbon portfolio in the world's #1, 2 and 3 bourbon markets, the U.S., Australia and Germany. In the quarter, we launched the new creators to Jim Beam in Australia, while the Jim Beam Live Music Series helped fuel core white label brand growth in the U.S. We ramped up the first-ever TV advertising campaign for Maker's Mark in the U.S. and we activated the Knob Creek Worth the Effort campaign in both print and digital media. This dynamic approach to brand building extends beyond our heartland. For example, to boost one of our attractive Rising Star brands, we initiated TV advertising in the U.K. for Sauza in the quarter. We're also proud that our advertising in Australia's Canadian Club ready-to-drink products earned one of the industry's highest honors and for good reason as C.C. is now the fastest growing RTD in Australia and is on its way to becoming a 1 million RTD case brand in that market. Another big part of our brand building success story and growth in the marketplace centers around innovation. We leverage 2 competitive advantages, our flavor expertise and our speed to market to generate substantial incremental growth. We aim to deliver about 25% of our annual growth with new products and our innovations will run well ahead of that rate in quarter 3. We're on track to deliver another record year of innovation for our company in 2011 with a number of successful new products that are building equity back to our core brands, enhancing mix by selling at premium price points and bringing new consumers to our categories. In bourbon, for example, premium innovations like Knob Creek Single Barrel Reserve, Red Stag by Jim Beam and Maker's 46 have exceeded our expectations and enhanced the growth profile of the entire bourbon category, which is now the fastest-growing of the 5 largest spirits categories in the U.S. At the same time, our agile organization is enabling us to bring our innovation to new markets faster than ever before. In quarter 3, we began our activation of our exciting Devil's Cut innovation in the U.S. and we're very encouraged by the early results. In just the past month, we've introduced Devil's Cut into Germany, the product's first international market. In addition, to continue strong growth in the U.S, we're expanding Red Stag into numerous international markets. It's already driving very positive results in Germany, as well as in markets like New Zealand, the U.K., Russia, Czech Republic, Sweden and South Africa. We're bringing female consumers into the cognac category with Courvoisier Rosé and we also address the needs of this important cohort in vodka, where we believe we've got winners with Pucker Flavored Vodka, an organic growth play that's off to a very promising start and EFFEN Cucumber, which is a big hit on a lot of bartenders' cocktail menus. And we're adding to our performance in key international markets with new products like Sauza Raspberry in the U.K., new RTD products in Australia and the expansion of Courvoisier 12 and 21 into the U.K. and Russia. And we've got some exciting new product concepts in our pipeline, so we're looking forward to continue our innovation momentum in 2012. And finally, we're continuing to expand the footprint of our Skinnygirl's cocktails acquisition. To complement the warm weather seasonality of the original Skinnygirl Margarita, we've introduced Skinnygirl Sangria and the next innovation in the line, White Cranberry Cosmo, which is hitting store shelves in the U.S. I'm also delighted to tell you that we're launching Skinnygirl this month in Australia, just 6 months after we acquired the brand and in time for the important holiday season. Our second strategic imperative is building winning markets. As I mentioned earlier, we substantially enhanced and gained greater control of our reach to market over the past few years. Spirits is an industry where the best strategic moves are often alliances and we amplify our scale in select markets by aligning with key strategic partners, combined with rigorous and locally relevant brand activation, these partnerships enable us to drive profitable growth across our 3 global regions. So, for example, we've strengthened our industry-leading distribution footprint in Australia with Coca-Cola Amatil, within we established a new long-term manufacturing and distribution partnership early this year. And we're very pleased with the results of this enhanced relationship. It's helping us strengthen Jim Beam's position as the #1 spirits brand in the world's #2 bourbon market, we've made Canadian Club Australia's fastest-growing spirits brand and the rollout of Skinnygirl in this first international market will be well-served by the strong partnership. We've also recently strengthened our reach-to-market in new or enhanced alliances in the emerging markets of China and Brazil and as of January, we plan to consolidate distribution of our full portfolio in Mexico with a performance-based partnership that will bring sharper focus to our brands and a very attractive market for us. These partnerships are an excellent complement to our distribution in other key markets, including our powerful U.S. sales organization and performance-based contracts, our alliance with the Edrington Group in 20 global markets and our company-owned bottling and distribution in markets like India, where Teacher's is the #1 scotch brand and where our investments are paying off in strong profitable growth. Our first strategic imperative is fueling our growth, which we seek to accomplish by optimizing our supply chains, designing products to maximize value for money for consumers and exercising disciplined cost management as well as by building an organization that's both more effective and more efficient. Through a continuous cost improvement, we aim to save 1% to 2% of our COGS and SG&A each year. These savings help us offset ongoing cost increases and invest in our growth initiatives. Here in the fourth quarter, we've just completed a significant supply chain initiative by consolidating our U.S. bottling facilities. Specifically, we've relocated work performed at our Cincinnati plant into our facility in Frankfurt, Kentucky, delivering significant logistical advantages, cost savings and innovation benefits. And we've also just begun in-sourcing some of the production of Skinnygirl cocktails. We're also pleased that our organization is performing efficiently and effectively. Over the past several months, we seamlessly integrated and expanded the headquarters' functions we need to operate as a public company, including building out our finance, audit, IT, legal and corporate affairs capabilities with talent from both Fortune Brands and other leading companies. And we accomplished our transition to public company readiness in very short order. So with the strategy I've outlined, we're now focused on leveraging our current marketplace performance and financial strength into profitable long-term growth and returns as a stand-alone public company. And let me also underscore that while our business generates strong free cash flow, we had hit a disciplined returned revenues of our financial resources. Our first priority for the use of cash is high return internal growth, we also evaluate high-return acquisition opportunities versus share repurchases, we returned immediate value to shareholders through an attractive dividend and above all, we intend to continue Fortune Brands' long-standing commitment to strong stewardship of capital. Now before I turn things over to Bob, a couple of comments on the global marketplace. The spirits category is one that performs well in most economic conditions and we're obviously keeping a close eye on our markets and consumer behavior. Factoring in the puts and takes of various markets, we continue to expect that our global market will grow at a low single-digit rate in 2011. The global market is supported by continuing solid growth in the United States and strength in the emerging markets of Asia, Central & Eastern Europe and South America and we're performing very well in these areas. We're seeing gradual continued premiumization in the U.S, with innovations helping to drive heightened consumer interest in categories like bourbon and flavored vodka. At the same time, economies and market conditions in Western Europe are more challenging, we're more than holding our own. And naturally the key fourth quarter holiday selling season will be important. But we like our competitive position. So now with a closer look at our third quarter and year-to-date performance, here's our CFO, Bob Probst.

