Constellation Brands, Inc. (STZ) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Constellation Brands Second Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Patty Yahn-Urlaub, Vice President of Investor Relations. Please go ahead.

Thank you, Jackie. Good morning, everyone, and welcome to Constellation's Second Quarter Fiscal 2012 Conference Call. I'm here this morning with Rob Sands, our President and Chief Executive Officer; and Bob Ryder, our Chief Financial Officer. This call complements our news release, which has also been furnished to the SEC. During this call, we may discuss financial information on a GAAP, comparable, organic and constant-currency basis. However, discussions will generally focus on comparable financial results. Reconciliations between the most directly comparable GAAP measure and these and other non-GAAP financial measures are included in the news release or otherwise available on the company's website at www.cbrands.com under the Investors section and Financial History. Please also be aware that we may make forward-looking statements during this call. While those statements represent our best estimates and expectations, actual results could differ materially from our estimates and expectations. For a detailed list of risk factors that may impact the company's estimates, please refer to the news release in Constellation's SEC filing. And now, I'd like to turn the call over to Rob.

Thanks, Patty, and good morning, everyone. Welcome to our discussion of Constellation's Second Quarter Fiscal 2012 Sales and Earnings Results. Now before we get started, I would like to take a few moments to discuss this morning's announcement of Constellation's purchase of the remaining portion of the Ruffino Wine business. Ruffino is an iconic Old World Wine brand, that filled a vital niche for Constellation in the Italian imported premium wine category. Our relationship with Ruffino began in 2004, when we purchased a 40% stake in the company and became the U.S. importer of the brand. In May 2010, we increased our ownership interest to almost 50%. And since that time, the Ruffino brand has become one of Constellation U.S. focus brands. Working together with Ruffino during the past several years, we've accomplished a great deal, driving the Ruffino brand to become the #3 Italian Super Premium wine brand in SymphonyIRI channels and the #2 U.S. Chianti brand with a 50% market share of the Chianti market in the greater than $20 per bottle price point at retail. And according to SymphonyIRI industry data for the last 52 weeks, Ruffino is experiencing 8% growth in U.S. dollar sales with Ruffino's year-to-date global sales growing 9%. Ruffino annually produces about 1.4 [indiscernible] cases of wine, more than half of which were sold by Constellation in the U.S. last year, with the next most important markets including Canada and Italy. In fiscal 2013, we expect to realize incremental sales and slightly accretive earnings, resulting from Constellation's 100% ownership of the Ruffino portfolio. And now, I'd like to turn our discussion to a review of our quarterly results. We've reached the halfway point in the year, and I'm pleased with our progress to date despite growing market concerns related to subdued consumer confidence in the U.S. economy. I am especially pleased with our significantly improved consolidated margin structure and our strong free cash flow results, which have essentially enabled us to fund our share repurchase efforts, while continuing to reduce debt. While we plan to continue to pay down debt in fiscal 2012, we have redeployed a portion of our free cash flow to repurchase our stock. We currently believe that Constellation's shares represent good value, especially as our market momentum builds in the second half of this year, and as we continue to reap the benefits of our ongoing transformation initiatives. In addition, the Crown joint venture continues to outperform the U.S. beer industry and the import category. As expected, depletion trends for our U.S. Wine & Spirits business lagged the market somewhat in the second quarter. This is primarily the result of the following actions. Earlier this year, we took price increases on certain specialty and value products, which negatively impacted volumes. And as I mentioned last quarter, we have changed the gating of our promotional activities in fiscal 2012 versus fiscal 2011 to better align with the upcoming holiday selling season, which will be upon us shortly. Overall, for fiscal 2012, we are targeting promotional dollar spend that is in line with last year, although the timing is different and that it is skewed more towards the second half of the year. It is through a combination of promotional spend and new product development initiatives that we expect to achieve our goal of category growth that is in line with the U.S. Wine & Spirits market for the year. As such, we expect to see improving depletion and market trends as we move through the balance of the year. The good news is that you can already see evidence of this improving market trends for Constellation. At the end of the second quarter, we began to ramp up our promotional spend in advance of the key holiday selling season, and this has manifested