Fortune Brands Inc. Q2 2009 Earnings Call Transcript

| About: Beam, Inc. (BEAM)

Fortune Brands Inc. (FO) Q2 2009 Earnings Call July 24, 2009 10:00 AM ET


Bruce Carbonari - Chairman and Chief Executive Officer

Craig P. Omtvedt - Chief Financial Officer


Peter Lisnic - Robert W. Baird & Co.

Analyst for Michael Rehaut - J.P. Morgan

Lindsay Mann - Goldman Sachs

Stephen East - Pali Capital

Analyst for Ivy Zelman - Zelman & Associates

Ann Gurkin - Davenport & Co.

Derek Leckow - Barrington Research

Karen Lamar - Federated Investors


At this time I would like to welcome everyone to the Fortune Brands second quarter earnings conference call. (Operator Instructions) A replay of the audio portion of this call will be available two hours after this call has ended. The replay number is 1-800-642-1687.

Bruce Carbonari

Welcome to our discussion of Fortune Brands second quarter 2009 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.

Also, this presentation includes certain non-GAAP measures that are reconciled to the most closely comparable GAAP measures in our news release or on our Web site in the supplemental information link in the Web cast page.

In the second quarter Fortune Brands continued to effectively navigate the challenges of the global recession and severe U.S. housing downturn. At a time when consumers are being very cautious, we are pleased that each of our businesses performed in line with our expectations for the quarter and that each is delivering industry-leading operating margins.

While we continue to aggressively manage costs we are maintaining an appropriate level of strategic investment, which is paying off in innovative new products that are helping us succeed in the marketplace.

We are also confident that our supply chain and balance sheet initiatives position us well to emerge from the downturn an even stronger company. Our spirits business benefited in the quarter from our breadth across categories and price points, higher pricing, and the return to volume growth for Jim Beam ready-to-drink products in Australia.

Results in spirits also reflected the success of new products such as Red Stag by Jim Beam and Sauza Margarita-in-a-Box, as well as management and timing of brand expense.

As anticipated, our home products business returned to profitability in the second quarter and sales declined at a more moderate pace as compared to the seasonally smaller first quarter. Despite lower year-over-year results, our home products business benefited from its dramatically lower cost structure, share gains with key customers, new products, and the favorable impact of the consumer tax credit for energy-efficient products.

While we’re seeing significantly lower discretionary spending on golf in the U.S. and Europe, including for corporate custom golf balls, our golf business is sustaining its leadership in this environment with successful new products, including the new Pro V1 golf ball, 909 drivers and AP2 irons, plus continued success in Asian markets.

Now let's take a closer look at the numbers for the quarter.

Net income for the second quarter was $100.0 million, or $0.66 per diluted share. EPS was impacted by factors including lower sales, negative operating leverage in home and golf products, adverse foreign exchange, and modest charges from one-time items. Craig will touch on the charges in a moment.

Excluding one-time items, diluted earnings per share before charges and gains, was $0.70, down from $1.25 in the year-ago period. These results were $0.06 ahead of Thompson First Call consensus estimate of Wall Street analysts.

Net sales were $1.74 billion, down 17%. Sales would have been down 15% on a comparable basis, excluding excise tax, foreign exchange, the Cruzan acquisition, and the impact of required accounting related to spirits route-to-market initiatives. On both a reported and comparative basis sales declined at a more moderate pace that in the first quarter.

Fortune Brands continues to benefit from the stability of our spirits business. Comparable net sales were flat in spirits, tempering the impact of a 14% decline in golf and a 23% decline in home and hardware.

Reported operating income came in at $193.0 million. On a before charges and gains basis operating income was $204.0 million for the quarter. That's down 37%, largely reflecting declines in both home and golf due to lower volumes and adverse operating leverage.

Reviewing our asset investment return measures, after-tax returns on net tangible assets before charges and gains was 15%.

Working capital efficiency came in at 38%. After maturing inventories for spirits, working capital efficiency was 21%, only up modestly versus the prior year.

Return on equities before charges and gains was 8% and return on investment capital before charges and gains was 6%.

Fortune Brands benefited from its foundation of powerful and enduring brands that consumers have trusted for generations and as we've indicated before, we have two main goals for Fortune Brands in 2009: outperform our markets at both the top and bottom lines, and position the company for strong growth when the economy recovers.

We are continuing to pursue these goals through three key initiatives across our business. First, we are fine-tuning our strategies to adjust to the evolving consumer. Consumers have clearly changed their behavior in the current environment and to succeed, companies must maintain strong brands, deliver value at various price points, and drive demand in targeted and creative ways. This included developing innovative new products and targeted brand-building programs to fuel consumer demand.

Second, we are significantly reducing cost structure and enhancing our supply chain flexibility to be responsive to consumers and economic trends.

And third, recognizing cash is king in this environment. We are aggressively managing our cash to strengthen our balance sheet and enhance our financial flexibility.

As you will recall, earlier in the second quarter we announced we had undertaken a series of aggressive cash management initiatives through our operations, including reduced capital expenditures and enhance use of working capital. Combined with the reduction in the dividend rate we announced in April, these steps are enabling us to target free cash flow for 2009 in the range of $400.0 million, more than double our previous 2009 free cash flow estimates.

Now I would like to take a few minutes to review our strategic progress in each business, how we are succeeding in the current environment, and how we are positioned for strong growth when the economy does recover.

Our spirits business is our largest profit contributor and our most stable business during challenging economic times. I am pleased to report that while no industry is recession-proof, the spirits category continues to demonstrate its resilience.

In the U.S., industry volumes are up modestly. Internationally, markets are mixed. Industry volumes in Western Europe and Mexico remain essentially flat, the market in Spain is off in the mid-single digit rate, and Australia is growing, following the annualization of the RDT tax in the second quarter. Emerging markets such as Brazil, India, and China continue to grow, though at a more modest rate, and while the downturn in Russia continues, the market remains attractive over the long term.

Also, reduced travel has adversely impacted the global travel retail channel, particularly in the United States. As we indicated before, consumers are going out less and shifting their consumption to the home. Some are trading down a price point, but strong brands that offer attributes consumers value continue to do well, even at the high end.

Our portfolio is well represented across key categories and up and down the price ladder, so we are well positioned to compete in this environment. For example, Makers Mark is growing at a healthy rate at the high end, while our economy vodka and whiskey brands are seeing their best growth in many years.

While we have the opportunity for further improvements in our spirits business, we continued to make significant progress in the second quarter for initiatives that are responding to the evolving consumer and enhancing our route-to-markets.