Thanks, Matt. As Beam emerges as a stand-alone business, we recognize there will be a sharper external focus on Beam's financial performance. Beginning today and going forward, I'll explain the drivers of our results and any significant factors impacting quarter-to-quarter comparisons to give you a clear picture of our reported and underlying performance and most importantly, how we're tracking against our full-year targets. Specific to today's results, there are a few items that impact our top line and operating income comparisons between Q3 and Q4 and I'll summarize the impact of those before I conclude. I'll begin by reviewing Beam's numbers for the third quarter on an adjusted pro forma basis. I'll touch on the Q3 results for the former Fortune Brands structure in a moment. As a reminder, adjusted pro forma is defined as Beam results before charges/gains, adjusted to assume that Beam was an independent business as of the beginning of 2010, including the impact of public company corporate expense, Beam's tax rate and the benefit of the debt reduction associated with the separation of Fortune Brands businesses. It's also adjusted for the onetime start-up benefit of the new Australia spirits distribution agreement we've discussed in prior quarters. Reconciliation of our results appears on the tables attached to our news release and on our website. For Q3, Beam's net sales were $707 million, up 10% to our third quarter record. Sales were up 12% on a comparable basis, which excludes excise taxes and adjust for foreign exchange, acquisitions and divestitures and the ongoing impact of the transition to our new Australia distribution model. A few points to make regarding the sales line. The top line in Q3 benefited from the timing benefits that Matt highlighted earlier, very strong shipments of Skinnygirl Margarita as supply caught up to demand and the new distribution model in Australia has shifted some sales from Q4 into Q3. Higher volumes and improved product mix driven by innovation, as well as the significant year-over-year growth of the Skinnygirl acquisition were drivers of our strong underlying sales growth. Once again, sales grew faster than case volumes, reflecting positive mix as pricing was relatively flat in the quarter. And we had an easy comp in Q3 as we lapped the year-ago quarter that was up just low single digits. On a year-to-date basis, adjusted pro forma net sales are up 10% and are also higher by 10% on a comparable basis. We're very encouraged by the broad-based growth we're driving in the marketplace. Again, our sales goal is to outperform our markets that we see growing at low to mid-single-digit rates, long term. So naturally we don't see double digits as our long-term run rate at the top line. But we are pleased as Matt mentioned that we're continuing to outperform our 2011 low-single-digit market even before the benefit of the Skinnygirl acquisition. Beam's operating income for the quarter was $142 million, up 4%. As we told everyone to expect, operating income was impacted by our strong double-digit increase in brand investment, start-up costs related to new products and higher commodities costs. The timing of product and market mix within our Asia Pacific South America region also impacted OI growth in Q3. Year-to-date, Beam's operating income was up 3%, reflecting the start-up cost for our new products, higher cost for commodities without the offsetting benefit of price and the impact of the strong double-digit increase in 2011 brand investment that we've discussed. We continue to expect that commodities cost on a full-year basis will be a headwind in the range of $15 million to $20 million. At the same time, we anticipate our full-year FX benefit in the range of $15 million to $20 million. That's down from our prior estimate of $20 million to $25 million of benefit. Given the impact of our strong sales and operating income, we're now targeting full-year operating income to be up at a low to mid-single-digit rate even with the less than originally anticipated benefit from foreign exchange. That's up from our earlier target of low-single-digit growth. Turning to net income. Beam's adjusted pro forma net income for the quarter was $83 million or $0.53 per diluted share. That's up 13% from $0.47 in the year-ago quarter. EPS reflects the benefit of approximately $0.03 from lower year-over-year interest expense as a result of our Q1 bond repurchase funded by the strength of Beam's underlying cash flow. Year-to-date, our adjusted pro forma diluted earnings per share is $1.43. That's versus $1.29 for the first 9 months of 2010. Now to close the books on Fortune Brands. Reported