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Executives

Bruce Carbonari – Chairman and CEO

Craig Omtvedt – SVP and CFO

Analysts

Gregory Malik – Morgan Stanley

Eric Bosshard – Cleveland Research

Lindsay Mann – Goldman Sachs

Ann Gurkin – Davenport

Karen Lamark [ph] – Federated Investors

Peter Lisnic – Robert W. Baird

Dennis McGill – Zelman & Associates

Kevin Dreyer – Gabelli & Company

Fortune Brands, Inc. (FO) Q4 2008 Earnings Call Transcript January 29, 2009 10:00 AM ET

Operator

Good morning, my name is Katherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands fourth quarter and full year earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator instructions) Thank you. Mr. Carbonari, you may begin your conference.

Bruce Carbonari

Thanks, Katherine. Good morning. Welcome to our discussion of Fortune Brands fourth quarter and full year 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 our Web site is the supplemental information linked to the webcast page.

With the acceleration of the global economic downturn, the fourth quarter proved even more challenging than we anticipated just three months ago. In this environment, Fortune Brands continue to pursue the initiatives, which are helping us compete effectively in a very challenging economic conditions and positioning us for strong growth when the economy returns. We are aggressively realigning cost structures for current and future demand and we accelerated those initiatives in the fourth quarter. We also remained focused on maintaining solid cash flow, at the same time we are intensely focused on outperforming the marketplace in our categories by investing selectively to build our brands introducing new products targeted to our most attractive segments and adjusting to the evolving consumer trends.

Even with the more challenging fourth quarter environment – in which trade customers and retailers across our businesses further reduced inventories and the remodeling segment of the home products market decelerated – our full-year results were within our earnings target range, albeit towards the low end. We also achieved our free cash flow target before a $63 million after-tax year-end contribution to our pension plans.

For our spirits business, 2008 was a transitional year in which we made significant progress to better position this business for long-term growth. We unwound our partnership with V&S, enhanced talent across the organizations, and developed our next-generation sales and distribution routes to market, which we initiated in the US in the fourth quarter and will launch in international markets at the end of the current quarter. Fourth quarter and full-year results were impacted by previously announced factors, including the Australia RTD tax increase and our route-to-market initiatives. On an underlying basis, excluding these factors and adverse foreign exchange, operating income before charges in the spirits business would have been flat for the quarter and the full year.

In a very challenging home products market in which we continue to face adverse operating leverage, full-year sales in our home products business ran ahead of estimated market performance as we continued to expand into adjacent product categories and grow internationally. To align capacity with marketplace conditions, we initiated further workforce reductions and the closure of additional facilities in our home products business. As a result, the number of facilities in our home products business will be 35% below its peak before the housing correction.

Our golf business delivered its second best sales year on record, benefiting from new-product development and double-digit growth in the Asian markets. Full-year golf operating income was impacted by brand investment, higher commodities costs and lower volumes. While golf results in the seasonally smallest fourth quarter reflected soft industry demand and adverse operating leverage, we benefited from strong sell-in for the new advanced-technology Titleist golf clubs.

Now let’s take a closer look at the numbers for the quarter and the full year. For the fourth quarter, reported net income from continuing operations was a loss of $275 million or $1.84 per diluted share. Results included a net charge of $2.50 per share, including non-cash write-downs and restructuring-related charges that Craig will detail later. Excluding one-time items fourth quarter diluted EPS before charges and gains was $0.68, down from $1.39 in the year-ago quarter. As previously projected, fourth quarter earnings per share was significantly impacted by the excise tax increase in Australia on ready-to-drink spirits products and our spirits route-to-market initiatives. Additionally, foreign exchange adversely impacted our results by $0.12 per share in the quarter.

For the full year, we reported net income from continuing operations of $165 million or $1.07 per diluted share that compares to $4.79 per share in 2007. Excluding one-time items diluted earnings per share before charges and gains was $3.79, that’s down $0.25 from $5.06 per share in 2007. These results were towards the bottom end of our target range which was for diluted earnings per share before charges and gains to be down at a high-teens-to-mid-20s percentage rate.

Fourth quarter sales were $1.8 billion, down 19%. On a comparable basis, our total net sales for the quarter would have been down 16%. Full year revenues were $7.6 billion down 11% on both reported and comparable basis. Operating income for the fourth quarter was as loss of $320 million, reflecting the impact of the non-cash write downs. For the full year, operating income was a $146 million. On a before charges/gains basis, (inaudible) was $198 million for the quarter and $1.05 billion for the year.

Reviewing our assets and investment return measures, after-tax return on net tangible assets before charges and gains was 21%. Working capital efficiency came in at 36%. Return on equity before charges and gains was 10% and returns on invested capital before charges and gains was 7%.

Before Craig discusses our segment performance, I would like to review the strategic progress we made in each of our businesses during 2008. Our presence in the relatively stable Distilled Spirits category is an advance for Fortune Brands. This is a business that now provides a majority of our operating income before charges nearly 60% in 2008 (inaudible). While no industry is recession proof, the spirits industry has historically been recession resistant. The market remained solid in the US in 2008 even as growth rates slowed. As we discussed before, the consumers signing out is (inaudible) shifting from our premise, restaurants, and bars to at home. Also we saw some modest substitution of lower price products with premium products towards the end of the year. Companies like ours that have broad strength across price points and key product segments are well positioned to compete in this environment. Our premium and super premium brands continued to outperform our value price brands in 2008.

Internationally, economic weakness challenged certain global markets. While we were able to grow in the important UK market and as well as in attractive emerging markets, notably Brazil, India, and China. As I indicated earlier, 2008 emerged as an important rebuilding year for our spirits business as we ceased the opportunity for further elevate our brand building and the distribution organizations. With the early termination of our US joint venture with Pernod Ricard's V&S Group for which we were paid $230 million, we have taken the opportunity to establish a company owned US sales organization focused 100% on our brands. Our dedicated US sales organization began in October, and it has simplified our distribution in our largest market bringing us closer to customers and consumers, also allowing us for better alignment with our marketing teams.

The US sales force is now structured to focus on key market segments including open state regions, controlled states, national accounts and the high end on premise segment. The bottom line, we are more feet on the street that are focused on nothing but our brands and the best growth opportunity lies ahead.

Just this week, we signed a long term agreement with the largest US spirits distributor, Southern Wine & Spirits. This agreement expands our existing relationship to 21 states and includes state-of-the-art performance requirements. With the addition of Cruzan rum, which we acquired at the end of September, we’ve also enhanced our portfolio in one of the spirits industry’s most attractive categories. Internationally, planning is well underway to activate our next generation international sales organization at the end of March. As you know, we are currently a partner in the Maxxium International joint venture. The V&S Group departed in October, and Remy is scheduled to exit the JV in late March.