At the start of the quarter we transitioned to our new international sales and distribution lines with the Edgerton Group and I am pleased to report that the new alliance is off to an excellent start. The alliance covers 24 key international markets and consists of wholly-owned and jointly-owned sales organizations that are largely built on the successful Maxium sales force.

One of the many benefits of this alliance is that it enables us to bring our Teachers, Laphroaig, Courvoisier brands into the joint distribution portfolio. The alliance also has the flexibility to handle complimentary third-party brands, such as Stoly in the U.K., and Russian Standard in Australia, New Zealand, Southeast Asia, and Canada.

Coupled with our wholly-owned sales organization in the U.S., our international lines completes the significant simplification of our route-to-markets in spirits. In fact, at this time last year, we directly controlled less than 10% of our worldwide spirit sales. Now we directly control more than 70% of our sales.

As a result, these new organizations bring us much closer to our trade customers and consumers and with faster decision making, they enable us to serve customers better and work with our distributor partners to respond quickly to changes in consumer behavior.

We have also elevated our new product development and innovation program, which is enabling us to respond nimbly to consumer trends and also create demand by developing products that add value for consumers.

Sauza Margarita-in-a-Box and Dekuyper Burst Bar Shots are new premixed drinks that make it easier for consumers to entertain at home when they're going out less. Consumer response to Margarita-in-a-Box has been so strong. We have already shipped more than double our initial forecast.

And three months ago I told you we were excited about the second quarter launch of Red Stag by Jim Beam, a bourbon that is infused with natural black cherry. Red Stag is off to a great start. Due to strong demand, we have shipped more cases in the product's first six weeks than we had expected to ship in all of 2009. And early reorder patterns are very strong.

We supported the introduction of Red Stag through aggressive marketing programs, including on-pack samples, social media, on-premise activation, as well as our sponsorship of Kid Rock summer tour. We are very encouraged that Red Stag is appealing to legal-purchase-age consumers outside of Jim Beam's core consumer group, including women.

We are being careful in targeting our brand spend and we have been adjusting our spend to best compete in the current environment. That includes shipping resources to the off-premise channel, which is capturing a larger share of the consumer purchases.

We will also be targeting an increased brand spend in the back half of the year, when spirits consumers make the majority of their purchase decisions. Among the brand-building programs you will see are a recently introduced Mischief campaign for Hornitos tequila, as well as new programs behind Jim Beam and Cruzan Rum in the coming months.

Lastly, we made a nice addition to our spirits portfolio late in the quarter with the acquisition of Effen Vodka. Effen is a high quality, super premium brand and is a good fit for us. Effen has built a solid consumer foundation in Chicago, Southern California, and Florida, so we see the potential to further build the brand with our strong sales organization and distribution network.

Effen's annual sales are in the range of $10.0 million and by swapping the Old Taylor whiskey brand, our cash investment was minimal.

Let's move on to the home products business. As we said before, when it comes to the homes products market, we can't control the health of the market but we can control how we compete. We continue to undertake proactive initiatives that have enabled us to outperform the challenging home products market over the course of the downturn.

Incorporating the impact of lower discretionary spend for big ticket products, including cabinetry, we now believe the industry is on track to experience a sales decline in the range of 25% for 2009. This estimate reflects our assumption that the new construction market is now likely to decline more than 40% for the year, worse than original expectations.

At the same time, the replace/remodel market remains down at a low-double-digit rate. Within the replace/remodel segment, consumers are focusing their spending on needed repairs, modest remodeling projects, and energy efficiency upgrades.

We continue to see consumer defer big-ticket discretionary remodeling projects. That dynamic is impacting the overall kitchen and bath cabinetry segment in particular, which is likely to be down more than 30% in 2009.

In this environment, we are working hard to win in the marketplace, protect profitability, and position this business to ramp up and leverage its low-cost base when the market does recover.

Our home products business further benefits from its foundation of brands that consumers trust. These include: Moen, the number one faucet brand in North America; cabinetry brands led by Aristokraft and Omega to give us a strong number-two position in the category; Master Lock, the world's number-one padlock brand; and Therma Tru, the number-one residential entry door brand in the United States.

As in other categories, consumers are seeking value for their dollars like never before. We have responded aggressively and are working closely with our retail partners to develop product lines that expand offerings across price points. For example, our cabinetry business is gaining share at home centers, which are capturing bigger share of home improvement spending in the current environment.

Our initiatives include new product lines that fill price gaps, storage innovations and tools that make it easier for in-store designers to sell our products.

To underscore our responsiveness, we rolled out a new product line in a major home center in just four months from concept to introduction and gained significant market share in that product segment.

Across categories we are bringing to market innovative new products that deliver value-added benefits for consumers. Let me give you some examples of the things we've been working on.

Moen has established itself as the leader in the ECO friendly faucet and showering products. The number one faucet brand in North America has developed the Eco performance products that enable consumers to conserve water without sacrificing functionality, style, or most importantly, performance. Moen's neutral line of hot shower heads is exceeding expectations at retail and we now introduced the market's first water-saving kitchen faucet.

Master Lock's next generation magnum padlock line and nightwatch deadbolt door hardware continue to gain share. And new innovations like the speed dial and precision dial combination locks, which offer advance design and allow consumers to set their own combinations, are exceeding expectations.

Simonton is also capitalizing on the new consumer tax credit for the purchase of energy-efficient windows with new glass packages that make it easy for consumers to qualify and save energy.

As we have discussed in the past, we have also aggressively reduced the cost structure in our home products business. These proactive initiatives have included significant headcount reductions in all areas of the business, including a nearly 40% reduction in the number of home products facilities.

Reflecting strong execution by our home products teams, these initiatives are ahead of schedule and are likely to exceed our projections for total savings. While these operational moves have benefited the business at the operating income line, they've also preserved significant supply chain capacity and flexibility to ramp up production when market conditions improve.

Turning to golf, this has emerged as a very challenging year for the golf industry. In this cautious consumer environment, golfers are deferring discretionary purchases and spending less associated with round they play. The pull back in discretionary spending has hit the golf club market especially hard.

While total industry shipment of golf balls are off at a double-digit rate, the high end of the golf ball category is holding its own. In fact, it's gaining a larger share of the overall golf ball market. The steepest declines of golf balls have been in the custom orders placed by corporations, a segment that represents about 20% of the golf ball market in the United States.

Participation has remained relatively solid, with rounds of play up modestly in the U.S. through May. Even so, we anticipate rounds of play will contract this year in both the U.S. and in Europe. At the same time, markets in Asia, particularly Korea, continue to offer excellent growth opportunities.