third quarter GAAP net income for Fortune Brands was $413 million or $2.67 per diluted share. That compares to $0.66 in the year-ago quarter. These results include the gain on the sale of the golf business and results for the Home and Security business. These numbers also include performance-related Skinnygirl acquisition cost of $25 million, $15 million after-tax and after-tax restructuring related charges of $6 million for items including the consolidation of U.S. bottling into our center of excellence in Frankfort, Kentucky. Also included in these numbers are after-tax costs related to the separation of Fortune Brands businesses amounting to $63 million in the quarter and $78 million year-to-date. Full-year separation costs are likely to be in the range of $80 million after-tax. Turning to our markets and Beam's segment performance. Beginning with fourth quarter results, our first as a stand-alone business, we'll report both sales and operating income for the 3 regions by which we operate our business: North America, Europe/Middle East/Africa and Asia Pacific/South America. As we did last quarter, we'll talk today about comparable sales trends in these segments. In North America, we continue to see consumers trading optimal or premium products including our new product innovations and gradually returning to the on-premise in the U.S. Our estimate for 2011 market growth in the U.S. is in the range of 3%. Our third quarter sales in North America were up at a midteens rate and are up low double digit year-to-date. We saw strong North America growth in the quarter for our bourbon brands, our new product innovations, the Skinnygirl acquisition and the catch-up shipments we've discussed. I'd also highlight that our distributor inventory levels in the U.S. are in good shape. Now turning to our Europe/Middle East/Africa region. Markets in Europe continue to be mixed with comfort trading conditions in Western Europe such as in Spain and the U.K., robust demand for bourbon in Germany and exceptional market growth in Russia, Central & Eastern Europe and the travel retail channel, which we run globally from this region. Our sales in EMEA were up at a low double-digit rate in the quarter, benefiting partly from easy comparisons in Spain due to the timing of the VAT increase in 2010 we discussed last year as well as growth in travel retail. Sales in EMEA are also up high single digit year-to-date, benefiting partly from significant gains in the travel retail channel. Results in the region are also benefiting from strong performance for Jim Beam and Courvoisier, which are helping drive double-digit year-to-date growth in Germany, Russia and Central & Eastern Europe. These gains are more than offsetting relatively flat performance in the U.K. and lower sales in the challenged Spanish market. Our Asia Pacific/South America region includes Australia, the world's #2 bourbon market, as well as the key emerging markets of India, Brazil, Southeast Asia and China. Demand for western spirits continues to grow at a robust clip in these emerging markets. In Australia, the market is slightly higher despite a competitive environment and challenges to consumer confidence. Our sales for the third quarter in this region were up at a high-single-digit rate, benefiting partly from pull forward of sales in Australia that we've previously discussed as well as very strong growth in India. Let me pause for a moment to further explain the impact of our new Australia distribution model because it also affects Q4 sales. As Matt indicated, we've enhanced our distribution in Australia with a new long-term partnership with Coca-Cola Amatil or CCA that shifts from an agency relationship to a distributor relationship. This means we now sell net of distribution cost and excise taxes to CCA. And we also now record revenues earlier based on shipments to CCA rather than CCA depletions to customers. This has the effect of pulling forward some peak Australia summer holiday season sales into Q3 at the expense of Q4. Looking at Asia Pacific/South America on a year-to-date basis, sales are up high single digits. These year-to-date results reflect mid-single-digit growth in Australia, as well as strong double-digit sales gains in India, Brazil and China. Let me also point out that as we saw in Q3 in Australia, the transition to our route to market enhancement in Brazil and China may naturally result in some uneven quarter-to-quarter comparisons in this region over the coming few quarters. At the same time, these distribution arrangements further enhance our confidence in our growth profile in these markets going forward. At the brand level, our news