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Executives

Bruce Carbonari - CEO

Craig Omtvedt - SVP & CFO

Analysts

Christine Farkas - Banc of America

Dennis McGill - Zelman & Associates

Peter Lisnic - Robert W. Baird

Eric Bosshard - Cleveland Research

Michael Rehaut - JPMorgan

Lindsay Drucker Mann - Goldman Sachs

Doug Lane - Jeffries & Company

Ann Gurkin - Davenport

Fortune Brands, Inc. (FO) Q1 2010 Earnings Call April 29, 2010 10:00 AM ET

Operator

Good morning. My name is Christy and I will be the conference operator for toady’s call. At this time, I would like to welcome everyone to the Fortune Brands first quarter earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Mr. Carbonari, Chairman and Chief Executive Officer of Fortune Brands. You may begin sir.

Bruce Carbonari

Thanks, Christy. Good morning. Welcome to our discussion of Fortune Brands first quarter results. Please note that our presentation includes forward-looking statements. These statements 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 website in the supplemental information linked to the webcast page.

With strong double-digit growth in sales, operating income and earnings per share Fortune Brands is off to an excellent start in 2010. Our strong first quarter results were driven by the powerful combination of higher volumes and lower costs, as each of our three brand groups outperformed our expectations.

Our sales reflected strong sales gains for spirits and home products brands. These results reflects market share gains, improved consumer markets, rebuilding of inventory by channel partners in certain home products categories, foreign exchange and favorable year-over-year comparisons.

Over the course of the downturn, we focused sharply in positioning Fortune Brands with strong growth, when the economy recovers and those initiatives are clearly paying off. Our innovations and strategic brand investments are helping to fuel top line growth and we’re driving even stronger growth at the bottom line as we leverage our lower cost structures. We’re also pleased that the momentum that we saw in the fourth quarter continued to build as we began 2010.

In the marketplace we’re seeing consumers getting more active, which reinforces our confidence that this is an excellent time to invest in brand growth, and go on offense. Our strategic investments in spirits help drive growth for our brand portfolio in all global regions, including share gains in key markets for brands such as Jim Beam, Maker’s Mark and Sauza.

In home products, better-than-expected remodeling activity, share gains at homecenters, rebuilding of inventories by customers in faucets and doors, and favorable comparisons help drive double-digit sales gains for our cabinetry brands as well as Moen kitchen and bath products, Therma-Tru doors and Simonton windows. In golf, successful new products help drive higher sales for Titleist golf clubs and FootJoy shoes.

Now let’s take a closer look at the numbers for the first quarter. Net income was $72 million or $0.47 per diluted share. We recorded charges in the quarter amounted to $0.02 per share Craig will tough on these little later. Excluding charges and gains diluted earnings per share was $0.49 that does 63% from $0.30 a year ago period.

Net sales were $1.63 billion that’s up 13%, on a comparable basis sales for the quarter were up 7%. Comparable measures exclude excise tax, foreign-exchange acquisitions divestitures and the impact of required accounting for new international spirits distribution structure.

Comparable net sales are up 7% in spirits, up 13% in the Home & Security and off 3% in golf. Reported operating income came in at $156 million. On the before charges and gain basis, operating income was $161 million for the quarter, that’s up 33% largely reflecting strong year-over-year growth on operating income in home and security.

Review our assets in investment return measures, after-tax return our net tangible assets before charges and gains was 15%. Working capital efficiency came in at 37%, asset maturing inventory to spirit, WCE was 20%. Return on equity before charges and gain was 8% and return of invested capital before our charges and gains to 6%.

I mentioned earlier, we’re benefiting from the work we’ve done over the course of the downturn. Let me discuss what I mean. First, during the downturn, we continued to make sensible investments and our trusted brands keep consumers excited. These investments include brand building programs, sustain new product innovation and expanded offering across price points.

We also continued support expansion to adjacent product categories and promising international markets. [During] this quarter success of these initiatives, in 2009 25% of our sales came from parts introduced in just the past three years. The percentage of our sales from markets outside the US continues to grow reaching 33% in the first quarter. In the first quarter of 2010, we continued to outperform our markets in Home & Golf, so we begin to see the benefits of our strategy investments in our spirits business.

Combined with our aggressive initiative to reduce cost structures, enhanced supply chain flexibility and manage our cash, these initiatives help Fortune Brands and merge from the recession in a strong position. It positioned us well to drive strong growth as the economy comes back. As we said before, we believe the front-end of our recoveries is a great time to invest in gaining competitive advantage and that’s our approach here in 2010.

We’re planning higher strategic investment of brand building programs, new product innovation in international expansion initiatives in promising markets. Given the signs of increased consumer activity, as well as greater our competency returning to EPS growth in 2010, we are further boosting our strategic investments as we previously indicated we would. When it comes to our source spirits business, we’re increasing strategic brand investment by double-digits in 2010 and that begin in the first quarter.

We are deploying these investments primarily behind our core categories, our biggest brands, new products, and our biggest market opportunities. As part of that, we’re reaching consumers in new ways, in fact 35% of our media spend this year in spirits will be for digital media, up from less than 20% in 2009. That includes our new multimedia partnership with our flagship Jim Beam Brand and ESPN.

This created program is led by The Next Round Served Up by Jim Beam, a First-of-its-Kind Web Series that premiered earlier this month on ESPN.com, SportsCenter and ESPN Radio. It also includes in innovative partnership program launched yesterday with Kid Rock and Atlantic Records, featuring exclusive digital downloads in Kid Rock Music and limited-edition bottles of Jim Beam and Red Stag.

Jim Beam is the first spirits brand to partner with a major record label in this kind of music distribution program and there’s a lot more. This week we launched the First-Ever TV Advertising news for Hornitos Tequila. We’re also recently launched new brand building program behind brand such as the EFFEN Vodka, Cruzan Rum and Canadian Club RTD’s in Australia. Our innovations in spirits are focused around four areas, flavor, convenience, premeditation and value and here some of our innovations.

First, let’s start by Jim Beam, which tripled our expectations in 2009, continues to grow and capture market share. Second, where we launched double aged Jim Beam Black with great new packaging, this is followed up by the soon to be launch Maker’s 46, a much anticipated new expression for Maker’s Mark.

At the value end, we just launched Old Crow Reserve Bourbon and to continue to adjust at out-of-home consumption trend with expanded our successful Cocktail Cube line to improve Cruzan and Margarita, and Strawberry, and Sauza Strawberry Margaritas and finally we’re brining innovations to international markets as well, with new RTD products in Australia and Teacher’s Origin in India. We have a great line of innovations in 2010.

To build wining positions in key markets, we’re leveraging our new sales and distributional organization that we’ve build over to past two years. Let me highlight that the increased cost for our international throughout the market initiatives analyze at the end of the first quarter. Further more, we believe we’re elevating our performance enhancing our prospectus with a more efficient and effective organization.

That includes aligning of our US sales organization by distributor rather than region. Implementation of six focused units, three in the US and three international, and enhancement of our team with the best talent from both inside and outside of the industry. In addition cost savings, and operating efficiencies also helping our growth initiatives are helping few our growth initiatives in spirits.

In home and security products, I’m pleased to say that we haven’t spent the housing recession in hunkered down. We’ve improved in navigating the downturn and aggressive in the positioning ourselves for competitive advantage when conditions improve. We began to see the result of this approach in the fourth quarter of ‘09 and our initiatives delivered again in the first quarter of 2010.

As we’ve discussed before, we’ve been very proactive and taking cost out of our home and security business. By reducing the number of facilities and headcounts by 40% during the downturn and pursuing continues improvement. Today we have a lean cost structure and also a very flexible supply chain.

These moves are clearly paying off in positive operating leverage as volume returns and underscoring our supply chain flexibility, we were pleased lastly week to announce the additional more that 300 jobs over the next three years for the cabinetry plant in North Carolina, due to an upcoming piece of new business.

On the growth side, we’re essentially investing a profitable share gain initiatives, new product innovations and expansion into adjacent international markets. We’re also leveraging our broad product offerings, industry leading lead times and after sales service to expand relationships with key customers and gain profitable market share.

Moen, our largest single brand continues to rollout new products and designs with advance functionality, innovation and eco-performance benefits. New product to helping Moen gain shelf space at home centers and it’s been also return to television advertising in the quarter to reinforce its position as a number one faucet brand in North America.

Internationally, Moen continues to expand in China and lay the foundation for growth in India. Last year alone, Moen opened and renovated more than a 155 showrooms in China and opened its first 40 showrooms in India were also established a new assembly facility. Our cabinetry brands are gaining substantial market shares home centers, where consumers are increasingly making cabinetry purchases.

We’re expanding with these customers by offering new product lines of fill price gaps, valued-added design features and added tools to help kitchen designers of our brands. Meanwhile, we’re seeing aggressive in the dealer channel were we historically have been very strong. Simonton and Therma-Tru are leveraging a vast material in state-of-the-art features to deliver products that combine aesthetic beauty with energy efficiency.

Simonton in particular has generated strong growth and new job on the back of the U.S tax credit for consumer purchases of energy efficiency home products. Master Lock continues to deliver evolutionary and revolutionary new products, while expanded effectively in adjacent security categories such as electronic security and international markets like Europe, Canada, and Latin America.

In golf, we have the games most trusted brands and we remain focused an outperforming the market thorough innovation and international expansion. We continue to sell at the high end of the market with the success of the industry leading Titleist Pro V1 golf ball and advance performance Titleist golf clubs.

In clubs, demand for the next generation Titleist AP1 and AP2 Irons continues to grow. Our Vokey Design wedges have been significant year-over-year market share and with new advanced performance models like the new California series, Scotty Cameron by Titleist putters are growing share.

In the quarter, we also launched a new Titleist drive in Japan, designed specifically for a Japanese market, which is also a very strong start. On the PGA Tour so far this year Titleist has been the most played in balls, irons, wedges and putter categories and number two brand in drivers. Our golf ball innovations extend across price points and we’ve introduced next generation Titleist NXT, NXT Tour golf balls, as well as the new Titleist DT Solo.

In shoes, the new flagship FootJoy icon is off to an excellent start and new FootJoy sports is bringing excitement to the category. The golf industry is best growth opportunities are in international markets and we’ve been investing successfully to capitalize in these markets. These investments include developing industry leading sales organizations in key market across the Pacific Rim, and the construction with new ball plant to serve these markets. This plan will begin production here in the second quarter.

Our investments have helped to drive our percentage of golf sales from international markets to 47%. One final note in golf, earlier this month we completed the sale of Cobra ball brand to Puma. Divesting the Cobra brand enables us to concentrate our golf investments entirely behind our industry leading Titleist and FootJoy brands. These are trusted brands were encourages the powerful innovation and strong brand equity. We believe Titleist and FootJoy representing our highest return growth opportunities in golf.

To further underscore the strength of the Titleist brand in 2009, Titleist golf clubs sales grew in a global golf market that declined in mid-teen rate. We use the process to pay down debt, which remains a priority for us, naturally that enhances our financial flexibility.

Now here is Craig, with a closer at our market in the first quarter performance for each of our segments.

Craig Omtvedt

Thanks Bruce, I will start with spirits. We entered 2010 with an expectation that the global sprits market would be relatively stable with over all growth in the range of flat to up 1%. We’re happy to say, we’re encouraged by what we saw across our markets in the first quarter. Here in the US, we’re seeing stabilization on premise and favorable consumption trend. We’re also seeing encouraging signs and select international markets including Australia our second largest spirits market.

Now, let’s look at our numbers for the quarter. Spirits sales for the quarter came in at $573 million, up 18%; sales were up 7% on comparable basis and that excludes the impact of foreign exchange, excise taxes, acquisition divestures and the impact of required accounting for our new International Distribution Alliance.

Case volume shipments increased slightly faster than revenues. Also of note various one off benefits including favorable comparison in markets such as Mexico, the U.K. and duty-free and the timing of bulk sales accounted for about half of that 7%. Geographically, comparable net sales for our brands were up 2% in the US and up 15% internationally.

Outside the US, we benefited from strong sales gains in Australia and double-digit increases in markets including the U.K., Canada, Mexico and the collective brick markets. At the operating income line, OI before charges came in at $119 million, down 9%. Lower year-over-year OI margin was a function of several factors.

The impact of the significant double-digit increase in strategic brand investment that we discussed three months ago, our previously announced incremental without the market cost that annualized in the quarter along with related international duties that we now record in sales and adverse foreign exchange as well as some degree of price mix. As a reminder here, we held back on brand spend in the first half of 2009. So our stepped up investment was magnified here in the first quarter, it will also impact Q2.

Looking at the year-to-date performance of our key brands, net sales in constant currency and excluding excise taxes were higher for each of three spirits consumer category that’s up mid-single digit rate for our industry leading Bourbon portfolio, up mid-single digits for mixable, which includes to keel up rum, vodka, gin and Cruzan, and up double-digits for classics which includes our Cognac Canadian from Scotch whisky.

In Bourbon, our flagship Jim Beam brand grew worldwide sales on strong performance in the US including the success of Red Stag in Jim Beam (Inaudible) make us not continued to make strong gains in international markets, including Australia the brand’s largest export market.

Now, Craig post a double-digit gains against a year ago quarter when supply was running short. In our mixable category, Sauza Tequila sales were up at a double-digit rate on a big bounce back in Mexico against any easy comparison, plus growth for Sauza Gold and Blanco in the US.

While our Courvoisier brands sales of Decipher were up modestly in the US while (inaudible) grew at a double-digit rate in Europe and increase in the warm gain share on the US. In the Classics category, sales of Courvoisier were up at a strong double-digit rate on strong growth in Europe, Asia and Global Duty Free. Canadian Club sales were up slightly, Laphroaig Scotch grew sales at a double-digit rate and Teacher’s was higher on strong sales in India and Brazil.

