Fortune Brands' CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug. 4.11 | About: Beam, Inc. (BEAM)

Fortune Brands (FO) Q2 2011 Earnings Call August 4, 2011 10:00 AM ET

Executives

Matthew Shattock - Chief Executive Officer of Beam Global Spirits & Wine Business

Bruce Carbonari - Chairman, Chief Executive Officer and Chairman of Executive Committee

Christopher Klein - Chief Executive Officer of Fortune Brands Home & Security and President of Fortune Brands Home & Security

Craig Omtvedt - Chief Financial Officer and Senior Vice President

Analysts

Judy Hong - Goldman Sachs Group Inc.

Christine Farkas - BofA Merrill Lynch

Michael Rehaut - JP Morgan Chase & Co

Eric Bosshard - Cleveland Research Company

Peter Lisnic - Robert W. Baird & Co. Incorporated

Matthew McGinley - ISI Group Inc.

Vivien Azer - Citigroup Inc

Timothy Ramey - D.A. Davidson & Co.

Operator

Good morning. My name is Sean, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands First Quarter (sic) [Second Quarter] Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Bruce Carbonari, Chairman and CEO of Fortune Brands. Sir, you may begin your call.

Bruce Carbonari

Thanks, Sean. Good morning. Welcome to our discussion of Fortune Brands 2011 second quarter results. Before we begin, please note that our presentation includes forward-looking statements. The statements are subject to risks and uncertainties, including those listed in the cautionary language at the end of our news release and 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 in the supplemental information linked to the Webcast page on our website.

I'm pleased to be joined today by Craig Omtvedt, CFO of Fortune Brands, as well as the executive leadership of our 2 brands independent companies; from Beam, CEO, Matt Shattock, and CFO Bob Probst; and from Fortune Brands Home & Security, CEO, Chris Klein and CFO, Lee Wyatt.

As we approach the planned separation of our 2 remaining businesses, both Beam and Home & Security are outperforming their markets and will be ready to hit the ground running on day one as independent companies.

As expected, earnings per share before charges and gains for the second quarter was modestly lower due to the challenging comparisons we highlighted 3 months ago. The guidance we highlighted included: first, the $0.10 to $0.15 per share benefit to the year-ago quarter, primarily from the mid-2010 expiration of the U.S. homebuyer tax credit; second, the diverse [ph] impact in year-over-year costs for raw materials and transportation; and third, the impact in the current-year period of our double-digit increase in strategic spend to more profitable long-term growth.

Looking at the businesses briefly. Beam achieved record second quarter sales, with gains across its 3 geographic regions. Notably, our investments in innovation and brand building are paying off in profitable share gains, and we're further stepping up our brand investment as a result. The Jim Beam brands accelerated its momentum in the quarter, Maker’s Mark continued its double-digit growth and our distribution muscle is fueling explosive growth for the Skinnygirl cocktails brand we acquired in March. In fact, Skinnygirl has already become the fastest-growing spirits brand in America, and we're planning to build on it success with innovations like the new Skinnygirl Sangria. Spirits operating income growth trailed top line growth as anticipated due to our strong double-digit increase in brand investment and startup costs associated with new product launches.

Taking a look at Home & Security. Our home products market was softer than we originally anticipated. Fortune Brands Home & Security continues to outperform on the success of new business wins and strategic investments and growth initiatives. Against challenging comparisons, we grew sales and gained market share. Solid growth for Moen, strong gains for our cabinetry programs at home centers and sustained global growth for Master Lock more than offset lower sales of advanced material windows and doors. While higher costs for strategic investments, raw materials and transportation impacted Home & Security operating income, each of the business segments was profitable in the quarter.

In a moment, Matt Shattock and Chris Klein will take you through the second quarter performance of their respective businesses in greater detail. But first, a quick update on our separation plan. We've made substantial progress since we spoke with you 3 months ago.

First, we announced we completed the sale of the Acushnet Golf business for $1.225 billion through a group led by Fila Korea and Mirae Asset Private Equity. The tender offers we announced last week are using up to $1 billion of the net proceeds from the cost sale to further strengthen our balance sheet, which support strong capital structures for both Beam and Home & Security assuming [ph] completion of the spend. [ph]

Second, the tax-free spin-off of our Home & Security business is on track to completion in the early -- early in the fourth quarter. We've received the private letter ruling from the IRS supporting the tax-free nature to Fortune Brands and its U.S. shareholders from the spin-off Home & Security. We filed a draft Form 10 with SEC, a necessary step towards lifting Home & Security stocks. We've also enhanced the high performance in the management team at Beam and Home & Security. For example, in the quarter, Home & Security added Lee Wyatt as CFO. Lee has joined us from HanesBrands. Lee helped guide the company through its spin-off from Sara Lee.

Third, we've announced the Board of Directors for the 2 companies. As we announced last week, David Mackay, a current Fortune Brands director and former CEO of Kellogg, will serve as non-executive chair of Beam Inc. [ph] And David Thomas, currently our lead independent director and former chairman and CEO of IMS Health, will be the non-executive chair of Home & Security. The CEOs of the 2 businesses, Matt Shattock and Chris Klein, will serve on their respective company boards [indiscernible] directors.

And we've announced ticker symbols for the 2 companies when they begin trading on the New York Stock Exchange. The remaining company, or remainco, if you will, Beam will trade under its name Beam, B-E-A-M. And Home & Security will trade as FBHS, Fortune Brands Home & Security. We'll announce further details of the spinoff in the coming week. Actually, the completion of the separation remain subject to customary regulatory approvals and filed for approval. [ph] Separation payment [ph] has gone as smoothly as we could have expected, and we feel very good about the progress we've made and about the prospects of these 2 businesses to maximize value for our shareholders as independent companies.

Now, I'll turn things over to Craig for a closer look at the second quarter numbers for Fortune Brands.

Craig Omtvedt

Thanks, Bruce. Excluding Golf and looking at our numbers on a continuing operations basis, net sales were $1.59 billion, up 5%. Excluding excise tax, foreign exchange, acquisition and divestitures, and further adjusting for our new Australia spirits distribution arrangement we discussed last quarter, sales were up 5% on a comparable basis as well.

By business comparable net sales were up 13% at Beam and up 0.5% at Home & Security. Including the divested golf unit, sales would have reached $1.99 billion for the quarter. Net income and EPS, our net income for the quarter was $102.9 million or $0.65 per diluted share. Our results include an after-tax charge of $8.4 million or $0.06 per share primarily associated with our separation plan.