release includes a table detailing year-to-date global sales performance for our Power Brands and Rising Stars as well as aggregate results for our Local Jewels and Value Creators. Comparable sales for our Power Brands were up 11% in the quarter and are up 10% year-to-date, reflecting growth for all 6 of these brands and the success of our increased brand investments. Maker's Mark, Courvoisier and Teacher's are all up double-digit year-to-date, with Teacher's reflecting strong emerging markets growth in India and Brazil. Jim Beam is also delivering its strongest growth in many years, outperforming the global market with a 7% year-to-date sales gain. We also focus investments on our Rising Star brands, premium brands with excellent growth profiles and attractive economics. Sales of Rising Stars are up 77% for the quarter and 57% for the year, with a strong lift from Skinnygirl but also including year-to-date growth for each of our brands in this category. That includes double-digit year-to-date growth for Laphroaig Scotch, Knob Creek and Basil Hayden's Bourbon, Hornitos Tequila and EFFEN Vodka as well as more than 900% year-over-year growth for Skinnygirl against a small 2010 base. Year-to-date sales of Local Jewels and Value Creators are up 1% and 3%, respectively, as we focus our effort in investment on our Power Brands and Rising Stars. A few final items before returning it to Matt. Return on invested capital, including intangibles before charges/gains came in at 7% and excluding intangibles was 23%. That's on a trailing 12-month basis. Our tax rate before charges/gains is now expected to be in the 26% to 27% range, reflecting market mix. We continue to generate attractive levels of free cash flow and to enhance our balance sheet strength and financial flexibility. We're targeting an adjusted pro forma free cash flow conversion rate of 90% or better in 2011. And we continue to see a year-end adjusted pro forma net debt to EBITDA ratio of about 2.5x. Our strong capital structure reflects the inherent strengths of Beam as well as the benefits of the separation of Fortune Brands businesses, including the proceeds from the sale of the Golf business in July and the $500 million spin-off dividend we received from Fortune Brands Home and Security last month. We used these funds to reduce outstanding debt in Q3 by about $900 million in tender offers and we expect about $800 million in additional debt reduction through bond repurchases in Q4. Let me also note that Beam has retained the Fortune Brands dividend, which currently pays out at an indicated annual rate of $0.76 per share, reflecting a payout ratio in the 35% to 40% range. Naturally, there are a lot of numbers and moving parts associated with the separation of Fortune Brands businesses as well as sharper focus on Beam's operations as we emerge as a stand-alone business. So in light of this transition, let me conclude with our full-year expectations for sales and OI as we enter Q4. As I mentioned earlier, there are a couple of items that will impact comparisons in the fourth quarter relative to the 12% growth in sales, excluding excise tax we saw in Q3. We'll be lapping the fourth quarter in 2010 in which the U.S. dollar weakens significantly versus our key currencies to levels largely in-line with current market rates. Therefore, the FX lift we've seen year-to-date will moderate in the fourth quarter. While Skinnygirl continues to expand rapidly, we'll see less lift from the brand in Q4 and in the prior 2 quarters as retail inventory has finally caught up to demand and also due to the seasonal nature of the ready-to-serve margarita category. Fourth quarter results will reflect the impact of timing in Australia that shifted some sales into Q3 and as we noted earlier, our Q3 growth rates benefited from an easy comparison. Due to the adverse impact of these factors on Q4 comparisons, we currently expect to deliver moderate sales growth, excluding excise taxes in the fourth quarter. That said, we're targeting full-year sales, excluding excise taxes to grow at a high-single-digit rate outperforming our long-term goal. At the OI line as brand investment increases, we'll now moderate to a growth rate more consistent with sales and as we benefit from supply chain efficiencies and targeted price increases, we anticipate that operating income will grow faster than sales in the fourth quarter, in-line with the outlook we've previously provided. In summary, the underlying performance of our business is strong and our performance is ahead of our expectations that we laid out for you last quarter. Now back to Matt for some closing comments about our outlook.

Thank you, Bob. While we continue to expect that our global spirits market will grow at a low-single-digit rate in 2011, I'm pleased with our progress as we enter the fourth quarter. We believe the execution of our focused strategy has primed Beam to accelerate profitable long-term growth. As Bob noted, we expect operating income will begin to grow faster than sales here in the fourth quarter and at the same time our strong year-to-date sales performance enhances our confidence in our full-year prospects. And as a result, we now expect to deliver full year-end adjusted pro forma diluted EPS towards the high end of our high single-digit growth target range against the base of $1.92 in 2010. We look forward to providing our 2012 EPS target range during our fourth quarter conference call in early February. As we look ahead, our confidence in Beam is underpinned by the strength of our team, our portfolio of growing premium brands, our balance sheet and our attractive cash flows, all of which give us the ability to be a lead player in the dynamic spirits industry. So I'll conclude where I began. Beam is off to a strong start. We have 216 years of heritage behind us and a promising future ahead of us. And as we look ahead, we'll remain focused on 2 things: our mission, to craft the spirits that stir the world and our commitment to you to create long-term shareholder value. Thanks again for joining us and for your interest in Beam. Bob and I would now be pleased to respond to your questions.

[Operator Instructions] Your first question comes from the line of Tim Ramey, D.A. Davidson.

I wonder if you'd -- if I missed it I'm sorry, but did you say what the core White Label Jim Beam growth was and what the addition from Red Stag might have been, relative to that?

It's Matt. No we didn't, actually, brought that out. We've described our brand at a total level. Certainly we've been encouraged by the underlying growth of the White Label business we've seen in markets like the U.S. this year but we actually aggregate the total brand, that's very much in-line with our approach towards brand building where we believe the innovations are very much part of building out the overall brand performance.

I think it's fair to say, Tim, that Jim Beam White, though, has been growing clearly with the total family growing at 7% year-to-date, which we quoted the White business has to be growing healthily, which it is. So we're very happy with its performance this year.

Great. And then on Skinnygirl, if I interpreted your comments correctly, you will still have -- you don't think this trade load significantly borrows for next year's growth, is that correct? Or how do you characterize this third quarter bump in sales so that we can better understand the impact on next year?

Yes, let me just give you a sort of framing of Skinnygirl, Tim, it's an important one. I think it remains a very important growth engine for both the category and for Beam and we're certainly seeing that the brand health continues to be strong. We're seeing growth in penetration and repeat purchase and brand purchase as we go through into the fourth quarter. Clearly, I mentioned the fact that there is this seasonality, I think if you looked at the sort of margarita ready-to-serve category, you'd probably see an index in the second or third quarters of 125 versus probably a 75 index in quarters 1 and 4 and combined with the fact that, that was the point in which we enabled our customers to replenish their stock. That's what -- the point we're making there. I think the good news looking forward is we're going to continue to build the brand out, we're broadening it at the shoulders, we've launched the sangria product, we've got the White Cosmo product to come along in time for the Christmas season and certainly we think it's a platform we can do more with both to fill out the offering of low calorie cocktails in the U.S. and maybe take it to other markets beyond the Australian introduction I spoke of. So going forward, we've got some big numbers flat no doubt next year, but we continue to see this as a strong asset and a growth driver for the business. Bob, do you have anything to add?

Let me build on that, Matt. As we think about the full year, Tim, and I mentioned that we've targeted high-single-digit growth for sales excluding excise for the full year, as we look at that, clearly, first is it's well ahead of our low-single-digit market growth and obviously we're very pleased with that. And as we unpack it, Skinnygirl is worth about 3 points of that growth. So even before Skinnygirl, we're clearly performing well ahead of our low-single-digit market growth, innovation clearly an important driver of that, but obviously Skinnygirl an important contributor for the full year.

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

First, just in terms of the benefit that you experienced in Q3 with the timing benefit both in the U.S. and then the Australia, can you just quantify that number for us?

This is Bob, Judy. There's a lot of puts and takes here in Q3 and Q4. We mentioned the number of those relative to the 12% growth rate we saw in Q3. So whether it be the FX lift we saw year-to-date moderating the Skinnygirl impact, finally catching up with demand, the timing shift in Australia and an easy comp in Q3 and indeed in Q4 a comp of about 6% on a comparable sales basis all in, you look at those with obviously some significant movements between the quarter and not unusual in our business or uneven as it is pretty inherent. That's why we moved you to 2 things: one, the expectation that we'll deliver moderate sales in the fourth quarter as a result of those things, but really we think the best measure for us as we step back is to look at that full-year sales performance and that high single digits growth rate that I quoted.

Okay. And then I guess then just sort of within the same context, if you think about that's high-single-digit growth that you're getting this year and then even excluding Skinny, you're outperforming the market pretty nicely this year. I guess how much of that do you think is really the 20-plus percent sort of brand investment that you've put into the marketplace this year? And then when you kind of look out for the next few years, this brand investment is now moderating, do you think that, that gap versus the overall market growth will start to narrow? Or do you think that you have enough of the brand equity, the innovation pipeline that gap versus the market growth will continue at a level that we've seen in 2011?

It's Matt. Obviously, we've been very encouraged by the momentum we've seen in the marketplace and certainly we've been growing ahead of the market as Bob said there is a significant contribution there from the impact of Skinny but also the underlying performance has been growing and it certainly benefited from the turbocharge of brand investment. But we do see a lot of growth opportunities in our business. As I said in my comments, we think the focus now of that brand is a testament on our Power Brands and Rising Stars. The continued roll that we see of innovation and then the overall reference to the growth algorithm we talked about in our road show, where we will drive those 2 portfolios of brands, Rising Stars and Power Brands in their core markets. The growth through innovation and then the incremental contribution of driving our growth through the emerging markets is certainly something, which I think has primed us to drive sustainable profitable top line growth and I think the benefits of all the investments we've made in route to market and brand investment will help us sustain long-term profitable growth.

Matt, can I just follow up on Skinny and just, as you think about launching that brand in Australia, how do you think about sizing the potential Skinny in markets like Australia? Do you think it could be similar to the U.S. or are there any dynamics that might be different, whether just the consumer behaviors or the competitive backdrop that give you more confidence or less confidence just in terms of the Skinny contribution in markets like Australia versus the U.S.?

Yes, I think there's a number of factors there, Judy. Obviously, the brand is a very strong brand and we know this from our tracking on its own merits and the intrinsics of Skinnygirl and the proposition of low calorie cocktails without compromise, it's something that's very appealing. But clearly, and our great relationship with Bethenny Frankel has been an extra factor in the U.S, her show is on TV in Australia, we're getting all of the tweets from women in Australia saying come on down to Australia, Bethenny. So we see it as a factor. But I do think that the market plays fair to your specific question's encouraging, ready-to-serve is growing. It plays into the convenience and premiumization trends we're seeing in a number of markets. If we look at other categories, you would look to markets like Australia alongside the U.S. as a market where low calorie offerings do very well. And clearly as we go into a holiday season there as we're heading the summer peak and launching in time, it will be a great opportunity to see how it goes. It's difficult to size it relative to the U.S., it's a new venture for us but we're confident from our research that the fundamentals are going to apply that as well as they will in the U.S. The size of the opportunities that generates, we'll obviously be very encouraged to see how that tracks and come back and comment on that as we go into next year.

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

I'm curious about your outlook for holiday as you think about promo and your own promotional investments as well as the competitive landscape. I was encouraged to hear you talk about selective price increases to offset commodity cost in the ACNielsen data that we saw on Monday. I, at least, was a little bit surprised to see volume growth decelerate in the category as pricing accelerated. So, as you think about holiday, pricing promo and kind of the consumer sensitivity to price increases given kind of the uncertain times, please.

Certainly, Vivien. Let me just sort of [indiscernible] a little bit of the background that you've put in your question then talk specifically about the holiday. The U.S. market, as we've seen, we continue to hold with our forecast of the market, we'll grow in the 3% range at the full year. Obviously, a little bit of slowing but certainly continued strength in the Napket channel and certainly -- we certainly will hope for that forecast. The nature of that growth, if you look at the most recent reads, about 3/4 of the growth in the U.S. market is coming from volume. Price is pretty flat and mix accounts for the other 25%. In Beam's case, our numbers are slightly different. Our volume probably accounts for about 60% of the growth we're seeing, we're slightly ahead on price which we're very encouraged by and we're seeing about 35% of our growth coming from mix. So certainly we're seeing an environment where price isn't moving ahead strongly. I think the price mix is coming very much from the mix line, but certainly our price is holding steady. Our sense looking at the holiday season is that we are seeing probably similar or potentially more moderate price competition as we enter the season versus last year. Obviously, there's some time to go but we're encouraged by that. There are certain pockets in the category, clearly, where you see more promotional intensity. A segment like tequila will be a case in point. But that's probably due to the more specific supply dynamics, but overall we see a reasonable price environment from a promotional opportunity point of view but certainly we don't see price significantly at the headline level moving significantly this side of the holiday season.

And as we look at our sales volume and mix contributions, really parallel, what Matt said. Our growth in the U.S. is really driven by volume, first and foremost, have been in the mix benefits we've been seeing as a result of the innovations and premiumization we've been driving. And as I mentioned, pricing relatively flat for us in the quarter.

But certainly, the last comment I'd add to that, Vivien, is obviously, I know there's been a number of comments in the past couple of quarters about where we are in price and we're certainly encouraged by the fact that our price is now slightly ahead of the market as we look at the most recent market reads.

Understood. And while I know you guys are going to offer your FY '12 guidance next quarter, can you give us some color on your outlook for commodity cost because certainly you’re pricing, that will be influenced by your expectations there.

Sure, Bob here. And as you rightly say, we are going to provide guidance in February and are going through our budgeting process now. But qualitatively as you know, we are able to look at our balance sheet and our maturing inventory and see what costs are likely to roll off the balance sheet and as we've quoted this year, we had about $15 million to $20 million of commodity cost decreases in the year. As we look ahead to '12 specifically, we continue to see commodity cost headwinds, albeit easing somewhat from that number, but they're still real. So we're obviously very actively engaged in driving supply chain efficiencies, as we've mentioned the Frankfurt consolidation as one example, and clearly, as a way to offset those headwinds looking at 2012.

Your next question comes from the line of Todd Duvick, Bank of America.

Had a quick question for you on the balance sheet. You talk about being down to net debt to EBITDA of about 2.5x by the end of the year. And I've also seen earlier comments about your acquisition appetite that you will be opportunistic with respect to acquisitions. Can you just tell us how you're thinking about acquisitions and financing and how much you may be willing to flex your balance sheet either from a debt to EBITDA standpoint or from a rating standpoint?