itself in the market trends you see in recent IRI data. During calendar 2010, we maintained our U.S. market share on a volume basis in total across all channels. And our intent is to replicate this performance again this year while achieving our profitability goals. An increasing portion of our growth this year is expected to come from innovation and new product development. As a reminder, we have 20 new product launches planned for fiscal 2012, many of which are included in hot categories that are experiencing significant growth. Sample of our new products have already hit store shelves, and are gaining traction as they are now readily available in the marketplace. Those brands that are particularly noteworthy include Primal Roots, a sweet red blend, Rex Goliath Moscato, Ruffino Prosecco, Woodbridge Malbec and the Simply Naked unoaked line of varietals. Our most recent introduction to the new product lineup is the Dreaming Tree brand, a collaboration between Steve Reeder, our award-winning winemaker at Simi and acclaimed musician, Dave Matthews. We are excited about the opportunity for this fun and approachable ultra premium product offering, which will be supported by a robust social media campaign. As is typical at this point in the year, I'd like to provide an update relating to the U.S. grape harvest, which is just more than 50% complete at this point. Although they are virgin estimates from varying sources relative to the expected size of this year's harvest, we are currently estimating that the 2011 U.S. industry harvest will be down 10% to 15%, versus last year's harvest. An early season frost in parts of the central coast and a mild growing season has led to lower yields with tightening supply for some key varietals. And moving on to SVEDKA Vodka. The SVEDKA Vodka momentum continues with the brand posting double-digit completion growth and consumer takeaway trends in IRI channels for the second quarter. This summer, SVEDKA launched its first-ever total portfolio of program entitled Summer of SVEDKA that showcase the depth and breadth of the brand's portfolio during the high-consumption summer months. Overall, we have increased our SVEDKA digital and media investment, and we are introducing new packaging configurations and flavor profiles that are highly innovative. As a matter of fact, SVEDKA Grape was launched in August as the sixth flavor added to the portfolio. Grape is currently a top 10 flavor in the imported vodka category, growing at a rate of about 20% in SymphonyIRI data. By the way, don't forget to purchase your SVEDKA girl fembot Halloween costume, which debuted during the New York Fashion Week, receiving positive press in the Wall Street Journal. Demand is very high for these costumes as they are literally flying off the shelves. Now moving to Crown Imports joint venture. Crown posted positive second quarter results in terms of both sales and depletions, which increased in the mid-single digit range, driven primarily by Modelo Especial and momentum from the continuing brand launches of Corona Familiar and Victoria. Crown experienced strong consumer demand during the busy summer selling season, resulting from the combined success of a number of initiatives including the Corona Win the Beach Promotion, Modelo Especial's VIP Soccer Sweepstakes program and the Corona Extra Find Your Beach advertising campaign. According to SymphonyIRI retail data coinciding with the end of our second quarter, Crown outperformed the total U.S. beer industry, the import category and the other 3 major beer suppliers in both case and dollar sales trends in the food, drug, mass and convenience channels. And among the 4 major U.S. beer suppliers, Crown was the only one to gain case and dollar market share. And earlier this week, Corona Extra was named one of the best global brands for 2011 by Interbrand. As we enter the remainder of fiscal 2012, Crown is focused on market execution and optimizing promotional and market initiatives. Some examples include the continued expansion of the Corona Familiar 32-ounce bottle, primarily in Mexican and Hispanic markets throughout the U.S. Victoria, which is already available in several states, will be expanded to cities that are adjacent to current markets. In addition, new packaging configurations are being introduced for the brand in existing markets. Crown is expanding its draft offerings for the Pacifico, Negra Modelo, Modelo Especial and Victoria brands, which are doing extremely well in existing markets. During the second quarter, Crown depletions for its draft offering increased strong double digits, making this the best quarter in the history of the joint venture for this format. Once again, Crown will be advertising during the National Football League season, which includes advertising on ESPN SportsCenter and Spanish-language ESPN. In closing, we continue to make significant progress in a number of areas despite the prospects of an unsettled consumer environment. We are entering one of our strongest seasonal periods, and I feel that we are well positioned for market execution in order to achieve our goals for the year. I would now like to turn the call over to Bob Ryder for a financial discussion of our second quarter business results.