We are pleased we have established an alliance with the Edrington Group, one of our original Maxxium partners, that will go to market in 24 key international markets. This new joint venture is a blend of sales organization that we will own in certain markets, the Edrington Group will own in certain markets, and there will be countries where we co-own the sales organization. In large part, these organizations will comprise of the former Maxxium sales forces that had established a strong record of successful brand building for the partners. By reducing a number of international distributors partners from three to just one, we will simplify our routes to market, gaining greater control over our distribution and still benefit from a powerful portfolio synergies.

From a portfolio standpoint, the combined alliance portfolio will become the third largest player in the UK market. And in Spain, we will benefit from the addition of Edrington’s Brugal rum, which is the hottest brand in the market. At the same time we will be able to bring in the alliance portfolio, our Teacher's, Laphroaig and Courvoisier brands, which have been kept out of Maxxium due to portfolio complex.

As a result of our combined US and international routes to market initiatives, we will fully own sales organizations that distribute more than 70% of our sales value, that’s up from less than 10% just six months ago. We are also sharpening our focus on bringing to life our spirits business –vision of building brands people want to talk about. It's all building brand equity and creating consumer pull to drive profitable growth that outperforms our categories. In 2008, we enhanced our consumer insights and marketing teams. This has been new processes to help us develop the most impactful campaigns.

We will soon see new brand building campaigns for our flagship Jim Beam Bourbon as well as Hornitos Tequila. Reflecting how we want to use the best ideas that are working for our brands, last week we began running in the US a television commercial for Jim Beam, developed by our brand teams in Australia, where Jim Beam is the spirits market leader. We also unveiled new packaging for Cruzan Rum, and 3G’s our ultra premium tequila from the Sauza family. And we revamped our new product development engine to create innovative products targeted at the most attractive opportunities. That includes our award winning RoyalOne [ph] whisky which is off to a promising start, as well as the DeKuyper Burst Bar Shots, the limited edition should be in distilled series and there is a number of existing new products to come.

While we believe we still have significant progress to make in outperforming our spirits categories, we saw some very positive value share trends in 2008. Specifically, in the US, according to the Nielson data, where we held share in American Whisky (inaudible) continue to gain share. In tequila our strategic focus on super premium Sauza Hornitos paid off in share gain in this segment. The core Canadian Club gained share and Courvoisier also gained modest share.

Internationally, we saw good share performance against most of our key brand market combinations. Jim Beam gained significant market share in Australia and Germany, the world’s number 2 and number 3 in bourbon markets. Courvoisier outperformed in the market in the UK and Russia. Our (inaudible) brand accelerated share gain in the UK. Teacher’s Scotch outperformed the markets in Brazil and India, both larger markets for the brand, and our Spanish national brand, Kiki [ph] whisky and Larios gin gained share in a challenging market in Spain.

Looking at the whole products market, it’s clear that the US housing market deteriorated as the year progressed, and that the challenges accelerated in the fourth quarter. As home buyers continued to decline, unemployment rises, all in a tight credit environment, the market is in continued increase in foreclosures. On the demand side, consumer confidence remains low. Meaning buyers are reluctant to jump into the housing market or undertake big ticket renovation and remodeling projects. On supply side, while declines in sales of new and existing homes had moderated, inventories still remain high and must come down before a recovery can begin. We believe in the US home products market in aggregate was down in the high-teens percentage in 2008.

As we’ve indicated before, our objective is to outperform our markets, no matter how challenging they maybe. We are encouraged that our home products business has outperformed the market over the course of the downturn, including 2008. So, we in the marketplace are focused on developing new products, delivering superior customer service, expanding brands into adjacent product categories and expanding internationally. For example, our commitment to innovation at Moen lead to the revolutionary new Duralast ceramic-disc cartridge, featuring a compact design for greater designability and 35% fewer parts for greater durability. Moen will feature the Duralast cartridge in more than 100 single handle faucets starting this year. At the same time we continue to generate growth in attractive international markets.

Moen grew in constant currency internationally and laid ground work for expansion into India. Master Lock drove continued growth in constant currency in Canada, Latin America, and Europe. While we continue to focus on success in the marketplace, we are also aggressively focusing on cost and supply chain initiatives. Since our last conference call, we have taken further actions to align capacity with the challenging marketplace conditions across our Home Products unit. This has included reduction and set in force including difficult decisions that are resulting in the closure of additional facilities in our Home Products business. Over the course of the downturn, we have reduced the number of facilities in our Home Products business by 35%.

Among our recent moves are the realignment of our Schrok cabinetry operations, consolidating production of Schrok cabinetry from four facilities into three, and further consolidation of the entry door businesses from two facilities to one. To further reduce cost structures, our Home Products business have made headcount reductions at all levels of their organizations. Additionally, we are taking actions to exit low return product wise. We believe the supply chain actions we are taking do two things. They appropriately align our costs with current conditions and they also maintain our flexibility of scale up when the Home Products categories begin to improve. We're carefully and strategically realigning our Home Product supply chains to put us in an advantageous position in the future. Our supply chain structure is underpinned by a sharp focus on productivity initiatives that are promoting valuable efficiencies, such as lean manufacturing techniques, distributive assembly in cabinetry, improved inventory management, and targeted global sourcing. These supply chains support our industry-leading lead times, which we have leveraged to deliver excellent customer service.

Looking now to the Golf business, we remain focused on two key initiatives important to extending our leadership, product innovation and international growth. These internal growth initiatives are particularly important, given the golf industry’s challenges. While participation in golf was relatively stable in 2008, with rounds of play lower by less than 2%, we are seeing consumers pull back on planned discretionary spend from products such as new clubs and new golf shoes, as well as reductions in destination travel and spending on corporate custom golf balls.

In this environment, we have continued to invest in new product technologies to sustain our market share positions and stimulate demand. That includes the next generation Tour-proven Titleist Pro V1 family of golf balls, which will begin shipping next month, as well as the new FootJoy SYNR-G golf shoe. It also includes hot new clubs such as the Titleist 909 series of drivers, fairways, and hybrids, and the highly successful Titleist AP1 and AP2 irons. In fact, our Titleist and club brands captured the most global awards in Golf Digest 2009’s hot list.

Our investments in promising international growth opportunities are continuing to pay off. In 2008, we continued to grow at a double-digit rate in key Asian markets led by Korea, Japan, and China. Sales for our golf brands outside the US reached 42% of our total golf sales in 2008, an all-time high in our Golf business. As in other businesses, we are also working hard to contain costs in Golf to enhance our competitive position. That includes an ongoing initiative to right size employment levels.

In addition to the actions we are taking to drive long-term growth and returns, we took concrete actions in 2008 to return immediate value to shareholders. We were pleased to repurchase at a very attractive valuation the minority interest in our Spirits business that had been held by the VMS Group. This enables us to fully benefit from the results of our highest profit business. We purchased 4.5 million shares of our stock, representing approximately 3% of the shares outstanding, and we boosted the dividend by another 5% in 2008. For the twelfth year in a row, we have increased our payouts since becoming Fortune Brands. At yesterday's close, our dividend yield stood at 4.6%. Through dividend payments and share buybacks, we have returned approximately $540 million to shareholders in 2008.