Looking to the rest of the year in spirits, it now appears to global spirits market in 2010, maybe up a point or so better than our earlier expectation of flat to up a percent. As we’ve already shared with you, we believe investing in our brands in 2010, is an excellent opportunity to help drive sustainable profitable long-term growth and the progress we’re making an encouraging market dynamics have reinforced that decision.

Our current outlook is that, brand and strategic investments will be top at a mid-teens rate year-over-year versus the approximately 10% estimate we talked about in January. The incremental spend will go against our digital media efforts, recent innovations that have momentum, and our smaller brands with significant growth potential. That increase level of investment coupled with our current outlook will likely result in margins for 2010 in the range of 23%. I will highlight that that continues to be among the best in the industry that were already getting traction in the marketplace from our initiative’s investments and that we are expecting further returns going forward.

Turning to home and security, we entered the year with an assumption, that the overall home products market would be flat to up modestly, included in that estimate was an assumption that’s pending on replacement model would be down in the low to mid single digit range that spending on new construction would be up about 20% and that’s spending in the cabinet’s market as a big tick at discretionary purchase would lag the market and be down at a low to mid single digit rate.

Although the home product market still faces headwinds, we’re seeing continued signs of stabilization. Spending on replace for model, new construction and cabinetry were all better than we expected in the first quarter. As a result, our current target is based on an assumption that the overall home product market will be up low single digits in 2010 better than we anticipated three months ago. That estimate assumes new construction spending will be up in the range of 15% to 20%, overall replace remodel spending flat to up low single-digits, and as spending for cabinetry will be up low single-digits.

Turning to the numbers, first quarter sales came in at $698 million, up 15% reflecting double-digit increases for cabinetry, office, windows, and doors. The top nine benefited from broad-based share gains, inventory rebuilding by channel partners and faucets and doors and favorable comparison to the results of the year ago quarter.

Operating income before charges grew from negative $23 million a year ago to positive $24 million in the current quarter, that’s the second consecutive quarterly increase in home and security. Our strong OI growth in home and security reflects favorable operating leverage that resulted from higher volumes on top of our significantly lower cost structures.

While we’re obviously pleased that OI leveraged at 50% in the first quarter, that rate reflects cost benefits that are annualizing as the year progresses and flat year-over-year raw material cost. As we highlighted in the press release, raw materials will be a headwind in the coming quarters. Bottom line, the underlying run rate was in the range of 30% inline with our full-year expectation.

Trailing down, sales for Moen increased more than 20% on strong gains for new products at home centers, inventory rebuilding in the wholesale channel and very strong growth in China and Canada. Sales for our cabinetry brands were up at high-teens rate driven by very strong growth from share gains for our differentiated offerings at home centers, strong gains with builders and dealers and the benefit of favorable comparisons.

Sales of windows and doors also increased in the high-teens. Simonton windows continued to benefit from share gains and the federal tax credit for energy-efficient for home purchases. Results for Therma-Tru doors benefited from favorable product mix as demand grew for higher end fiberglass entry doors.

Sales in security and storage products were slightly higher as growth from Master Lock more than offset lower sales by Waterloo organization products. As we look to the balance of the year in home and security despite the stabilization we’ve seen, the home products market still face a headwinds.

While big ticket remodeling has improved somewhat, we still expect consumers to remain cautious. The new home has being built generally smaller, entry level home, which was fewer faucets and windows and it remains to be seen how foreclosures as well as the expiration of the home buyer tax credit here in the second quarter will impact the market. That said, we were able to out perform the market and gain share in the first quarter and we feel well position to continue our performance.

Our cost and productivity initiatives are helping us at the bottom line, even as we do strategic investments and face increased cost for commodities such as copper, zinc, steel and transportation. Of note, since our January call each of these commodities is up double-digits. All in, we now anticipate full-year ‘08 margins will be up versus our prior estimate of flat to up modestly.

Moving onto golf, we expect the industry to return to growth in 2010 after a double-digit decline in spending in golf in 2009. Despite, we saw first quarter industry conditions, partially due to lower round of play cause by adverse weather in US warm weather locations. We’re seeing golf consumers responding favorably to new product innovations in advance of the prime playing months as well as growth in key international markets.

We continue to expect that worldwide spending on golf equipment will be up at a low single-digit rate of the year. Our first quarter Golf sales were $354 million, that’s up 2%. On a constant currency basis, sales were up 3% from the year ago quarter, which benefited from the launch of the new Pro V1. Geographically, sales were lower in the US. In the international markets, sales and constant currency were lower in Europe and Japan, but up strongly in Korea the Pac Basin in Latin America.

Operating income in Golf was $44 million, up 27% before charges reflecting the benefit of foreign exchange and successful productivity initiatives. On a product line basis, sales of golf balls were modestly lower due to challenging comparisons to the launch of new Pro V1 models in the year ago quarter as well as again the impact of poor weather on rounds of play.

Worth noting is that while the early months of the year are relatively small, rounds of play in the US were down more than 20% year-to-date through February due to the unusually bad weather. Sales of Titleist golf clubs were up at a mid-single digit rate reflecting strong demand for new Titleist iron models as well as Scotty Cameron putters and the introduction in March of a driver designed specially for the Japanese market.

Sales of FootJoy shoes rose at a double-digit rate on shipments of new icon, sport and eComfort models. FootJoy has gained significant share in the US on and off for our shoe market year-over-year and those gains accelerated in the first quarter. The success of icon and sport is helping drive favorable mix shift.

Sales of gloves and accessories also increased at double-digit rate. Looking to 2010, we are very well positioned to reinforce our industry leadership, but a sharp focus on outperforming the industry we’ll continue to invest in our trusted brands, new product innovation and growth initiatives in attractive international markets.

Now before turning things back to Bruce, just a few additional items. Reviewing charges for the quarter, we’ve recorded after-tax restructuring related charges of $3 million or $0.02 per share as it related to previously announced projects in both spirits and home. With regard to our tax rate, our rate came in at $28.3 for the quarter, but approximately two points were attributable to the true up of differ tax related to the recently enacted healthcare bill. We continue to target that our full-year rate will be in a 26% to 27% range.

Turning to cash flow, our target for 2010 remains the $375 million to $475 million and as a remainder, that cash flow from operations let less net capital expenditures. It also excludes the proceeds from the sale of the Cobra golf assets. The target represents and earnings to free cash flow conversion rate of more than a 100%, we’re particularly pleased about that.

Now back to Bruce for some final comments on our 2010 outlook.

Bruce Carbonari

Thanks, Craig. Our goal entering the year was for Fortune Brands return to EPS growth in 2010 and our first quarter result enhance our confidence in achieving the goal. Earlier this week, as a result of our strong first quarter, we’ve raised the bottom end of our earnings target range. We now are targeting to deliver EPS before charges and gains for 2010 in the range of $2.50 to $2.80, that’s versus our prior target of $2.30 and $2.80.

As we’ve indicated on Tuesday, we are holding the high end of our range because there’s still uncertainly in global economies and it remains to same in our expiration of the U.S government stimulus program will impact home products demand. In addition, raw material costs have increased. The US dollar has strengthened and as previously indicated we are increasing high returns strategic investments in our brands to capitalize on the improved consumer environment.

All that said, we feel very well positioned to deliver improved results. We expect the markets for each of our brand groups will be up at a low single-digit rate for the year and we’re aiming to outperform our categories by continuing to invest in our brands and leverage our lower cost structures.

Thank you again for joining us, now Craig and I will be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Christine Farkas with Banc of America.

Christine Farkas - Banc of America

I have question on you home segment, if I could first growth we’ve seen on our top line in three years yet they were some inventory built and cabinets were performing quite nicely, but you guidance is still for a low single-digit decline at this market launch for the year. Can you just help us understand how much the inventory built or other factors might have helped your quarter and were would the weakness may come in cabinets in the balance of the year relative to guidance? Thank you.

Craig Omtvedt

Cleary we saw a great performance in the first quarter as you outlined. As we look at the balance of the year, as we said in our prepared comments, we’re just taking a cautious approach at this point and then we think with normal and consumer cautiousness about big ticket and where things stand with credit availability that being cautious at this point is the right thing, obviously for the degree if that opens up and those results could be better, but as you talk about the build of inventories out there in the channels with select consumers, obviously in cabinets we don’t have that, so what’s order it is built and shift, so the results are the results.

Christine Farkas - Banc of America

Where would the build come from and how much does that help your quarter?

Craig Omtvedt

The majority of the business is, I make the orders both windows and doors, actually the windows and cabinets. So when you look at our growth rate, a portion of it wasn’t inventory build and profits and in doors, but the majority were share gain. We think more, but have to maybe in a little bit more for share gain.

Christine Farkas - Banc of America

If I could just follow-up on spirits, you’ve indicated some stabilization in on premise. Looking to the US, where your sales were up 2%, can you look at the on premise and the take-home, and just kind of walk us through the consumer behavior changes that you might be seeing?

Craig Omtvedt

Interesting up spirits business in US has performed well on the first quarter. We saw stabilization in our premise meaning that, the declines we saw last couple of years has really started to stabilize through the third and fourth quarter and now seem to the first quarter. We also saw that the price mix was very good. It was stable to improving and the basic volume was up. So our view with the first quarter, when you look at yields and the control phase combined, it was up for 13 weeks in the 3% range and if you look at the most current four week that in going faster than that.

Christine Farkas - Banc of America

More stronger.

Bruce Carbonari

So a real positive response again to the market, I think again for particular business innovations and some of our core brands are really driving our performance.

Craig Omtvedt

I think the other noteworthy point here is that, we talked about the fact that reported sales were up 18% level, but on a true underlying basis, we were more in a 3% range, but that was the very much inline with the market. So that’s encouraging at this point.

Operator

Your next question comes from the line of Dennis McGill with Zelman & Associates.

Dennis McGill - Zelman & Associates

I was wondering on the first question, if you could maybe talk to sort of rank order, what you think the most important variables would be or what you’d have to see to get more confident in top end of the range. I know you brought up raw materials and sort of the uncertainty of demand and what might happened in the back half and how inside, but can you prioritize those for us as far as how you guys thinking about?

Bruce Carbonari

Sure, are you specifically talking about the housing side?

Dennis McGill - Zelman & Associates

No. In total, I mean most of it sound like as tight to the housing side, but --?

Bruce Carbonari

It’s really as a general economy, I would say that housing market is probably the one that we see the raw material in the house tax credits, actually tomorrow I guess, during away so and I think the consumer environment generally is one that consumer is back active again. They have a still demand in value, and where and how we’re positioned with our brands really placed to that.

I mean we have very trusted brands that basically are a price and price value equation is very competitive and we continued to invest behind these brands and innovation behind them. So we try to keep the consumers in the market very excited. So when you say that, okay, what’s really going to fuel this thing and the downstairs, I think in the US it’s going to be jobs, and people feeling more confident about what’s in their wallet and spend a little bit more aggressively on their home.

There is obviously a pent up demand not only in what they want to do in their home, but also when you just look at the basic math of house information versus housing starts over last couple of years. Is just I believe that people have to feel more comfortable with what’s going to happen in the general economy.

I would also say that, we are growing in the Home business and the Golf business. We’re going into fairly big quarters here the second quarter is the spring selling season for Home as up to start of golf season here. So until we see the second quarter and really see how that plays out, I think that will really solidify more of our components for the year.

Dennis McGill - Zelman & Associates

So end demand is certainly more important than the raw material, Hausberg and you spoke about?

Craig Omtvedt

Yes. I think the raw material piece is a piece that in the first quarter, we really didn’t have much impact it just building over the year. But end demand right now is probably the one that we would like to see a little bit more solidification. Two quarters really now for us hasn’t positive, where we just needed to see more.

Commodities were basically flat for us year-over-year in the first quarter, but looking out to the full-year, our expectation is that raw material costs along with say ocean freight and transportation we’re looking at something that’s going to be in the range of make incrementally say, $50 million or so year-over-year, so that’s to come. When you look at FX the benefit that we derived in the first quarter really represents at current exchange rates about two-thirds of what we are expecting would be the benefit fro the full-year.

So when you look at the numbers for the first quarter, I mean, we’re really, really pleased and I think an evidence is that, we’ve done the right thing to position in the marketplace for growth, we’ve done the right things on a cost structure, but it’s also a quarter where the stars really aligned so I mean back to Bruce’s point, when you look at the spirits market somewhat better than we expected Golf, still expecting up kind of low single digits are so, the really driver here is, what’s going to happen with the consumer in home in terms of purchasing new homes and where they stand with repairing remodeling.

Bruce Carbonari

I’d just say, it’s more of market, I really like what our businesses represent. We’ve done all the work. We linked out our cost structures, where basically done with restructuring were place with them that last year and we are in a very flexible supply chain leaning position to be able to leverage when the volume continues. I like where our businesses are, it’s more about the market.

Dennis McGill - Zelman & Associates

Craig, on the $50 million for the raw material had been vast majority of that’s in the home business.

Craig Omtvedt

It is.

Dennis McGill - Zelman & Associates

Just my last question, so talking around grand spend on the spirit side, first part is, can you talk about where you guys think you are relative to some of your peers whether you’re investing earlier and at a greater magnitude now than you things some of peers are? Second part of it, you mentioned 23% certainly being among the top in the industry. Should we interpret that to mean going forward you’re happy running at that rate more continue to spend more on brands energy see you that pay getting it back to maybe where you were previously on the margin side?