As for our golf business, we remain focused on maintaining and extending our industry leadership through efficient investment in both innovation and international expansion.

On the innovation front, we are developing exciting new products that are helping us compete in the very challenging industry environment. Most notably, the new Titleist Pro V1 golf ball is performing well and extending its leadership position with the year-to-date share gains at on- and off-course U.S. golf shops.

In clubs, our Titleist brand is gaining share in every product category with a new Titleist 909 driver and fairway medals, the AP2 irons, Vokey wedge, Vokey-designed spin milled wedges, and Scotty Cameron putters.

FootJoy's new Synergy golf shoe is off to a good start and we're about to launch the tour-validated FootJoy Icon as the next-generation successor to the FootJoy Classic.

While consumers are being cautious and pulling back from big-ticket discretionary purchases, we're not seeing golfers trade down from premium products like the Pro V1, or the Titleist golf clubs that offer distinct technological advantages and great value for the dollar.

That said, we're building promotions around select products but we believe that we are doing it in a manner that protects the equity of our brands.

The international piece of our golf business continues to increase as a percentage of our overall sales. As we make targeted investments to pursue promising growth opportunities, such as Korea, where we are growing rapidly as the game continues to grow in popularity, and in Japan, where we're gaining share in a market where we have significant upside for growth.

We are moving forward with plans for our golf ball production plant in Asia that will more efficiently meet growing demand in these markets. In fact, we broke ground on this project just yesterday.

We will also work hard to reduce our cost structure in golf and aligned our supply chain with industry conditions. We will continue to make difficult decisions to reduce positions at all levels of the organization. That includes shift reductions, operational streamlining, and the closure earlier this year of a golf shoe production facility in the U.S.

Over the course of the past year, we have reduced the number of worldwide positions in our golf business by 13%. Despite the golf industry's challenges, we continue to benefit from driving innovation and international expansion, on top of our strong foundation of the game's most trusted and enduring brands, the industry's strongest sales force and relationships with on-course professionals, and our broad offering across price points in key product categories.

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

Craig P. Omtvedt

Starting with spirits, sales came in at $600.0 million, and that's off 1%. Sales were flat on a comparable basis and that smoothed the impact of foreign exchange, excise taxes, the Cuzan acquisition, and the impact of required accounting related to our route-to-market initiatives.

Geographically, sales in the United States were off at a mid-single-digit rate, following a double-digit increase in the first quarter. And I would highlight here that these rates were primarily a function of priory-year swings in distributor inventory movements. When you look at us on a year-to-date basis here in the U.S., sales are actually up 3%, excluding excise taxes and I think that's a more normative, descriptive percentage.

On a constant currency basis, Q2 sales outside the U.S. were relatively flat, excluding excise tax and gains in Australia, Spain, Mexico, Brazil, and Canada and India offset soft results in markets such as the U.K., Germany, and duty-free.

Operating income in spirits came in at $140.0 million, up 1% on both a reported and a comparable basis. At the OI line we continue to benefit from higher pricing as well as the timing of brand spend, which compared favorably to the prior-year period when brand spend increased double digits. These items more than offset the incremental increases in route-to-market investment.

Turning to the markets, in the U.S. year-to-date depletion case volumes are off at a low single-digit rate as increases from Makers Mark, Hornitos, Laphroaig, and several value-price brands have tampered declines for other brands. Thanks to price and mix, U.S. depletion revenues for our global brands are up 2%. In international markets, depletion case volumes improved versus the first quarter and are not off at a high single-digit rate year-to-date.

Key highlights here. The tax increase in Australia on ready-to-drink spirits products annualized mid-quarter. Our volumes in Australia have now returned to growth and are up modestly for the year.

Our volumes are also up at a low single-digital rate in the challenging Spanish market and in Canada. On a year-to-date volumes remain down in Mexico. They did bounce back in the second quarter, following the transition to new distribution in that market.

Volumes also remained down in the U.K., Germany, and global duty-free channel, but we are seeing signs of improvement in the U.K. The results in Germany primarily reflect softness for regional brands.

Looking at the year-to-date performance of our key brands, and again, this is on a constant currency basis and it excludes excises taxes, starting with bourbon, where we're the global leader, global volumes for Jim Beam are off at a single-digit rate and in line with our expectations. Jim Beam case volumes are up 1% in the U.S. but up 5% on a depletion revenue basis, reflecting the benefit of higher pricing. The brand is also benefitting from the Red Stag line extension introduced in June.

International results continue to reflect softness in the duty-free channel as well as the impact on volumes, particularly in the first quarter, of the Australia RTD tax. Jim Beam RTD volumes trended positive in the second quarter, as the tax increase annualized. The brand is also gaining share in Germany.

Makers Mark continues to grow at the super premium end of the category, with double-digit depletion revenue growth in the U.S. supplemented by double-digit international growth.

In tequila, Sauza volumes were up in the quarter and are down at a single-digit rate for the six months. Sauza results reflect a first quarter decline in Mexico in advance of our change of distributors there, as well as softness for Sauza Gold and Blanco in the U.S. On the upside, Sauza is benefitting from the brands new distribution in Mexico, as well as growth in the U.S. for Sauza's high-end Hornitos, 100 Anos and 3G’s Expressions.

Volumes for Canadian Club are up modestly as softness in the U.S. is offsetting growth in Canada. Here in the U.S. depletion revenues for Canadian Club are up 2%. And again, up 2%. Our value-price Windsor Canadian whisky brand is growing solidly.

In a challenging cognac segment, global volumes for Courvoisier are off at a double-digit rate.

Cruzan is up double digits, and Laphroaig is lower, though the world's number one Islay malt whiskey trended favorable in the quarter.

In cordials, continued growth for Souaz in Europe is partly offsetting lower volumes for Dekuyper in the U.S.

Looking to the back half of the year, we continue to feel good about the spirit category stability in this economic environment and we feel good about the progress we are continuing to make. A couple of points here. First, as Bruce indicated earlier, while we have held back brand spending the first half, results in the back half will reflect higher brand spend as new brand-building programs ramp up to align with the seasonality of consumer purchases and the shift to off-premise.

And second, as we discussed last quarter, full year results in spirits will reflect two factors: adverse foreign exchange, which we now expect or estimate will amount to $20.0 million to $25.0 million; and net costs in the range of $30.0 million related to our route-to-market investments and initiatives.

