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…

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…

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…

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.

Thank you for participating in today's conference call. This call will be available for replay beginning at 1 p.m. Eastern time today and available through November 7 at 11:59 p.m. Eastern time. The conference ID number for the replay is 19839755. The number to dial for replay, 1 (800) 585-8367 or 1 (855) 859-2056. Internationally, +40-4-5373-3406 [ph]. This concludes today's conference call. You may now disconnect. Thank you.