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Executives

Bruce Carbonari - President and CEO

Craig Omtvedt - Senior VP and CFO

Analysts

Ann Gurkin - Davenport

Jonathan Feeney - Wachovia Capital Markets

Dennis McGill - CSFB

Alexander Paris - Barrington Research

Peter Lisnic - Robert W. Baird

Omar Aleem - Cleveland Research

Bryan Spillane - Banc of America

Scott Scher - Clovis Capital

Fortune Brands Inc. (FO) Q1 2008 Earnings Call April 24, 2008 10:00 AM ET

Operator

Good morning. My name is Don and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings Call. All lines are placed on mute prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Carbonari you may begin your call.

Bruce Carbonari

Thanks, Don. Welcome to our discussion of Fortune Brands first quarter 2008 results. Please note that our presentation includes forward-looking statements. These are subjects to risks and uncertainties, including those listed in the cautionary language at the end of our news release. Our actual results can 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.

In our seasonally smallest quarter of the year, Fortune Brands delivered results and achieved our previously announced earnings target range. We did so even with the US housing correction and challenges in the US economy. We are continuing to move aggressively to best position our business to compete in this environment and over the long-term. That includes reducing cost structures in our Home Products business, sharply focusing on company wide productivity initiatives and continuing strategic investments to fuel long-term growth across our brands.

Specifically we are determined to maintain strategic spending to support brand building, new products and international expansion. Our new investments in these targeted growth initiatives reduced first quarter operating income in our Spirits and Golf segments. We believe that these are the right investments to help drive sustainable long-term growth. Furthermore, our underlined performance was better than our reported numbers indicated, and we expect improved performance in the second half the year.

Notably our international growth initiatives are paying off. Strong growth in international markets across all three business segments help temper the impact of the correction in the US housing market. Our sales in the international markets grew by double-digits. Worldwide sales increased for key brands including Jim Beam, Courvoisier, Teacher’s, Titleist, Cobra, FootJoy and Master Lock. While reported spirit sales were relatively flat, shipments were adversely impacted in the US by reduced reductions in distributor inventories that don't reflect the health of our brands in the marketplace.

The distributor inventory movements have been consistent with the prior year. Our worldwide spirit sales would have been slightly higher. Sales increased at the premium end of our portfolio, reflecting favorable mix shift and our focus on growing our global premium spirits brands. On a depletion basis, our global premium brands grew in the US and demonstrated strong growth in the UK, Spain and Germany, as well as Russia, India and China. We sustained a double-digit increase in brand spending we began in the third quarter of 2007. We believe that brand building campaigns we launched over the past several months for Sauza, Canadian Club and Courvoisier are helping each of these brands accelerated growth.

In an increasingly challenging growth for our Home Products brands, Moen and Master Lock continue to gain share in the quarter. We also are benefiting from our strength in the replace and remodel segment, which continues to perform significantly better than the new construction segment of the market. The success of our international growth initiatives contributed to the results as well. And in Golf new advanced technology products helped us achieve first quarter sales records, with growth in every product category and in all key geographies. That includes especially strong growth in Japan and Korea, two key markets where we invest to expand our business.

Now let's take a closer look at numbers for the quarter. Net income from continuing operations was $108 million or $0.69 per diluted share. That's down 12% from $0.78 in the year ago quarter. These results reflect a net charge of $0.06 per share in the current year quarter, and Craig will spell out these charges in a moment. Diluted EPS before charges and gains came in at $0.75, that's off 7%. These results were within the target range we previously announced. Being, that diluted earnings per share before charges and gains be in the range of flat to down, at high single-digit rate. That's down 5%.

On a comparable basis, excluding excise tax and foreign exchange, total net sales would have been down 7%. Even so, we drove strong growth in international markets for our Spirits, Golf and Home Products brands. Operating income was $227 million, down 11%. The decrease reflects our adverse operating leverage in the Home Products business and modest one-time charges. Reviewing our assets and investment return measures; return on equity before charges and gains was 15%, after tax returns on net tangible assets before charges and gains was 23%, and working capital efficiency came in at 33%. Return on invested capital before charges was 9%.

Since we spoke to you three months ago, the offshoot process for Absolut has concluded. As you know the Swedish government has signed a deal with Pernod Ricard, we are comfortable with the outcome for several reasons. First, we took the disciplined approach that our shareholders have come to expect. Absolut is a terrific brand that would have been a nice fit for us. We know the V&S business well and we saw an opportunity to create value and substantial synergies at the right price. However, at the final sale price we did not see the perfect return for our shareholders. It wasn't a close call.

Second, we preserve our financial flexibility to create value in other ways. We have a strong value sheet that enables us to focus resources on building our brands, repurchasing shares, evaluating high return add-on acquisitions, and paying dividends. At the levels we have recently seen in our stock price, we see share repurchase as very attractive. Upon conclusion of the auction on the last day of the quarter, we immediately announced an authorization to repurchase up to 15 million of our shares. The announcement came right on top of our quarterly earnings blackout period. That means we have little opportunity to put our share repurchase program into action.

Third, we have significant protection in our distribution joint ventures with Absolut. In the US we intend to continue the current distribution arrangements with Absolut into 2012. And Absolut remains in the Maxxium International joint venture. Absolut represents about 15% of Maxxium's total volume, and Pernod Ricard has publicly indicated that the brand could remain at Maxxium for two more years. As a reminder, Maxxium represent 50% of our total spirits revenue. Additionally we have done significant work to prepare for the exit of Remy next year, and are well positioned to manage any future transitions.

Fourth, we are very well positioned to compete effectively in the spirits industry. Our Beam Global Spirits unit remains the fourth largest premium spirits business in the world. Consumers buy brands and not portfolio brands, and we have leading positions in several key spirits categories, including Bourbon, Tequila, cognac, Scotch Whiskey, Canadian whiskey and cordials and liqueurs. We also have industry leading margins and we are committed to investing in the growth of our leading brands.

Let me also underscore that we are moving forward with plans to repurchase the 10% equity stake that V&S holds in our Beam Global Spirits business. Spirits is our highest profit business, and this will enable us to fully capitalize on our financial performance in the attractive spirits segment. We were pleased with the streets response and the uptick in our response following the sales announcement. Even so, we see Fortune Brands shares as very attractive at current levels. While we were participating in the V&S auction process, we maintained our focus on investing for the future across for Fortune Brands, all with the objective of driving growth and returns.

Craig will discuss the performance of each business segment in a moment. But first I want to review the initiatives we see as key to our success across our businesses. First, growing and investing in our brands; second, navigating the downturn in the US home products market; and third, leveraging our investments in innovation and international growth to expand our leadership in Golf. Starting with spirits, we made excellent progress growing our premium global spirits in 2007, and that's coming into 2008. