Beam's CEO Presents at 2013 Barclays Back-To-School Conference (Transcript)

| About: Beam, Inc. (BEAM)

Beam, Inc. (NYSE:BEAM)

2013 Barclays Back-To-School Conference

September 04, 2013 02:15 pm ET


Matt Shattock - President and Chief Executive Officer

Bob Probst - SVP and Chief Financial Officer


Michael Branca - Barclays Capital

Michael Branca - Barclays Capital

The spirits category has certainly been one of the faster growing areas within the broader CPG universe, and our next presenter, Beam, has certainly been a large part of that story. With their core and the American whiskey category led by Jim Beam and their healthy stable and strong brands, it would seem that we are in the early innings of this growth transformation within the global beverage alcohol. We're fortunate to have Chief Executive Officer, Matt Shattock, joined by CFO, Bob Probst, and Investor Relations, Tony Diaz, here with us today to discuss their vision for the future. And with that, I'll hand things over to Matt.

Matt Shattock

Thanks very much indeed, Mike, and good afternoon everybody. It's good to see you. I am delighted to be joined by Bob and Tony. We'll spend about 25 minutes going through a presentation and leave some time for Q&A, and then obviously there's a break and afterwards we'll be delighted to see you there.

If I could so just turning to this first page, take us with the Safe Harbor statement, and then take that as read and move into our presentation. It's very interesting because it was two years ago that the Barclays Back-to-School Conference was one of the key foundations for our roadshow where we became a standalone public trading company as we broke away from Fortune Brands, and really just a summary here of some of the themes of this presentation about the progress we have made in that period.

We have been executing our strategy very single-mindedly focused on creating sustainable shareholder value, and the candidates [indiscernible] are really creating famous brands, building winning markets, and fuelling our growth. It's just a headline. The work we have been doing and in a moment the results and we'll unpack those further as I go through the presentation.

When it comes to creating famous brands, we've really been focusing on our big assets, we call them our global Power Brands. They are the vehicles through which we sought to outperform through investing and building brand equity and driving growth through innovation and really creating a set of brands that we will sustain this for the long term in this very exciting and dynamic global category. At the same time, our leadership of the fast-growing and very dynamic bourbon category has been a key tenant in what is our heartland market.

When it comes to building winning markets, we have been enhancing our roots to market both in terms of our core assets, the U.S., Australia, Canada, Germany, and the like have been very much the main space of our business, and at the same time, we've been focusing a lot of our attention on creating new sources of growth, primarily in emerging markets such as Mexico and China and Poland, but also in developed markets where we thought we had headroom for growth such as in Japan.

And then the third leg of our strategic stool is fuelling our growth. We have been delivering a lot of rocket fuel to both offset the headwinds of cost inflation but also to generate the investment to put into our business, it's an ongoing fragment of both efficiency and effectiveness measures that spans our end-to-end supply chain from creating shared services centers, bottling plant consolidation, the introduction of Lean to all of our plants, and a stepped-up and much more professional procurement function. At the same time, we have been driving organizational effectiveness through building better capability and making sure we strengthen the bench of talent which is very much a hallmark of the Beam team.

And finally, we've been very conscious of the fact that it's our job to be strong stewards of capital, and that's certainly an inheritance that we brought to our business from Fortune Brands. And so we strengthened our portfolio in 2012 with two bolt-on acquisitions in key categories and white spaces for us in vodka and Irish whiskey, and at the same time we divested certain non-strategic assets along the way. I'm pleased to say that we've now got to a point where our debt-to-EBITDA ratio is back to 2.7 times, roughly the same level it was before the Pinnacle acquisition. So the balance sheet is in good shape.

And that's been helped by the fact that we continue to deliver strong earnings to free cash flow conversion, and that's two dividend increases since we've been a public company, and we also executed a bond financing successfully earlier in the spring as well as most recently coincident with our debt-to-EBITDA ratio of coming back to that level of having our Board re-up our authorization to share repurchase.

The result is that we're seeing strong underlying performance in our second quarter results that we announced just about a month ago. We announced 5% comparable sales growth in the second quarter which was reasonably widespread across volume, price, and mix, and we outperformed what we estimate to be our 3% market, and that's on the back of a level of growth at about 6% level in 2012. In line with our roadshow commitments a couple of years ago, we are leveraging our sales growth through our operating income and earnings growth, and this year we have again confirmed in our earnings release for the second quarter that we will target a rate of growth for earnings per share this year in the high single digit range.