Now here is Craig with a closer look at the fourth-quarter performance for each of our segments.

Craig Omtvedt

Thanks, Bruce. Good morning everybody.

Starting with Spirits, our fourth-quarter results reflected the impact of three items we told you to expect. First, the continuing impact of the ready-to-drink tax increase in Australia, which will now annualize at the end of April; two, costs associated with the transition to our new US sales organization; and three, a new inventory management model that is part of our new US distributor partnership program. We're planning to rely on leaner and more consistent US distributor inventory levels going forward and we closed the year with US distributor inventories that where 25% lower than the prior year. We believe this is a healthier base in which to drive growth and as we have previously indicated, supporting faster inventory turns for our US distributor partners creates valuable efficiencies for them and for us and further improves our competitive position in our largest market.

Largely as a result of these factors, fourth-quarter sales in Spirits were down 16% to $721 million. At the OI line, operating income before charges was $183 million and that is down 26%. OI was adversely impacted by the Australia issue, our route to market initiatives, and foreign exchange. On an underlying basis, excluding the impact of our route to market initiatives, Australia RTD, FX and excise tax, fourth-quarter sales and OI would have been flat.

For the full year, sales in Spirits were up 5% to $2.5 billion and operating income before charges were $635 million, off 12%. Global volumes for our entire portfolio and based on depletions were off 4%. Here again, the full-year results reflected the impact of the Australia RTD issue and our route to market transitions. On an underlying basis, full-year sales and OI would have also been flat. All this said, I am pleased to underscore that our global premium brands, excluding Jim Beam in Australia, grew at a mid-single digit rate for the year on a depletion revenues basis, reflecting solid volumes and the benefit of higher prices.

Looking at the full-year performance of key brands, on a constant currency basis and excluding excise tax, and starting with bourbon, global depletions for Jim Beam were off at a low single-digit rate. The decline is largely attributable to RTD in Australia, where Jim Beam is the number one spirit of any kind and also due to a soft year in the US. Excluding the Australia RTD issue, Jim Beam depletion revenues grew mid-single digits, and again I would emphasize that, Jim Beam depletion revenues grew mid-single digits. Even with the market challenges in Australia, the brand continues to outperform the market down under, gaining five share points in RTD and one point in standard bottles and I think that is quite a performance for the chain down there. The world’s number one bourbon is also demonstrating strong growth in key international markets. Jim Beam grew volumes at a double-digit rate in Germany, the UK, and China.

At the high-end of the category, both Maker’s Mark and Knob Creek had strong years. Maker's Mark volumes grew at a high single-digit rate and net sales and depletion revenues increased double-digits.

In tequila, global volumes for Sauza were off at a low single-digit rate, largely due to the distributor issue in Mexico we discussed previously. Even so, Sauza volumes bounced back in Mexico in the fourth quarter. In the US, super premium Sauza Hornitos and Cionanyos [ph] both delivered solid full-year volume growth and gained share.

In Canadian and Scotch whiskey, despite a modest decline in volumes driven primarily by soft results in Canada, Canadian Club increased net sales and depletion revenues at a low single-digit rate. Including our value Canadian whiskeys, we gained market share in the category in the US. Laphroaig grew as fast as its supply would allow with volumes up mid-single digits. On double-digit volume gains in Brazil and India, Teachers scotch continued its momentum.

In cognac, Courvoisier posted a high single-digit volume increase in the UK, where it is the number one cognac and Courvoisier also gained market share in the US. Globally, the brand grew volumes at a low single-digit rate, net sales and depletion revenues in the high-single digits.

In rum, in its first quarter in our portfolio, depletion revenues for Cruzan rum grew at a high single-digit rate, reflecting pricing and favorable mix.

In cordials, strong double-digit growth for the Sourz brand in Europe partly offset a mid-single-digit volume decline for DeKuyper in the US. We are focused on improving results for DeKuyper in 2009.

As we look at 2009, we feel very good about our strong foundation in Spirits, the progress we're making to further improve our business and the ability of the industry to remain solid during these challenging economic times. Reported Spirits results will reflect several factors including one, an incremental $35 million to $40 million in adverse foreign exchange due to the stronger dollar; two, net costs in the range of $30 million associated with our route to market initiatives in the US and internationally. This number includes increased international investment that we believe will enhance our growth prospects. At the same time, our underlying Spirits results will benefit from the first full year of our dedicated US sales organization, our focused brand building initiatives and the annualization after April of the Australia RTD tax increase.

Now turning to Home, fourth quarter sales were $852 million, down 23%. Operating income before charges came in at $41 million versus $139 million in the year-ago quarter. The margin erosion primarily reflects adverse operating leverage due to lower volumes. As Bruce indicated, we are continuing to proactively align capacity and cost structures to help offset lower leverage. We are viewing the performance of our key Home Product brands amid further weakness in the US remodeling and home construction markets, sales of our kitchen and bath cabinetry brands held share in a cabinetry market that declined in excess of 25% in the quarter and in the range of 20% for the year.

Despite lower sales, we continued to benefit from our breadth across price points and distribution channels, as well as our strong customer service. Sales from Moen were off at a mid-teens rate in the quarter, as continued growth and share gains in the retail channel partly offset lower sales related to new construction. The number one faucet brand in North America also benefited from growth in Canada and the continuing success of its expansion in commercial products. Moen’s full-year sales were off in the single-digit range.

Sales of our Simonton windows brands declined in the range of 20%. Reflecting its exposure to the new construction market, sales for Therma-Tru doors were off more than 30%. In security and storage products, sales for Master Lock were relatively flat and sales for Waterloo tools storage products were off at a single-digit rate. I would underscore here that despite the black fourth quarter, Master Lock had a terrific year, with sales up at a mid-single-digit rate on share gains driven by successful new products and the penetration of adjacent categories as well as continued international growth.

Looking at the full year for Home & Hardware, sales came in at $3.8 billion, down 17%. At the OI line, Home & Hardware’s full year operating income before charges was down 42% to $348 million. OI before charges margins came in at 9.3% and continued to compare favorably to other companies in the Home Products segment.

As we look ahead to 2009 in our Home Products business, the market will clearly remain challenging. We believe the Home Products market could decline in the range of 20% in 2009 and we expect that will further pressure margins. To best compete in this environment, we will remain focused on our initiatives to outperform the market, as well as on our supply chain and cost initiatives that will likely and partly offset the impact of adverse operating leverage. As you have seen, we have significant restructuring actions underway and we are continuing to evaluate ways we can take costs out to limit margin erosions.