Thanks, Rob. Good morning, everyone. Our comparable basis diluted EPS for the quarter came in at $0.77 versus $0.52 last year. The majority of the EPS increase was driven by a lower tax rate in the quarter, 3% this year versus 35% last year. Comparable basis EBIT came in $4 million lower than last year, while interest expense decreased $8 million. For the first half of fiscal '12, EBIT is $15 million higher than the same period last year. This is timing related, as we continue to expect a flattish EBIT results for the full year. The quarter reflected a 4 percentage point operating margin improvement driven primarily by the divestiture of Australia and U.K. business. We've generated $478 million of free cash flow for the first 6 months, $215 million more than the same period last year. This strong performance has enabled us to reduce debt by $290 million since the end of fiscal 2011 and utilize $188 million to repurchase shares during the second quarter. I will outline more details on the share repurchases in a moment. Given those brief highlights, let's look at our second quarter 2012 P&L performance in more detail, where my comments will generally focus on comparable basis financial results. As you can see from our news release, consolidated reported net sales decreased 20%, primarily due to the divestiture of our Australia and U.K. business. The North American net sales on an organic constant currency basis were even with the prior year. This reflects favorable mix, offset by a decrease in volume and higher promotion costs in the U.S. Now let's look at our profits on a comparable basis. For the quarter, our consolidated gross margin was 41% versus 36.5% for the prior year. This primarily reflects the benefit of divesting the lower gross margin Australian and U.K. business, partially offset by higher promotion and transportation costs in the U.S. I'd now like to discuss the segment operating income results to provide highlights on our operating income change. The North American segment operating income decreased $14 million to $167 million. The decrease was driven by lower volumes combined with higher marketing, promotion and transportation costs, partially offset by favorable product mix. Corporate costs were down $9 million, primarily related to lower compensation costs in Project Fusion. As a reminder, the Australia and Europe segment reported an operating loss of $3 million in Q2 last year. Equity earnings for Crown totaled $63 million versus $65 million for the prior-year quarter. For the quarter, Crown generated net sales of $727 million, an increase of 7% and operating income of $126 million, a decrease of 4%. The net sales growth was driven by volume growth from Modelo Especial and the roll out of Corona Familiar and Victoria. Crown also saw improvement in net pricing and mix. Higher marketing costs during the quarter more than offset the benefit of higher sales. Interest expense for the quarter was $43 million, down 16% versus last year. The decrease was driven by reduced balances of lower term debt. Let's take a look at our debt position. At the end of August, our debt totaled $2.9 billion. This represents a $290 million decrease from the debt level at the end of fiscal 2011, and was driven by our strong free cash flow generation. The net debt increase drove our debt-to-comparable basis EBITDA ratio down to 3.2x at the end of August from a 3.6x at the end of February. Our continued strong free cash flow generation and deleveraging efforts have created flexibility in the management of our capital structure. This flexibility enabled us to redeploy a portion of free cash flow to repurchase 9.8 million shares at a cost of $188 million during the second quarter. From the end of the second quarter through September 30, the company repurchased an additional 3.5 million shares at a cost of $63 million. In total, we've repurchased 13.3 million shares at a cost of just over $250 million. We expect the repurchases through September 30 that I just outlined to benefit diluted EPS by approximately $0.06 for fiscal 2012. As mentioned earlier, we decreased debt by $200 million for the first half of 2012. In fiscal 2011, we utilized $300 million of cash to repurchase shares and decreased debt by approximately $600 million. Cumulatively, since the beginning of fiscal 2011, we've repurchased approximately 31 million shares or $550 million in a highly accretive manner. During that same time, we decreased debt by $890 million and reduced our leverage ratio from 4.1x down to 3.2x. This activity highlights that our free cash flow priorities are focused on debt reduction and share repurchases, as part of our ongoing efforts to optimize the capital structure of the business. As mentioned earlier, our comparable basis effective tax rate came in at 3% versus 35% in Q2 due to the favorable outcome of various tax items. The Q2 rate came in