So let me step back and unpack that story a little bit for you, and do so through the lens of our three pillars. So before I do so, I think the most important start point for our story is the story of our industry and we do compete in a very attractive and very dynamic spirits industry. And fundamentals we believe are not just the characteristics which make it a factor today, we think it will sustain the attractiveness of this industry going forward.

So with sustained share growth from beer, we've seen about 50 basis points per annum conversion in North America from beer to spirits and we see that continuing. It's a business that's seeing favorable premiumization trends and you can see the growth of that in the mix in the market and the trend towards higher price points and higher value-added products. Consumer interest and innovation is high, it's been heightened in the past couple of years and we and others have been driving growth through innovation in a very strategic and brand building way.

At the same time, there is rising global appeal in general for brown spirits and particularly we're very excited about the growth prospects of bourbon which continues both in the U.S. and internationally, again great traction. And finally, this is an industry which has shown itself, and just so in the last downturn, to be pretty resilient to the economic cycles and the ups and downs that we see in the macro economy.

And within that, we operate from a position of strength. We are the fourth largest premium spirits company. We are number two in by far the biggest and most profitable market in the world, and that's the U.S. We have a strong presence in key international markets, and as I said, we augment that through strategic alliances, and I'll give you some more examples of that in a moment.

At the same time, we're the world leader in bourbon. Bourbon accounts for about a third of our sales and we are also number two globally in the premium tequila market and we have got excellent positions in all key categories. In fact if you add bourbon to other brown spirits such as cognac, such as Canadian, such as Scotch, about two thirds of our sales come from brown spirits, the remaining third coming from [indiscernible] whites, so we have vodka, we have tequila, we have [indiscernible]. So there is a good and balanced portfolio which sets us up well to compete in the markets around the world.

Our overall scale, we're a $2.5 billion business and we operate at a 30% EBITDA margin and therefore our growth algorithm is sustained profitable growth leveraging that very strong rate of profitability at the bottom line. And culturally, I would describe our business as a pretty unique combination of scale with agility. We believe that we leverage that number four position in the global marketplace, and at the same time, we have a culture which is about entrepreneurism, it's about empowerment, it's about innovation, it's about being fast-moving, and within that, we try and blend the best of the CPG world and bringing some of those best practices today with some of the team and some of the capabilities we're introducing to our business, but at the same time we have a very deep, respectful, and a very unique characteristics in the spirits industry upon which this business expanded and which has made it so successful and profitable in the industry over many years.

So, as I said, if we look at our strategy, the headline, we have been operating this strategy for about the past four years since 2009. It's anchored to a very simple vision which is to craft the spirits to stir the world and it's build as I said on the three pillars of creating famous brands, building winning markets and fuelling our growth, all laddering up to our commitment to deliver sustainable, profitable long-term growth and returns to our shareholders.

So let me just delve into that and unpack a couple of key facets of each of those pillars of the stool to give you a little bit more enlightenment about what we have been doing at Beam. The first leg is clearly around creating famous brands, and you can see here, we've had this now for several years, a pretty clear segmentation of our brand portfolio at a global level. The heartland of our business or our Power Brands, you can see them on the left of the chart, they are seven in total. Those are big brands, they are international, they are the brands that we've been investing in significantly over the past several years, and they are the vehicles through which we have driven a lot of our growth through innovation, and they are the brands, and I'll show you in a moment how we will do this, that we will use to open up the emerging markets. They are the bedrock of our business.

Next to them you can see our Rising Stars. Rising Stars tend to operate in the same category segments as the big brands, they are at higher price points, and they are the brands that are tapping into the premiumization trends. They have higher gross margin, strong growth prospects, and because of that profile, we are investing in them ahead of growth because we know in the long term that will give us good returns and hopefully some of them will be the Power Brands in the future, and you can see some examples there of our small [indiscernible] bourbon, our premium malt whiskey, Laphroaig , our Irish acquisition, our Hornitos Tequila, so very important assets to the business.

On the right hand side of the chart, you see two other clusters. Our Local Jewels, they have big regional scale, and in some cases, act as Power Brands in their local markets, the case of Larios and DYC whiskey in Spain being very good examples of very strong and very powerful and profitable Local Jewels.