Excluding charges and gains, diluted EPS from continuing operations was $0.71. That's off $0.03 or 4% versus $0.74 in the year-ago quarter. Layering in the earnings from the divested Golf business, Q2 EPS before charges/gains would have been $0.93 versus $0.98 a year ago when the results were up $0.40.

Overall, our results came in a bit ahead of what we were targeting. And considering the year-ago quarter benefit, $0.10 to $0.15 per share from the pull forward in demand we previously discussed, we consider this a very good result.

Operating income came in at $187.5 million. On a before charges/gains basis, operating income was $199.5 million for the quarter, down 5%, versus the year-ago quarter.

Reviewing our asset and investment return measures, and I'd highlight that these measures are inclusive of Golf, and as always, our last 12 month averages. After-tax return on net tangible assets before charge/gains was 16%. Working capital efficiency came in at 35%. Tax and maturing inventories for Spirits, WCE was 18% and that's a year-over-year improvement of [indiscernible].

Return on equity before charges/gains was 8%, and return on invested capital before charges/gains was 6%. For the quarter, our tax rate before charges/gains came in at 27.7% and that's in line with expectations.

On the cash flow front, we'll note the first 6 months were negative, approximately $90 million. I'm happy to state this is simply timing-related. We continue to target strong 2011 cash flow for both Spirit and Home, with strong earnings to free cash flow conversion ratio in the 100%-plus range.

And lastly, with the benefit of the sale of Acushnet, our current bond tender and our strong cash flow. we continue to be confident both businesses will start [ph] independent with strong capital structures. As we've discussed before, we're targeting year-end net debt to EBITDA ratios in the range of 2.5% for Beam and in the range of 1.5% for Home & Security.

For a closer look at Beam and its second quarter results, let me introduce our Beam President and CEO, Matt Shattock.

Matthew Shattock

Thank you Craig. Let me start by saying that the Beam team is sharply focused, confident and highly energized, as we prepare for our future as a leading pure-play spirits company. I'd like to outline for you today the strategies we're pursuing to prime our business to accelerate profitable long-term growth. In doing so, I'll emphasize 3 points.

First, we're right where we want to be in our journey. We've reshaped the root [ph] to Beam portfolio. We've invested the strength in our risk to market and accelerated the growth of our brands, and we've put together a team that's built to win. Second, we're executing a simple and effective strategy that's driving our results today and positioning us for the future. And third, we're focused on leveraging our current marketplace momentum and financial strength into profitable long-term growth and returns as a stand-alone public company.

Underpinning our confidence in the future is our strong foundation, which is built on the unique combination of scale with agility that we believe gives us a distinct competitive advantage. With an enviable portfolio of leading brands in key categories, Beam is the world's fourth largest premium spirits company and the #2 in the U.S., the world's most profitable market. And we've built a high performance organization that's simpler, smarter, faster and closer to customers and consumers. So as a result, we have the size to lead in key categories in the markets, as well as the speed to seize opportunities and accelerate key growth initiatives.

We're driving momentum in our business with a strategy focused on 3 simple platforms: creating famous brands, building winning markets and fueling our growth. When it comes to creating famous brands, we focus on 3 initiatives to grow our brands. First, building our core equities, which includes investing in impactful brand communication. For example, we're driving success for our flagship Jim Beam brand in the U.S. with the new Bold Choice campaign, along with the Jim Beam Live Music Series and our 360-degree partnership with ESPN. And we're driving further growth at Jim Beam with locally relevant campaigns in key markets like Australia and Germany. While at the same time, we've launched the first-ever TV campaign for Maker’s Mark in the U.S. in the second quarter.

We further accelerate our growth through innovation. Just singling out bourbon for moment, we've revolutionized the category over the past 2 years with groundbreaking innovations like Red Stag, Maker's 46 and Jim Beam Devil's Cut. These products are helping grow and premiumize the bourbon category. In fact, across our portfolio, 2010 was a record year of innovation for us, driving a 1/4 of our sales growth.

And we'll continue in that momentum in 2011 with successful product launches in the U.S. like Devil's Cut, Knob Creek Single Barrel Reserve, Pucker Flavored Vodka, EFFEN Cucumber Vodka and Courvoisier Rosé, as well as Red Stag in Germany and the U.K. We're now launching new Sourz Raspberry in the U.K., and we're continuing to build momentum in Australia with the Canadian Club RTD products. We're bringing new products to market faster than ever before, and we have more innovations to come in the second half.

And finally, we also leveraged our scale through high return acquisitions. Our addition of the Skinnygirl's cocktail brand, which we acquired in late March, is a perfect example. Skinnygirl harnesses the megatrends of convenience, premiumization and low-calorie. And we see the brand as an excellent platform for further innovation.

Leveraging our sales and distribution organization on behalf of Skinnygirl has already boosted availability of the brand by nearly 70 percentage points of distribution. And we're seeing stunning results, Skinnygirl has already become the fastest-growing spirits brand in America, and we're the #1 brand in dollar sales gains in the U.S. in the most recent 13-week Nielsen data. We've already launched Skinnygirl in Canada, where it's become the fastest-growing ready-to-serve product, and we've just introduced the brand's first new product, Skinnygirl Sangria, to the U.S. market in July.

Let me underscore that we're supporting our creative famous brands strategy with a strong double-digit increase in brand investment in 2011. In fact, we further increases that level of investment as the year has progressed, in effect, doubling down on successful initiatives to build our core equities, to drive awareness and trial of our new products and innovations and to set up platforms to drive sustainable profitable growth into 2012 and beyond.

Our second strategic pillar is building winning markets. We've made substantial strategic investments over the past several years to enhance risk to market and get closer to our customers and consumers. We now directly control sales organizations responsible for more than 75% of our global sales. That's up from 8% 3 years ago. And we amplify our scale in key markets with the support of our strategic partners, such as Southern Wine & Spirits in the U.S., Coca-Cola Amatil in Australia and the Edrington Group, in more than 20 international markets.

We leverage the strong and agile distribution bubble to bring rigorous and locally relevant brand activation to drive growth across our 3 global regions. As a result, we're strengthening our position in markets such as the U.S., where we hold the #2 position. We're fortifying our strength in Australia, the world's #2 bourbon market, where Jim Beam is the #1 spirit brand of any kind. And we're outperforming in Germany, the #3 bourbon market. And we're driving our fastest growth in emerging markets like India, Brazil, Russia and Eastern Europe.

Our third strategic platform is to fuel our growth through disciplined cost management and supply-chain optimization across the enterprise. We aim to achieve continuous cost improvement to fuel our growth initiatives and help offset ongoing cost increases. One important initiative that we'll completed in the fourth quarter will be the consolidation of our U.S. bottling facilities. By relocating the work performed in Cincinnati to our facility in Frankfort, Kentucky. We will create a center of excellence for the bottling of a wide range of products, offering competitive costs and innovation capability.