Now concluding with Golf; fourth quarter Golf revenues were $212 million, that is 13% below the year-ago quarter when sales increased 13%. Adverse foreign exchange reduced reported quarterly sales by 4%. Additionally, the golf market became increasingly challenging in the quarter as consumers pulled back on bigger-ticket purchases and retailers reduced inventories.

On the upside, sales in the quarter benefited from strong sell in for the new Titleist 909 series drivers, fairways, and hybrids, as well as continued growth in international markets. OI was down $12 million from last year’s loss of $6 million. In addition to the fact that in the golf industry's seasonally smallest quarter we normally run a loss, results were impacted by adverse operating leverage and lower volume.

For the full year, our Golf sales came in at $1.37 billion. That is off 3% from our industry record results a year ago when sales were up 7%. Sales reflected lower sales in the US that were partly offset by double-digit growth in constant currency in Japan, Korea, China, and Southeast Asia. Full year golf ball sales were modestly lower against the high single-digit gain a year ago, in part due to companies reducing custom golf ball orders and industry-wide inventory reductions. I am pleased to say that we will begin shipping the next generation of the market leading Pro V1 family of golf balls next month.

On the club front, sales increased as strong double-digit growth for Titleist more than offset lower sales for Cobra, which faced a challenging comparison to 2007, when Cobra sales grew at a double-digit rate. Titleist drove significant share gains in irons with the successful introduction in 2008 of the new AP1 and AP2 irons. We are also very pleased with the buzz in the marketplace for the new Titleist 909 metals introduced here in the fourth quarter. Sales of golf shoes, gloves and accessories where relatively flat. Even so, FootJoy strengthened its position as the number one shoe in golf with market share gains in the US.

At the operating income line, OI before charges in golf was $125 million, and that is lower than last year by 25%. The variance between sales and operating income was largely attributable to brand investment, both here in the US and internationally and to adverse operating leverage. Over the course of the coming year in Golf, we'll benefit from the strength of our brands and from next-generation new products. Even so, the soft consumer environment in the US and Europe, particularly for discretionary purchases of golf clubs, an anticipated FX hit of approximately $25 million, as well as negative operating leverage will more than offset expected growth in key international markets for our Golf business. As Bruce indicated earlier, we are currently implementing an initiative to right size the organization in Golf to better align costs with marketplace conditions.

Before turning things back to Bruce, a few additional items. First, reviewing one-time items; during the quarter, we recorded a non-cash after-tax write-down of $349 million for goodwill and identifiable intangibles primarily related to our entry door business. As many of you are aware, GAAP requires us to evaluate goodwill and identifiable intangibles on a current fair value basis. This write-down reflects the further weakening of the economy in 2008, our cautious view of 2009, and the fact that our books reflect the relatively recent nature of the acquisitions. Let me underscore that we continue to be very positive about the long-term prospects for our entry door business.

We also recorded after-tax restructuring and restructuring related charges in the quarter of $33 million. As you will recall, earlier this month we issued an 8-K outlining plans to record after tax charges of approximately $62 million, half of which is cash for the course of the fourth quarter and 2009. The charges relate to proactive initiatives to align capacity with current and future marketplace conditions and better position our operations in this current economic environment. The fourth quarter charges reflect initiatives in our Home Products business, route to market initiatives in Spirits, as well as the exit of low return product lines in multiple segments. We anticipate that these initiatives will generate savings with a cash pay back of three years or less.

With regard to our tax rate, as a result of shipping geographic mix toward more international business, our effective tax rate before charges gained ended the year at 29.3. That is down 130 basis points from a year ago. Here in 2009, while we're still finalizing our plans, we anticipate we will be looking at a tax rate in the range of 27% to 29%.

With regard to free cash flow, we ended the year at $430 million. Again, that is after dividends and capital expenditure. I would also highlight that number is net of a pretax $100 million pension contribution in December that impacted cash flow of $63 million on an after-tax basis. Our decision to fund the pension contribution was a function of several factors including our strong cash flow, current market multiples and valuations, anticipated funding requirements here in 2009 and our commitment to the pension security of our employees. We currently anticipate we will have only minimal funding requirements in ’09 and are targeting free cash flow to be in the range of $100 million to $200 million, and I highlight for everyone that that starts with approximately $600 million of cash flow from operations.

Lastly, turning to our balance sheet and liquidity position, we continue to be solidly positioned. We currently have in excess of $1.1 billion available financing under our revolving credit facility and on the bottom side, we have a 300 million euro note coming due tomorrow, for which we have already arranged financing, and we have no other debt maturing before 2011.

Now let me turn it back to Bruce.

Bruce Carbonari

Thank you, Craig. In the most difficult and uncertain economy in decades, we are planning for the global economy to get worse before it gets better, and we expect the challenges of 2008 to continue throughout 2009.

Based on the credit crunch, declining home values, rising job insecurity, consumers are being very cautious. At the retail level, we anticipate customers will maintain lean inventories across categories. While we anticipate the Home Products market will decline in the range of 20%, Fortune Brands will benefit from our significant presence in the relatively recession-resistant distilled spirits category, which now provides nearly 60% of our operating income before charges. We expect the global spirits market will remain solid and that spirits will remain an affordable luxury.

While we can't control the health of our markets or the headwinds such as adverse foreign exchange, we can control how we compete. The actions we have taken position Fortune Brands well to navigate these challenging times and to return to strong growth when the economy recovers. We will continue making targeted investments to gain profitable market share, including innovative new products, expansion into new markets, and impactful brand-building programs, and we will remain sharply focused on our ongoing cost and supply chain initiatives, while retaining appropriate flexibility to ramp up production when conditions improve.

We are budgeting very cautiously in this environment. Accordingly, we are currently targeting diluted earnings per share before charges and gains for 2009 to be in the range of $2.00 to $2.50 per share. That target reflects sharply lower results in the Home Products business, lower results in Golf partly offset by underlying growth in Spirits. We expect 2009 results will be impacted by adverse foreign exchange amounting to approximately $0.35 per diluted share at current rates. Costs associated with the Spirits route to market initiatives in the range of $0.15 per diluted share as well as negative operating leverage in the Home and Golf segments. Our earnings targets assume that the consumer trends we saw the fourth quarter will continue into 2009 and that the seasonally smallest first quarter, during which comparisons will still be impacted by the Australia RTD tax will be the most challenging of the year for us.

As a result, we may deliver only modest EPS before charges and gains in the first quarter. As the year progresses, we will benefit from easier comparisons as well as the improvement in the underlying performance of our Spirits business. Despite the challenges that 2009 will bring, we remain committed to outperforming our markets, aggressively managing our costs and emerging from the global economic crisis an even stronger company. We feel very good about the long-term fundamentals of the categories we are in and even with the challenges we will face in 2009, we feel good about the things that we are doing to outperform in this environment and to accelerate growth when the economic conditions improve.