better than previously expected, and as a result, we're now targeting the full-year tax rate of 27% versus our previous 29% guidance. Constellation's tax rate has varied quite a bit in the recent years. This is due to finalization of various audits by foreign, state and federal jurisdictions from multiple prior periods. As an audit is concluded, the impact of the years under audit is reflected in the rate of the quarter in which the audit was settled. This causes some unusual quarterly tax rates. These tax rate settlements are equally beneficial to cash, as reflected in this year's free cash flow guidance. Several state and federal audits are still underway. The timing and resolution of these could impact our tax rate guidance before the end of the year. Now let's discuss free cash flow, which we defined as net cash provided by operating activities less CapEx. For the first half of fiscal 2012, we generated free cash flow of $478 million versus $263 million for the same period last year. This improvement primarily reflects a reduced use of cash to fund receivables and a cash benefit for taxes. Our receivable balance increased less than the previous year due to the timing of sales and the sale of our Australian and U.K. business. As previously discussed, in Q1, we received a net refund of taxes primarily related to the Q4 fiscal '11 sale of our U.K. business. We continue to target free cash flow for fiscal 2012 in the $600 million to $650 million range. As a reminder, free cash flow in the back half of the year is impacted by the funding of the U.S. harvest and the divestiture of the Australian and U.K. business, as its earnings and cash flow were primarily generated in the third and fourth quarters. Now let's move to our full-year fiscal 2012 P&L outlook. We now expect comparable basis diluted EPS to be in the range of $2 to $2.10 versus our $1.91 result for fiscal '11 and our previous guidance of $1.90 to $2. The increase in EPS guidance reflects the share repurchase benefit and the change in tax rate guidance I just outlined. I would now like to reiterate a couple of items related to our fiscal '12 guidance. As a reminder, the overlap of the fiscal 2011 distributor inventory build from our U.S. distributor consolidation initiative should keep our North American business at flattish organic sales and a modest EBIT growth for fiscal 2012. You saw this in the Q2 results I just outlined, as U.S. domestic shipment volumes were down 3%, while U.S. domestic depletions were down only slightly. We expect the overlap impact to be greater in the third quarter. Turning to the Beer business. Crown is still targeting low- to mid-single digit depletion growth for this year. As we have previously outlined, the JV partners decided on incremental funding levels of marketing and promotion spending by Crown for calendar 2011 and thereafter. This additional investment is expected to drive flat to slightly down operating earnings for Crown in fiscal '12. This marketing spend is more heavily weighted in our second and third quarters. In addition, Crown faces a difficult sales comparison in Q3 fiscal '12 versus Q3 fiscal '11 when Crown sales grew 22% as inventories were rebuilt to more optimal levels after the supply chain issues experienced during the summer 2010. As a reminder, the divested Australia and U.K. business produced about $11 million of EBIT in the third quarter of last year. Given the challenging comparison in Q3 that I just outlined, we expect Q3 EBIT to be down approximately 15% to 20% versus Q3 last year. I would also like to note that interest expense is still expected to be in the range of $180 million to $190 million, even with the funding of the share repurchases. As a reminder, in fiscal 2011, we entered into a delayed start interest rate swap that just became effective in September 2011. It fixed the LIBOR rate before borrowing margin at an average rate of 2.9% or $500 million of term loan debt. We expect weighted average diluted shares to now approximate $210 million versus our previous guidance of $216 million. This reflects the benefit of share repurchases made through September 30, but excludes any repurchases of common stock that may occur subsequent to September 30. So exclusive of the shares and tax rate, we're essentially maintaining the comparable basis guidance we issued at the beginning of the year, which given the current economic sentiment is a positive. While we are behind the market from a depletion and consumer takeaway perspective, we expect to pick up this lost ground during the key holiday selling season. Our free cash flow remains quite strong, and we've utilized it to further deleverage while buying back a significant number of shares. The accretion from these share repurchases and from our lower tax rate has been reflected in our increased EPS guidance. With that, we're happy to take your questions.