In summary, we are encouraged by the opportunities ahead of us to make further progress in spirits. We believe our new products and brand-building initiatives, as well as our simpler route-to-market, position us well to deliver growth in underlying operating income for the full year.

Turning to home and hardware, sales were in line with our expectations at $775.0 million, off 25%. That's an improvement from the first quarter when sales were down 32%. On a comparable basis, excluding FX and acquisition/divestitures, sales in home products would have been down 23%.

Our faucets, window and storage and security categories performed better than that rate while our bigger ticket cabinetry and entry door lines were off in the range of 30%.

Operating income also improved relative to the first quarter. After recording a loss in Q1 home and hardware returned to profitability, generating positive operating income before charges of $44.0 million in Q2.

These results reflect the benefit of the significantly lower cost structure we've established in this business, as well as moderating sales trends and the fact that the second quarter is seasonally larger than the first, improving our operating leverage.

As challenging as conditions are for home products, we're pleased with our initiatives to outperform in the marketplace. At Moen, declines related to new home construction were tempered by more moderate declines in the retail channel, where the number one faucet brand in North America is gaining share. Moen is helping drive consumer demand with several new products, including as Bruce mentioned, new ECO performance faucets and showerheads.

Cabinetry sales continued to be impacted by sharp declines in both new construction and big-ticket remodeling. Our cabinet brand continue to gain share at home centers where, as Bruce discussed earlier, we've expanded key customer relationships and introduced new lines.

While we've seen some trading down in the entry door segment, Therma Tru outperformed its market.

Sales at Simonton windows were off at a mid-teens rate, reflecting the benefit of expansion at home centers plus favorable mix driven by the energy-efficiency tax credits here in the U.S.

In storage and security products, results for Master Lock were lower against the double-digit increase in the year-ago quarter.

Waterloo was up on the benefit of favorable comparisons and growth for new products at Sears.

We are pleased about the performance of our home products business in such difficult market conditions. In a market that is likely to decline in the range of 25% for the full year, we are continuing to make carefully targeted investments in new products and we are continuing to work closely with our channel partners to adjust to the evolving home products consumer.

Additionally, we have the benefit of a much lower cost structure that is helping us to reduce the impact of adverse operating leverage. Overall, we believe we are well positioned to continue to outperform the industry.

Now golf. Sales came in at $366.0 million. That's 19% below the year-ago quarter. On a constant currency basis, sales were down 14%. While sales were off 20% in the U.S., they were off 5% outside the U.S. on a constant currency basis.

Korea continued to excel with a strong double-digit increase. Sales also rose double digits in Australia, while revenues were flat in Japan, and down in Europe and Canada.

At the OI line, operating income before charges came in at $42.0 million, $26.0 million below the prior-year quarter, largely reflecting the impact of adverse operating leverage, partly offset by cost recovery actions.

Sales were down in the double-digit rate across product categories. While the premium priced Titleist ProV1 golf family has grown market share year-to-date in a competitive category, our golf ball sales were adversely impacted by two key factors: softer demand for other models, and sharply lower corporate custom-imprinted orders.

Despite the challenges in competitor promotional activity in the golf ball segment, we grew our industry-leading golf ball unit share on a year-to-date basis at on- and off-course U.S. golf shops.

On the success of our new Titleist golf club products, mainly the 909 drivers, fairways, hybrids, AP2 irons, Vokey wedges, and hammer and putters, Titleist has gained significant share in clubs at U.S. on- and off-course golf shops. At the same time, in the game improvement sector, results were down on soft industry demand.

Impacted by soft industry conditions, sales of FootJoy golf shoes were off at a double-digit rate against a double-digit increase in the year-ago quarter. And sales of gloves and accessories were off versus a solid performance last year.

Over the balance of the year, FX will continue to adversely impact results. As we previously indicated, we anticipate the full year FX impact will be in the range of $25.0 million. Even with the success of our new products, international growth initiatives, and cost reduction programs, adverse operating leverage will be the story in the second half of the year.

While we expect to continue to outperform the industry, operating income before charges in golf will be negative in the back half of 2009 due to seasonality and lower volumes spread across our fixed cost base.

Even though year-over-year results will be lower for 2009 we anticipate that our golf business will deliver a substantial profit for the year.

Before turning things back to Bruce, a few additional items:

Review of one-items, in the quarter we recorded after-tax restructuring and restructuring-related charges of $7.0 million. The charges principally relate to previously announced supply chain initiatives in home products that are helping reduce the cost structure of the business.

With regard to our tax rate, based on our current expectations of our global mix of business, we are now looking at a full year effective tax rate in the range of 24%. That's versus our prior estimate of around 27%.

Lastly, turning to our balance and financial flexibility, we finished the first half of 2009 in a strong cash position and well ahead of where we were at this time last year. As Bruce mentioned earlier, we have taken a very focused approach to cash management to bolster free cash and enhance our financial flexibility. That's enabled us to more than double our free cash flow target for the year, and today we have reaffirmed our target for free cash flow in the range of $400.0 million for 2009.

And I would remind you again, that's after dividends and net capital expenditures.

In the quarter we also completed a five-year, $500.0 million bond offer at an all-in rate of about 6.5%. Conditions in the debt capital markets were favorable and we saw this as an opportune time to be proactive and extend out our debt maturities. Combined with free cash flow and existing cash balances, we expect to pay off the revolver balance by year end.

We currently anticipate that we will renew the revolver in the range of $1.0 billion, and I would remind everybody our existing revolver is in the range of $2.0 billion.

Again, combined with our free cash flow, we believe we are very comfortably positioned to deal with our debt maturities, including those coming due through 2012. So at the end of the day, we are really in a good position.

Now back to Bruce for some final comments on our outlook.

Bruce Carbonari

As we look ahead, while the economic downturn may be moderating, we expect our markets will remain challenging throughout the year. In this environment we will keep executing the initiatives that are enabling us to succeed in the marketplace and position Fortune Brands for strong growth when the economy recovers.

As we've discussed, these priority initiatives include adjusting to the evolving consumer, developing innovative new products and brand-building programs, reducing cost structures while enhancing our supply chain flexibility, and of course, aggressively managing our cash.

We suspect that we continue to benefit from our ability to deliver value to consumers with our trusted brands, quality products, innovations, and excellent positions up and down the price ladder across our businesses.

Our first half results and our ongoing initiatives enhance our confidence in achieving full year results within our EPS targeted guidance. With six months now behind us and a clearer picture of our markets, we are in a position to refine our full year EPS target. Because the high end of our range was dependent on some measures of improvement in our markets and because conditions in the home and golf products markets remain as challenging as they are, we are now targeting EPS, before charges and gains, to be in the range of $2.00 to $2.30 for the full year.

