Fortune Brands Inc. Q3 2008 Earnings Call Transcript

| About: Beam, Inc. (BEAM)

Fortune Brands Inc. (FO) Q3 2008 Earnings Call October 24, 2008 10:00 AM ET


Bruce Carbonari – Chief Executive Officer

Craig Omtveldt – Chief Financial Officer


Peter Lisnic – Robert W. Baird

Brian Spillane – Bank of America

Ivy Zelman – Zelman & Associates

Eric Bosshard – Cleveland Research

Stephen East – Pali Research

Ann Gurkin – Davenport & Company

Jonathan Feeney – Wachovia

Lindsay Mann – Goldman Sachs


I would like to welcome everyone to the Fortune Brands third quarter conference call. (Operator Instructions) Mr. Carbonari, you may begin your conference.

Bruce Carbonari

Welcome to our discussion of Fortune Brands third quarter 2008 results. Please note that our presentation includes forward-looking statements. These are subject to risks and uncertainties including those listed in the cautionary language at the end of our news release. Our actual results could differ materially from those targeted.

This presentation also includes certain non-GAAP measures that are reconciled to the most closely comparable GAAP measures in our news release or on the web site is the supplemental information linked to the web cast page.

Despite the adverse impact of the sustained U.S. housing correction, the global credit crisis and weakening consumer confidence, we delivered on our third quarter earnings target and also made significant progress in positioning Fortune Brands for future growth.

In the third quarter our Spirits results benefited from the time of shipments in the United States, higher pricing and favorable product mix partly offset by the continued adverse impact of the excise tax increase in Australia in ready to trade Spirits products.

Jim Beam, Makers Mark and Courvoisier were among brands that drove sales increases. Despite softer than anticipated conditions in the home products market, our home products business has continued to outperform our categories and double digit sales gains for our golf brands in Korea, Japan and China partly offset soft U.S. and European demand for golf products.

As we carefully managed through the current environment, we remain focused on managing our costs, generating cash flow and maintaining a strong balance sheet. We'll continue to contain costs and protect operating margins through purchasing initiatives and by aligning manufacturing capacities with market place conditions, including further capacity reductions in home products.

At the same time, our team across Fortune Brands remains focused on outperforming our markets and we believe challenging times provide opportunities to gain competitive advantage and win profitable market share. That's why we continue to make targeted investments to build our brand through development of new products, new markets and expand customer relationships.

These initiatives are paying off in several ways. For example, we're driving revenue growth for our major Premium Spirits brands that outpaced case volume growth. We're seeing double digit growth in key emerging markets for brands in each of our businesses, and we've developed a tremendous line up of new golf products.

In the third quarter, we also made significant progress to proactively position Fortune Brands for future growth. Most notably, we efficiently unwound our Spirits partnership with V&S Group on very favorable terms. That included repurchasing the minority interest in our Spirits business, receiving $230 million in pre-tax compensation to accelerate the end of our U.S. distribution joint venture with the V&S brands, establishing our new Spirits sales and distribution platform in the United States and globally, and acquiring Cruzan Rum at an attractive price.

Taken together, these moves enable our Spirits business to look forward to the future with more clarity, a simpler sales structure and prospects for stronger growth.

Now let's take a closer look at the numbers for the quarter. Net income was $336 million or $2.21 per diluted share. That's up 66% from $1.33 per share in the year ago quarter. These results reflect a FIFO gain from one time items due principally to the payment we received to accelerate termination of our U.S. Spirits distribution joint venture. Craig will talk about all the charges and gains in a few moments.

Diluted earnings per share before charges and gains from continuing operations came in at $1.11. That's off 17%. These results are comfortably within our target range for diluted earnings per share before charges and gains to be down at mid teens to mid 20% rate. We are also $0.04 ahead of the first call mean estimates of Wall Streets Security Analysts.

Net sales were $1.9 billion. That's down 10%. On a comparable basis excluding excise tax and foreign exchange, total net sales would have been down 12%. Reported operating income was $255 million, down 31%. On a before charges and gain basis, operating income was down 21%.

Assets and return measures after tax return on net tangible assets before charges and gains were 21%. Working capital efficiency came in at 35%. Return on equity before charges and gains was 12% and returns on invested capital before charges and gains was 8%.

Even with the economic conditions more challenging than anyone had anticipated, we're determined to control our destiny and position our brands for future growth. At the same time, we're working hard to protect margins by conserving productivity initiatives and aggressively managing costs and align capacity with market place conditions.

As we discussed in previous quarters, we've been strategically focused in 2008 on key initiatives in each of our businesses. First, position our Spirits business for stronger performance in the future, second, navigating the ongoing housing correction and outperforming the home products market, and third, extending our leadership in golf to sustain innovation and international expansion.

Starting with our initiatives in Spirits, we're operating our Spirits market and as thus far, remain resilient in the United States although it's too soon to tell how consumers will respond in the fourth quarter we haven't seen significant changes to date. As we noted in the past, consumption patterns have shifted somewhat in the United States. Consumers have cut back on dining out. They have shifted purchases to off premise channels which account for more than three-quarters of our U.S. spirit sales.

While we've seen some slowing in trading up, we continue to be at the high end of the market. Internationally, Spirits markets are mixed. While the economic slowdown in Western Europe has challenged several markets the niche for distilled Spirits continues to grow strongly in countries such as the great markets.

We've had a lot of success in Spirits and it's become an increasingly important part of Fortune Brands portfolio. We've built the world's fourth largest premium Spirits business and the second largest in the United States. It's a business with profit margins among the best in the industry. Even with the success we've had, we continually challenge ourselves to out rate our performance in all of our businesses.

In Spirits, we're focused on three key initiatives to take our Spirits business to the next level and to position it for stronger long term growth. First, we're simplifying and building our routes to market to give us greater control over our distribution and to bring us closer to customers and consumers.

Second, we're focused on building our Premium Spirits brand to drive profitable growth. And third, we're developing a high performance organization in our Spirits business by aligning the best talent and systems with our strategic priorities.

Let me begin by talking about the significant progress we made in the third quarter towards simplifying and building our future routes to market. That started with successfully unwinding the three level partnership we shared with V&S Group, all under very favorable terms and in a remarkable short period of time.

First, we repurchased at a very attractive valuation, the minority interest that V&S held in our Beam global Spirits business. As a result, we now receive the full financial benefit of our highest return business.

Second, we negotiated early termination of the U.S. sales and distribution joint venture we operated with V&S. Under the terms of the deal, Pernod Ricard paid us $230 million in pre-tax proceeds which will more than offset the loss of the remaining cost synergies of the JV that was scheduled to end in early 2012,

Third, we established a dedicated sales force in the United States. Fourth, we negotiated a V&S early departure from the four partner Maxium International joint venture, and fifth, we developed a distribution alliance with Edgerson Group that will launch next year, providing a strong foundation for our Spirits distribution in major markets outside the United States.