And then to the right then you see what we call our Value Creators. They tend to operate at more economy price points, they give us good scale, and they give us good overhead absorption, and they provide in turn the rocket fuel to fund the most strategic parts of the portfolio on the left-hand side.

As I said earlier, growth through innovation is an important part of our growth algorithm. About a quarter of our growth as you can see here we target to come in the long term from innovation, and we operate here with a very strict discipline that we believe innovation is about strategic brand branding and we have a thing which we call our 'borrow/build' mantra. For innovations to be allowed into the marketplace, they must borrow from the scale, the awareness of the big brands so that the consumer can make sense and trust innovations, but also the economic power, the ability for the brand to actually devote advertising communication to make consumers aware of those brands and those new offers.

But at the same time, and that's necessary but not sufficient to borrow, they must also build the economic and equity level. So our margins will be accretive at the top of the P&L in terms of adding gross margins to the brand's profile but also we must add some new element of interest in brand equity back to the mother brands in order that there is a two-way street.

I'm also delighted to note that we have opened up this year our new Global Innovation Center in Kentucky and that's a further augment to our capability in this area and the source from which a lot of the innovations we talk about will come from. I'm also very pleased about the fact that just recently in Forbes review of the most innovative companies in the world across all industries, Beam was named as one of the top 25 most innovative companies in the world, and that's a great reflection of the work of our team in driving that particular strategic thrust.

At the same time, we want to drive growth through building our brands, and so the sort of communication and activation of our core brands is a key element of what we do. We've had now three years of sustained double-digit growth in our brand investment. We now think we are at the right level and so we will go forward from here at the mid-teens levels of reinvestment in brand investment, but at the same time we will continue to focus that investment on the right brands but also on the right media.

You can see two good examples here. We have increased our presence in TV and online video as a medium from 25% to 50% of our advertising budget, and at the same time digital marketing has more than tripled to 35%. So we are using those mediums as tools to really connect with our consumers in the various ways that we need to in the markets categories and brands around the word.

At the same time, I think we are gaining a reputation for being the leading edge when it comes to digital and social marketing, and at the same time, we've been named last year by Ad Age as one of the top 10 U.S. marketers and I was very pleased to see our team this year obtain an Effie Award for our Devil’s Cut initiative which really speaks to advertising effectiveness and the impact it actually had in the market and on the P&L.

And just to sort of close out the perspective on our brands, let's talk a little bit about bourbon. Obviously bourbon is our heartland category. It's our first priority for investment and it's an exciting story. It's the fastest-growing of the large categories in North America and it's entering this year its third year of double-digit growth, which is obviously very exciting for us and for our customers. And at the same time, we are seeing that growth being driven by a number of core drivers, not least of which is innovation. Flavors alone have accounted for about half the growth of the bourbon category in North America in the past couple of years.

And then further we are seeing a trend towards premiumization which is giving us the opportunity to raise our consumer price points and operate at all levels and price points in the marketplace. In fact if you look at the performance of say bourbon versus scotch in North America, still today bourbon probably gets about 75% of the price per bottle of the average bottle of scotch. So we do see good headroom continuing for premiumization in that regard.

A number of factors we think will continue to further that growth. Heritage, the millennial consumer is very interested in the story of American make of spirit, where it comes from and what it stands for, the flavor profile both intrinsically of it being a very accessible flavor and then the mixibility with flavors but also the mixibility with mixers per se, and that versatility we believe is not just relevant for the U.S. market but increasingly as we look to continue the expansion of bourbon globally, particularly in emerging markets we think will be very well to the adaptability of the brand and the product form to the consumers in those markets.

Jim Beam is our number one and our most powerful brand in our Company. It's the name on the door. It's the world's number one bourbon. It occupies the number two position in the broadly defined North American whiskey market. It's the number one spirit brand of any kind in Australia, the world's number two market for bourbon. It's also the leader in the number three market in Germany.

Maker’s Mark is a fantastic brand and continues to go from strength to strength and is really one of the most iconic brands in the spirits industry. And then we also created some years ago the fast-growing small batch category with the launch of Knob Creek, with Basil Hayden and more focused on premium offerings such as Booker's and Baker's.