[Operator Instructions] Your first question comes from the line of Tim Ramey with D.A. Davidson. Timothy S. Ramey - D.A. Davidson & Co., Research Division: Just remarking on the strong reduction in corporate and unallocated, and you chalked that up to lower corporate expense and the cost reduction program. Should we think that, that level is somewhat sustainable in the $19 million, $20 million a quarter, or will that go higher?

Tim, I think that the cost of that versus the prior year I think is sustainable. Most of that decrease is due to the overlap of some compensation costs last year. So we do think that, that run rate will persist for the balance of the year. And we should see a reduced corporate cost for the full year. Timothy S. Ramey - D.A. Davidson & Co., Research Division: And just, Rob, maybe if you could just comment on what you think the overall picture is for wine sales for the category. You've been pretty pressing in on that for the last 18 months to 2 years. I'd love to hear your thoughts.

Yes. We think that the category is actually pretty robust right now. You can see that in IRI and Nielsen. A few trends that continue are sort of high-double digit, high-single digit growth trading up in general, continues to be a pretty strong trend. And there continues to be a lot of confusion on that. And we see the consumer trading up to higher price category, but there is some trading down that's going on at the -- I'll say, at sort of the highest end of the business from products above $20 down into products that are more in say $15 to $25 range. And promotional activity remains pretty robust in the market as well. So in general, we see the category growing well. We don't anticipate that, that's likely to stop, and we see trading up to be a trend that's also going to continue. So we expect to see dollar sales growth in the category continue to be ahead of volume sales growth.

Your next question comes from the line of Reza Vahabzadeh with Barclays Capital.

As far as the impact of the lighter smaller grape harvest, can you just talk about the impact of that going forward, whether it's on your cost base, promotional activity and how much pricing you need to offset that?

Yes. Basically, you see a shorter harvest as I said in the 10% to 15% range. Even with that being the case, I would say that the supply-demand situation in the United States remains pretty well balanced, especially when you take into account supplies of wine from outside the United States that are often used in brands and various SKUs and brands like Malbec and so on and so forth. Pricing will be up. We definitely expect pricing to be up. So volume will be down, pricing will be up. But therefore, the 2 probably balance each other out in terms of the cost of the overall harvest. And as I said, since supply and demand pretty much remains balanced, we don't expect higher grape prices per ton to really affect us beyond what we've already built into our guidance and expectations in general. So it's probably a positive thing for the industry to have a bit of a short harvest this year because we've had some historically some longer harvest. So we think that is not a bad thing.

And I'm sorry, the increase in cost per ton is going to be how much?

We don't know exactly what that is, but we do expect some increase in cost per ton. It basically depends on where we're talking about. We're seeing the biggest probably impacts in the south central valley for some of the typically lower-priced grapes that are used in value and lower premium product. So that will probably impact us to the least extent, because we focus more on the Premium Plus categories. And so they're not going to be impacted as much.

And then, as far as cash flow, you've been using cash flow to reduce leverage and also buy some shares. Is that likely to be the scenario going forward, or would you foresee other uses of cash flow such as M&A going forward?

Yes. Our priorities remain the same, which is our first priority continues to be paying down debt. And obviously, we've been very successful and aggressive in taking our debt down to now about 3.2x debt to EBITDA at the end of the second quarter. We've moderated that because our cash flow is so strong with stock repurchases taking advantage of what we believe has been some very good values for our stock in the marketplace, as our transformational activities have kicked into gear and as we become more and more optimistic about our performance and our expectations for the future. And then relative to M&A, basically, what I've said is that we're not categorically ruling it out. And if something that we think is strategic and material comes along, we'll consider the opportunity. But it's not really our core strategy at the moment, which is really focused on brand building, organic growth, innovation. That's really where we're focusing all of our attention from a strategic point of view.