And finally, sixth, we acquired Cruzan Rum, filling a gap in our portfolio and giving us an excellent position in a growing Premium category. Cruzan in the fifth largest rum brand in the United States and with double digit growth in 2007, we believe Cruzan has excellent upside potential that the purchase price of $100 million or approximately two times sales, we also believe that we've bought very well.

Let me focus for a moment on the next generation sales platform we've established in the United States and internationally. In the U.S., as of October 1, we now own 100% of our U.S. Spirits sales force and we're determined to build it into a state of the art, high performance organization.

We see significant benefits in a dedicated sales force in our largest market. That sales force is focused solely on our portfolio brand. This new organization simplifies our route to market, brings us closer to customers and consumers and enables closer collaboration with our marketing teams.

In the U.S., the sales force will be implementing a business unit structure to best align our resources and focus on key market segments including open state regions, controlled states, national accounts and the high end on premise segment. In conjunction with the enhanced U.S. sales organization, In Global is introducing a new distributor partnership program to further improve our service and add value for our distributors. This program will better align our organization and our customers around common goals and in a sense, drive business together.

As part of this program, we've implemented a new inventory management model that will rely on more leaner and more consistent U. S. distributor inventory levels going forward. We believe supporting faster inventory turns for our U.S. distributor partners, creates valuable efficiencies for them, and for us, and will further improve our competitive position in our largest market.

Internationally when we made the previous announcement exit from Maxium next March, we'll move to our distribution alliance with Edgerton Group one of our original Maxium partners. Again, we see this as a valuable simplification of our routes to market and this cost efficient alliance will offer an enviable position of portfolio brands including Edgerton's famous grouts and McCowen Scotch whiskeys.

Importantly, the new international agreement will enable us to bring Courvoisier, Teacher's and Laphroaig brands into the distribution alliance. As you know, these brands have been excluded from Maxium due to portfolio conflicts with other partners.

We are pleased that only six months after the auctions for our Absolute concluded, we are already in a position to move forward even beyond our former partnership with V&S. Let me point out that we still have some work to do to optimally position both of these new sales organizations. As we optimize talent, incentives and capabilities in building our high performance sales organization in the U.S. as we launch our new international alliance with Edgerton..

We also continue to focus on growing our Premium Spirits brand, driven by a vision to build brands people want to talk about, we're creating and implementing brand building campaigns designed to create product in the market place. Those brand equities support higher pricing and drive consumer pull.

With this latest March partnership with Rock the Boat, our Canadian Club's Damn Right campaign [inaudible] that builds successful consumer brand. Importantly, we're pleased that our key Premium brands are driving revenue growth on top of solid volume growth.

We'll continue growth for our major brands by tying resources to the key combination of brands and markets that offer the highest returns and most promising prospects for the future. For example, we're successfully driving growth for Souza in the United States, Jim Bean in markets such as Germany, Marker's Mark in the U.S., Courvoisier in the U.K. and select brands in Brazil, Russia, India and China.

To further build equity for our brands and fuel growth, we're stepping our innovation in new product development as well. For example, we recently introduced the new DeKuyper's first bar shots, a very successful new product line that eliminates complicated mixing in order to make great tasting and unique drinks.

We'll also expand the cocktail solution we offer to bartenders through an agreement to distribute in the U.S., the U.K. leading line of their fresh fruit cocktail mixers called Funkin. In honor of Canadian Club's 150th anniversary, we've introduced a limited edition Canadian Club 30 year old and that's available now through December.

And finally, to capitalize on the resurgent popularity of rye whiskey, we've introduced a new super premium brand called Rye One.

To best execute our priorities and evolve the evolution in Spirits we continue to upgrade our high Spirits organization in both people and systems. Accordingly, in addition to building a high performance sales organization, we're adding talent in critical functions including marketing, consumer insights and finance. And to support higher performance across the organization, we're successfully implementing globally a state of the art SAP systems platform.

Today, we've also announced that the President of our Spirits business Tom Flocco will be leaving the company to pursue other interests. Tom's been with Fortune Brands for nearly 10 years and almost six with the Spirits business. Tom and the team at Beam Global have accomplished a great deal over the past several years to build our Spirits brand into one of the top four premium Spirits companies in the world. We're confident Beam Global is on the path to the future promising opportunities and stronger performance and we're committed to taking our Spirits business to the next level.

We appreciate Tom's many contributions to the Beam Global success and wish him all the best in the future. The senior executive team at our Spirits business will report directly to me on an interim basis which a search is conducted for a successor.

With our foundation of strong Premium brands and some excellent categories, and our focused strategic initiatives, we're exited about the significant progress we're making in the continued evolution of our Spirits business and the position it has for sustainable long term growth.

Moving to the home products market, as the year has unfolded, the U.S. housing correction has intensified and the related challenges have increased. Declining home values, tighter access to credit and reduced consumer confidence continues to take its toll on the home products market. The inventory of unsold homes in the U.S. remains high further reducing new home construction.

At the same time, consumers are deferring big ticket home renovations or remodeling projects. This mean the replacement model center which now represents three-quarters of the home products market has weakened beyond previous forecasts. We previously anticipated the home products market to be off in the range of mid teens in 2008. However, given the greater softness in both the replacement, remodel and new construction segments, we now anticipate the home products market in aggregate will be off in the high teen's percentage rate for the current year.

As we've said many times, our view is, we can't control the market, but we can control how we compete in that market. Accordingly, our focus continues to be doing what we need to do to outperform the category and gain profitable share. While our results in home products have been down, we have certainly outperformed the home products market over the course of the downturn.

To continue winning in the market we're sustaining targeting investments in key strategic priorities including new products, extending brands into adjacent categories and expanding internationally. As a result we benefit from innovative new products across our product lines including new water saving faucets from Moen and new styles in cabinetries, entry doors and windows.

We're going into adjacent categories such as commercial products from Moen, commercial security and government contracts for Master Lock, and multi-family segments across all of our kitchen and bath lines.

We continue to win new business with major home centers and large home builders and we're capitalizing on attractive international growth opportunities including Master Lock in Europe and Latin America and Moen in China, India and Canada. Importantly, we continue to earn costs and capacity with market place conditions in home products and also to build cutting edge sharper supply chains for the future.

During the quarter we announced the closure of an additional cabinetry plant, closed a cabinetry component facility and the phase down and ultimate closure of a plant that produces lower margin steel edge entry doors. As a result, we've reduced the number of facilities in our home products business by about 30% over the course of the down turn.

At the same time, we're building flexible, scalable supply chains and competencies that we believe will position us at the forefront of the industry and in an advance position when the recovery does come. As part of that effort, we announced plans to realign certain production equipment to expand the capacity from our cabinetry plant in Las Vegas. It will be minimal cost but will enable us to much better serve customers in the south west and on the west coast and provide valuable flexibility for future growth.