Bruce Carbonari

I take the first part of that question with what’s happening in the marketplace. I think everyone, last year in the spirits industry and it’s a generalization obviously, pull back on brand expenses somewhat just to see where the consumers going to be and what was happening. We might have pull back a little bit more mostly because we were going through the international after market change in the first half of the year.

As we even starting to see the stabilization in the market, I’m talking about us now, and to see some of our innovations really start to take hold and some momentum in some particular market. We decided to fuel those. We want to see for example, the Red Stag, it had phenomenal start and can this become a million case brand. Well, let’s go see and let’s funded. So we have energy behind things, we want to puts and continued put money behind and to see how far we can take that and I think that part, what you’re seeing here in the spirits business. We have created some momentums in areas that we want to see how far we can take that.

Regarding the overall margin, again the 23% is higher once in the industry. We are spending against brands that we think growth from market and from a growth and return situation or good return on investment proposition that this meant every brand going to get funded, but once that we think have to most potential to grow in the best returns of the once we’re going to hit on harder.

Craig Omtvedt

Let me jump in here too, because we in January told you that, that we were targeting margins would be in range of to say 24% down 50, 60 or so from where we were last year. Obviously that they moved to 23% or 1% or so, it’s a function of the higher brand spend, it’s a function of where we think we are right now in terms of foreign currency benefits.

Then lastly, it turns out that our international duties from the new international structure are coming in and going to be -- it looks like right now higher than we were contemplating and those obviously are in sales, they come out of cost of sales. So there’s no impact that the OI line, but just from the math standpoint it impacts the ROS that we have and so for the foreseeable future given where we are in terms of what we think our opportunities really for reinforcing the longer term sustainable growth.

I would say that margins in the 23% to 24% rate is really will be our run rate, obviously as this thing kind of plains out of the water and we’re moving forward the way we expect to, then we would expect through price mix as well as on leveraging the cost structure to have a further opportunities.

Operator

Your next question comes from the line of Peter Lisnic with Robert W. Baird.

Peter Lisnic - Robert W. Baird

I guess Craig, first question if you could 50% incremental on Home & Security, if you kind to square the comments on materials cost, is it safe to say the kind of role through this year that base 30% incremental margins something like you’re going to seeing our Home & Security business?

Craig Omtvedt

Yes, I do think that’s were we’re at. Again I mean obviously, we have static to be leveraging a 50%, but it’s just as that and the point I was trying to make you is it just doesn’t really were flat the underlying state of the business, but we do expect to leverage in that kind of 30 percentage kind of range.

Peter Lisnic - Robert W. Baird

Then I guess what I’m also asking is, are you going to be a loss at some of that commodity headwind that you’re facing so that the realized incremental that we’ll see will be around that 30% number?

Craig Omtvedt

I think it’s kind of interesting, I think everyone is aware of the fact that delta went out and took some actions, but we are looking at that will evaluate, that we’ll see what happens here as the market hopefully strengthens over the balance of the year and, yes there may be some opportunities to deal with that. But we’re being cautious at the moment, and you know as we’ve said, with the new kind of normal for consumers, I think we’re operating in the moment that any price increase leads to be very carefully considered.

Peter Lisnic - Robert W. Baird

Okay, all right. As you’re gaining share in some of these categories in Home & Security, I’m introducing new products and kind of filling in some of these value gaps or price gaps I guess, can you talk about the profitability of the businesses? Are you seeing things emerge that are markedly different than say pervious cycle, plus or minus by business?

Craig Omtvedt

Yes, these are possible opportunities, so we really don’t gain share, we have a profitable return. So we’re leveraging and some cases are a very competitive supply chain there may be some competitors don’t have. We’re leveraging some innovations that others starting to have it maybe in best of the way they should have doing this downturn. So these are good business.

Bruce Carbonari

The beauty of where we are with our cost structure, I mean this is win-win, it’s a win for our customers and it’s a win for us. So everybody is happy at this point.

Peter Lisnic - Robert W. Baird

Yes, but I guess what I’m wondering is as you come out this, are you may be seeing reasons to be a bit more optimistic on what these structural profitability of home and security might be given from the success which you’re have in so far?

Bruce Carbonari

As we’ve said, I mean as we’ve said publicly to a lot of people. I mean, we do expect that when we get back to kind of true run rate in the business, but we will be looking at margins that are up and approaching that kind of 15% level, and we quantify that from the revenue standpoint as kind of a high for $4 billion-ish range with housing starts in the $1.3 million, $1.5 million range and repairing the model that would be running at up kind of mid-single digit levels. So I mean, it’s approaching 15%, we think would be pretty healthy.

Peter Lisnic - Robert W. Baird

Then just last quick question on free cash flow out flow in the quarter. Can you give us any insights on what sort of big drivers there were?

Bruce Carbonari

Yeah, I mean the fist quarter is always an outflow for us and just as we kind of build our inventory positions in anticipation of kind of where the full year is going to be, so growth obviously is a big piece of that and then we got product that maturing inventories that were been lying down in spirits, but obviously I mean when you look at where we are year-over-year it was a better than last year, so I would say to you that’s pretty much normal situation.

Operator

Your question comes from the line of Eric Bosshard from Cleveland Research.

Eric Bosshard – Cleveland Research

A couple of questions. In the cabinet business for share gains were pretty stunning relative to the market and relative to others, can you just talk a little about what you think you are doing to drive that magnitude of share progress and the sustainability of that through the year.

Bruce Carbonari

Sure. We have been awarded new business in the home centers area, really at the higher end of the market and that is both here in the US and Canada. We’ve also seen some growth in the dealer side of the channel, so which is again in the higher price point area, so I think that how we are structured to go to market is playing well right now. This is business as you know we have to, this is business really we won last year that really displays in, you have to get the designers trained and then it comes two or three months later, so this is things that we expected and positioned last year and that they started to work quickly than we thought in the first quarter, we’re very pleased with that.

Craig Omtvedt

The other thing I would add here is, and we’ve talked about this before, but I think it also speaks to the intelligence of how we approached cost takeout within just simply willing nearly start cutting costs just to say diluted earnings per share, I mean we were very careful to maintain the national footprints, so that we’re servicing all of our customers across our channels to maintain flexibilities so we can deal with the volume and then lastly make sure that we are doing the right things so that we had flexibility for cost as well as being able to deal with new products and I mean it’s all bearing fruit.

Eric Bosshard – Cleveland Research

Secondly within the incremental margin on the business you talked about the underling incremental margin in home is 30% once you pullout some of the sort of other things in the numbers. I guess I kind of thought maybe that was conservative guidance when you gave it to us 90 days ago, is there anything that would suggest the incremental margin can be any better than in your March back towards 15% or is that just kind of how this business structurally sets up.

Bruce Carbonari

No, I think no. Clearly, I mean if indeed the consumer is strong over the balance of the year than we will get some incremental leverage on that, but that’s hard to call at this point because it’s going to be a function of where does it come from and what’s kind of the nature of it, but, yeah so when you look at the price mix, but no definitely, I think that we are positioned that as we get additional volume and then we should get benefit and so that could start to move higher from the 30s if things really come back.