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

Just following up on the last comment you made about the use of cash. I'm just looking at the leverage ratio right now, and understanding that in 2Q, you wanted to take opportunity of your stock prices. But if you just look at your leverage target, is it still your intention to continue to take that down as your priority or just given that the leverage has not come down, you have more flexibility to do more buyback?

Yes. We'll continue to take it down. But we also, obviously, have put in place a multiyear buyback program for our stock. And therefore, we also continue to take it -- we also intend to continue to take advantage of that as well. So just mathematically, the leverage has got to come down in all likelihood, the leverage ratio.

Okay. And then just in terms of your comment about the M&A strategy, because I guess at the Analyst Meeting, it sounded like you were a little bit more focused on M&A as part of your core strategy. And today, what we're hearing from you is that, that isn't the case. So I'm just wondering, has there been a bit of a change in thinking as you think about M&A, whether because. . .

No, Judy. It's basically the same. If there's some opportunities that arise, which we think are both strategic and synergistic and material, we'll certainly consider it. But as I said at the Analyst Meeting, and as I said today, our primary focus is going to continue to be on driving organic growth. We will continue to pay down debt. And we do have the stock buyback program in place. So nothing has really changed. I mean, obviously, we also announced simultaneously today that we did purchase the remaining 50% of Ruffino. That was expected. That's turned out to be a pretty strategic brand for us, as it builds a niche, i.e., Old World Wine and Italy, which Italy in particular is a growing category. So M&A is really quite unpredictable and not a key part of the strategy. But it's not something that we will ignore either. So no change in our philosophy or approach relative to that.

Okay. And then, Bob, just in terms of your net sales outlook for North America wine in the back half of this year. So if you look at year-to-date, I think you're up about 0.8%. I think in the last call, you talked about flattish sales numbers in that part of the business. It sounds like depletion will be better in the back half given some of the new product and the promotional programs that are going to be in place. So how shall we think about the net sales growth in the back half? Do we see an acceleration or does the price mix then becomes a little bit of a less positive as you put more promotions in place?

Yes. So I apologize for this, it gets a little confusing because of the overlap, right? So our sales growth versus prior year, especially in the third quarter won't look very strong for wine or for beer, because there were distributor inventory builds in the third quarter. Now the fourth quarter, it will not be that way. And as Rob had said from a depletion perspective, we do expect to experience better depletion growth in the back half of the year than we did the front half because of the incremental promotion spend and the kick in of additional new products. So expect to start gaining share back in the back half of the year. But I would say from a full year perspective, I think sales are expected to be relatively flattish because of the distributor overlap.

How about just in terms of price mix trends? Because it sounds like in 2Q, you had a benefit of close to 3 points or so.

The mix shift, it's interesting not just to us, it's the category and Rob alluded to it. Generally, the more expensive wines are growing much faster than the less expensive wines. So if you look at the wines above $5 a bottle at retail, they're growing at a multiple of wines below $5 at retail. So we have experienced, and it was in the first quarter as well, a very positive mix shift. I would anticipate that to continue in the balance of the year, because that's driven by consumer behavior.

Okay. And then can you just help us understand. So the nature of the higher promotional spending in the back half, is that more focused on just really price-related promotions or other type -- are there any other consumer-driving promotions that you're looking at?

Yes. Those promotional activities are definitely not just focused on price, but really focused on driving merchandising activity, i.e., displays, feature ads and things of that nature, which in the licenses is what really drives sales. So in actuality, what we try to do is be very careful not to put all of our promotional dollars against price, but to put them against things like incentives that help to, as I said, drive the kind of merchandising activities that drives sale that don't necessarily impact margins on an ongoing basis. So it's really a good mix of promotional activity. Some price and a lot, again as I said, is incentives.

Your next question comes from the line of Gary Albanese with Auriga.