So, boosting investment behind bourbon as I said has been a key priority for us. We've probably doubled the amount of investment we've put behind our brands in the past couple of years. About half of our capital investment over the past five years has been dedicated towards increasing the capacity for both distillation and warehousing to service the growth. We saw it coming back in 2009 and we are continuing to invest against that and you will see our first priority of our investment is in the organic growth of our core assets and obviously sustained innovation will be the name of the game going forward as a contributor to driving overall category interest and growth.

And if you look at this next chart, what is exciting about this is you can see that if we look at our portfolio, we do believe it advances because it covers all needs, occasions, and price points from products with more reasonable prices all the way up to $50 and more a bottle. And what's exciting, if you look at this chart, for those who can't read at the back, is that if you look 2011 and 2012 actuals, the actual NSV growth rates in those two years, the higher the price point, the faster the rate of growth. So therefore the premiumization is very evident in those numbers and we do feel confident in the prospects of these assets the further we go up to innovation and through the brand portfolio itself.

And then finally we put out a release this morning, we're excited when we are using this conference to announce the fact that we are now ready to Make History. And in fact today Jim Beam is announcing our first ever global advertising campaign for the world's number one bourbon, an exciting moment for us. It's a big brand idea, we spend a lot of time developing it, and it really does resonate globally with our consumers around the world in our core but also in our new and emerging markets, and reflects a great deal of consumer insight, but also it reflects the commitment we have to continue leading investing and growing this category around the world. And the simple idea is that we have been making history since 1795 and hopefully that can be an inspiration for you to make your history, whether that's being having a [number one title] (ph) in pursuing your dreams and leaving your mark on the world, and we find that to be a very resonant and very credible message from a brand like Jim Beam towards consumer, a one that we can adapt to different markets and different mediums around the world.

It will be executed across multiple media, and I can give you a sort of splattering of the ideas here, whether it's on the bottle, whether it's on the point-of-sale, the point of consumption, all the way through to outdoor, Internet and ultimately television advertising. So you'll see the Make History campaign come to life as we go through the fourth quarter and really get into real traction as we go into 2014, so an exciting moment for that business.

Let me shift gears now to the strategy to build winning markets, and I said earlier that we have been investing successfully to strengthen our global routes to market, and we do believe that one of the characteristics of our business, part of that scale with agility management is to invest in mutually beneficial partnerships, and nowhere more so than in the case of distribution. In our heartland market in the United States, we have over the past several years been investing in strong long-term relationships with our core distributors and that's based upon performance based contracts which give us both the growth and returns that we want from that relationship.

And then outside of the U.S., depending on the market and depending upon the need, we've used those partnerships to amplify our scale and we have done that in various ways. One example is we've been consolidating from several distributors in particular markets to one. So for example in Mexico we have now over the last year consolidated our relationship with a company called La Madrilena who have a strong platform in Mexico and now who distribute all of the Beam brands in that market, and the results so far have been very encouraging. Equally in Japan, we had three distribution partners, and as you know in Japan, scale and focus really matters and we are now dedicated in our relationship to [Century] (ph), and they again have done an excellent job in the first year activating [indiscernible] consolidating a more meaningful relationship.

In other instances, we have re-upped existing relationships. We announced last year, we have extended our very productive relationship with Coca-Cola Amatil in Australia. Clearly the delivery system of our brands, particularly bourbon, in Australia is in the ready-to-drink format and therefore having the lead Coke bottler in that market is the ideal partner and we are doing all sorts of exciting things together to create system-based innovation as well as effective core distribution.

And likewise in Brazil, we have re-upped with our partner there, and then in markets like China, we found we needed a new partner and we recently over the past year began distributing with a company called Asia Euro, a big wine importer. They've got the infrastructure and grafting our premium spirits into their portfolio. It made a lot of sense.

At the same time, as well as managing distributors, we want to manage customer relationships, we want to own that relationship with the customer, and so empowering our local teams to really know on the ground in the market who those customers and who those consumers are to be intimate with them and understand how we service their needs is critical, and we have augmented that by building capabilities around customer management and category management and account management, and those are the key building blocks I talked about earlier in terms of some of the CPG best practices which can then be the partner of the traditions of the industry to drive scale and profitability.