This full year target, which is in within our original guidance, continues to reflect our assumption that results in our home products and golf segments will lower, partly offset by underlying growth in our spirits business, which now represents more than 70% of our operating income before charges.

Our growth rates in the second half will also benefit from comparison to last year's progressively soft result, predominantly in the fourth quarter.

Thank you again 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 & Co.

Peter Lisnic - Robert W. Baird & Co.

On the taking down the top end of the range, can you weight that for us by segment? It sounds like home and hardware and golf, and I'm guessing home and hardware is the biggest slug of that, is that the right way to think about it?

Craig P. Omtvedt

Yes, it is. As you look at where we're at right now, our expectation is that we will basically be in line with plan in the spirits business and then with the home business being softer than we originally were targeting, I mean, you will recall at the beginning of the year we said we were targeting that we'd be down in the range of 20%, 20% to 25%, and now we're saying down in the range of 25%, so that's a bit worse.

And then clearly the golf business, with the slowdown in discretionary spend, is a bit more challenging.

Peter Lisnic - Robert W. Baird & Co.

If I look at that home business, I'm guessing it's volume or top-line related, because, at least relative to our expectations, that second quarter margin you put up was a bit stronger. And just if I can look at that number that you threw up in the second quarter there, that sequentially the incremental margins were around 40%, and I'm guessing that could be a bit stronger as you realize more of these cost savings initiatives. Is that the right way to think about it? Is 40% kind of a just starting to see the benefits and should we see better incremental as we go forward?

Craig P. Omtvedt

I think that's hard to call. You know, obviously there's variability, quarter to quarter, in terms of the timing of spend and so on and so forth. I think 40% is on the aggressive side. I mean, if you look back at what has been a sequential margins, looking back here over the last several quarters, it's run anywhere in the range of kind of 30% to 40%. So I would say 40% is too aggressive at this point.

Peter Lisnic - Robert W. Baird & Co.

Pricing in terms of the home and hardware business, can you give us a sense of what an overall impact might have been on top line? And then there's talk about obviously deterioration or pressure as volume continues to be under pressure, what you're seeing there, what you're expectations are.

Bruce Carbonari

First, generally, in the retail side of the business, obviously consumers are shopping for value and much more selective. What we're seeing, though, probably more is the size of projects that they're undertaking, so a shift to more repair or smaller remodel. Especially seeing that in the cabinetry business, where the bigger remodeling projects would be when you blow out a wall or you're shifting the whole design, we're seeing more recall boxes in than boxes out so you are replacing exactly what you had before. So the average size of the remodeling projects are smaller.

Actually, the average sale price is pretty consistent, mostly because people are adding on functionality, such as storage inside the box and so forth. So the actual mix and pricing per box is staying about the same.

In the faucet category we're seeing a bit of trading down. Probably a price point. And the same thing happening in the door business.

Peter Lisnic - Robert W. Baird & Co.

And is the net of that effectively that margins are under some pressure from price in the trade down or are you kind of maintaining?

Bruce Carbonari

We're kind of maintaining. Again, we've been very aggressive around the cost side. That's helping. And we've been able to have some wins in the marketplace as well, which are helping the volume side of it.


Your next question comes from Analyst for Michael Rehaut - J.P. Morgan.

Analyst for Michael Rehaut - J.P. Morgan

I was wondering if you could talk about some of the sales trends by segment throughout the quarter and if you can comment on anything so far through July.

Bruce Carbonari

Sure. The spirits business continues to hold up well. We are actually seeing there that the volumes are a little bit higher than we initially expected them or that we've been talking about 1% ends are up more toward the 2% range.

I'm talking about the United States, first of all. The actual mix has stabilized. We saw an earlier shift from super premium down a price point to premium and standard down to value and so forth. That has basically stabilized between the first and second quarter and actually improved a bit from the fourth quarter of last year. So all of that is very positive. And we just see a lot of stability in that market, which we are very happy to see.

The Western Europe market is kind of a mixed bag, although the U.K. economy is challenging, the spirits business is holding up well there, whereas Spain where about this time last year we saw quite a reduction in the economy, mostly driven by the housing correction there, we have now seen a stabilization. Actually in the second quarter we saw a little bit of stock build up in the channels again, which was positive.

In the emerging markets, again are pretty all strong except for Russia. Russia is down quite a bit.

And then, of course, Australia for us, we annualize through the RTD, through the May period this year, and we're seeing growth back again in that market.

The whole market, again, we see it down about 25%. Again, that's pushed. Basically we haven't seen much improvement at all. Again, what I talked about earlier, about the remodeling and types of projects that are going on, are probably the most significant shift we've seen for the last quarter.

And in the golf business, the discretionary spend, especially related to clubs, and then I guess shoes as well. What's surprising us a little bit is that the rounds of players still up through May. That's a May number in the U.S. and we think that will be down for the full year. But people are playing and when they play they use, obviously, a lot of our products, because we're more skewed to the consumerable products, the shoes, gloves, and balls than we are to the clubs.

Internationally, Western Europe is not as down as far as the U.S. and then Asia continues to grow very strong.

Craig P. Omtvedt

The only thing I would add to that is coming back to the home business, we've seen some stability in terms of order patterns. And while the overall market is going to be down in the 25%, that's still more in line with the overall range that we're looking at. But the real aspect of us taking down the full range is more the fact that the markets haven't improved, or we're not going to see some of the improvements that potentially we thought might be there.

Analyst for Michael Rehaut - J.P. Morgan

I guess like through July then, trends are pretty much in line with the second quarter?

Craig P. Omtvedt


Bruce Carbonari

Pretty much consistent.

Craig P. Omtvedt

Now, as you look at the back half of the year, particularly in home again, I would remind everybody that the fourth quarter of last year is when we saw the steepest decline. So this year, with things at kind of a run rate basis, it'll make the fourth quarter an easier comp for us, and I think people should be mindful of that.

Analyst for Michael Rehaut - J.P. Morgan

Just turning back to the home and hardware margins, to get some more color on there. Given current demand levels, how much incremental cost cutting do you think you can do there, and then where do you expect margins to trend sequentially?

Craig P. Omtvedt

Obviously I think we've done a first-rate job of taking costs out of that business, when you think that we've taken out 40% of the people and 40% of the facilities, and that's in line with the downturn.

We continue to look at this in terms of what should be the right size of the cost structure on a run rate basis. But as we've said repeatedly, what we're not going to do is take out a dollar today and find out that we have to spend two dollars to put it back in place. So we're continuing to track the market, look at it. There are some additional levers we could pull if we deemed it appropriate, but that's something that we're continuing to watch carefully.

I think that the other point that I'd make is that in addition to cutting costs, it hasn't just been cutting costs. We've been very careful to maintain our national footprint. We've used this as an opportunity to put additional flexibility in our global supply chain so that when the market comes back we're in a position to be able to come up with the innovative products that consumers are going to be looking for and to be able to adjust to kind of the demands when we get there.

Bruce Carbonari

And the key of being able to deliver extremely well when volume returns.

Craig P. Omtvedt

Yes, and the third aspect of this is that as things come back, as we look at it from an investment standpoint, the first phase will be adding back shifts, then secondly, as we need more equipment we'll take equipment out of mothballs, so we're not going to have to go out and buy equipment. And with the footprint that we have, we don't see a significant investment in brick and mortar. So we think we're extremely well positioned at this point.


Your next question comes from Lindsay Mann - Goldman Sachs.

Lindsay Mann - Goldman Sachs

Even if I take your 25% full year home products outlook for the industry, it's tough to get to the back half EPS numbers that your guidance implies, especially considering the inventory rebuilding spirits, the lower tax rate, the favorable FX and all that sort of stuff. So can you talk through some of the items that I might be missing are that are driving the very weak EPS performance in the back half of the year.

Craig P. Omtvedt

Well, I'm not sure how you're modeling this, but again, to just kind of come to the year and just starting with home, for the first two quarters here we've been at a run rate that's, for the market, down in the range of kind of 25% to 30%. In the first quarter our reported sales were down 32%, they're down 25% now. We think the third quarter obviously is going to continue to be challenging with the overall market down in the range of say 25% or so. We've got some things that we think we can outperform, and I just mentioned, when you get to the fourth quarter, with the weakness of last year's fourth quarter, that's going to be an easier comp.

Now when you look at spirits, again, as I said earlier, our expectation is to kind of track to what was our full year target so we think we're in line there. We're benefitting from price increases. Obviously that's offset a little bit by what's going on with FX and with our investment in those markets. But the reality is FX for the full year will be less impactful than we originally planned.

And then as you look at the golf business, as we've already discussed, we've got some softness there. But overall, without knowing exactly what's in your model, I can't specifically comment. But obviously we wouldn't put out a range unless we were comfortable with it.

Lindsay Mann - Goldman Sachs

And turning to spirits, first of all, the grocery store data, the scanner data shows that you're taking pretty strong pricing but your volume share trends have been pretty week, so I was curious if you could talk about the rationale for the meaningful price increases you're taking when perhaps you're losing some volume share to competitors.

Bruce Carbonari

We have gone out selectively and put price increasing up there in the beginning of the year and part of our program in the end of last year as well. We actually think it's been very successful when you look at the bottom line. So, yes, we have given up a little volume but the price realization has been excellent.

Now there are a couple of cases where we probably were a little too aggressive but all in all we're very happy with the program.

Again, I think we talked about Jim Beam volume being off 1% but the value being up 5%. That's an equation we like. So we've been very selective about it and very controlled about it. It wasn't anything that we did just to, you know, obviously build for the short term. These are brands that have equity that we think the pricing could realize behind.

Again, there are some that maybe we were a little too aggressive on and we've made some adjustments there the latter part of the second quarter and you'll see into the third quarter, but the majority we're very happy with.

Craig P. Omtvedt

The thing I would add to that is that while clearly there will likely be some fine-tuning, that's driven more by what's going on with call it competitive activity out in the marketplace. So we'll take care of that. But at the same time, with the fact that we've now got direct control of our sales organization and then that's coming forward, we feel pretty comfortable with how we're tracking.

Again, some of this is still in transition, but nonetheless, it's tracking as we would expect.

Lindsay Mann - Goldman Sachs

Would you consider issuing equity to either further strengthen your balance sheet or perhaps go after some attractive acquisitions that might be out there?

Craig P. Omtvedt

Obviously issuing equity is a pretty expensive proposition and I wouldn't speculate on that. Obviously if we saw something where the value-added proposition and the returns justified it, yes, we would consider it. But at the same time we consider, from an intrinsic standpoint, our stock is still undervalued.

But I think more importantly, I think as you look at the actions that we've taken here over the first half of the year, I think we've been pretty measured and pretty effective in terms of first of all, taking the steps to increase our cash flow to allow us to use that to help pay down debt. You look at the bond issue that we just did, we have significantly strengthened our liquidity position, and as I outlined in the prepared comments, our expectation right now is the revolver will be paid off by the end of the year and actually we could be in a cash position.

So as you think about what we will do in terms of putting a new revolver in place, you think about the cash flow generation next year, we're very comfortable in terms of how we think we're positioned to take care of the debt maturities coming due in 2011 and that takes us all the way out to 2013.

So, we'll see how things play out. But anything that we might do with equity will be a very thoughtful, careful, measured discussion.

Bruce Carbonari

You've got that exactly right, Craig. I would take it from the other side as well. A lot of what we would be looking at strategically from an acquisition standpoint in this particular market would really have to be a diamond. I think with a lot of the businesses, especially in the home space, and a little bit in the golf as well, a lot of these businesses have to go through significant restructuring to match up with the market and with the uncertainty of the market, it's just a harder acquisition proposition.

I would also say in the spirit side, there are diamonds out there but some of the multiples out there are still very high. And we look at where we're trading and where those multiples would be, and we would be diluted from day one. So they would really have to be a very strong proposition strategically to make an acquisition.

Effen was one of those which was a rough diamond and it has a lot of upside potential that we basically could trade another brand for and a little bit of cash.

So right now our position today, from the cash flow that we're generating, and I think you've seen how we exceeded expectations in the second quarter, our default position is to pay down debt.


Your next question comes from Stephen East - Pali Capital.

Stephen East - Pali Capital

If we look at the spirit side, sequentially your profitability came down. Could you walk through what the drivers were and whether we should expect, looking forward over the next several quarters, for the profitability to look more like the first quarter or more like the second quarter?

Bruce Carbonari

We had a lot of moving parts in there, because again, keep in mind that we have the route-to-market expenses that both in the fourth quarter last year for the U.S. and then beginning April 1 in the international side, as a component of that, as well as the FX impact.