So let me now discuss the market, our numbers for the quarter and give you a sense of how our strategy is succeeding.

We continue to expect that the global market for spirits will grow at a low single-digit rate in 2011, with recent data suggesting, there could be upside to this estimate. Our worldwide net sales for the quarter reached $703 million, up 11% to its second quarter record. On a comparable basis, which excludes excise taxes, foreign exchange, acquisitions and divestitures and the Australian distribution agreement we discussed last quarter, sales were up 13% for the quarter and they're up 9% year-to-date.

Our strong second quarter performance benefited a few points from the timing of sales in our Asia Pacific, South America region and pipeline fill for new products and acquisitions. We also grew value faster than volume in the quarter, reflecting favorable mix from innovations and premiumizations. And we drove strong double-digit growth in emerging markets as well.

Let me now go a little deeper into our 3 regions: North America; Europe, Middle East and Africa; and Asia Pacific, South America, which represent anticipated reporting segments as a stand-alone company.

Starting in North America. We continue to see consumers trading optimal premium products and gradually returning to be on-premise in the U.S. We see the U.S. market now growing value in the range of 3% to 4% for 2011. And notably, the bourbon segment in the U.S. is now growing faster than vodka, according to the latest Nielsen data.

Our comparable sales in North America increased to the double-digit rates in the quarter, driven by broad-based strength in the U.S. on our strong growth of Skinnygirl. Year-to-date, North America revenues are up at a high single-digit rate, benefiting partly from our new product launches.

Markets in Europe are varied, with profit trading conditions in Western Europe markets, such as Spain and the U.K., and the market strength in Central and Eastern Europe, as well as Russia. After a double-digit rate increase in the first quarter, comparable sales in our Europe, Middle East and Africa region were at a low single-digit rate in the second quarter. Strong performance in Germany, Russia, Eastern Europe in travel retail more than offset softness in the U.K. and Spain. Year-to-date, EMEA sales are up high single digits.

And finally, despite consumer challenges, the spirits market is flat to up slightly in Australia, and spirits are seeing robust growth in emerging markets such as India, Southeast Asia and Brazil. As a result, our Asia Pacific-South America region drove a double-digit comparable sales increase in the quarter. In the price competitive Australian market, we're seeing solid share momentum. These results also reflected very strong growth, partly due to the timing of sales in Brazil, India and Southeast Asia. Year-to-date sales in Asia Pacific-South America are up at a double-digit rate, including strong double-digit growth in emerging markets like Brazil, India and China.

Operating income before charges for the quarter came in at $148 million, up 1%. As expected, operating income trailed sales due primarily to 3 factors: First, the increase of more than 20% in brand investment, which is priming our long-term profitable growth engine; second, startup costs related to our aggressive calendar of new product launches and the success of Skinnygirl, which is triggering incentive payments sooner than we anticipated; and third, higher raw material costs in the quarter without the offsetting benefit of pricing. That said, we see the pricing environment improving in the back half, and we expect to begin implementing selective pricing actions towards the end of the year.

Now turning to year-to-date performance of our key brands. Our power brands are Jim Beam, Maker's Mark, Sauza, Courvoisier, Canadian Club and Teacher's. These are all global brands with annual sales exceeding 1 million cases. And collectively, their net sales are up at a double-digit rate for the first 6 months. Each of our power brands is growing year-to-date, with Maker's Mark, Courvoisier and Teacher's all up double digits. We're also seeing very strong global growth and meaningful share gains for our flagship Jim Beam brand, a 6 million case brand.

Now our rising stars. These are brands with excellent growth profiles in attractive categories. Our rising stars consist of Hornitos Tequila, Cruzan Rum, Laphroaig Scotch, Knob Creek Bourbon, Basil Hayden Bourbon, Sourz liqueurs, EFFEN Vodka, Pucker Flavored Vodka and Skinnygirl cocktails. Our investments are paying off in strong growth across our rising stars. Year-to-date, sales are up strong double-digits, which includes double-digit gains for Cruzan, Laphroaig, Knob Creek, Basil Hayden, EFFEN and Skinnygirl.

Our local jewels. DeKuyper, Larios and Whisky DYC, are brands with particular strength in a single market. Year-to-date, net sales of our local jewels are off at a mid-single-digit rate, reflecting softness in Spain. While sales for other brands are off at a low single-digit rate for the first half of the year.

So as we look ahead to the back half and the full year, we feel very good about our competitive position and momentum we were driving in the marketplace. Given the global strength of our power brands and the strong gains for our rising stars, we expect to outperform our global spirits market at the top line in 2011.

With regard to OI. 3 months ago, when we raised our guidance for Beam, we told you we're targeting to grow operation income before charges at a mid-single-digit rate in 2011. And we're tracking very well towards this target.

Given we would like to report our next quarterly results as an independent company, we will today begin presenting our earnings targets on an adjusted pro forma basis to provide a better apples-to-apples comparison. Adjusted pro forma is defined as continuing operations results before charges/gains adjusted to assume that Beam was an independent business as of the beginning of 2010, including the impact of public company corporate expense, our underlying spirits tax rate and the benefit of the debt reduction associated with the separation plan.

It's also adjusted for the onetime startup benefit of a new Australia spirits distribution agreement.

So translating our prior guidance to an adjusted pro forma basis, we expect Beam to deliver full year adjusted pro forma operating income growth at a low single-digit rate. To be clear, we are not changing our guidance. The sole difference between our prior target and the adjusted pro forma target is the absence of the onetime sale of inventory to Coca-Cola Amatil in Australia in the first quarter, which accounts for a few points of growth.

Naturally, our adjusted pro forma target reflects increased brand investment, as well as the headwinds of high or low raw material costs and the benefit of favorable FX at current rates. Our momentum in the marketplace has encouraged us as the year has unfolded to further step up our investments in the brand initiatives we like most.

As a reminder, we expect third quarter results to again reflect our strategy to invest ahead of growth, as it will boost brand investment by strong double digits to support new product launches and build core brand equity. We believe our increased 2011 brand investment is primarily Beam for profitable long-term growth. And we anticipate brand investment will normalize in the fourth quarter to a relatively constant run rate as a percentage of sales, which will benefit bottom line comparisons.

Even with this run rate, we'll deliver highly attractive and competitive margins of approximately 30% at the EBITDA line net of excise taxes. Dropping down to EPS, with momentum on the top line and the benefit of lower interest expense, we're targeting adjusted pro forma EPS for 2011 to grow at a high single-digit rate against the base of $1.92 in 2010.

So we're looking forward to a strong year for Beam on an independent company basis. And additionally, our prospects for strong capital structure, our excellent cash conversion and high return opportunities to leverage our financial flexibility will further enhance our ability to drive shareholder value over the long term.

I said at the start, we like where we are on our journey and how we've prepared Beam to go out on its own. With the benefit of our portfolio transformation from 2005 to '07, the enhanced route to market that we've built in 2008 and '09, and the turbo-charged brand investments behind sustainable growth initiatives we've made over the past few years, we like our prospects and now accelerate profitable growth in 2012 and beyond. With OI growing ahead of sales, and EPS growing even faster. And we look forward to discussing our strengths, strategy and our prospects on our road show beginning next month.

Now I'll turn things over to Chris Klein, President and CEO of Fortune Brands Home & Security, to discuss his business and its second quarter performance. Thank you.

Christopher Klein

Thanks, Matt. Our team at Home & Security is also very excited without thinking about our position as the industry leader and our future as a stand-alone company, ways to create value today and with the hallmark returns. We have a strong management team. And together, we're continuing to outperform the market. I'd like to discuss how we're succeeding now and how we intend to outperform going forward.

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At Moen, we've been rolling out our new spot-resistant stainless finishes and Reflex pulldown kitchen faucets, 2 innovations which responds to real consumer needs. Similarly, the rollout of Martha Stewart Living cabinet line at Home Depot and our Diamond Prelude line at Lowe's address the consumer needs for new on-trend designs and finishes at affordable prices. In a way, that's also a compelling value proposition for us and our retail partners.

Therma-Tru's smooth Classic-Craft paintable doors and new vented sidelites and Simonton's brickmould series enhancements for the new construction segment have again excited consumers with a fresh clean look that our builders and remodelers are excited to take to their customers. Waterloo's new garage storage organization system with improved functionality, ease of installation and new styling at more affordable price points is performing well, which again meets a real consumer need.

And Master Lock's new speed dial and precision padlocks are doing quite well in this early back-to-school season, representing just over 30% of all back-to-school sales, as kids and their parents respond to the fresh, clean look and modern functionality of a traditional padlock. These are just a few examples, but I think this focus on smart consumer-led innovation has really distinguished us from our competitors.

Our second strategic initiative is to expand into new and adjacent markets. For example, we're continuing to extend Moen into the commercial faucet and bath accessories categories. We're expanding internationally as well. Moen is the #3 imported faucet brand in China and growing, as we are increasing our Moen storefronts in China by over 100 this year on the way to more than 500 retail storefronts by the end of the year.

And we're growing Master Lock in adjacent categories like commercial safety, where our safety products are providing superior solutions for manufacturing and mining operations worldwide, especially on the mining side, given the global demand for commodities. We're also increasing our investment in electronic security, and we'll be coming to market with some exciting consumer and commercial electronic products in the coming quarters.

Our third strategic initiative is to continuously improve upon our operating platform to lower costs and efficiently serve the business in any environment. We restructured and enhanced our supply chains early in the downturn, cutting nearly 40% of our manufacturing footprint and that's enabling us to capture profitable market share today.

We continuously seek to optimize our supply chain to match with demand patterns in this recovery and are constantly improving upon our already lean manufacturing processes. The fact that we attacked our manufacturing footprint early in the housing downturn and developed alternative strategic sourcing partnerships around the world gives us the confidence that we can service business with new products and new programs regardless of the pace of the shape of the recovery.

Importantly, we have maintained the flexibility and capacity necessary to grow up to $5 billion in annual sales without the need for capital outlay significantly above normal levels. This lean and flexible supply chain also enable us to deliver industry-leading lead times and add value for customers. To underscore our commitment to excellent customer service, we're pleased that Simonton Windows once again rated highest in satisfaction among consumers and remodelers, builders, finishing first in the just-released survey by J.D. Power and Associates.

Before I review our second quarter results, let me first discuss the overall home market. Coming into the second quarter, our assumption was that the market for home products would grow at a low single-digit rate in 2011. We also assumed our market would be down in the first half due to the tough comparison created by the expiration of the homebuyer tax credit and be up in the second half. So pretty clear that the market for our products is running below most estimates including our own.

We estimate the market was down mid-single digits in the second quarter, factoring in the slower new construction market, continued consumer caution for big-ticket purchases in the windows and doors market that's off at a double-digit rate due to the expiration of the energy tax credit. Even so, once again, we significantly outperformed the market in the second quarter and I feel good about our performance in this challenging environment.

Second quarter sales for Home & Security were $890 million, up 1% from a year ago and about 5 points ahead of the market for our home products. Our investments to drive share gains generated meaningful growth, particularly at MasterBrand Cabinets, Moen and security and storage.

Operating income before charges for the quarter was $71 million, down $12 million or 14% from the same quarter last year due primarily to increased raw material and transportation costs and price increases and continued investments to support new business wins, innovation and brand building. Our business model continues to perform as expected regardless of the pace of recovery.

Now just some brief commentary by segment. In the challenging market, 3 of our 4 segments drove top line growth and all 4 were profitable. Cabinetry sales were up mid-single digits rate versus year-ago quarter and were solidly profitable.

Our cabinets business remained on track with the rollout of new business wins like the Martha Stewart Living line of cabinets at Home Depot and our in-stock cabinetry and vanity programs at Lowe's. We should start to see the real impact of these programs flow through in 2012 and 2013 as we work closely with our channel partners to maximize the impact of these important new initiatives.

We continue to see great success in attracting new dealers to our portfolio of brands by leveraging our strong product and service reputation. This business has been built over many years by consistently executing and being seen as a reliable and strong partner to the small business owners who run these dealerships.

Also, as a leader in the cabinetry segment, we are focused on profitable sales and we remain disciplined in navigating an aggressive promotional environment in order to drive profitable growth. We're always conscious of being close enough on price and then letting our quality and service shine through. We believe our leadership in the dealer market, coupled with our strength in home centers with unique brands for both, puts us in the sweet spot of the cabinet market for a long time.

Profit sales were up low single digits. Moen continued to see solid gains, especially in home centers and other retailers, as we rolled out new products in showering, kitchen pulldowns, lab faucets and bath accessories. While the wholesale side of the market continues to be challenged by softness in new construction, we've maintained our strong market share of the top builders and are very well positioned to excel in this channel as the recovery emerges.