Across our home products business, we're leveraging industry lead times and customer service supported by sharp focus on productivity initiatives such as distributor assembly that bring cabinet assembly closer to the customer, lead manufacturing techniques that increase plant efficiencies and global sourcing to improve inventory management that helps contain costs.

Looking now at the golf business; in golf we're continuing to focus on extending our industry leadership across the backdrop of both challenges and opportunities. On the one side, U.S. markets continue to be soft reflecting slightly lower rounds of play and reduced discretionary spend and demand is also soft in Europe.

On the other hand, markets across Asia are providing excellent growth opportunities. International markets continue to represent an increasing percentage, about 40% of our total golf brand sales. That reflects growing enthusiasm for golf in certain Asian markets as well as strategic investments in international markets for a brand that has significant upside potential.

Be seizing growth opportunities in markets such as Korea, China and Japan, our international golf sales are up double digit year to date. We're supporting our growth prospects in Asia with plans for new golf ball production facility to be located at a site to be determined in Asia. We expect this golf plant to up and running in the next two to three years.

Our sustained commitment to innovation remains essential to building our brand in golf. As a result, we've recently unveiled several next generation advanced technology products including the new tour proven Harris 909 series drivers which will be available at golf shops next month, The new L5D driver from Cobra which just began shipping this month, four new Scotty Cameron Studio Select putters models which are available in golf shops now and coming in January, FootJoy's new synergy golf shoe combining advanced comfort and stability features.

The strategic condition initiatives we're undertaking across Fortune Brands and our confidence in our future prospects are underpinned by excellent long term fundamentals in each of our three attractive high return consumer categories. Distilled Spirits is steady, a long term growth category that drives high returns and generates strong cash flow. Distilled Spirits performs well in most economic conditions. While no industry may be recession proof, Spirits has a track record of being recession resistant.

Over the better part of the last decade, Spirits case volumes are growing in the U.S. in the range of 2% to 4% range annually. We have gained share from beer. Consumers in the U.S. and around the world have demonstrated a growing passion for premium Spirits, giving us a sustained trend of trading up to high end Spirits.

Growing interest in western style Spirits in emerging international markets which include China, Russia, India and Brazil provide excellent growth opportunities for companies like ours that have strong positions across premium Spirits segments including Bourbon, Tequila, Rum, Cognac, Scotch, Canadian Whiskey and Cordials.

We also have long term confidence in the home products market for a very good reason. The category has excellent demographics and we believe that our strong position in the kitchen and bath openings and security segments position us in the strongest part of the category.

The number of households in the United States is expected to continue to rise due partially to immigration trends. The center on housing studies projects net new housing formations could exceed 14 million in the coming decade. At the same time, the American housing stock continues to age.

The demographic trends in golf are favorable as well. Golf is growing internationally and our brands are under penetrated in these markets, providing significant head room for growth. At the same time, 75 million baby boomers are entering retirement and demographic trends demonstrate that golfers spend more as they get older and have more available time.

Before Craig reviews the performance of our business segment, let me note that we returned immediate value to shareholders during the quarter with a 5% dividend increase over what we announced three months ago. We've boosted the dividend each of the 12 years since we began trading as Fortune Brands. Our dividend currently represents a yield of more than 5%.

Our year to date shares repurchase currently stands at $4.5 million and through year to date dividend payments and share buy backs, we're returned approximately $475 million to shareholders already this year.

We are obviously not pleased with our current stock price. It's clear that the huge sell off in the global stock markets are disconnected from the quality of many companies. In this market, in the economic environment we recognized the value creation opportunities in maintaining financial flexibility and we believe we will be well served by our consistent disciplined approach to cash and our strong balance sheet.

As always, our priorities for the use of our free cash remain first and foremost, the investment in internal growth followed by a valuing high return on acquisitions versus share repurchase and then the payment of attractive dividends.

Now here's Craig with a closer look at the third quarter performance for each of our segments.

Craig Omtveldt

Starting with Spirits, benefiting from the timing of shipments in the U.S., third quarter sales reached $636 million and that's up 4% to a record. On a comparable basis, excluding excise taxes, FX, divestitures and a third party bottling contract, spirit sales would have been up modestly in the quarter, and that's reflecting the ongoing impact of the Australia tax increase as well as soft results in markets such as Spain and Mexico.

Additionally here, adjusting for the timing of U.S. shipments, underlying sales were up at a healthy rate in the U.S. and off mid single digits internationally.

Operating income before charges grew 1% to $172 million. OI was adversely impacted by the Australia tax increase on our high margin RTD products and a higher share of U.S. joint venture costs due to weaker than planned partner shipments in the quarter.

I'd also underscore here that the double digit increases in brand investment that we discussed in previous quarters annualized at the end of the second quarter. We remain focused on driving revenue growth on top of volume growth in Spirits. In the quarter, value one again grew faster than case volumes as we continued to benefit from higher pricing and trading up by consumers.

On a year to date basis, depletion revenues in the U.S. are up at a mid single digit rate for our key premium brands, on a low single digit increase in depletion case volume. Outside the U.S. year to date volumes for our major global brands are off at a low single digit rate and that again is reflecting the Australia RTD issue as well as Spain and Mexico. In Brazil, Russia, India and China our sales are up double digit rate off a relatively small base.

Drilling down year to date on a constant currency basis and excluding excise taxes, and starting with Bourbon, net sales for Jim Beam, the world's number one bourbon, remain up at a low single digit rate on flat volume. While the depletion case volumes for Jim Beam are off slightly in the U.S., we've seen stronger depletion revenue growth for the brand in the U.S.

At the same time, Jim Beam continues to grow around the world. Year to date, case volumes for Jim Beam are up at a double digit rate in Germany and that's the world's third largest bourbon market, as well as in the U.K. and emerging markets such as China, Russia and India.

In Australia, where the excise tax increase on ready to drink products has truly changed purchase patterns, consumers are remaining loyal to Jim Beam brand. Volume of regular bottles of Jim Beam are up strong double digits as we watched the volume on higher margin RTD products decline.

Our growth in bourbon is fastest at the super premium and ultra premium end of the category. Maker's Mark and Knob Creek have both increased year to date revenues at a double digit rate on strong increases in case volume.

Tequila led by Souza Premium El Tesoro depletions for Souza Tequila are up mid single digits in the U.S. largely due to the distributor issue in Mexico that we've spoken to previously. Global net sales in volume for Souza remain up single digits year to date.

In Canadian and Scotch whiskey with solid performance in the U.S. net sales for Canadian Club are up at a mid single digit rate on flat case volume. Volumes and revenue for Laphroaig Single Malt Scotch are up double digits, and Teacher's Scotch continues to excel in India and Brazil.