Looking at the focus brands, the depletion level seemed to be much higher than I guess the rest of the wine shipments and it's even above the focus shipments. Is that something that you expect to continue? I know you mentioned trading up, but is this the kind of level that you expect to continue?

Well, we actually think that depletion trends will accelerate for the focus brands. They've been growing in the 3% to 4% range in the first half actually, 3.6% in depletions that is in Q2, which is pretty robust. But clearly, with our promotional activities, much more focused towards the second half, we expect our focus brands, which are growing at a faster rate than the total portfolio to benefit even disproportionately, positively versus the rest of the portfolio. So we expect to see that the depletion trends accelerate on those.

Okay. And what's the...

They represent about 85% of our U.S. profitability, actually about 70% of our U.S. profitably. So the focus brands are what are really important.

Okay. That's good to know. With the Modelo new products, I mean, I know you're expanding into new markets, but how quickly is that expansion going? At what one point do you consider yourself to be fully, I guess entrenched into the markets that you're targeting?

On the new products for Modelo, we see a lot of room to continue expanding within the U.S. on those price. I mean Victoria is not in full distribution by any stretch in the United States. So it's not even in some of the major markets like Florida and New York, for example. So there's a lot of runway on that and also a lot of runway on the new packages like the Familiar in particular, which has been a very, very successful package for Corona Extra.

Is that going to be like a 2-year kind of, I guess, growth period for these products or is it going to be a little bit longer or...

We haven't put any definitive time frame on that, but it will definitely take a couple years to expand those products nationally. Yes, for sure.

Your next question comes from the line of Mark Swartzberg with Stifel Nicholas. Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division: I guess 2 questions. Firstly, Bob, the corporate expense coming in so much lighter than last year, what was the cause of that?

Yes. Mark, it was primarily an overlap of higher compensation cost last year. So that this year's run rate should continue. Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So I'm still trying to understand why the EBIT then came in, like I would assume you knew that at the start of the fiscal year. I'm still trying to figure out why the EBIT came in better than expected in the quarter than what you guided for the first quarter.

Yes. I think a lot of that would be just the timing amongst quarters for both sales and how the expenses hit. But I think for the full year, we're reiterating EBIT guidance. It will be relatively flattish for the full year. Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division: Got it. And then, Rob, just the tail of these non-focus brands are getting smaller as a percentage of your mix. Just trying to get a sense of how we should think about when that starts to become small enough but it's not a drag, the drag that's been on your total portfolio. Can you give us an update on what portion of the mix is now non-focus? What kind of decline rates are you seeing there and when you think you see it become less of a drag on the total portfolio?

We don't necessarily see it as a big drag on the portfolio. Our tail is very similar to the industry's tail in general. Our focus brands represent about 60% of our volume. The rest is, you can call it -- some of it is not tail, some of it is actually what we might even call incubatored. Our new brands, for instance, are not in our focus brands and they're not in the tail. So I guess what I'm telling is that the tail is not a huge drag in general, but it's more about growing the rest of the portfolio at a faster rate to achieve our growth goals. So I wouldn't be thinking of the tail as a big inefficient to meeting any of our goals at this moment in time. So it's not something that we're looking forward to in the future, i.e., it diminishing. It's simply not a big issue.

Your next question comes from the line of Vivien Azer with Citi.

I think it's very encouraging to hear that you guys are going to maintain your guidance for the business as well as for the category. I'm just wondering, what's the different today relative to a couple of years ago in terms of what you're seeing in terms of consumer behavior. Because it seems to be every category you're seeing the consumer respond a little bit differently in terms of some stepped up economic concerns.