China continues to be an important market for Moen, and we were up double digits over the prior year second quarter as we expand our footprint in our brand in this growing market. Windows and door sales were down double digits for the quarter. This market has been hit very hard by the expiration of the energy tax credit at year end 2010 which pulled forward into 2010 substantial demand for both windows and doors and remodeling projects.

We think, longer term, this market will return to more normal levels, that the benefits from energy-saving windows are well-documented for consumers and as aging homes require replacement windows, there should be a return to a more normal replacement cycle. We continue to roll out new products and programs and our innovation is selling in the market.

In storage and security, our sales were up mid-single digits. Master Lock had a strong quarter and benefited from strong growth in its new products ahead of back-to-school, as well as worldwide sales of safety products. And Waterloo continued to rollout its new tool storage and large organization platforms which had resulted in nice gains at both Sears under Craftsman brand and Home Depot under the Husky brand.

As we look forward to the second half of the year, we feel confident in our continued ability to outperform the market. However, we see a weaker market in the second half than we originally forecast, and we now estimate the market for products will be relatively flat year-over-year in the second half, which is still better than the market than we saw in the first half.

Despite the assumption of a relatively flat market, we expect to continue to outperform the market, driven primarily by share gains and the benefit of pricing actions implemented in the first half. And we're prepared to report our next quarterly results as an independent company. We also will today begin presenting our earnings targets on an adjusted pro forma basis to provide a better apples-to-apples comparison. Our adjusted pro forma basis is defined in the news release you've all seen this morning.

Even with a relatively flat market and continued in investment spending, we expect our adjusted pro forma operating income to grow at low single-digit to low double-digit rate in the second half. This growth is due to the new business wins and the benefit of price increases that should increasingly help offset higher costs and commodities. In fact, if commodity prices stabilize at current elevated levels, our price increases coupled with our continuous improvement initiatives should largely offset the higher cost as we move through next year. And importantly, operating leverage for the full year 2011 would continue to be in line with our 30% expectations when you adjust for investment spending, as well as $75 million in higher cost for raw materials and transportations.

The resulting adjusted pro forma diluted EPS before charges for the second half of 2011 should be flat to up low double digits versus $0.41 in the second half of 2010. As a reminder, third quarter results will compare to the year-ago period in which we recorded a $0.03 per share benefit from favorable resolution of patent litigation. Factoring in our lower first half results and improvement in the second half, we anticipate full year adjusted pro forma diluted EPS before charges will be off at a mid-single-digit to low double-digit rate versus a base of $0.73 in 2010.

So to sum up. We're executing well on our strategy. Our new business programs are on track and our proven business model is working. The pace of the market recovery is uncertain as we saw in the first half of the year, but we look to an improving 2012 both in R&R and new construction. Importantly, we create value today with our businesses by capturing share through consumer-driven innovation, expanding to new and adjacent markets and improving our operational platform. We have a motivated management team, hard-working associates and operations around the world and are looking forward to being an independent company.

So regardless of the pace of recovery, we will stay aggressive and are determined to keep winning. We'll continue to see the potential to return to a $5 billion in sales and 14% operating margin business if the market reaches a more steady state of approximately 1.5 million housing starts and 5% annual growth in R&R in the years ahead.

I look forward to further discussing our businesses and opportunities with you on our equity road show ahead of our spinoff this fall.

Bruce Carbonari

Thank you, Chris. I think both Matt and Chris' discussions give you a very clear sense that these 2 companies are performing very well and are ready to create substantial value for shareholders as independent companies. Each company has great brands, powerful market positions, strong management and proven strategies. I couldn't be more confident in their future.

Let me also offer a word of thanks to the team at Acushnet, which we divested last week. Wally Uihlein and his team are second-to-none in the golf industry, and they have a great future ahead as they continue to passionately grow the iconic Titleist and FootJoy brands.

Both Beam and Home & Security are planning to conduct equity road shows in September to introduce these 2 new companies to a broad range of investors. And we will announce further details related to the spin-off as the spin date approaches.

Lastly, as this is likely to be the last earnings call as Fortune Brands, I want to thank all of you for your confidence you've demonstrated in Fortune Brands over the years. This diversified structure of Fortune Brands has served shareholders very well. In fact, since we began trading as Fortune Brands in 1997, the investment of Fortune Brands has nearly tripled in value, including dividend reinvestment, and outperformed the S&P 500 by more than 40%.

I'm excited for the journey that lies ahead for both Beam and Home & Security. Each company has a great future ahead. Thank you again for joining us, and I'll be happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Pete Lisnic, Robert W. Baird.

Peter Lisnic - Robert W. Baird & Co. Incorporated

I guess, first question, if I look at Home & Security, the sales and operating income comps year-over-year were basically the same so leverage tempered or muted I guess. Can you give us a sense as to how much of that was price cost or how much of it was mix? Just some of the components that kind of led to that margin?

Bruce Carbonari

Yes, sure, Pete. I'm going to let Chris and Lee handle that question. Chris?

Christopher Klein

Pete, most of that is commodity and transportation fuel impact. So if we adjust that out as well as the investments that we're making to support our new business and brand building, that would explain the difference.

Peter Lisnic - Robert W. Baird & Co. Incorporated

Okay. Is there a way of maybe calling that out numerically or just assume the majority is the transport materials cost?

Christopher Klein

That's the majority of it as well as some investments in the programs we've talked before about, kind of the setup costs associated with some of the business in the cabinetry programs, as well as the setup costs and some of our other initiatives.

Peter Lisnic - Robert W. Baird & Co. Incorporated

Okay. Then, in terms of follow-up, if I could, just as you look at the business going forward from your perspective strategically, I think historically, we've looked at the business where the goal is to try to get something near 300 basis points of productivity every year. Is that a comparable goal for you looking forward? Or is there anything strategically there that would suggest that goal could be stronger or weaker as you look at the business?

Bruce Carbonari

From a productivity standpoint, every year we have strong continuous improvement initiatives. It will remain about the same. That's a key component to improving our operational efficiency. And then, frankly, some of that savings could fuel investments over time. So as we get into a normal run rate where pricing, with the actions that we've taken in the first half, offset the commodity costs and we get into kind of steady-state growth, we'll see that historic formula return.

Operator

Your next question comes from Vivien Azer, Citigroup.

Vivien Azer - Citigroup Inc

My question is for Matt. In terms of the growth that you saw in the quarter for the Spirit segment, clearly Skinnygirl has just been a home run, the Skinnygirl data we're seeing would point to contributing about 50% of your growth at each of the last 2-4 weeks periods. I'm just wondering, can you help us think about kind of how the rest of the portfolio if we stripped out Skinnygirl and then we strips out any other kind of new product selling that you've got, how is the rest of the portfolio doing?