Our confidence is reinforced by the fact that behind our portfolio of great consumer brands is a team of more than 25,000 best-in-class people who are resilient, passionate, and committed to our success every day. On behalf of everyone in the Fortune Brands family, thank you again for joining us. Now Craig and I will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Gregory Malik with Morgan Stanley. Okay, Mr. Malik, your line is open. Sorry for the delay.

Gregory Malik – Morgan Stanley

Hi. Can you hear me all right?

Bruce Carbonari

Yes.

Gregory Malik – Morgan Stanley

Great. I have one question on Home and one on Golf. On the Home side, did you tell us about the quarter – what you think the difference was between new construction and if you will, the retail trade or repair model or give us some sense of that and then your outlook.

Bruce Carbonari

Sure. What we saw in the fourth quarter was pretty much in the new construction market staying at pretty much the same level as it had been traveling before. But really, the difference was in the remodeling and repair side of the business. Most of the high ticket discretionary remodeling projects slowed down. We saw that in our cabinet business and some of our window businesses as well.

Gregory Malik – Morgan Stanley

Okay, so it was more – you'd think it was the mix that really drove it more than volume; the volume was bad but the mix are more.

Bruce Carbonari

The mix between remodeling and new construction, yes.

Gregory Malik – Morgan Stanley

Okay, great. And then on the Golf side, you mentioned that sell in of the new clubs helped in the fourth quarter. How much was that in dollar amounts?

Craig Omtvedt

That is not something we would quantify for competitive reasons, but it was a benefit. But I think the important message here is the fact that we did indeed see some slowdown in consumer discretionary spends, along with a takedown of inventories by a number of retailers to kind of lean out and protect their cash positions.

Gregory Malik – Morgan Stanley

Okay, great. Thanks a lot.

Operator

Our next question comes from the line of Eric Bosshard from Cleveland Research. Your line is open.

Eric Bosshard – Cleveland Research

First question on Spirits. Can you talk a little bit about – you mentioned a relatively solid spirits market, but then you also mentioned a bit of a mix shift down as you ended the year. Can you talk a little bit more about the mix shift and the impact that it could have on share; and then secondly, just your ability to get price in the spirits category in 2009, your thoughts there.

Bruce Carbonari

Sure. Yes, as we had earlier talked about in the prior quarters, we did see a shift from on-premise to off-premise, you know restaurants, bars and then to more liquor stores if you will. That continued into the fourth quarter. What we thought was a little different was just the mix shift within certain categories, and that mix shift was going from maybe ultra premium down to premium or from standard down to value. It wasn't significant but it was noticeable, especially in the vodka category in particular. So, as you may know from our portfolio, we don't have a premium or a super premium vodka but we do have a value vodka. So we actually benefited from that. The other thing that I would tell you, as you know, we are very deep in tequila and bourbon, and Canadian whiskey. If you look at our portfolio, we have basically products of each of the price categories. In each of those particular categories, we didn't see much of a shift in the mix.

Eric Bosshard – Cleveland Research

Have you seen an unwillingness by distribution to accept price increases, any change with your ability to get your annual price increases in the spirits industry?

Bruce Carbonari

Not really, no.

Eric Bosshard – Cleveland Research

Okay. Second question, if you look at 1Q, your guidance suggests operating profits off 50%, somewhat similar to the fourth quarter, but then as you work through 2Q and 4Q, the drops get a lot less worse. Anything outside of comparisons, anything that you are seeing that would cause you to guide this way?

Bruce Carbonari

Yes.

Craig Omtvedt

Let me jump in on that for a moment, though, because if I heard you right, I think what you said was incorrect. We certainly have given guidance for the full year that would – if you use the $2.00 to $2.50 would have us down kind of mid-30s to high-40s year-over-year. We did in our prepared remarks indicate that we are targeting for the first quarter that diluted earnings per share will be up modestly and that is in an absolute sense. I know we have got a number of things that are going on. We have got the Home business in its seasonally smallest quarter, where we're expecting to be impacted by reduced volumes and lower leverage. At this point, the recovery actions that we have underway will be offset by other items.

In Golf, we are looking at lower volume, but we are going to be impacted by the stronger dollar and so FX is going to be an issue.

And in Spirits, we have got all of our kind of one-off initiatives or repositioning initiatives going on with route to market, the RTD impact that will carry through to the month of April, and then again, given that we have got largely 45%, 50% of our business internationally, we are going to be negatively impacted by the strong dollar.

So the first quarter is going to be a challenging quarter for us. But then as we go through and – excuse me, I may have outspoken here. As I talked about Spirits, let me just reiterate the factors. We have got Australia RTD tax increase that annualizes in April, we have got our route to market initiatives that are impacting us year over year and then we have got the impact of the strong dollar. As we go through the year, obviously we get past the RTD issue here largely at the end of the first quarter and then the route to market and the FX issues will annualize at the end of the third quarter.

So for us right now, our expectation is that while the full year is going to be challenging, as we move through the year, these one-off kinds of items annualize and then we obviously are going to be up against easier comps from ’08. So that is what is going to result in the improvement year over year. So, long answer, but hopefully that clarifies what you are asking.

Eric Bosshard – Cleveland Research

Yes. Thank you. And then just real quick, with the payout ratio near 80%, what is your current thinking on the dividend, any updated color there is appreciated. Thank you.

Craig Omtvedt

Yes, I guess the response I would give you there is that is not something that we would speculate on, that is always a matter for Board consideration, but I think that one, our track record of the last 12 years speaks for itself. We do have a dividend yield today that is quite attractive as Bruce outlined in his remarks. We are north of 4 1/2 and that is against an S&P dividend yield that is running about 3 1/4 right now.

And as we look at cash, nothing has really changed for us. The default position right now is still one of paying down debt, but as we think about the sequence for the use of cash, it always is first to fund our internal growth initiatives and then it is acquisitions versus share buyback, and then obviously comes the dividend. So all those factors will be considered as we assess and determine where we're going to go or how we deal going forward with the dividend.

Eric Bosshard – Cleveland Research

Thanks, guys.

Operator

Our next question comes from the line of Lindsay Mann with Goldman Sachs.

Lindsay Mann – Goldman Sachs

Hi guys, how are you? So, first of all, I was hoping that you could maybe talk about what happened between the third quarter report where you gave some pretty specific OI guidance for up-and-down the division and what you were actually able to print and specifically with respect to the Spirits division.

Craig Omtvedt

Well, clearly in the fourth quarter, we had a fair number of one-offs, the largest of which was just the impact of foreign exchange. In our guidance, we were wrongly assuming that perhaps we would want to see some uptick in where we want to be with that (inaudible) set differently that we were going to see the strengthening of the dollar subside and we didn’t get that, but the other items that for spirits in particular impacted – and hang on here a minute, I just want to get to our summary. Near with me just for one second.