Well, Vivien, a couple of years ago, we were in the midst of the greatest recession since the Great Depression. So things are quite different today. We've seen the consumer rebound from where they were in 2009, in 2008, in particular. Our industry was not as impacted as other industry, so the rebound has been quite so stark because we didn't see the consumer basically go away and then come back again. We just saw the consumer shift channels and shift a little bit into some lower-priced segments, even though trading up actually almost remain constant throughout the recession and into the current period. If we look at sort of prerecession, postrecession, I'd say the biggest change in consumer behavior is that the consumer is still looking for more of a bargain than they have historically. The consumers become very accustomed to looking for deals, buying on promotion. And that's a trend that I think we would expect to continue for some time until things like unemployment abate and the economy becomes a bit more stabilized. So in general, the consumer is back. The business is robust, a lot of trading up going on, but the business remains fairly competitive in terms of promotional activity. The consumer remains highly sensitive thereto.

Okay. But just in terms of thinking about your promotional strategy for the back half, you were talking about kind of the balance of incentives versus price promotions. How quickly can you adjust that to the extent that the consumer does get more price-sensitive bargain holiday?

Most of our promotional activity is pretty lax and loaded for the holiday season. But we're also pretty confident that we put the dollars in the right place to drive depletion growth. And you can already see our depletion growth or consumer takeaway accelerating in IRI beginning with the beginning of September, so I think you'll continue to see that. We're basically in R&D, so it's pretty locked. But that's not an issue. We're there. This is the holidays.

Your final question comes from the line of Tim Ramey with D.A. Davidson. Timothy S. Ramey - D.A. Davidson & Co., Research Division: Rob, I was just thinking back to almost 5 years ago when you bought SVEDKA for $384 million. I think it was a 1.1 million case brand then. It's like 4.4 million now. And would you hazard a guess on what that's worth? I mean it might be worth half your market cap at this point or 1/3 or something.

I'll let you hazard that guess, Tim. But it's obviously a very valuable asset. And as a standalone brand, yes, it probably does have a significant value, a disproportionate value to our market cap. There's no question about that. Timothy S. Ramey - D.A. Davidson & Co., Research Division: I guess I have to apologize for making fun of you over that purchase back then, but...

You do. It’s actually turned out to be a very good purchase. The brand has performed fantastically and continues to perform fantastically. We're the third largest import and pretty much tied for second, and growing faster than the #2 import, right, which is Gray Goose. Timothy S. Ramey - D.A. Davidson & Co., Research Division: And would you now call it about 4.4 million cases? Is that about right?

It's not quite 4 million or 4.4 million now. The question is what's the run rate? And definitely has a run rate similar to that.

We think it will hit around 4 million cases by the end for this fiscal year.

And it continues to grow at double digits. So obviously, it will get to a 4.4 million case run rate as well. So we haven't seen a diminishment in the double digit sort of consumer takeaway growth rate. So we're pretty optimistic it's got a pretty good runway. And the beauty of SVEDKA is that most of its business is in the 80 proof, the non-flavored. So that bodes extremely well for the future and that it's not a flavor proliferation or trendy kind of thing with flavors coming into fashion and going out of fashion. The vast, vast majority of the business is, as I said, in the non-flavored 80 proof. And that means that it's a very, very stable business, and the growth in the business can be relied upon.

So you must have gotten to the 4.4 million by assuming the sales of the Halloween costumes. But they don't end up in the top line, so you got to take that away and that will get you close to the 4 million.

That was our final question. I'll turn the floor back over to you, Mr. Sands, any closing remarks.

Okay. Well, thanks, everybody for joining our call today. And as I mentioned, I'm very pleased with our second quarter results, and I'm confident that we'll continue to execute in order to achieve our goals for the year. And most importantly, I remain focused on growing our U.S. Wine & Spirits business in line with the category of growth. And we're excited about the initiatives, which we have put in place for the second half of the year in this regard. We have all hands on deck and we believe we are well positioned for market execution during the holiday selling season in particular. Our next quarterly call is scheduled after the New Year, so please be sure to enjoy some of our excellent products during the upcoming holiday season. And as Tim and I just discussed, don't forget to wear your fembot Halloween costume while sampling our newest flavor of SVEDKA Vodka. So thanks again for everybody's participation. And again, happy holidays to everyone.

Thank you. This concludes today's conference call. You may now disconnect.