Regarding cognac, on a very strong performance in the U.K., and I would highlight we're the market leader there, Courvoisier has driven a mid to high single digit increase in world wide depletions revenues on a low single digit increase in case volumes. And in cordials, double digit sales growth for the Sours brand in Europe is adding to flat net sales for [Decipher] in the U.S.

As we enter the seasonally important fourth quarter in Spirits, we clearly are keeping a watchful eye on the market place. At present, consumers in the U.S. are continuing to trade up, though at a more moderate pace. Internationally some markets are stronger than others, but we believe our focus on the most promising brand combinations positions us well.

At the operating income line, we do expect fourth quarter results in Spirits to reflect the adverse impact of the three items we're discussing here today. Repeating those items; one, the ready to drink tax increase in Australia, two, expenses related to our new dedicated sales force in the U.S., and I'll highlight here that we've already been compensated by the card payment. As previously announced, these include higher operating costs of approximately $12 million due to the termination of distribution cost synergies and three; our new distributor partnership program under which we'll support faster inventory turns for our distributor partners by relying on leaner and more consistent inventory levels.

Implementing this program in the fourth quarter will reduce year over year distributor inventory levels and result in a one time adverse earnings comparison of approximately $20 million in the fourth quarter.

As a result of these factors, we're now targeting full year operating income before charges in Spirits to be down at a mid to high single digit range.

Turning to home and hardware, third quarter sales came in at $978 million, and that's off 19%. Operating income before charges was $112 million, 40% below the year ago quarter. As we've seen in previous quarters, the variance between sales and OI primarily reflects adverse operating leverage partly offset by our strong restructuring and productivity initiatives.

Looking at the performance of our key home products brands, sales for our kitchen and bath cabinetry brands outperformed a cabinetry market that declined at a low 20% rate in the quarter. Once again, the biggest declines were in channels related to new home construction. That said, we're also seeing the increased impact of consumers pulling back on big ticker, remodeling purchases.

Sales for Moen were off at a low double digit rate. Even so, Moen gained share and new product introductions at home centers helped the brand drive double digit sales increases in the retail channels. Underscoring the success of our strategy to enter adjacent categories, Moen's commercial products business continues to grow off a small base.

Sales for our window and door brands continue to be adversely impacted by the sharp declines in new construction activity. Again, it's a relatively tough comparison. Sales were down in the range of 30%. For our Simon's window brand, sales were off at a mid teen's rate.

On the upside, Master Lock continued to be a bright spot, driving strong sales gains on excellent international performance as well as gains in the U.S. retail and commercial market. Master Lock's gains partly offset lower sales for Waterloo Jewel Storage.

As we look to the balance of the year, we remain intensely focused on out performing the golf products market and driving to leaner, more flexible supply chains to support both current conditions and future growth. Given our current expectations for softer than previously anticipated market conditions in home products, we're now targeting full operating income before charges in home products to be down at a mid 30% to 40% range.

Now concluding with golf, third quarter sales were $308 million. That's 3% below the year ago quarter when sales increased 7% to a record. Soft demand in the U.S. and Europe was partly offset by double digit sales increases in Korea, Japan and China. I would highlight that on a year to date basis, our golf sales are flat.

Operating income for the quarter was $24 million, down $6 million or 20% from a year ago. OI trailed sales largely do to adverse operating leverage along with the higher investment spend in our growing international market.

Golf ball sales were modestly lower against a double digit increase a year ago. The results reflect an unfavorable comparison to last year's results which benefited from the launch of new Titleist NXT models both in international markets partly offset lower sales in the U.S.

Sales of golf clubs were off at a mid single digit rate partly reflecting a soft selling environment in the U.S. as well as year over year timing of new product launches. Sales of Titleist clubs were higher on the launch of the new Titleist AP1 and AP2 irons, as well as new Scotty Cameron putters.

Cobra brand sales were lower due to comparisons to the year ago quarter which reflected the launch of new fairway metals. Sales of golf shoes were slightly lower against a double digit increase a year ago and gloves and accessories were relatively flat, also against a strong gain a year ago.

We're now entering the fourth quarter which is the seasonally smallest quarter in golf. As many of you know, historically the fourth quarter generates a small loss in our golf segment. Given the global slow down in consumer discretionary spending, particularly for golf clubs, we're now full year operating income before charges in golf be down at a mid to high teens rate.

Now before I turn things back to Bruce, let me just highlight a few additional items. First, regarding one time items, on the credit side we recorded a pre tax gain of approximately $230 million reflecting the previously announced payment for early termination of the U.S. distribution joint venture we share with V&S. On top of that, we recorded a pre tax gain of $72 million to recognize the remaining unamortized gain from V&S's initial investment in the joint venture.

With regard to charges, as we told you to expect last month, we recorded the charge of $25 million to write down the value of our investment in the Maxium international joint venture in connection with V&S group's early departure from the JV.

We also recorded restructuring and restructuring related items of $38 million, primarily related to the transitions in our Spirits joint ventures and supply chain initiatives in our home products businesses.

With regard to our tax rate, our effective rate before charges gains came in at 29.6% for the quarter, and that's a modest improvement over last year. We continue to expect our full year tax rate to come in around 30%.

On the cash flow front, reflecting both the benefit of the $142 million after tax payment from and the impact of lower earnings, we're now targeting free cash flow for 2008 to be in the range of $475 million to $550 million. And again, I'd remind everybody, that's after dividends and capital expenditure.

In the current environment we believe that maintaining liquidity is important, that cash is kind and we are clearly operating with that mindset across the company.

Lastly, turning to our balance sheet for a moment, we continue to benefit from the strength of our cash flow and our prudent and disciplined approach to capital. Over the course of the past 12 months, we've paid down close to $800 million of debt. I'm happy to say that we continue to successfully access the commercial paper market.

That said, should we ever need it to support our approximately $850 million in outstanding commercial paper, or other credit needs, we have $2 billion committed with our credit facility with a strong group of leading financial institutions with whom we have excellent relationships.

With regard to the long term markets, as I'm sure many of you have seen, we recently closed a $400 million three year bank term loan at favorable rates. Depending upon market conditions we may use the term loan to cover a $300 Euro bond issue coming due next January 31. Beyond that we have no long term debt coming due before 2011.

As we've said many times, we see benefit to an investment rating and it's clearly serving us well. Now back to Bruce.

Bruce Carbonari

Looking ahead, it's clear the current economic environment will present near term challenges. As consumers navigate the global credit crisis and as the U.S. housing correction continues, consumers are taking a very cautious approach, especially to big ticket, discretionary purchases such as major remodeling projects.