Eric Bosshard – Cleveland Research

And then last in the spirits business, Bruce you talked about the new normal, is there anything you are seeing of concern or interest more so on, because the concerns aren’t related to how price mix is playing out is the consumer starts to feel better anything that you are seeing there that makes you think differentially about where you are going with new product or with the existing portfolio?

Bruce Carbonari

No, that’s tied by different markets we’re in, so just specifically talking about the US, but let’s start there. US is I think what we saw from the industry last year was a bit more aggressive promotion and may be even pricing behavior in the middle of the year and during the Christmas season, I think, as I told you, it was back to normal and during the first quarter it’s back to normal, so the price mix piece is both we can control and (inaudible) looks pretty healthy again. It’s not as robust as maybe it was in ‘07 or ‘06, but it is on the plus and the volumes are very strong too, so the market although it’s only one quarter and you don’t want to get away ahead of ourselves, but the US has responded well.

Now there are other markets that are lot more challenging, you go to Spain or you go to the UK, much more challenging markets and as really economy driven, but Australia is the healthy; India is very healthy, it was the market that we’re obviously strong and coming [Multiple Speakers] coming back to Canada’s remain strong. So I would say that once we were most concerned about pretty much in Europe, the UK, and Spain in particular.

Operator

Your next question comes from the line of Michael Rehaut from JPMorgan.

Michael Rehaut - JPMorgan

First question I was hoping and I know this has been asked in a couple of different ways and it just appears that you are really just sticking to kind of a conservative wait and see approach still in terms of the end markets, but you know all-in with the growth that you had in the first quarter mathematically unless I’m not really up here, you are basically talking about zero growth for the rest of the year to come into to a low single digit type of world and just going back to the inventory rebuild, I mean you said that there might have been (inaudible) saying share gains are over half of that growth then inventory rebuild maybe one of the remaining segments for that. But still if you have starts kicking in a bit further and just stable consumer, would seem that for home and security for example, could do least a mid single digit and I would say similarly to sprits. So there is anything that -- and again I know you are [quite] conservative, but are you really expecting that type of a dramatic fallback or again is this just, you’d say overly conservative?

Bruce Carbonari

Michael, let me just jump in on this, because at this point we are not locking down on 250 to 280. The reality is, we’ve taken up the low-end to reflect the first quarter, I mean without question as we’ve already outlined, the first quarter results are great, but it also was an easy comp quarter, I mean the world was in a freeze in the first quarter of last year. And the reality is right now as we have said is, we really want to get ourselves to mid year have a better sense of just exactly where do we think the year is headed, get a better sense of where we are with commodities, get a better sense of where we are with end markets and it’s going be at that point that we will update the guidance. So it isn’t that we are sitting here and [hand ringing] at the moment, it’s just that we went to be prudent and pragmatic and careful in terms of whatever we’re going to give in terms of what our targets are going to be for the full year. But as we’ve already outlined, I mean we think we’ve done the right things to position ourselves out in the market place. We know we’ve done the right things from a cost structure standpoint and we will see where we go.

Michael Rehaut - JPMorgan

Okay, fair enough. The second question is more I think a little bit longer term conceptual on the sprits business, clearly the focus in terms of the twenty brand country combinations and some of the growth initiatives I think are very interesting and show a lot of promise. But I was wondering if you could give some type of quantifiable, some broad brush numbers in terms of what you think the overall market opportunity is in the sprit categories that you compete, maybe just some broad numbers, some broad math in terms of what’s the overall opportunity in terms of total market where you think you are competing more aggressively that you spend to gain some share over the next five or ten years?

Bruce Carbonari

Let me just sort of top summary and I’ll let Craig to handle (inaudible) more finer details, but what we’ve done, we’ve explained this to you and a lot people over the last couple of years, but what we are trying to do is, really focus on what -- we said the BMC is a brand market combinations that have the biggest and best returns, that maybe because of the growth side in particular market or just how the brands position. So instead of trying to spend, just pay everything with one rush and we have 680 brand market combination. We’re focusing on the best returns or the best emerging returns.

So we were putting our money is against our best bets and we’re putting significant money behind that and with that we’re starting to see traction and that’s what we are hoping for and now it’s been a combination of a series of strategic [load], including getting a control of our router market. Getting the brand positioned right from a price value equation getting them positioned right to have the right targeted audience to talk to for these particular brands and then getting the messages out that I’m in the right passion.

So this is something as you know we’ve been working on for several years and we started tractions during the Christmas holiday seasons and continued into the first quarter and then you compound that with some innovation to bring some spark to it and it really start to work well, now we have a long way to go, because first quarter is not a big quarter in the spirits business. We have very fine-tuned focus and we hope that continuous investments will support building these brands and building the equity in these brands and that will translate eventually into better pricing and to solid growth and that’s the model we’re going after and when you have a business that has 23% return on sales and you’re going after the better part of those returns it should play well.

Craig Omtvedt

So Michael, just to help you kind of the modeling here longer term, I mean we’ve always said that in the spirits market it’s (inaudible) model would be, first, you got revenues kind of growing kind of low-to-mid single digits, you say ballpark you’re talking about volumes that are kind of one to two and then price mix that could be kind of one to two that gives you your top line and then an expectation that should get down to the OI line and you’re leveraging that, so that you are kind of mid-to-strong mid-single digits OI and then to as first as just outline, taking something down to were you’ve got kind of margins and the margins that we’ve just said for us kind of for the foreseeable future kind of 23% to 24%, I mean that’s a pretty terrific model and it’s a business where it also got great cash flow so that’s how we’re thinking about it and our view right now is more than happy to make some investments behind what we think are really our opportunities to really drive [flow] and so for now to put some money behind that with the expectation that those sales are going to leverage at a 23%, 24% some brand contribution margin level better than that, we clearly think is the right thing to be doing at this business.

Bruce Carbonari

This is Bruce, in market that we have some momentum is not like we try to turn around some of the easier things, they would have momentum we’re trying to just capitalize on that momentum.

Michael Rehaut - JPMorgan

No, I mean I appreciate all the comments, I guess what I am just trying to get at is again on a much more broad basis just the overall market size or market opportunity in the spirits that you competent in and the countries that you competent rite now the business is about a $2.5 billion business and I am just trying to get a sense for the overall opportunity and specifically just by starting off with on a broad basis what is the overall dollar number for the markets you compete in and just you want to think about it longer term?

Craig Omtvedt

Okay, but as we said, I mean just trying to -- and we really have to go market-by-market but just kind of broadly speaking I mean the expectation here is you are looking at global markets that on average can be kind of up in the kind of maybe 2% to 3%, range in a normalized environment. We came into this year a bit more cautious, but are now saying we think that could be kind of up by 1% or so. I can take this offline with you if you want, but I think that’s about as much as we can offer up at this point.

Michael Rehaut - JPMorgan

Okay. Maybe we will talk about it later. I’m just trying to get a more of a size in type of the question.