So first let's talk about the route-to-market piece. The route-to-market piece we estimate to be in the $30.0 million incrementally. I don't think you're going to see that flow through the course of the year. And as Craig had mentioned earlier, the FX impact, too, of being annually about $20.0 million.

Bu the business, as we see it from just a volume and gross margin standpoint, it's very stable. The pricing has helped us, we don't see much inflation in the business. The mix hurts a little bit but definitely the pricing has offset that. So I don't see a lot of variation.

The brand expense is probably the biggest piece that you will see as we make more investment in the second half on the brand side.

Stephen East - Pali Capital

On the free cash flow estimate, I assume you are including working capital change in that.

Craig P. Omtvedt

We are. Of course.

Stephen East - Pali Capital

And on the home and hardware, you talked a lot about what trends you're seeing on the retail side. Are you seeing any changes during the quarter, does it look like the housing side of the market is trying to show some signs of life, are the builders talking any differently, trying to line up capacity any differently?

Bruce Carbonari

Not really. I think, again, it's very geographic. There are certain markets that I have seen, the ones basically that have been hurt the most and the prices have come down the most, that you see the most activity.

I think the builders, especially the big builders, have done a great job of moderating their production and also trying to re-engineer their footprints in the cost of a home. We participated and helped them with that, with a lot of our national contract with the big builders.

But I think they're being very cautious, as they should be, as we are, about what the new construction market is going to look like and how it will progress and how it will recover. But single family homes are at the 300,000 to 400,000 rate, which is extremely low considering we were over 2.0 million just three years ago.

So they, like us, are waiting to see these, if you will, green shoots coming out and eventually they will get back into a more aggressive production program. But I think everybody is being cautious right now.

Stephen East - Pali Capital

Are they still trying to trade down in all of their trades or are you seeing a stabilization in the type of product that they are requesting.

Bruce Carbonari

Pretty much a stabilization. This has been going on now for three years so we've done a lot of re-engineering, especially for the opening price point products. So a lot of that is behind us. I think we'd all like to get back to building some homes. To see how these new designs and these new programs are put together and how well the consumer receives them.

Craig P. Omtvedt

Let me just come to your point on spirits, because I just want to reinforce the point here and be clear, as you look at the back half of the year, with some ramp up that we're planning in terms of brand spend to kind of reinforce our positions out in the marketplace and the reality that FX was a little more favorable to us, I mean still negative but more favorable in the first half, it's going to be more challenging in the second half. We are going to see the OI comparisons be somewhat softer in the back half than they were in the first half.

But still overall, we're tracking in line with our expectation for the full year.


Your next question comes from Analyst for Ivy Zelman - Zelman & Associates.

Analyst for Ivy Zelman - Zelman & Associates

I was curious with your obviously long experience in the housing market and kind of compare and contrast this cycle to others, without thinking about when the cycle bottoms, when it does start to come back, do you have an opinion of the shape of given of probably where the consumer is, where foreclosures are, are we going to see something rapid and v-shaped or is it going to be more shallow. How do you think about that as you align your capacity.

Bruce Carbonari

Well, this is one man's opinion because there are a lot of opinions out there. First of all, as you said, I've been in this business a long time but this is nothing like we've ever experienced before, so I don't think you really can compare it to anything that we saw in the 80s or 90s or even early 2000s. So this is its own unique animal.

My bet here is that it's going to be slower. It's not going to be a "v". The reasons why really have to do with just the availability of credit and the type of credit that will be available and the ability of the consumer to digest that.

We're 20% down on 30 year mortgages or the lack of debt equity they used to have in their homes to do remodeling projects, I just think it's going to be a slow recovery. I'm very pleased that we're seeing consumers save more now and really try to get their net worth and their own personal balance sheets straightened out.

And it will be build. There is an underlying demand there but I think it's going to be more of a slow build than us sky-rocketing back to 1.4 million housing starts in a 12-month period.

I think it's going to be more stable, stable growth. But the long-term attractiveness of the market is still there. We still need housing and we need good quality housing to feed and help the growing population and the household formations.

We have corrected, maybe over-corrected to some extent, but I think until the consumer feels comfortable enough to really go out and spend or trade up or trade around for different housing or different remodeling, it's going to take a little while for all that to come together.

Analyst for Ivy Zelman - Zelman & Associates

And I assume about the capacity, you've obviously planned accordingly for that type of environment. Do you feel like on the margin side in home that it will be tougher climb back to a double-digit range if the industry or your competitors are looking for something that's more on the v-side?

Bruce Carbonari

First of all, with what we've done in the supply chain, I'm really proud of what our guys have done. Obviously we took a lot of cost out but we really had an idea of what the future footprint should be and our operating model should be and it's a lot more flexible or even, if you will, a variable cost structure. So we could flex up and down much more quickly.

We also believe that, and we've modeled this obviously, at certain points that we will lever very well. So as long as the pricing and the environment and volume comes back at a reasonable level, we should return to very solid margins back in this business.

Analyst for Ivy Zelman - Zelman & Associates

My question is can you do that in the face of competitors that maybe haven't adjusted their cost structure like you have?

Bruce Carbonari

I think so because the other thing we've done is continue to keep the consumer excited. We have continued to develop new products and bring out new programs, enhance our services. And right now we're getting recognized for that with some of our market share gains at Moen and the cabinetry side.

So I even think tomorrow when these companies who haven't done their restructuring and pretty much killed the new product development engine, have to restart all that and recreate that, it's going to be a tough engine, tough for them to do.

But keep in mind, with our flexibility, as Craig had said, we can go from one shift to two shift to three shifts. We have the equipment that's been mothballed so it's just a matter of training the people and bringing them back up to speed, that we can get to really decent capacity levels.

Analyst for Ivy Zelman - Zelman & Associates

The comment you made earlier, windows seemed to be declining less than the overall is, is that a category that is benefiting from some of the tax incentives or can you go through why that isn't down as much as something like doors, given the discretionary nature there as well.

Bruce Carbonari

Exactly. We do believe with the energy tax credit we did see a pop in the business. And consumers are very active. And one of the interesting things is that we don't see much trading down there, as well. The mix is very strong.

So people are out there, because of the tax credit, and they are doing the things that they need to do as far as energy efficiency for their homes.

So that's why it's a bit different than the door business and some of the other businesses.

Craig P. Omtvedt

And you're also benefiting from the repositioning that the team has done in terms of the overall organization and how we're dealing with various markets and various products and kind of moving more strongly into some of our channels with customers. I mean, it's all playing to give us a better positioning.


Your next question comes from Ann Gurkin - Davenport & Co.