Even so, we benefit from the fact that nearly 60% of our profits come from the relatively stable distilled Spirits category. We have powerful brands, great new products in the market place, proactive share gains and productivity initiatives across categories, and balance sheet strength that will continue to serve us well in this environment.

In the fourth quarter, results for our Spirits business reflect a one time item of our strategic route to market initiatives in the United States, specifically the new distributor partnership program and inventory management model we discussed earlier.

Given that the current economic environment has become more challenging than anyone had anticipated, we approach our earnings targets with caution. For the fourth quarter, reflecting the economic environment and the impact of our Spirits initiatives, we're targeting earning per share before charges and gains to be down at a low 30% to high 40% rate versus $1.39 a year ago.

Let me underscore that nearly half of the anticipated fourth quarter decline is attributed to the Australia RTD taxes shift and our Spirits route to market initiatives. For the full year, we're now targeting 2008 results to be down at a high teens to mid 20's percentage rate compared to $5.06 in 2007.

As we look ahead, although near term challenges will carry into 2009, we feel very good about our ability to manage through this environment and very positive about Fortune Brands long term prospects. Our long term confidence is underscored by several important strengths.

We have powerful consumer brands. We compete in consumer categories with very attractive long term fundamentals. We generate strong free cash flow, and we're undertaking important initiatives to out perform our categories and position our company for strong performance over the long haul.

Thank you for joining us. Now Craig and I will be happy to take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Peter Lisnic – Robert W. Baird.

Peter Lisnic – Robert W. Baird

I was wondering if you could talk about some of the economic targets that you're striving to get to with some of these initiatives in the Spirits business.

Bruce Carbonari

The Spirits business traditionally been a market in the United States that has been between 2% and 4% volume growth. This year in 2008 we expect that to be in the low range of that historical performance. We have performed as a company, brands are up and down. Basically they have performed about to the market and our expectation is that we should be performing better than the market.

We are putting the infrastructure both people and systems and now with a simplified route to market and some of the brands that we annualized earlier in the year, and the priorities that we're setting in the business to start achieving that. It's going to take some time obviously, but it's a business that has very high returns and if we can get some growth in those returns, we think it has excellent prospects.

Peter Lisnic – Robert W. Baird

On the profitability side of the equation and the cash generation side of the equation, in terms of some of the things you're doing, it looks like you're trying to improve or alter the structural profitability profit of the business and the cash generation profile of the business. If you could address that side of the equation as well that would be very helpful.

Craig Omtveldt

Obviously it's been a strong cash contributor to us. You've seen that getting back to the acquisition of Allied, we've had a nice progress in terms of improving margins at the end of last year, we were up to nearly 28%. What we're talking about now in terms of how we're going to approach the inventory levels that are out there with distributors, particularly here in the U.S., we're really moving on all fronts.

With that said, with the incremental costs that we're going to have going into next year that we already outlined for future, the investment that we're making to have a stronger sales organization, most likely we're going to step back a bit on margins. But when you look at what we're targeting should be the future growth and price increase capabilities and people trading up to premium, our expectation is that that will continue to improve over time.

On the down side, we've still got the issue of RTD out in Australia and that's been a significant factor this year that is going to carry at least through the first four months for next year. We're going to be a bit of a transition story here, and as Bruce outlined with new organizations in place both in the U.S. and then with what will be the conversion of Maxium in March, it's not going to be just a straight line up.

It's going to be a little bit more like other things we've seen with recent trends. It's going to be a little bit up and down, but the reality is, it's definitely strategically has us more favorably positioned, and we're expecting good things from it.

Bruce Carbonari

It's a very profitable category. If we can drive value as well as volume, we should be in a position to drive single digit OI on a sustainable growth for the long term. So getting more value here as well as accelerating volume in the market is an exciting proposition for this business.

Peter Lisnic – Robert W. Baird

The mid to single OI growth and just look at '09 and some of the costs that you're going to be incurring there, but we fast forward to 2010 and beyond, is that mid single OI, I assume there is leverage.

Craig Omtveldt

I think mid single digit or better is the way you ought to think about it.


Your next question comes from Brian Spillane – Bank of America.

Brian Spillane – Bank of America

Net interest expense in the third quarter was a little bit lower than we were forecasting. Can you talk about as you roll into your commercial paper and also thinking through refinancing the maturing debt, would you expect to see that your blended rate is going to rise over the next 12 months?

Craig Omtveldt

I don't know that I speak to the next 12 months but clearly near term, you're going to see our blended rates rise. We were paying back in August we were paying in the range on commercial paper of about 3%. That jumped up in mid September up to about 6%. The good news is that that's trailing back down now and now we're in the range of 4% or so.

On a blended rate it's clearly going to go up, but it's a little bit hard to call at this point. I would say for the balance of the year, we're definitely going to see the blended rate rising. We'll sort out where we are next year as we go further down the pipe.

Brian Spillane – Bank of America

Foreign exchange, to the extent that it was a modest benefit in the third quarter, you've had some pretty material moves in exchange rates since the fourth quarter has started. Is the guidance you've provided currency neutral and how should we think about how some of the moves in the exchange rates will affect that?

Craig Omtveldt

We've factored that in. As you look at the spot rates right now, obviously the dollar has strengthened dramatically. When we look at what is still consensus views for next year, that's something we'll have to work our way through.

To deal with the fourth quarter in particular, as you know, our home business is largely U.S. centric so expect modest impact there. Fourth quarter is seasonally the smallest quarter for golf so I'm not expecting that's going to have much impact there. But as I look at Spirits, and we do have hedging programs in place for a number of our global transactions, I would say our best bet would be that we might see an additional impact of $4 million to $5 million at the OI line, but that's factored into our guidance.

Brian Spillane – Bank of America

Tax rate for the balance for the full year?

Craig Omtveldt

We're going to come in right around 30%. It might be a little above that. It might be a little bit lower. It's going to be a function of just what mix of business looks like in the fourth quarter.

Brian Spillane – Bank of America

How are you thinking about using the free cash flow? As interest rates have crept up a little bit, does that affect your thinking about whether you use cash or share repurchases versus debt reduction. Had debt reduction become more attractive at these rates?

Craig Omtveldt

Everything is affecting our thinking right now as we watch what's going on out there. The first thing I would say to you is that we're really focused first and foremost on liquidity at the moment. And we truly believe that maintaining flexibility with our balance sheet right now is in our best interest. But with that as a back drop, as Bruce outlined, nothing's changed in terms of our overall model.

First and foremost is using cash for internal growth. It's been a function of looking at returns on share repurchase with the stock driven down as far as it is right now. That's certainly makes that more attractive. At the same time, as we think about where we are commercially, there's a number of things that may be surfacing that could be very interesting on the acquisition front.

So at this point we're taking a very careful, prudent approach to how we go forward, but that the moment, liquidity is our top priority.