And then finally we do believe that in this agility management, local selling and marketing is the name of the game and taking big ideas like Make History but then adapting it to local custom and culture is the way to really drive the global scale to the local agility, and that's something we believe in strongly and we recruit people in our markets to make sure we are able to do so.

In respect to building winning markets, is our approach towards emerging markets. About half of our growth in the long term at the top line won't come from our core brands and our core markets, and as I said, a quarter comes from innovation. The other quarter will come from our emerging markets. And one of the benefits, and I talked about that if you add bourbon with other brown spirits, that's about two thirds of our portfolio, you can see how our portfolio gives us an opportunity there to enter the emerging markets with the most relevant premium western spirit as we see the conversion from local to international spirits. So in a market like China as I'm sure you are aware, cognac has been the entry point and therefore our Courvoisier brand has been the focus with our partner as here in that market.

In markets like India or South America, they are very big whiskey markets and therefore having the leading Scotch brand in India, the number two in Brazil in the form of Teacher's is a great asset. If you go out to Mexico, and clearly that's the home and heartland for our tequila business, still a very strong and important platform on the back of which we do see growth in whiskey, scotch and ultimately bourbon, and so seeding those brands against the local entry point, and then having alongside it, on the right of each of the countries you can see there our big Power Brand, Jim Beam and the long-term opportunity we do see for bourbon in those markets gives us a good one, two punch as we calculate our approach towards driving that particular part of our growth algorithm.

And finally, fuelling our growth, the third leg of the stool. Driving efficiency and effectiveness in all we do is a absolutely critical component of our strategy. In the long-term, our goal is to deliver between 1% and 2% savings across our cost of goods and our operating expense. That's about $1.4 billion number and that's a very important savings initiative ongoing which we use as I said earlier to offset the headwind of cost inflation and also generate the rocket fuel to fuel the growth of our business.

It operates across a number of areas and I'll just highlight to you some of the initiatives that we have been executing over the past year or two. We have opened up this year a new shared service center in Kentucky and that's also been augmented by enhanced information technology. That along with its sister center in Madrid means that all of our transactional services and all of our back-office work can be done from centers of excellence which gives us both better service to our internal and external customers as well as better cost and efficiency in terms of transactional processing.

Pinnacle integration is a good example. As I said, we've conducted two open acquisitions in 2012 and that's all [indiscernible] thrust. They are rooted in strong cost synergies. We made a commitment that we would deliver about 20% cost synergies from those acquisitions. We are on track to do that and we will certainly see the accretion we saw coming from those initiatives this year, earlier as I said in areas like procurement and lately as we consolidate manufacturing into our plants.

Strengthening direct and indirect procurement has been a big initiative for us over the past couple of years as we have been a standalone company. We've built great capability there and the team will continue to work very hard to find the optimum solution to a lot of our opportunities there to drive out scale and make sure that we are procuring our goods and our services for the right price and the right quality.

At the same time, we rolled lean manufacturing to our plants around the world. That process is ongoing and we are seeing that reflected as we grow OEs and other key measures to make sure that we are sweating the assets that we have. And then we have [a product that we call] (ph) designed to value which fundamentally tries to remove cost that are not valued by consumers. Over the past year, we estimate we've removed about 29 million pounds, lb pounds, of packaging from primary and particularly from secondary and tertiary packaging. That's good for our cost but it's also good for the environment and it's a good reflection of our stewardship of our assets there.

So we really are targeting the high end of our savings target this year. We've said and we have got a very big cost headwind this year to the tune of $35 million to $40 million that's falling to the second half of this year. Therefore the ongoing savings initiative is actually equivocal to offset those costs and make sure we sustain the investment in the long-term top line growth of the business.

And finally, let me talk a little bit about our capital allocation. This is an inheritance also from Fortune Brands and it's something that we are very clear about and we stick to very consistently. As I said earlier, our first priority is to fund high-growth internal organic growth and therefore the investment we have made in bourbon is an example, in our brands and our assets there is a great case in point. That will always yield us the best returns and it's the first place we look to invest.