Matthew Shattock

Vivien, yes, the most encouraging part of this is that base business, excluding Skinnygirl, continues to outperform the market. We're seeing that in a number of markets around the world. For example, in the U.S., we're seeing the most recent data, we're seeing very good performance in end markets outside the U.S. Obviously, I mentioned the performance in Australia and also the performance in our other core markets, such as Germany and emerging markets like India. So the preponderance of our growth came from the core business and Skinnygirl really took a very good result leading to a great result we're having [ph] on top.

Vivien Azer - Citigroup Inc

That all makes great sense and that's terrific to hear. Just given how fast it is growing, are there any concerns about capacity issues? Do you have ample excess capacity to keep up with the robust demand that you're seeing?

Matthew Shattock

Yes, we are doing, I think, a sterling job in our supply chain keeping up with demand. When you take the brand up by 70 percentage points of distribution so quickly, they have really done a tremendous entrepreneurial job getting access to materials, packaging and ensure we keep our customers in supply. And going forward, obviously, one of the opportunities I'll refer to will be to leverage that more fully through our supply chain. But in the short term, our focus is on service and we're pleased with the progress we've made there.

Vivien Azer - Citigroup Inc

Terrific. And my last question has to do with kind of the go-forward on Skinnygirl. Should we expect to see kind of 100% ACV in the next quarter or 2? How close are we from a distribution standpoint? And secondly, how has the retail acceptance been for the Sangria? Did you see a big boost in the third quarter from the shipments of that?

Matthew Shattock

Yes. I think whether the distribution we've got was pretty explosive and reflective of I think our real sense of consumer demand and consumers actually going into customers and asking for it, so a lot of our normal lead times, we beat there. I suspect there's still some headroom for the base brand. It's a little early to tell on the new Skinnygirl Sangria. It's just going into the market as of July, and we suspect that will be a very helpful and sustainable increment to the brand's performance going forward.

Operator

Your next question comes from Eric Bosshard, Cleveland Research Company.

Eric Bosshard - Cleveland Research Company

On the Home side of the business, can you talk a little bit about what you're seeing develop in terms of your market share trends and the pricing environment? It seems like perhaps there's a little more competition in faucets and cabinets, and perhaps, some trade-down in cabinets. Can you just flesh out a little bit of what's going on in that area in cabinets and faucets?

Christopher Klein

Sure, Eric. I'll be happy to. We think about share, overall, we're up if I take it by segment. Cabinets, we're performing very well, the heavy promotional environment today in the home centers. And we're being kind of cautious in terms of pulls on, pulls off, but overall, we continue to gain share there. And on the dealers side of the market, that's a long run game. And we've been winning there over multiple years. And quarter-over-quarter, we continue to perform on the dealers side. On the faucet market, I think what we're seeing is we continue to gain share. We think the other major brands continue to gain share. It's that second-tier that we see is probably weakening, and the in-store brands are kind of sitting flat to where they are. And the window and door market, pretty flat share in a stagnant market. So that's kind of what we're seeing right now.

Eric Bosshard - Cleveland Research Company

From a profitability opportunity with the promotional and the price mix, is that anything to be concerned with? Is it getting better or getting worse? Where does it go from here in the second half and as you start to think about 12?

Christopher Klein

It's been more aggressive the first half. We've tried to be kind of tried to moderate a bit. As we go into the second half, I think it will be potentially about what it was in the first half. Eventually as more volume comes into this market, I think we'll see a little bit more discipline kind of across the board. So we're planning for it to be about the same, and we're comfortable that we're very competitive. As we got close on price, we tend to win. We've got terrific product, terrific service, quality, the designers like us. So in the end we kind of feel like we got get close. But we're not in a pure price competition state of mind.

Eric Bosshard - Cleveland Research Company

And then last related -- in terms of the input cost pressure, at what point does price catch up to inputs, or what point to input cycle that we shouldn't see sort of a normalization of comparisons?

Christopher Klein

Well, second half, we'll get better. There's always a lag here, and we took pricing action late first quarter into second quarter and that pricing in addition to our continuous improvement initiative. So we take those 2 things together, we'll recover commodity cost. If they stay at about where they are -- and it's kind of stabilized. I mean they shot up but they've been pretty stable over the last couple of months. And so if things stabilize where they are, fourth quarter will start to get close. And going into next year, we should be able to cover. So we'll be in good shape in 2012.

Operator

Your next question comes from Judy Hong, Goldman Sachs.

Judy Hong - Goldman Sachs Group Inc.

Just a question on Beam, Matt. Just as you think about going forward, obviously, you've spent a lot of money this year in brand investment. Some of that, I guess, would be more strategic in nature. So as you go forward, can you help us understand what you think is more normalized brand investment? And then, just given that your operating income this year has been lagging sales and has resulted in margin pressure, can we see margin really recovering to what we saw 2, 3 years ago, where spending was a little bit more normalized?

Matthew Shattock

Yes, Judy, I think it's just putting in context. And as I said on my comments, we're really exactly where we wanted to be in our journey. And I think that assures [indiscernible] to the investments we've made in our business and our portfolio are routes to market in the past 2 years in our brand has really primed the business to deliver strong and sustainable earnings gross going forward. And as we get to the end of this year, our P&L profile will be the one that we will use in staying out of the water going forward into '12 and beyond. And specifically to your question on brand investment, we see that being in the ratio in the mid-teens and that will be one that we will grow in line with sales going forward. And I'd get this get this to a P&L profile with a level of margins delivery, which we think is both attractive and competitive. It will be, as I said my comments, before excise tax, EBITDA margins in the range of 30%, so really going forward. The metric we'll be focused on will be earnings growth and returns, driving the top line ahead of our markets, growing their first of after the sales and then leveraging our balance sheet to make sure EPS grows in excess of OI.

Judy Hong - Goldman Sachs Group Inc.

Okay. And then, can you just maybe help us understand just the price/mix outlook, especially if we think about inflation picking up a little bit more in the spirits side? Do you think that we should see more pricing in the industry going forward? What sort of magnitude in terms of cost inflation should we think about if we look out more 2012?

Matthew Shattock

Let me take that in 2 parts. I'll talk about price and I'll ask Bob Probst, our CFO, talk a little bit about the cost base. I think, overall, we are encouraged by what we're seeing from the full year of pricing. We're very pleased with the fact that we didn't have share gains in the first half, but we grew our value faster than our volume. And it looks like our premier innovations are really enhancing that trend. So our pricing is very much now coming into line with the market. And speaking of the market, if you take the U.S. as an example, about 3.5% aggregate growth in the period that we're looking at most recently, I'd say probably 3 points of that is volume and then there is a further point coming from mix, which is reflecting the return to premiumization and probably about 0.5 point give back. But going forward, it looks like the pricing environment is looking more positive it will enable us to take selective and targeted price increases, as we go towards the end of the year and probably set up to lever as we go into 2012. Bob, would you like to cover the commodities.