Bruce Carbonari

Having the flexibility right now I think is a huge plus. With the cash flows that we do generate, and the balance sheet where it's positioned, we have that flexibility.

Brian Spillane – Bank of America

You commented on inventory reduction, wholesaler inventory reductions in the U.S., but more broadly is liquidity becomes an issue for retailers and customers outside the U.S., any thoughts on the prospects at this point of seeing some inventory de-loading anywhere else in the world?

Bruce Carbonari

On the beverage side I think we've already seen that in western Europe. I think in Spain we talked about last quarter, we saw the economy slow down dramatically and we've seen some during this quarter, some inventory shifts out of the channels in the U.K. I think in western Europe we're definitely seeing it. The other markets are pretty strong and healthy so we don't expect it in the other markets.


Your next question comes from Ivy Zelman – Zelman & Associates.

Ivy Zelman – Zelman & Associates

On 2009 and looking at the weakness predominately coming from the home segment, what's the worst case scenario may be and how you're preparing for that in terms of your cash flow. You haven't given guidance for next year, but is there a situation that could result in your worst case scenario where you're actually going to find yourselves in a loss situation, or is that not conceivable from your perspective.

Bruce Carbonari

Trying to speculate on 2009 right now is really difficult. We'll give you specifics in January. We actually have an internal process of rolling out number just because of the volatility of the market. I think in the home business specifically, we have been at this now for two and a half, three years and I think you've seen us be very aggressive, maybe in the fore front of taking actions and you'll continue to see us do that.

It happens in more ways than just reducing capacity. We do have a lot of other initiatives going forward. We do have still healthy, with respect to what's happened in the market, pretty healthy returns still in our home business, margins that are in the 10% range as well as in excess of 20%, so we still feel good considering that we have very, very strong brands in what we think are the most attractive categories in the space.

We'll make the adjustments as we think appropriate, but this is as you can imagine, a day to day, week to week dial out there and we are very well considering what it is, but it's a challenge.

Ivy Zelman – Zelman & Associates

Can you give us an update with respect to the challenges of servicing customers that are in distress? What percent of the business as home really is to the large builders and how much now is to the home center channel and realizing that you might not have exact numbers, I can appreciate that it might be difficult to answer that, but sort of ball parking? And then looking at the bad debt expense, a lot of these builders are obviously in default with their banks and we're continuing to see more problems as the market gets worse. What kind of reserves do you have for other ways to mitigate the risk that customers aren't going to pay you?

Bruce Carbonari

We have a different mix than a lot of other people in the building products. We have roughly 20% with home centers having the Home Depot's the Lowe's and the Minard's. We have less than 10% of our business with big builders. So we're well blended both in the residential side and in the commercial side as well as having all the channels that are out there.

That is good and bad and there are things with wholesalers as well as small, but we're pretty well spread out so we don't have one particular customer that's huge.

That being said, we obviously have been looking at our reserves. We're actually seeing a couple of things happen in the market place; one on the customer side is that there are small players that are feeling the pinch and going out of business. But what we've seen too is a lot of small competitors leaving the market place as well and us getting the share from them.

It's a double edged sword here as you go down the path. But we fell we're adequately reserved. We look at that continuously.

Craig Omtveldt

This obviously has been a priority for us dating back some time and we've made a point of making sure every one of our business groups is very much focused on making sure that we're keeping current and collecting, and I'm happy to be able to say that in addition to taking some steps to build up reserves, more importantly, we've done a good job of staying on top of aged receivables and we haven't really seen any significant deterioration.

Where we go in the future, some of this is a tough call, but at the moment, I think we're in pretty good shape.

Ivy Zelman – Zelman & Associates

I'm trying to understand fixed costs in home, realizing that you've got an incremental margin and you're doing well and you're profitable. How much of the business is truly fixed and what is your incremental margin?

Bruce Carbonari

I don't think anything is fixed. This is a volatile time so we're looking at everything, so what used to be considered fixed may not be fixed today. Our model too is that a lot of our businesses have been variable over a number of years. It's not just during this turn down.

Craig Omtveldt

In a traditional sense we do have a percentage that's fixed but for competitive reasons, we don't share that.

Ivy Zelman – Zelman & Associates

It sounds to me like you're doing as much as you can to stay ahead of thee curve and when you look at your margin performance and you've weathered this three year down turn already very well compared to some of your competitors. If in fact housing starts and new home sales continue to be down significantly in '09 is there a way for you to mitigate the bleeding enough where you can hold margins again, or is the risk that it's just too difficult from a timing perspective to really stay that far ahead of it, but the risk is modest down side to margin as opposed to significant down side to margin.

Craig Omtveldt

When we looked at where we are this year, we're at a run rate right now that say's we're going to be most likely down overall somewhere in the range of 300 points. We were down last year. It's all going to be a function of just how much slow down we actually see. As we've said many times, we're really focused first and foremost on what are we doing in terms of our strategic initiatives to have a position for the long haul, or what kind of progress are we making on that?

And secondly is to say okay, within that context, let's look at capacity and how are we sized for the near term as well as the longer term requirement, and thirdly, looking at it from a G&A standpoint. And we've done all of that, and I think because of our approach, we're making progress to gain share, doing the right things for the long haul and I think it's also the reason we've had the success we've had in terms of near term protection of margins.

There's only so much that we can do short of simply bag it all for the near term and we're not prepared to do that.

Bruce Carbonari

I think it's important as we look at our company and evaluate how we're doing, obviously managing costs and managing the balance sheet is critical. But to position your business to strategically invest in the right areas and make sure the brand is healthy and be opportunistic along the way, is critical as well. There's going to be some opportunities here to either gain share or add on or whatever, and we are on top of this every day.

Ivy Zelman – Zelman & Associates

You must benefit to some extent from a lot of foreclosures being sold in the market and a lot of those homes albeit new stock have plumbing stripped out and HVAC, I imagine that there might be some offsetting benefit from all the weakness in housing with foreclosure velocity. Are you seeing any of that?

Bruce Carbonari

It's hard to tell because a lot of it in the plumbing side, a lot of the other businesses go through wholesalers or through retail. It's hard to tell who the end user is specifically. We hear that. We also hear about a lot more repairs going on in the market place with smaller remodeling projects. But it's hard to specifically say its foreclosure related. We don't have the transparency down channel.


Your next question comes from Eric Bosshard – Cleveland Research.

Eric Bosshard – Cleveland Research

The new focus of inventory with the U.S. distribution, can you explain a little bit of whose idea this was and how life is better with distributors holding less inventory?

Bruce Carbonari

Don't look at it as an isolated thing. It's an idea that's part of our team's Spirits businesses team. It's a whole distributor relationship program which is meant to better align us with the distributor so that we can get better aligned focus and drive growth in the market place. That's one of the pieces of many parts of a program.