Bruce Carbonari

Well, the inventory takedown too in the US was a big factor, but we did call that out in the third quarter. Those are the two major pieces, the currency and inventory.

Lindsay Mann – Goldman Sachs

The inventory you had guided to I believe 20 million.

Bruce Carbonari

Yes.

Lindsay Mann – Goldman Sachs

Did it end up – turn out being significantly different than that?

Bruce Carbonari

No, very close to that.

Lindsay Mann – Goldman Sachs

Okay. And I was hoping perhaps you could – I mean, you have issued this $2.00 to $2.50 guidance for next year. With some specifics, could you perhaps go up and down the divisions and talk about what your underlying assumptions are there?

Craig Omtvedt

Yes. Again, what we're doing and we have made the decision that we are going to go through more kind of qualitative rather than quantitative, but just to give you a sense and this will just give you kind of maybe three metrics that you can triangulate from, but within the bandwidth of $2.00 to $2.50, our expectation right now is that the Home market will be off in the range of 20%, and if that happens, that puts us towards the midpoint of our guidance. In the Spirits market, if volume remains kind of up 1% or so, we would be at the high end of our guidance; and if golfer rounds played remain off low single digits, that would put us at the high end of our guidance. So hopefully that helps you as you try to triangulate through the numbers.

Lindsay Mann – Goldman Sachs

You mentioned an incremental $30 million of investment on the Spirits side and I think that you have talked before about I think it was $25 million or so in 2009 for some of your distribution initiatives. Is that $30 million incremental to what you have already discussed?

Craig Omtvedt

Yes, let me help you with that little bit, because what we had indicated before was that for the US we were anticipating something in the kind of 30 to 35 range, in totality maybe 35 to 40 and we had about, we were saying that about 10 of that was coming in the fourth quarter. So that then says you have got 30 million incrementally in 2009. We had originally targeted that on international distribution, we would largely be lapped up modestly and as we are now getting ready to implement and we have thought about what we want our position to be in various markets gets similar to the US, we are going to run with higher numbers of people, which we think will get a strong payback over time, but we are now looking at incremental investment there in the range of about 13 million to 15 million. We have got some payments that had come to us – that were coming to us out of Maxiam that we won’t have any longer. So in aggregate, international is going to be up in the range of 15 to 17 and then if you take out the 18 to 20 for the – what will now be a benefit in ’09 because of the fact that we already took distributor inventories down here in ’08, we don't have that kind of normal bleed down that we might get over the course of ’09, all of that, taking the 30 for the US, taking the – kind of 15 to 18 for international and netting off this year’s benefit on distributor inventories, that’s what brings us to the net $30 million.

Bruce Carbonari

I think it's really important to understand strategically what we're doing here. You know if you look back really just six months ago, and I said this in my prepared comments, we had roughly 90% of our sales going through shared organizations, or roughly 10% of our sales that were dedicated sales organizations. That means 100% owned sales organizations. With this investment and the moves we are making now both domestically and internationally, we have over 70% of our sales now by dedicated sales force. So, we could focus on the programs, a 100% on the programs we want them to focus on.

Lindsay Mann – Goldman Sachs

And then lastly, could you talk about – if you were to see a dramatic swing in consumer preferences from the high end of bourbon and tequila for the low end, what sort of impact did that have on your margins?

Craig Omtvedt

Say that one more time.

Lindsay Mann – Goldman Sachs

You mentioned that you really not seeing significant trade-down within some of your key categories bourbon and tequila. If that were to happen, what’s the implications for margins?

Bruce Carbonari

I don’t believe it will be dramatic at all. We have – if you take the bourbon category from Old Crow, which is our value to Jim Beam, which would be standard to Makers Mark all the way up to our small batch and Jim Beam and Knob Creek. We are well positioned in each of those categories and we have solid margins in each of those categories.

Lindsay Mann – Goldman Sachs

Okay. Thanks very much.

Craig Omtvedt

Thank you.

Operator

Thank you very much. Our next question comes from the line of Ann Gurkin with Davenport. Your line is open.

Ann Gurkin – Davenport

Good morning.

Craig Omtvedt

Hi, Ann.

Ann Gurkin – Davenport

Let me start with Spirits. How is the search for a head going?

Bruce Carbonari

It’s going well. We have seen a number of people. A little bit of slowdown during the holiday season because we just lost a little bit of momentum, but we have had a couple back, couple of time and I think it’s moving well.

Craig Omtvedt

We like the guy we have got right now, though.

Ann Gurkin – Davenport

Good point. With respect to Jim Beam, it looks like accord [ph] to impact that case unit – sorry, case depletion volume is down 1.2% for the year. Can you comment on your strategy for hopefully reversing that volume decline in 2009?

Craig Omtvedt

And is that the US number you are talk about?

Ann Gurkin – Davenport

US, yes.

Craig Omtvedt

I think you know we are looking for value shared. So, when you look at that we are actually up about 3%. So, we will trade that value share for volume share any time.

Ann Gurkin – Davenport

I didn’t know if you were going to put that as an emphasis with this new sales force – or new distribution agreement with Southern Wine & Spirits.

Bruce Carbonari

Yes, that’s too new – we just signed that agreement last week, and the sales organization is 120 days old or something like that. So, it’s a little young to see that type of response yet in the marketplace because of it.

Craig Omtvedt

Ann, just to add to that, obviously, we are focused on a profitability that’s being generated. But I think you are going to see more from our ad campaigns this year, I think I should just say as Bruce outlined in his comments, we kicked off a kind of new TV ads. We’ve got some other things coming and I think you are going to see some payback from the initiatives we have so that we will benefit on the volume side along with the overall profitability.

Ann Gurkin – Davenport

Great. And switching over to the home business, I think you said home, you are looking for that business to be down 20%, can you break out repair and model and new construction within that number?

Craig Omtvedt

Yes, right now we are saying that our expectation is that repair and remodel will be down kind of mid teens and that – and in fact probably a bit higher than that in the cabinet business, could be as much as 20. And then on the new construction, I think our latest –

Bruce Carbonari

30% or more.

Ann Gurkin – Davenport

Great. Thank you very much.

Operator

Our next question comes from the line of Karen Lamark [ph] with Federated Investors. Your line is open.

Karen Lamark – Federated Investors

Good morning, I’ve got a few questions. On the balance sheet, notwithstanding the $349 million on goodwill you just took. I'm noticing that your intangibles are still about 56% of your assets and with few years now declining sales and margin across all the business, I am wondering how you reconcile those values of those businesses on the balance sheet to your outlook for future cash flow out of those businesses. How are you thinking about write down to evaluation at that point?