Ann Gurkin - Davenport & Co.

On the spirit side, related to inventory build, where is inventor right now at the retailer level and where do you see it going for the holiday season?

Bruce Carbonari

Are you talking about the United States?

Ann Gurkin - Davenport & Co.


Bruce Carbonari

I would say the retail level is pretty good. I don't think we've seen much swings at either the distributor or retail level here in the second quarter. Again, we made some significant adjustments in the portfolio last year with our distributors and I think over time the retailers have just sharpened themselves up as well. So that's pretty much, I think we're very much in line.

Going into the third quarter, really the end of the third quarter is really the build for the holiday season. It will be interesting. I think the holiday season will be a healthy year this year. How the distributors and how the retailers play that as far as inventory goes, it's a guess. Mostly because I think they will be sharper and smarter and won't buy as aggressively as maybe they had in the past, but we'll be ready to respond quickly when they want to reorder and so forth.

And I think most of the spirits manufacturers are in that same position as well.

Ann Gurkin - Davenport & Co.

What are you expecting for a competitive price environment in the second half?

Bruce Carbonari

Again, it depends. I think that premium and super premium, I don't think you'll see much pricing there. I think you will see it more on the standard side of the business. Much more at the high volume items. But I would say those are going to be more in the form of promotions and mostly on the off-premise side.

Ann Gurkin - Davenport & Co.

You expect a heightened promotional environment coming up?

Bruce Carbonari

Not heightened, I think just probably a healthy one. There are certain times, certain parts of the season that you see certain products that go on promotion and probably with the consumption at home, we see the 1.75 liters growing as well and seeing a little more promotion on those to attract the consumer at home.

So I think it's we're already seeing it. I don't think it's going to be much different in the second half of the year.

Ann Gurkin - Davenport & Co.

Could I get your read on the likelihood for an increase in excise tax on spirits in the U.S.

Bruce Carbonari

I think the big thing with excise tax, and especially it's really at the state level. There really is no federal excise tax increase currently pending in the U.S., it's really all at the state level and each of the states have their various different budget deficit issues.

We have seen, right now to date, excise tax increases threats in 33 states. 24 have been defeated. We have seen some increases in Kentucky, Illinois, New Jersey, Oregon, South Dakota, and Vermont.

So we think a lot of it is behind us. There are still obviously a number of states out there and something that obviously we fight diligently with the industry as well. But it is something that we adjust to.

When the states do have the excise tax increases, the one that we have had so far, we really haven't seen a change in consumption level. So that's healthy as well.

So it's out there. Obviously the states are struggling to figure out different ways of solving their budget deficits and the ones that have adopted it we haven't seen much impact on the consumption level and we've already had 24 states defeat it.


Your next question comes from Derek Leckow - Barrington Research.

Derek Leckow - Barrington Research

Just a follow-up on the comments about the brand-building expense. Could you help us calibrate that a little bit and it sounds like it's going to be weighted more toward the third quarter than the fourth quarter. Is that about right?

Craig P. Omtvedt

We don't get into specific commentary on quarter by quarter for competitive reasons, but so I'll just have to leave as we're certainly going to have increases here over the balance of the back half.

Bruce Carbonari

Keep in mind that the consumer is more active in the spirits category in the back half of the year. So we think it's just diligent and smart to be there when they're there.

Derek Leckow - Barrington Research

You get better pay off in the back half of the year is the point. But in the third quarter is there sort of a spending level that doesn't get that same benefit and should we think about the fourth quarter being one where you get most of the benefits and more of the expense in the third quarter?

Craig P. Omtvedt

That's a little hard to call in terms of some of the timing of some of the things that we're going to do, but clearly, I think as you think about it, it's going to start to ramp up, we've got the advertising kind of longer-term brand building that's kicking off here but then we've also go the king of the market initiatives that are going on and that will start to pick up here over the course of the third quarter and into the early days of the fourth.

So I just wouldn't try to put a precision to that that you're looking for. I understand where you're trying to go with that but there's a variableness to this that I just can't call at the present time.

Bruce Carbonari

Consumption trends don't know about quarters.

Derek Leckow - Barrington Research

What I'm trying to get to here really is last year's spend you kind of pulled back a little in the fourth quarter I thought, and so I'm looking at this from an incremental increase. Could you help us by telling us how much of an increase you're looking for?

Bruce Carbonari

No. Because that's all competitive stuff that we just don't want to have out there right now.

Derek Leckow - Barrington Research

On the golf business, we have seen a lot of consolidation in the retail channel there, and the big season is behind us but do you still have some exposure to additional consolidation of the retail channel.

Bruce Carbonari

Say that again. I'm sorry.

Derek Leckow - Barrington Research

I'm looking at the retail channel in the golf business. We've seen a lot of consolidation here and I wondered if you had more exposure in the second half of the year to any further consolidation? What are your thoughts about further consolidation of the retail channel?

Craig P. Omtvedt

Actually, the real strength for us is on-course, the on- and off-course segment, not so much the retail, which has traditionally been our strength. So as we look at the retail, I would say to you right now that even with the consolidation, our run rate in the back half should more or less match where we were in the first half. But you've got to remember that it's just very fragmented, even though you've seen some level of consolidation.


Your final question comes from Karen Lamar - Federated Investors.

Karen Lamar - Federated Investors

Can you give us a little color, by business unit, on your inventory quality and levels and maybe any changes that you might plan, given your sales trends and your outlook.

Craig P. Omtvedt

I would say to you that as we look at the spirits business right now we are very comfortable with how we are positioned. We have obviously taken a very thoughtful look at what we think the future sales trends are and the requirements. As you look at our inventory levels this year, we've ramped up a bit in terms of distillings for maturing inventories. So we are fine there.

You look at the home business, you almost have to go kind of group by group but as an example, in the cabinet business, there's no inventory out in the trade. They place an order and then we build it.

Bruce Carbonari

We build a kitchen at a time. The same thing with windows. We don't have any finished goods inventory.

Craig P. Omtvedt

So across our home business, we feel comfortable.

Golf obviously we've got a little bit of work to do with the slowdown in sales that we've seen. We're a little higher with our inventory levels than ideally we would have liked to have been at this point in time. But the group has done a great job of kind of managing us for the position we're in and our expectation is that we will manage that over the back half of the year.

So all in all, I would say we're in good shape.

Bruce Carbonari

Thanks again for joining us. The people at Fortune Brands are working hard every day to navigate this difficult economy and we look forward to discussing our progress in the third quarter results with you in October.


This concludes today’s conference call.

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