It's one though that has financial impact in the fourth quarter, a one time financial impact in the fourth quarter. That's why we highlighted it in the call. The program is designed to do exactly what I said. It is to align up better with the recourses they have and resources we have and to be able to accelerate and activate better in the market place to drive the brand equity and as we drive brand equity we expect that not only volume will increase but the value we get for that volume will increase. You'll see this already, we're fairly aggressive on the price side as we built equity.

So that combination is very favorable proposition for a business that already has a relatively high margin. That's the philosophy behind it.

Craig Omtveldt

The other part of this is obviously returns for our distributors really comes on two fronts. One is the margins they make on moving the product, but the other is where they are in terms of their gross margin return on investment. The faster they can turn the inventory, at the end of the day, the better their overall returns are going to be so we're looking at this holistically both from a margin standpoint as well as an overall return.

Eric Bosshard – Cleveland Research

So this basically translates into you carrying more inventory and them carrying less inventory?

Craig Omtveldt

No we don't carry more inventory. We don't need to. It's just the way our supply chain is built and the processing times to build our Spirits is involved. It will take inventory out of the system that may not be needed.

Eric Bosshard – Cleveland Research

What are the thoughts on who is going to run the Spirits business on a go forward basis with the departure of Tom?

Craig Omtveldt

I will be doing that in the interim and we'll have a search going on.

Eric Bosshard – Cleveland Research

The inventories on the balance sheet are up year over year and I think the sales are down 10% year over year. Can you help us understand where there's growth in inventory beyond the growth of sales across the business?

Craig Omtveldt

At this point it's coming on two fronts. The biggest share of it is in Spirits, as we had previously outlined to you we laid down more agave to be sure we had source of supply to meet our growth expectations here over the next few years, and obviously it's also laying down more for our Spirits category. We've spoken to that before.

We also ended the quarter with somewhat higher inventory in the golf business. Part of that was a build of inventories for some of our fourth quarter initiatives. We've got the new clubs being introduced that Bruce had outlined and so those were the two sources of increases.

In the home side we actually saw somewhat lower inventories. As I look at where we are overall from a working capital position, it's not something that's got us too terribly concerned.

Eric Bosshard – Cleveland Research

On the home profit situation, you've been taking consistent restructuring charges through the year to try to get ahead of the decline in business, yet the cut in profit for the year coming out of 3Q relative to what you were saying coming out of 2Q, any insight you can provide into the revision of that segment in the light of how much cost and capacity you've taken out?

Craig Omtveldt

The biggest impact is just the caution that we've layered in for the fourth quarter. With the current credit challenge that's out there right now, we're being very cautious about what we may see in terms of consumer spend here in the fourth quarter. Obviously to the degree that happens, that's not something we can react fast enough to impact it.

Eric Bosshard – Cleveland Research

We're almost at the end of October and knowing the cabinet business for the fourth quarter, it's kind of October/November business. I guess this isn't just cautious, this is responding to what you're seeing since the credit crisis has begun. In September/October have you seen that change really manifest itself on the business?

Craig Omtveldt

We've certainly seen a level of impact. As I outlined in my prepared comments, we talked about where we are with new construction, and we also highlighted that we indeed are seeing consumers pulling back on the big ticket remodeling projects. So yes, we've seen an impact here in October.


Your next question comes from Stephen East – Pali Research.

Stephen East – Pali Research

On the Spirits side, your transition from the previous distribution to what you are going to, what's the duration and excess cost you expect starting from 4Q on, and then when it's all said and done, does this change your cost profile versus what you had before?

Bruce Carbonari

A part of the U.S. transition is the one that we had announced previously as moving away from the joint venture with V&S and there is incremental cost associated with that that will be going on going forward.

The distributor partnership program, there is a one time fourth quarter hit with the inventory piece, but going forward as you grow, to get further growth and what we believe is marketing or whatever market plus is, and those incentives then would be paid out. We have to pay those because that means the growth is faster than the market.

Other than that, we feel that that's a pay for performance type of program, and there shouldn't be any incremental costs that won't be offset by incremental margin.

Stephen East – Pali Research

And the costs involved in actually moving from the V&S to your own distribution ignoring the partnership, how long does that take do you believe to get to a normalized cost structure?

Craig Omtveldt

We'll get to a normalized cost structure next year. What we've outlined to everybody is that here in the fourth quarter the impact of having 100% of the sales organization is going to be an incremental $12 million of cost, and then next year we're looking at an incremental $19 million to $20 million. When all is said and done, our U.S. cost structure is going up around $30 million to $31 million.

What that's going to give us in terms of additional feet on the street, in terms of having to layer in some merchandisers, and doing the kinds of things that we should be doing in terms of the higher end in terms of restaurants and bars, our expectation is obviously that that's going to provide a payback.

So broadly speaking, just coming back to the numbers right now, I'd probably band width the total cost next year and put it in the range of $30 million to $35 million.

Stephen East – Pali Research

If you looked at the home and hardware as you went through the third quarter and into October, could you just give some more color on what you also saw from a demand perspective as you worked your way through?

Bruce Carbonari

On new construction sites it continued to soften but not a dramatic change. I think the real change was in the remodeling side of the business, especially the higher end, more discretionary type of items that we saw a step down in remodeling in the third quarter and actually continuing here in October. That's the type of thing we're seeing. Big ticket items normally aren't sold very much in November/December because it's the holiday season, so we're going into a soft period.

The real test will be how it comes out of it in February, March and April. People don't do renovations during the Thanksgiving, Christmas season.

Stephen East – Pali Research

On the pricing side, the home builders have sort of gotten to the point where they're saying, price cuts are not driving demand. Are you at that point on that side of your business, or do you think there's some room to stimulate demand with that?

Bruce Carbonari

We are working with our customers and have been working through different types of promotions. I would tell you that some work and some don't. It's consumers becoming more sophisticated. The ones that are shopping and buying out there, are becoming more sophisticated in looking for those types of promotions.

At some point it becomes meaningless, and I think what the builders have though is it really smart to accelerate in certain markets and don't paint a brush across the whole world. I think the retailers have done that well too. But there are different markets that are still pretty solid out there. There's other markets that are very quiet.

I think they've been smart and selective about how they're doing that and we're supporting them and I'll bring them new ideas every day trying to help us and the people who are coming into their model homes or keeping people in the aisles at the retailers.


Your next question comes from Ann Gurkin – Davenport & Company.

Ann Gurkin – Davenport & Company

Can you comment on any change in strategies at the home centers, Home Depot, Lowe's?

Craig Omtveldt

Both of them are on top of their game and they understand what's going on in the market place. I think they have been aggressive as far as trying to keep people in the aisles with promotions. They are obviously receptive to new costs and so the people are out there to buy something. I think both are working on a lot of things like we are and it's a different time out there and we're all trying to be proactive together.