Craig Omtvedt

I mean, globally it is so hugely fragmented, but just it’s challenging to try to just put a kind of a, call it a homogenous number that’s been a part is across all the markets.

Operator

Your next question comes from the line of Lindsay Drucker Mann from Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs

I guess I just wanted to press a little bit on the sprits performance in the quarter, because it was really surprising to see the profit declines despite underlying ex currency and others, I guess excise tax issue growth was 7%, but then I think Craig you mention that even underlying that and inventory that was up three. I mean, I can appreciate the 10 million you highlighted is incremental to market investments and then the fact that you’ve been spending higher on advertising, but that’s something that’s been going on for the past couple of quarters. So is there anything else that you can add to kind of illuminate what [caused] degree of margin pressure that we saw in the period and how we should think about whether this elevated level of -- what the outlook is, what kind of balances (inaudible) how the timing will play out in terms of your margin behavior?

Craig Omtvedt

Yes, I’m happy to deal with that. First of all, I mean looking at margins in the first quarter last year, 27%, I mean that obviously was aberrational and in part was a function of just the fact that we had held back brand spend. But just to give you a sense just year-over-year, if you are looking at 20.7 this year against 27, so we got basically six points of spread, which on the face and you should say, my god, what’s going on. But when you start to work your way down FX accounts were probably about 1.5% or so of that, route to market cost along with -- now we’ve got the international duties sort of flowing through sales, but don’t comedown to the OI line, the combination of those two is three points, the brand spend, which for competitive reasons we don’t breakout specifically, but that’s a big part of it.

And then obviously in the quarter we had some degree kind of price mix decline, I mean as you are well aware, last year was a big year for us, in terms of what we were able to do with the price mix, in fact, I think we were ahead of lot of the competition. As we kind of came into the tail end of the year, as Bruce outlined, I mean we had competitors that were taking more aggressive actions, and so in select markets on select products we’ve sharpened our pricing to be sure that where we need to be. So, that’s something that also was a factor here in the first quarter. But, it’s small and as we are outlining, as we look for the full year, our expectation is that the combination of price and mix, and I would say to you that from now, price will be somewhat negative, but that mix will be positive and net of that will be positive for us. So we are not losing lot of sleep over the first quarter at this point, it largely is tracking where we expected to be and as we look to the full year, we are targeting that with the things we’ve just outlined, that we will be in that 23-ish percent range versus the 24% that we outlined in January.

Lindsay Drucker Mann - Goldman Sachs

And if I could just kind of clarify. So, when I look at your sprit sales I net out excise taxes. So, when I look at your margin it would be operating income over sales less, whatever you talk about is excise taxes, are the international duties that you mentioned are those something that’s about and beyond what would come out when I net out excise taxes or would that actually be reflected in their.

Craig Omtvedt

Well, it’s reflected in and when we talked to you about comparable numbers it’s reflected their, but here (inaudible) we didn’t have that when we were selling to all maxim and we were selling to them net of distribution and there were no excise taxes in it. So now that we have taken over those markets and were reflecting a 100% of those sales in the top line, it has an impact in terms of how you look at our margins or less margins versus where we were in the past.

Lindsay Drucker Mann - Goldman Sachs

Okay, and then just back on the inventory issue for home products business, half of your growth were share gain and the other half call it inventory, that maybe 6% or so mid single digits anyway. It seems like a pretty big amount especially in light of fact that it’s on products that are maybe a third of your total sales. So I guess I was just wondering, is that the right way to think about it and then is that inventory loading something that will potentially come out of numbers reverse in the Qs through four or is that sort of permanent in the base?

Craig Omtvedt

Well, I think that’s the range to be seeing in terms of kind of what happens with the market I mean…

Bruce Carbonari

Well, first off 6% wasn’t -- when we do the inventory due to much lower percentage. So, that’s the right assumption there.

Lindsay Drucker Mann - Goldman Sachs

So, can you give us a better sense quantifying the amount then?

Craig Omtvedt

Well, let’s just kind of come back on this for a momentum, because our reported sales are up 15, as we outlined our comparable sales are up around 12 and of that 12 more than half of that was share gain I mean, we’re trying to call in terms of just exactly where things role with the market and tight numbers on inventory build is hard to do, but I believe at this point to saying that, usual numbers I do not say them more than half of the 12 a share gain and that would come back and say that we’re looking at a market including the distributor inventory builds that would have been up kind of a low to mid single digits. So I mean that’s the strength that can offer anymore than at this point, I mean, we don’t have tight data.

Bruce Carbonari

Yes in market growth as well on that, because the market compared to a year ago is not it was a lot better, I mean the year ago was frozen.

Operator

Your next question comes from line of Doug Lane from Jeffries & Company.

Doug Lane - Jeffries & Company

Couple of Golf questions, I noticed the Cobra deal closed, and we are still assuming $0.02 of dilution from that deal this year?

Craig Omtvedt

Actually at this point I think, we’ve got a shot at that that’s being flat. Looking at our cost structure and the things that we can do and how I want to play out so at this point I would rather than saying $0.02, I would say flat to $0.02, we’ll have to see how thing is going.

Doug Lane – Jeffries & Co

Can you give us a little color on how that deal evolved? Is Cobra something you have been looking to sell or improve more approach, just what was the background there?

Craig Omtvedt

First of all, the Cobra is the very good brand and it’s in the game of proven side of cost business. So a very, very competitive piece of business and when we look at basically strategically what we want to do with the Golf business and see that the international growth is really the heart of the business along with the demographics that will happen here in the United States, when you look where international growth was, predominantly in Asia, where Cobra really has no position. Cobra is strong here in the US and in Europe, but very little positioned and the investments we need to really get ahead of our market, we said till we really build the three brands we have two great brands with FootJoy and Titleist, let’s pull our resources behind that those who had a better returns and a better return on proposition in those markets.

So where then does Cobra fit, then with the success we’ve had in the clubs with Titleist, they reinforced us that may be this asset will probably fit better with someone else. Simultaneously, Puma was looking to get more involved in the Golf business and as you’ve seen them through some of the brand investments there and some of the signage they gone to a little bit in the shoe side, but they had a thirst to get into that space and Puma is a great grand with a very edgy profile and Cobra has got that same type of profile, so it seem to the work from a marriage standpoint.

So that’s basically how it came together, we weren’t necessarily looking to sell it and I think they were looking to get into the space when we sort of assessed everything and it came together.

Doug Lane - Jeffries & Co

Also in the Golf side, there were some news about the Callaway litigation and you’ve been disclosing at in you SEC filings for sometime, will that disclosure go away now?

Craig Omtvedt

No, I think that, we’ll be disclosing and you’ll see it here in the 10-Q coming up, what happened basically is that, we’ve won the appeal, it went back to the district court and the hearing happened here in the first quarter the jury agreed with us and found Callaway’s parents invalid, the same thing that the patent office decided on that their patents were invalid. So we’ve been very reassured by all of that and we will see where Callaway takes it from it from here.