Craig Omtvedt

Yes, to be honest, the reconciliation is quite easy. We look at fair value across all of our businesses as I outlined in my prepared remarks, one of the reasons that you saw the write down in our door businesses that fact that it was a relatively recent acquisition. And when you look at the goodwill that’s on there, or sort of the other businesses, that’s goodwill that’s been there for a longer period of time and the aggregate book values of those businesses even in this softer market we still have our fair values that are comfortably in excess of the book values that we have. So, as we look at things right now we are not anticipating that we are close to the line in any of our other businesses.

Karen Lamark – Federated Investors

Should we assume – it’s an ongoing exercise or an annual one?

Craig Omtvedt

Well, as you know if you know US GAAP, I mean we are required to assess our carrying values at least annual and anytime that there is a trigger event. So, this is something that we are constantly monitoring.

Karen Lamark – Federated Investors

And then sort of a similar question around inventories. They declined a bit year over year, but obviously sales are down quite a bit more, and I am wondering if you have any comment about how you are planning on working those down and what visibility you have to inventories in home and golf out in the channel.

Craig Omtvedt

Let me, I guess I will comment on three points there. One, we did work to take down our inventories. The greatest amount of progress was made in the home business, but it was also associated with the fact that as you pointed out the sales were declining. We in terms of what you are seeing on the balance sheet in Spirits, it’s somewhat – here is the reverse side in terms of the stronger dollar foreign exchange, the translation of the cognac inventories and others that we have internationally translated back at lower number so that we benefitted there . And then in our golf business we did end the year with higher inventory levels because of the slowdown that we saw in consumer spend as well as the retailer and other customers taking their inventory down at the end of the year.

Bruce Carbonari

And let me talk about the customers, and that’s part of your question as well. We’ve seen pretty much across the board in all of our businesses customers being much more conscious of the balance sheet and adjusting their inventory level. So, from the big mass merchants and Depots and Lowe of the world doing excellent job of managing their inventories. We’ve seen that continue pretty much in the second half of last year. I think in the spirits business, we’ve see the distributors start to take down some of their inventory as well as some of the retailer. We think a lot of that is behind us. And as I think Craig mentioned before also in the golf business, we’ve seen that. We don’t think that’s – I think they are going to be very disciplined and not bring those inventories back in very quickly. So, we aren’t building that into our model going forward either.

Craig Omtvedt

So, looking at ’09, we are already coming out of the blocks, have initiatives underway to work to manage our inventory levels down.

Karen Lamark – Federated Investors

Okay. And then thanks for the comments on capital allocation. I just had a question about – would you preference be to buy back stock as opposed to raise dividend given right now the payout ratio is so high.

Craig Omtvedt

I mean that’s not something that we would speculate on.

Karen Lamark – Federated Investors

And on the pension, did you make any changes in your discount rate or your rate of return assumptions?

Craig Omtvedt

No, not for this year.

Karen Lamark – Federated Investors

2009, this year?

Craig Omtvedt

Right.

Karen Lamark – Federated Investors

And then lastly. The Australian RTDs that you referenced, can you I don’t know how much of it is in terms of sales. Can you share that, how much of that was Q4 sales?

Craig Omtvedt

Hang on a minute, just one second. Let’s see if I can kind of help you with that. It would be – just a second. It would be in the range of about $25 million in sales.

Karen Lamark – Federated Investors

Okay. Great. Thanks so much.

Operator

Thank you very much. Our next question comes from the line of Peter Lisnic with Robert W. Baird. Your line is open.

Peter Lisnic – Robert W. Baird

Good morning gentlemen.

Bruce Carbonari

Hi, Peter.

Peter Lisnic – Robert W. Baird

Craig, I guess, or Bruce, the first question on the spirits, and then relative to the guidance, you know, potentially hitting the high end of the range in sprits being up 1%, can you maybe break that down in to what your expectation are US versus international?

Craig Omtvedt

Sure. We are seeing, basically in the US that the market will be up on a volume basis about 1%. And I would say that – and there is room for price. That will be slightly offset by mix. So, in general, net-net we are talking about a market that will be up below single digits. Internationally, it’s kind of a mixed bag. Western Europe is probably the more challenged, as you saw Spain early on the year. But we see a slowdown now in the UK and Germany as well. So, we are seeing that to be around the flattish part, and then as you look to Asia and some of our positions in Brazil, we still look at those for pretty good growth.

Peter Lisnic – Robert W. Baird

Okay. Fair enough on that. And then just on the – and it sounds like the Western Europe, UK and Germany flattish, I would think imply some share gains, is that the right way to think about that?

Craig Omtvedt

Yes, I think so, and the momentum we have right now in those markets we see carrying over into next year.

Peter Lisnic – Robert W. Baird

Okay. Great. On the home and hardware front, we would be interested to hear, I guess answers to a couple of questions. One is, Craig, I think you mentioned it’s been printed that these restructuring activities are a three-year payback or less. Just wondering, A, how volume dependent is that assumption or that assertion I guess? And then second, if you kind of look at the business in some of these restructuring activities, and assume at some point we enter a normalized environment what are you thinking about the structural margin profile or structural return profile of that business relative to previous cycles?

Craig Omtvedt

Okay. Let me just talk about the restructuring first. Obviously, I mean, we outlined that we will have taken out or have taken about 35% of our facilities and along with that we’ve unfortunately have to reduce headcount by about the same number. The vast majority of our restructurings are based simply on cost and – and compensation or – or salaries, people are a large part of that, so I don’t expect that volume is a material factor there. Turning to your question about margins, obviously I mean we are taking a hit on the leverage side here. We are looking to be surgical, to be smart about this, to take out as much as we can, but at the same time be sure that we are maintaining a footprint that will allow us to benefit when the market starts to recover. If you look at where we are right now with the overall home market, and I think with what’s now projected in 2009, we are going to be down 20% from the peak when taken out about, as I said, 35% of facilities and people. So, we are still taking a hard look at this thing to say, is there more that we can and we should be doing. But I think we are positioned right now that as the market comes back we’ve been very careful to make sure that the supply chain properly maintained and positioned. We're not just knee-jerk reacting taking out costs. We've been very focused on this. So, we should start to see margin improvement and fairly quickly as they economy picks up. You look back at kind of a high watermark of kind of 15% or so. I think that that is still a long term objective. But I would highlight long term, but I think getting ourselves back up into the 10% to 15% range is something that I would expect we would get to in a fairly reasonable amount of time.

Peter Lisnic – Robert W. Baird

Okay. That is very helpful commentary. I appreciate that. And just if I can, one follow-up on that. Are there any specific end markets or product lines where you see the industry or yourselves being maybe under-capacitized, if that’s the right way of thinking about it. Has there been any sector where there has been too much capacity taken out?

Bruce Carbonari

I don’t think in our particular categories, again we are in the kitchen and bath and the windows and doors business, as well as security business. So, I think there are particular segments that we – when you look at cement and some other things, but in our particular category, I would say no, we are not in an under-capacity situation as an industry.

Peter Lisnic – Robert W. Baird

Okay. And then last question, any sort of potential opportunities for pick up attractive or somewhat distressed assets in home and hardware in ’09 or 2010?