Secondly, we will then evaluate synergy driven acquisitions versus share buyback. As I said earlier, Pinnacle is on track to deliver. We are very pleased with that performance. We have also disposed off this year about $30 million in sales of some of our tail Value Creator brands that weren't giving us the returns that we were looking for. We got about $63 million as purchase price for those or selling price for those. And then at the same time as I said coincident with the fact that our debt-to-EBITDA level is back to about 2.7 times, very much in line with where it was before the Pinnacle acquisition, that was a good moment for our Board to reauthorize our share repurchase program and give us again the flexibility to evaluate share repurchase versus bolt-on acquisitions.

And then a balanced approach of an attractive dividend. We had two dividend increases since we've been a standalone public company. It currently stands at $0.90 and that last increase was actually in January where we raised it by some 10%. And we've had a payout ratio in our dividend in the region of 35% to 40% and obviously each year that's a Board decision but that's the framework we've been working in.

And along the way, we want to maintain a solid investment grade for our business. Why? It gives us the benefits of flexibility. This is a dynamic and unconsolidated industry and our ability to evaluate and seize opportunities as we see them, but at the same time it also does give us the optimum of cost of capital as we look to finance our business, and I will say that Bob and his team have done an absolutely excellent job in that regard with our balance sheet, and so we sit today as I said at about 2.7 times net debt-to-EBITDA.

So in summary, our goal is to drive sustainable, profitable, long-term growth and returns, and we are a 218-year-old business. Our roots go back to 1795 when Jacob Beam first put his bourbon in the barrel in the wall to Kentucky, and yet at the same time our business does have a lot of the energy of a startup and one of the benefits of becoming a standalone company was to engender that enthusiasm and that sense of ownership in our colleagues around the world. We're a leader in what we see as a resilient and dynamic and very profitable and growing industry in spirits and we are committed to creating value through even stronger brand portfolio and entry position going forward and we believe we are well-positioned therefore to maintain our mantra about performance and in so doing in our own way to make history.

So with that, I will pause and hand back to Mike and we can take some Q&A. Thank you.

Question-and-Answer Session

Unidentified Participant

Matt, obviously with the global campaign coming, I was hoping you could dimensionalize for us the international opportunities that you see for Beam and for bourbon and how we should think about the growth for your Company and the investments required to support that growth as you expand further and further into these international markets and how that might impact the margin structure as we go forward?

Matt Shattock

Absolutely. I think as we said, we talk a lot about bourbon through the lens of North America and seeing the double-digit growth but we are also seeing very high rates of growth internationally for our bourbon portfolio, and it takes a number of forms. As I said, I talked about a market like Australia where Jim Beam is the number one spirit of any kind, in a market like Germany where the conversion from local to international spirits has been late, it's been primarily through whiskey and within whiskey, bourbon has been doing really well.

So our business there has been growing very fast and we are seeing that now spill into other whiskey markets. Central and Eastern Europe is a good example, the U.K., we've had a very successful focus on Jim Beam in the past couple of years, and we do see as I said in the long-term, because of the taste profile and the inherent versatility of bourbon, particularly in some of the emerging markets which have more of whiskey but very strong long-term growth prospects for that to come in the wake of scotch and be one of the portfolio whiskey consumer will be interested in.

In terms of the investment and return implications of that, we have devoted a significant fortune of our investment. Again this is our cornerstone and our first priority. I mentioned about half of our CapEx has gone there in the past five years and that's ready to build the distillation and warehousing capacity because bourbonization takes a long time to go from creation to being available for sale, we've got to be farsighted and we've got to put the right capital in there.

At the same time, what we like about it, and I talked about the sort of borrow/build mantra, is that bourbon is a profitable category. It's one of our more profitable categories and therefore the top of the P&L, the gross margin level, both the core business and therefore the innovation we've been putting is accretive and therefore growing bourbon is good for our business and it encourages us therefore to invest in both the brand investment and in the assets and the capital to service that growth in the long term. So it's an important part of the mix and for the foreseeable future we see good growth and it will be the cornerstone and the first priority for our investment.

Unidentified Participant

And then, Bob, in terms of balance sheet, obviously you've maintained down the debt related to the Pinnacle acquisition and your capital structure seems to be in a good place, I know you said you prioritize in investments back in the business, and then the decision tree between acquisitions and share repurchase, could you maybe kind of go through the thought process of how you are going to and the Board considers the allocation of capital and importantly the returning of capital back to shareholders and where does that fit in that scheme?

Bob Probst

Sure. Matt laid out our hierarchy in terms of priorities of use of cash and it does start with organic investment and we have been doing that behind very high return investments in bourbon for example as we talked about, and that will be our first protocol and our best return. We are then looking at the returns on share buybacks versus M&A, and obviously in the last 24 months, as a public company, we have been actively investing in bolt-ons, high return bolt-ons. We are now at this stage where we have delevered to the point that we are at or below the leverage level pre-Pinnacle at about 2.7 times.

So we went to the Board to say we want to have authorization, a routine authorization, to have the flexibility to go into the market to buy back shares. And that will be a decision that's very much based on the choices between M&A and share buybacks to optimize our returns, recognizing as Matt pointed out in the presentation the desire to have a long-term solid investment grade credit rating and return an attractive dividend.

So we will continue to be in dialog with the Board every quarter around those allocation decisions and it will be opportunistic in terms of share buyback, and again it will be in the context of the M&A environment which in this industry is reasonably unpredictable. A lot of privately held businesses and brands tend to come to market unpredictably, as was the case with Pinnacle. We then [indiscernible] sell out. So we want to make sure we have that flexibility to act when we need to, but the approval from the Board gives us the club in our bag to be able to if we want to on the share buybacks.

Unidentified Participant

After a really good start, Skinnygirl had kind of its first off quarter last quarter. I guess some of the concerns might be, was it a fad or how sustainable Skinnygirl is, can you guys provide a little color on that please?

Matt Shattock

I think Skinnygirl, we go up against a period a year ago where we saw really explosive growth. The brand had a very high level of awareness and our partner, Bethenny Frankel, was very helpful in that. We had taken control of the brand and got it into full distribution, began to put investment and brand investment behind it. And at the same time we decided to seize on what we saw as a wonderful opportunity which is in [indiscernible] to take it from ready-to-serve into adjacent segments which are wine and vodka as the two other segments in which we anticipate. We are cycling that, so that's a year on year factor, and there also has been a ready-to-serve market which has been significantly impacted I think this year by weather, and what's unique about ready-to-serve, and it's a bit more like traditional CPG, it's an impulse category and it depends upon high levels of display and merchandising and just to make that impulse and I think when the weather wasn't so good, the retailer naturally didn't give space [indiscernible]. So just know that we are up against that cycle. So that's exactly the strength.

I think as we go through the rest of the season, we will then see as we get to the fourth quarter what the run rate of the brand is, what the size of the underlying size of the business is and where it goes from here. I will say I think we have got a very good brand, it's already been a very good deal for our shareholders in acquisition. I think there is a compelling point of difference and there is a core group of consumers who are loyal to it. Bethenny Frankel, our partner, will be coming back on the [indiscernible] herself with her new daytime talk show which I think will help inject the awareness and excitement that the brand needs, we'll continue to innovate, we are launching [indiscernible] wines for example as we go to the back half of the year. So I think there's lots of good stuff coming Skinny's way. I think what we now need to do is to get to that point of size in that business and rate of growth going forward. So I think we have come up with very high peak but fundamentally I still think we've got a strong and strategic asset.

Unidentified Participant

I was wondering also now if, Matt, you could give us some color on how you see the market and channel trends in the U.S. evolving, specifically dimensionalize what you see on on-premise and off-premise and how is that playing out for the category and for Beam and what are your expectations for it?

Matt Shattock

Sure. We said in our second quarter earnings call that we did see the markets slowed a little bit as we went to the second quarter. We certainly I think have to take the ready-to-serve component because I think as the disproportion of the amount of that slowdown, and we certainly have seen, I think others have commented, that the on-premise has not continued its rate of return to growth that we saw as we enter the year. So certainly those have been interruptions in taking that rate of growth from that sort of 3% to 4% level to the sort of low single-digit level.

We believe that the fundamentals I've talked about strategically for the category overall are going to be the drivers of the industry, and we have said and we do expect to see that U.S. rate of growth in the market to come back as we go through the second half of the year. We need to see that happen. There's no reason to believe we should not, but obviously we along with others will wait to see that come through and hope the consumer does bring that level of growth as those fundamentals drive the level of growth that we'd expect for the category in the second half.

Michael Branca - Barclays Capital

Okay, I think we'll break here and head into the breakout room. Please join me in thanking Matt, Bob and Tony.

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