Craig Omtvedt

As we’ve indicated then we still have disclosure, because I mean there are things where we have filed against them and they have filed against us and that just seems to be the nature of the industry today, but the big ticket item obviously was that basically we just have the jury award.

Doug Lane - Jeffries & Co

So it was a big win, but it doesn’t result the issue entirely?

Craig Omtvedt

No, but it’s a big win.

Doug Lane - Jeffries & Co

I don’t want to understate that, but it doesn’t go away. Switching over to the home and hardware as well, Craig, you mentioned that you’re looking at maybe a $50 million commodity headwind this year in the remaining nine months. If we were sitting here in January, what do you think that commodity headwind would have been?

Craig Omtvedt

Well, we outlined it, but then I was anticipating that we are probably looking at maybe something in kind of the 30% to 40% range, and obviously it’s gone up because of what we seen in terms of what’s the moment has been over the last 90 days. On the other hand, I mean there are some people out there, who are forecasting that some of these cost cut could be coming down over the balance of the year. So I mean we just have to see who it place out.

Doug Lane - Jeffries & Co

So just to be clear, I’ve gotten a lot of data today, but that $50 million number is up from $30 million or $40 million or it’s in addition to the $30 million and $40 million?

Craig Omtvedt

I would say that, no. For me right now, as I’m thinking about where we are, commodities are up kind of 15% to 20% over where I was expecting they were going to be in the budget process and the FX is down $10 million or so from where we were targeting to do. So against our starting point that two of those represent a headwind against plan of our around 30 and when you look on a year-over-year, we are talking about on the commodity piece and an incremental $50 million over the balance of the year.

Doug Lane - Jeffries & Co

Got it. Okay, thanks for clarifying that. And for monitoring this, heading into the summer and into back half of the year, what are the two or three or four basic commodities here we should be keeping an eye on.

Bruce Carbonari

A good point, we are looking at brass, we’re looking at copper, we’re looking at steel and then we’re looking at [particleboard].

Doug Lane - Jeffries & Co

And lastly, you talked about Europe and being maybe the least performer of your major geographies, just first, can you give us this big picture, what is the strategy in Europe here, and waiting to require, is there really more M&A in Europe or is there just a need to be focus marketing effort, really where do we go from here in just in the spirits business Europe?

Bruce Carbonari

Again it’s a lot of different markets and the strategies are different each market. For competitive reasons I can’t get into the M&A strategies or what not, but what I can tell is, Spain is the market which is probably the most challenge there of the markets that we participate heavily in. That market historically has been 80% on premise, 20% off premise, so very active social restaurants, night life have to be seen. With the economy in a status in people aren’t going out. So really it does matter and a lot of our products are on premise oriented as you would imagine because it’s (inaudible) in the market. So we really need to see that come back and we haven’t yet, it’s been down dramatically and basically staying there so we need to see that economy coming back.

Strategically, where else will we differently and we got good brands that just -- it’s just nature, you can only do what you can do in a market like that. UK is almost a wholly different profile that is a market that is more off premise, a market that is more like the US 80/20 off premise to on premise. It’s a market that has a lot of very big players like Tescos of the world there and it’s very competitive there. So there you have to be smart and you have to be able to have more of a category management approach and then more of a retail approach. We’ve realigned our organization to attack the market that way.

Doug Lane - Jeffries & Co

And then elsewhere in Europe is there anything on the joint board for the (inaudible) Eastern Europe?

Bruce Carbonari

No, I wouldn’t say, our emphasis really are on the US, Australia, two biggest markets and I would say, within some of our emerging market where we see some great potential of our brands. That’s India and Brazil predominately.

Doug Lane - Jeffries & Co

So emerging Asia, emerging Latin America, not so much emerge in Europe?

Bruce Carbonari

Yes, not so much in Eastern Europe at this point. Russia is the market that we’ve done something there as well, that’s Poland and [Romania] to the world.

Operator

Our last question comes from the line of Ann Gurkin from Davenport.

Ann Gurkin - Davenport

Starting with Golf, the impressive margin improvement in the first quarter, does that puts you on track to reach your long term target of high single digits or low double digit operating margins for Golf for 2010?

Bruce Carbonari

No.

Ann Gurkin - Davenport

No, okay.

Bruce Carbonari

No. I mean the first quarter, I mean as you know, we are kind of in a build period and traditionally with Golf, the lion’s share of kind of revenues in OI comes in the first six months. So, no, not at this point.

Ann Gurkin - Davenport

Switching to spirits, revenue in the US, we have been looking for flat to up 1%, can you help me with what we should looking for now given the better volume?

Bruce Carbonari

Yeah, we’re saying for the year is going to be up low single digits, 1% to 2% really going to continue. We’ve seen the fab start for the balance of the year, that’s what we saw in the US, again the 13 weeks we’re looking at about 3% growth in the market. We hope that sustains itself then actually in the more current four weeks we’re looking about 4% growth. So we only may be a little bit conservative there, but I think over we’ll see how the year plays out this is still an economy that’s in development.

Ann Gurkin - Davenport

And within that 1% to 2% are you still assuming a negative price is that what you said?

Bruce Carbonari

No price mix is basically flat.

Ann Gurkin - Davenport

Flat, okay, great, and then…

Bruce Carbonari

Let me be clear there because for the full-year on price will be down of bit, but price mix for the full year will be positive.

Ann Gurkin - Davenport

And then on the home business, the strength in the faucets, can you give any more color on consumer takeaway are pull through volumes versus inventory build how to think about that?

Bruce Carbonari

Yeah, where we saw inventory build was more in supporting the new construction piece and I think that was really anticipation of the end of the tax credit and the activity that would happen prior to that in the new construction side of the market. We have been necessarily seeing the retail channels, so the retail channels remain to be where the action is and I also -- last year in January, through the first quarter we saw destocking, so we are comping against that as well. I think everybody with the consumer freeze last year was in a much more destocking mode.

Ann Gurkin - Davenport

Turning to retail channel for faucets, we’re not concerned right now about it when inventory bubbled?

Craig Omtvedt

No, they’re in good shape.

Bruce Carbonari

Well, thank you, everyone. Hopefully we had a chance to adjust your questions and we look forward to getting back to you here in the second quarter and look forward to have a strong second quarter. Thank you.

Operator

Thank you for participating in today’s Fortune Brands first quarter earnings conference call. This call will be available for replay beginning at 1’o clock Eastern Standard Time today through 11:59 p.m. Eastern Standard Time on May 3rd, 2010. The conference ID number for the replay is 66047933. Again, the conference ID number for the replay is 66047933. The number to dial for the replay is 1-800-642-1687 or 1-706-645-9291. Again, the number to dial for the replay is 1-800-642-1687 or 1-706-645-9291. This concludes today’s conference call. You may now disconnect.

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Source: Fortune Brands, Inc. Q1 2010 Earnings Call Transcript
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