Yes, we'll take a very disciplined approach towards acquisitions. I mean we're highly returns focused. And therefore, we are looking at acquisitions very much through the lens of the returns it will give us and certainly you won't see us in a position of buying growth. I think the best examples of the acquisitions we've done that meet those criteria are some of the bolt-ons where we can leverage our supply chain, our reach to market and our brand building capabilities. And certainly those are the ones that we would see ourselves focusing on and -- but we'll look at various levels of acquisition but only if it delivers return back to our shareholders.

From our perspective, it's important to be solid investment grade. We think that offers financial flexibility to us and also the lowest cost of capital. So we're pleased with the capital structure we have today. We're keen to maintain that investment grade rating and clearly, as Matt said, that's where we're very focused on, on returns and the opportunity and M&A would be very much focused against driving returns, while at the same time being mindful long term of that capital structure target I quoted.

One more question from the line of Jamie Oswaldo [ph], Deutsche Bank.

I've got 3 questions around innovation, actually. The first one, whether you think there's any constraints to keeping innovation levels at the sort of where we are currently in terms of either sales force or marketing ability, et cetera and can we keep up this pace of innovation through next year, for example? Second question, in terms of innovation pipeline, how much visibility do you have in terms of new products to come to market in the next, I don't know, 18, 24 months? And then lastly, it's sort of bit of a theoretical bigger picture question, given what's going on in the spirits industry in the U.S., do you think there's ever such a thing as too much innovation?

It's Matt. Here, let me just take each of those 3 parts. Certainly constraints to keeping it going, we've put up a growth algorithm out there for our top line, which says that innovation will occupy about 25% of the incremental growth of our business on a go-forward basis. As I've said in my comments, we've beaten that target this year and we certainly see the opportunity to sustain that going forward. I would make a comment there, it's very important that we look at innovation in a very strategic way. We have a mantra in BEAM which is called Borrow and Build, any innovation must borrow from both the parent equity and the economic power of the parent brand but almost is filtering back to it, we want innovations to be accretive at the gross margin level to help premiumize the portfolio impaired in the medium term and also they have to add back some elements of sort of brand equity D&A. And so, that's the lens through which we put them and that's the nature of the innovations we do. And if you look at things like Double Scotch by Jim Beam or Red Stag, I think they're good examples of hitting both of those criteria. Going into '12, we certainly are excited that we can continue the momentum. We've announced recently some big opportunities to really sustain our growth, while building upon our flavor expertise and our speed to market as competitive strengths and felt very much to be focused on as I said our premium brands, our Power Brands and Rising Stars and the mantra premiumization. So, for example, we have launched -- or were asked to launch some new flavors into Red Stag, which we think will broaden the shoulders of what is a very exciting continuing growth opportunity in flavored bourbon. We're doing some exciting work, as you know, at the moment in Courvoisier by bringing Rosé and new cohorts into that business, very encouraged by what we've seen in our new launch of Pucker Flavored Vodka and we're going to buildout the shoulders there, as well as super premium brands like Knob Creek, et cetera. So we've given our distributors a pretty rigorous briefing of what we're doing there. I'm also excited by the fact that we're going to really start to push some of these innovations globally. I spoke in my comments about Red Stag being driven around the world. Devil's Cut has obviously got on to a fast start in markets like Germany and we talked just now on the call about the Australia of Skinnygirl. So the visibility is there and more importantly, the pipeline is full. And I'll tell you that we've got more than we can launch. And that really as to your last comment about how much is too much and how much can you do. I think that one of the disciplines we're trying to bring to this whole business is some of the tools such as revenue management, category management, key account management. And therefore, helping our customers manage their shelves, manage their stores and ensuring that we are taking out as well as putting in. We're doing things which are accretive to the category. Our jolt for our customers is to bring new users and new users occasions to the category that's why Skinnygirl, I think, has been such a success for them as well as for the consumer. And very much so that is the criteria by which we take [indiscernible] and they expect us to do that. So I would say going forward, I feel confident, I think it's an advantage for us, and I do see continued growth from our innovation pipeline.

No further questions at this time, sir. Turn the call back.

Thank you, Beth. Well, on behalf of the 3200 people of Beam worldwide, thank you for joining us. We look forward to continuing to execute against our strategy and our first quarter as a stand-alone spirits company. We'll discuss our 2011 results and our outlook for 2012 with you in early February. Thank you.

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