Bruce Carbonari

I would tell you that the deal flow that we are seeing has increased since last time we’ve talked. It’s tough time really right now because I would like to see a little bit more signs of stability before we would jump in and risk our flexibility. So, I think the housing market really needs to show some better signs right now for us to get in. I will tell you we are seeing some interesting opportunities, but I think a lot of the opportunities, they are facing a lot of the same challenges we have and maybe some haven’t been as aggressive as we have in restructuring our businesses. So, there is a lot of work to do. But we would be very, very selective.

Peter Lisnic – Robert W. Baird

Okay. That is very helpful. Thank you for your comments.

Craig Omtvedt

Take care, Pete.

Operator

Thank you. Our next question comes from the line of Dennis McGill with Zelman & Associates. Your line is open.

Dennis McGill – Zelman & Associates

Hi, guys. Thank you. First question has to do with the comments you guys made on the trading in spirits as people move to more at-home consumption and so forth. Is that I would assume – pressures margins on the distributor side. Can you talk about the potential of that circling back to you guys?

Bruce Carbonari

I can’t say that we see – we don’t see tripping back and I am not sure that’s a true statement on the distributor side. So, I can’t answer that because I am not sure I agree with the comments that you’ve made. I think distributors are doing a lot of the right things as you reallocate their resources internally to focus in on in-store promotions and in-store POS rather than probably visiting as many bars as they used to visit. I think they are doing all the right things, at least our partners are.

Dennis McGill – Zelman & Associates

So, that's a low risk in your guys' mind?

Bruce Carbonari

Right.

Dennis McGill – Zelman & Associates

Okay. On the home side, I guess you’ve talked around this a little bit, but I was hoping you can maybe give us a little more quantified numbers on the cost savings from the actions you guys have taken, what you would expect this year? And then how you think about the detrimental margin as I am sure a lot of the easier cost cuts have been made, would you expect that to accelerate as volumes deteriorate more?

Craig Omtvedt

Well, I would say more broadly and we don’t normally kind of break out specific cost savings by our business. But I think as we look here at ’09 and we think about our home business for, let’s say, for the year, it’s – our expectation is that our recovery actions and benefit should be similar to what it was here in ’08. Looking at materials and commodity costs, we are expecting that to come down to a degree. As we outlined in ’08, we took a level of hit in commodities because our timing of prices and things lag the commodities in just some degree, we just didn’t put them through. But we will benefit somewhat from that. And obviously at this point the big hitter is just what’s happening with just leverage, lack of leverage on the lower sales.

Dennis McGill – Zelman & Associates

Okay. And just two numbers to wrap up. Can you just update us where you on in the commercial paper revolver situation? And then on the currency, can you talk about how much of that’s translation versus transaction oriented?

Craig Omtvedt

In terms of where we are with the balance sheet, we are not in the commercial paper market. When we dropped to A2 or A3, P3 rating we moved to the revolver. And as things stand right now, we will end or have ended the year with about $800 million drawn from our $2 billion revolver. And I am sorry, what was the other question?

Dennis McGill – Zelman & Associates

The earnings impact of currency in ’09. How much of that, is that all transaction, how would that split between transaction and translation?

Craig Omtvedt

I don’t have the (inaudible) in terms of the equities really split out for you, I mean, obviously because of how we sell in to the markets, impacts then what is going to be their cost of goods sold, which then impacts the OI and then drives itself back into translation. So, I don’t know that the breakout is really relevant at this point. But the net impact of the two, we are estimating across the company right now is going to be in the range of, say, $70 million, $80 million this year.

Dennis McGill – Zelman & Associates

Okay. That’s helpful. Thanks again guys.

Operator

Thank you very much. Our last question for today’s conference call comes from the line Kevin Dreyer with Gabelli & Company. Your line is open, sir.

Kevin Dreyer – Gabelli & Company

Hi, good morning.

Craig Omtvedt

Hi, Kevin.

Kevin Dreyer – Gabelli & Company

Just to clarify on spirits. When you said that that is going to be an offset and have growth, is that before or after the foreign exchange in route to market investment?

Craig Omtvedt

Not sure I understand the question.

Kevin Dreyer – Gabelli & Company

We are talking about sales, so – well, in terms of your guidance?

Craig Omtvedt

Well, we haven’t given you ’09 guidance per se. What I outlined for you when I talked, I only said that for our EPS guidance of $2.00 to $2.50. We said that if spirits volume growth is up, US volume growth is up in the range of 1% or so. That would put us towards the high end of our guidance.

Kevin Dreyer – Gabelli & Company

I am just look at where it says $2.00 to $2.50 partially offset by underlying growth in spirit. So, that’s growth of sales or operating income.

Craig Omtvedt

Now, I understand, okay, the question. Yes, as we adjust out for all kind of the one-offs that are going on in the FX as well as Australia RTD, what we are trying to convey to everybody is that the underlying health of the business is still we think good and that the up low single digits that’s going to be OI, because at the volume or at the revenue line, if an underlying basis were up 1% or so, we expect some translation and some benefit of that leverage on that down at the OI line.

Kevin Dreyer – Gabelli & Company

But after those items, it would –

Craig Omtvedt

So I think at this point, yes. It’s really full, but a little bit of leveraging there between revenues being up, say, modestly kind of 1% to 2% and then maybe some leverage at the OI line.

Kevin Dreyer – Gabelli & Company

Okay. And for home and hardware, if the market continues to be this weak, I mean I guess, you keep talking about business positioning yourself for a recovery, but what if this is kind of the run rate level sales, are there other ways to get your margins up or are you basically do you need a market recovery to increase profitability?

Craig Omtvedt

Well, I think look I mean, it’s as I outlined, we are continuing to look at the cost structure of the business. And we are looking at both the near term as well as the longer term, and obviously our objective and our responsibility to the shareholders is to deliver an appropriate return. So, if indeed, we kind of find ourselves in a position where this down turn is going to be long term, then obviously we are looking at it then from a different light and with a different lens that will cause us to rethink the total cost structure of the business.

Bruce Carbonari

Yes, we’ve been very careful to take out costs that we wouldn’t have to put back in a year or two later. So, we’ve been very diligent about that. But if we saw a flat market for at this level for an extended period of time, it would be different decisions made.

Kevin Dreyer – Gabelli & Company

Okay. Thank you.

Operator

At this time, we will turn the call back over to Mr. Carbonari for closing remarks.

Mr. Carbonari

Thanks again for joining us. We look forward to discussing our first quarter results in April. And, again, I appreciate all your questions and comments and we go forward here – as we go forward here in 2009. Thank you.

Operator

Thank you very much for calling in. At this time, your call has concluded. You can hear a recorded replay of this call by dialing 1-800-642-1687. This call will be available until close of business on February 01, 2009.

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