Robert Probst

Yes, please. We've highlighted before, we're going to have a commodity impact this year, about $15 million to $20 million. But Matt mentioned we really won't see the offset in pricing in that this year. So we will have some targeted price increases towards the end of the year. We expect to see the full year benefit of a pricing next year. At the same time this year, we see some startup costs related to innovation of Skinnygirl. That's a cyclical [ph] margin. But again, as we think about 2012, we'll cycle through that from a cost perspective as we get the supply chain in-house. We feel good about where we're going for a margin perspective in '12.

Judy Hong - Goldman Sachs Group Inc.

Okay. Matt, just following up on premiumization trend. More recently, we've seen consumer confidence weaken a bit. You've heard some of the CPG companies in terms of how things have actually gotten worse for them more recently. Are you seeing any evidence of premiumization perhaps starting to slow down a little bit, on-premise starting to show another leg down? Any color as to more recently what's happening with the consumers and your trends?

Matthew Shattock

No, Judy. I mean, it's something we track very closely in the correlation between the consumer sentiment and the economy and their purchasing habits. The good news is, as I said, we are seeing the return of premiumization as we look at the data unfolding. The most recent reads, again, reflected the fact that we saw good mix in the market, which reflects driving premiumization and the data we're seeing on the on-trade is that it is coming back steadily but surely. So at the moment there is no indication that those trends are being interrupted. In fact, we see them strengthening as the year has gone on.

Operator

Your next question comes from Dennis McGill, Zelman & Associates.

Dennis McGill

I guess this first question is for Chris. Chris, I'm just trying to understand whether or how the guidance for EPS would compare to the prior full year guidance for operating profit that you guys had given before, and whether those are apples-to-apples.

Christopher Klein

Well, the guidance we gave on a pro forma basis for the full year or for second half?

Dennis McGill

For the full year, but I guess we can talk about the puts and takes of the second half.

Christopher Klein

Well, the difference we called out is really going to be the market. So overall, we're now where before we had the market up mid to low double when we talked last quarter. Now we're calling it down mid-low to low double on the market overall. Therefore, for us, our change is going to be down.

Dennis McGill

Okay, so just to be clear, before, I think, the operating profit for the way the prior segment was disclosed was up mid-single to up low double, and the operating EPS for the pro forma today is down mid-single to down low double. So it's a complete reversal, and those are apples-to-apples changes.

Christopher Klein

Yes, they are.

Dennis McGill

Okay. And can you maybe, I guess, given that's a pretty sizable impact on the second half of the year, can you just walk through within the portfolio where there's pluses and minuses by product category? And then I guess by end channels, if you think about it, new construction versus repair/remodel, where you would see the biggest expectations there?

Christopher Klein

Yes, it's really market-driven overall. So the new construction market that we're seeing right now into the second half is a lot weaker than what we had thought we were going to see at the beginning of the year as well as even when we came out of the first quarter. So that's the biggest change. The R&R market we're looking at is probably kind of low single-digit bouncing along. And so where that impact hits us the hardest on the faucet side of the market, we're very strong in wholesale linked to new construction, on the cabinet side of the market as well and in entry doors. So when you see the kind of moment that we are projecting down in new construction from where we were before into now, our new second half outlook, it's all market-driven. There's nothing else in our business model that's changed from the way we're operating. Our share gains are rolling through. All the new business continues to roll through. We talked before about getting price to offset the commodity increases. So the business that we're running as we would intent, it's really just our view on the market is a lot more conservative for the second half.

Dennis McGill

Okay. And just to be clear, within that change, the new construction piece coming down is where all the change is and the home improvement is stable? Or are you seeing the home improvement weaker than you thought a quarter ago?

Christopher Klein

It's really all new construction. Home improvement, we kind of saw it's roughly 2% and we're kind of projecting out roughly 2% second half. So I think it's kind of bumping along, at least, in our categories. It's really new construction that's off sizably, and we just don't see the kind of activity right now in the marketplace that would indicate that the second half is going to produce at where we thought it would.

Operator

Your next question comes from Tim Ramey, D.A. Davidson.

Timothy Ramey - D.A. Davidson & Co.

Matt, I think you said a few minutes ago that you thought 2011 category would be up 3.5%. Does that represent a change in your view of category growth, and would you hazard a guess on 2012? It sounds like you think the market has gathering momentum.

Matthew Shattock

Tim, let me just clarify. The comment I made there, 3.5%, was what we were seeing in the U.S. market from the available data year-to-date. Our global view is that we see the global spirits market up low single-digits with the sense that there could be some upside to get us [indiscernible] if we see strength continuing in markets like the U.S. and some of the emerging markets space.

Timothy Ramey - D.A. Davidson & Co.

And any initial view and category for 2012?

Matthew Shattock

Well, we continue to see the market growing at a very similar rate into 2012. And that's the basis on which we would rate our performance objectives.

Operator

Your next question comes from Michael Rehaut, JP Morgan.

Michael Rehaut - JP Morgan Chase & Co

I guess I just want to make sure -- there's been a few different numbers thrown around with regards to Home & Security. And maybe I wrote them down incorrectly. I just wanted to make sure we have this right. Going into this quarter, the expectations were operating profit growth for the full year of mid-single-digit to a low double-digit. You've put out an EPS of a decline of those rates, but I thought I heard you say that you think operating profit for the full year will still be up slightly less but still be up at a low single-digit to low double-digit rate. Is that correct?

Christopher Klein

No. Thanks for asking to clarify. Lee?

E. Wyatt

Let's start with the EPS for the full year. We've said EPS for the full year will be down mid- to low double digits, and then, actually, flat to up double digits in the second half, and obviously, down in the first half. And we've said operating profit actually kind of mirrors that same thing. Operating profit for the year will probably be down on an adjusted basis mid-single to low double.

Michael Rehaut - JP Morgan Chase & Co

Okay. So I guess just going back to Dennis' question, how much of that -- are you saying that all of that is a change in growth outlook for the second half, more of a top line issue while your -- the raw material costs and brand spend in investments that obviously you highlighted affected 2Q, those expectations for the back half remain roughly where it was 3 months ago?