Ann Gurkin – Davenport & Company

Are you resetting any products?

Craig Omtveldt

We have. The faucets we want some new business with both the big retailers and we're putting in some new stains in the cabinet side into retailers. So we are selectively doing that. Lowe's have a couple of initiatives going on, and Home Depot in particular. There's still a lot of activity out there to try to get the products right and keep the consumer that comes in the door excited.

Ann Gurkin – Davenport & Company

In the U.S. there's been emphasis on growing the premium segment which you talked about this morning and moving the consumer up the value chain. But as the news gets more difficult and jobs are lost and incomes are coming down, how do you remain that that strategy stays in place as you look over the next six, nine, twelve months.

Bruce Carbonari

The trends we've seen in the Spirits business in the U.S. is that although the premium side of the business has slowed, it's still the fastest growing segment, and I think that the reality is that consumers view this category as sort of a luxury. So there is some trading down but it's not at a point where we would change our strategy.

The one thing that is nice about our portfolio brands is that we do have brands up and down the ladder, especially in our key categories like bourbon and tequila. So we're catching all different price points along the way.

Ann Gurkin – Davenport & Company

As you look out to '09 for the Spirits business, is pricing still going to be a component that you can use?

Bruce Carbonari

We believe it is, especially if we can continue to build brand equity with the consumer. They're clearly more selective, but we continue to believe that we've got opportunities globally.

Ann Gurkin – Davenport & Company

What kind of feedback are you getting from distributors and customers right now as you put in your dedicated sales force?

Bruce Carbonari

We're getting very positive. We have our first national sales meeting with the whole group next week for three days and we're going to introduce our new partnership program. We're getting huge kudu's for that. We're trying to be as aggressive as we can and excite our new organization to really be hustlers out there, and hopefully it's all going to come together for us quickly.

Ann Gurkin – Davenport & Company

In terms of overall commodity costs for the company, as you look out into '09, some companies are starting to comment maybe things are moderating. Some are not making any kind of statement whatsoever because things are still volatile. Are you willing to make any comment?

Craig Omtveldt

When you look at where we are with stock prices today, whether it be metal, oil and gas or grains, woods, etc., we've seen prices come down pretty significantly. Here in the fourth quarter though, because of the time lag, I'm not expecting much impact at all. We will get some minor benefit from the fact that fuel costs have come down so that could give us a benefit of $1 million to $2 million, but for the most part I think any opportunities are going to be part of next year.

It's interesting, you look at China right now and with the slow down we think there may be some further opportunity not just in terms of raw materials but from a sourcing standpoint as well. Those are things that we're looking at hard right now, but it's premature to try to quantify it.


Your next question comes from Jonathan Feeney – Wachovia.

Jonathan Feeney – Wachovia

I wanted to dig into the inventory management model. How much of that was driven by distributors themselves having a little bit less favorable of an outlook? Did that have anything to do with the timing of it?

Craig Omtveldt

No. This is a program that we put together about the last two or three months. We introduced it to some of our bigger customers probably a month ago, so this is something that we've looked. We share a lot of it because of the financial impact, but there's a number of other elements to it that make sense as far as aligning our resources together and growing our businesses better in the future.

Jonathan Feeney – Wachovia

Can you tell us anything about depletion in distributors' inventories trends over the past few quarters that might have driven this?

Bruce Carbonari

Our depletions here in the U.S. have stayed pretty constant. We've basically been more or less flattish when you take the overall market and then if you match it up against our product mix, it says we're performing at or must modestly behind the market. The positive side for us has obviously been when you look at what we've done from a value side in terms of the price increases we've taken and overall mix of business, it's allowed us to have the more favorable revenue generation against depletions that I outlined in the prepared comments.

One other thing that I should mention here, the timing of the distributor partnership program is in line with our new sales organization. We have a new sales organization, 100% owned and dedicated sales organization for the first time effective October 1. So that's why the alignment makes so much sense.

Jonathan Feeney – Wachovia

Is there any change in payment terms accompanying this?

Craig Omtveldt


Jonathan Feeney – Wachovia

You mentioned $20 million would be roughly a cost just of the inventory reduction, or does that include Australia?

Bruce Carbonari

That's the margin profitability on taking the inventory levels down, the absence of what would be the normal fourth quarter build. In the Spirits industry the fourth quarter at least here in the U.S. obviously is a prime season and ordinarily is a buy in by distributors as well as by some push on our side to make sure that they've got the inventory to match whatever the demand level is going to be.

Then obviously you're going to get past the Christmas season, and at that point you say, okay where did we end up, and you end up normally just kind of truing that up for the period of the first quarter and we're accelerating that process. That won't be losing anything, it's more a timing issue.

Jonathan Feeney – Wachovia

And that $20 million that should be about margin flat so that should be about the sales trend as well proportionately?

Craig Omtveldt

That's not from a loss profit standpoint. I wouldn't break out that because that's competitively sensitive. So for that reason, I just wouldn't comment.


Your last question comes from Lindsay Mann – Goldman Sachs.

Lindsay Mann – Goldman Sachs

On the U.S. with all the branding activity that you have planned, I know we just lapped the accelerated advertising investment in the second quarter. Are we looking at another four quarters out of upped investment on the Spirits side?

Bruce Carbonari

What we're looking at and digesting, we had a pretty big double digit increase that annualized the second quarter to last year. We needed to digest that and we're looking at a mix of that as well. How much should be promotional, how much should be equity building. We're digesting that and we'll evaluate it as it goes. If we see some opportunity where we really have some momentum, we may shift some dollars here or there or incrementally spend it if we can drive it.

We think we're at a pretty healthy level right now especially considering the times and I think we're focused on supporting the brand market combinations that have our highest returns. So that's where the money is going against, and hopefully it will translate to the bottom line growth.

Craig Omtveldt

I will speak more specifically to that in January after we've had a change to really sort out what we think and where we're headed for next year.

Lindsay Mann – Goldman Sachs

The inventory re-aligning this quarter, does that mean that you expect to be shipping ahead of depletion sequentially for the next couple of quarters to fill, or is that the year over year where you get the shipments ahead of depletions.

Craig Omtveldt

It's the year over year. It's looking at where we would normally be this year versus where we're going to be at the December 31.

Lindsay Mann – Goldman Sachs

You mentioned that your U.S. major brand SPR's were up low single digits year to date but in answering Q&A you said flattish for your U.S. portfolio.

Craig Omtveldt

Flattish is for the overall portfolio. So value obviously has been a little stronger.


Mr. Carbonari do you have any closing remarks?

Bruce Carbonari

Thanks again for joining us. We made significant progress in the third quarter, and we look forward to successfully navigating the challenges ahead and to create value for our shareholders. We'll review our full year results and discuss the year ahead on our call in January. Talk to you then.

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