Christopher Klein

Yes, it's our market outlook. So it's basically our view on the new construction market. We're slightly more balanced in new construction than R&R than the market general. And so our strength in faucets where we're very strong, new construction, cabinets and entry doors, when we revise down our market outlook, it impacts it to that magnitude.

Michael Rehaut - JP Morgan Chase & Co

Okay and also in terms of the second half sales outlook, you were expecting, I believe, the market to be roughly flat year-over-year, but that you expect to continue to outperform the market. You mentioned that you estimate you were about 5 points ahead of the market in the second quarter. Do you expect that similar type of outperformance in the back half, given the momentum with the -- again, the share gains in cabinets and faucets?

Christopher Klein

Yes, I think that's a good assumption.

Michael Rehaut - JP Morgan Chase & Co

Okay. And just lastly, if I could, as we're thinking about 2012 and, of course, look forward to seeing you on the road, I mean, are there any changes that we could expect in terms of either corporate or other kind of restructuring, et cetera, there that might provide some, let's say, an incremental boost to productivity in '12? Or given that you've been operating as an independent for -- within the umbrella for a while, stuff on a corporate level or things of that nature should be more stable?

Christopher Klein

Yes, I think we'll be relatively stable. The structure of our business as a division under Fortune Brands, really, we're a stand-alone operating enterprise. We've done an enormous amount of restructuring over the last 4, 5 years and are operating at a very efficient level. So I think most of the restructuring we're doing is coming into the spin-off. And so there may be some things just ahead of the spinoff, just on the other side of it. But things will be cleaned up in '11, and we'll go into '12 clean, stable, running as we're running.

Operator

Our last question comes from the line of Christine Farkas, Bank of America.

Christine Farkas - BofA Merrill Lynch

I'm wondering if I could follow up, Matt, on Skinnygirl. Just with respect to the incentive payments that came in the quarter, is this something that's ongoing? Will this continue to grow along with sales, or does this end at some point in the near future?

Matthew Shattock

Well, I don't want to go into too much of the -- to the specific details of that. But certainly, there is a disproportionate front load as we've exceeded some of our initial targets with the great success we've initially had. Net-net that, combined with the leverage we'll get from our supply chain, means that this will be a positive OI driver as we look forward to 2012.

Christine Farkas - BofA Merrill Lynch

Okay, great. And then, while I have you, with respect to the OI growth for the segment or for Beam going forward, you did some clarification of the change in guidance. I'm just wondering if you can reiterate that, now up low single digit, which excludes or includes the impact from the Australian inventory?

Robert Probst

Let me take that one for you. It's Bob here. So the guidance on an OI level for the year, we gave, last quarter, was up mid-single digits. We've made one adjustment to that, adjusting now to an adjusted pro forma basis, which is taking the onetime CCA impact. That's what takes us to a low single-digits OI full year forecast. On an EPS basis coming down from that, on an adjusted pro forma basis, we're at high single-digit. So the one and only change in OI is just the adjustment for that CCA impact in the first quarter.

Christine Farkas - BofA Merrill Lynch

Okay. And then, Bob, just on the interest guidance. I just want to understand what the comment in the press release about a $60 million reduction in interest expense, that's coming off of the 2010 actual, the $214 million level, is that right?

Robert Probst

There are 2 things going on in interest. In the adjusted pro forma, what we're doing is effectively restating both last year and this year for the reduction in debt, which we anticipate to be about $1.7 billion, as we recapitalize from the separation. So the interest benefit of that is in both years and, therefore, isn't an EPS benefit year-on-year from a growth perspective. We are seeing an interest benefit this year as a result of a bond that was retired in the first quarter in January of about $600 million. So that is the interest expense benefit you're seeing flowing through in the EPS year-on-year.

Christine Farkas - BofA Merrill Lynch

Okay. The 2010 looks back with that. But my point with respect to the total debt then, are we taking $1.7 billion off current net debt or 2010 net debt? What's our starting point for that level?

Robert Probst

Our expected is year end and backed up to beginning of January 2010. So it's as if we restated January 2010 for that debt reduction.

Operator

[Operator Instructions] Your final question comes from the line of Matt McGinley, ISI.

Matthew McGinley - ISI Group Inc.

I have a question on the inventory composition and free cash flow conversion, and the comment that was made on that. First of all, when I look at that inventory growth, was Home up or was that primarily driven by the maturation of the Spirits? And then second, given what we've seen with raw material inflation across the Home segment, would that impact the conversion at all? I know you said that they still had a pretty good free cash flow conversion on the year, but if raw materials continue to cycle through and the outlook for the back half is kind of flattish, as you said, would that impact the cash flow on the year specific to the Home segment?

Craig Omtvedt

Okay, let me just deal -- this is Craig. Let me just deal with aggregate cash flow of Fortune Brands. As you look at the balance sheet and you look year-over-year, obviously, inventory is up pretty significantly. But first and foremost, about $120 million of that is just FX translation. And as we look then at the remaining $100 million, it's fundamentally -- it was build of inventory for Golf and secondly, then, it was build of inventory for Beam in the range of about $50 million. And about 50% of that was just increase maturing inventory and then about 50% of that is just simply the timing related to finished goods inventories. So in the grand scheme of things, not really an issue to the discussion that we mentioned in terms of what the free cash flow conversion rates are going to be for both Home and for Spirits. So we saw a little bit more inventory in Home but not meaningful.

Matthew McGinley - ISI Group Inc.

Okay, that's helpful. And then a last question. When you look at the new business that you won in the quarter, how much of that drive in terms of the top line? And then when would the expenses associated with that new business that you won start to cycle through? Is that a 2012 impact, or should we start to see better cycling of that into the second half?

Christopher Klein

We haven't broken out the exact dollar of the new business other than to say it's hundreds of millions of dollars, so between $200 million, $300 million annually. That business is still being rolled out and will be complete and in the system by early fourth quarter. And then as we move into '12, they'll start to annualize, so you'll really see the impact in lift '12 and '13. It's important to note it's not just loading in new business, we work closely with our partners to get those programs up to full potential. So you'll see it building in '12 and '13. The expenses have been rolling through the system this year, so we amortize some of the costs of putting up displays and other costs associated with bringing that business online. So it's already flowing through and a part of the investments. So that will -- still there will be kind of flowing through this year, next year. It will start to drop off in the out years, '13, '14. So that business will become more profitable over time, both with top line level as well as the expense associated with it will start to amortize through.

Operator

There are no further questions. I turn the call back to Mr. Carbonari for closing remarks.

Bruce Carbonari

Thanks, Sean. Thank you again for joining us. We look forward to keeping you posted on the progress of our separation plan and to discuss the performance of 2 great new independent companies going forward. Thank you.

Operator

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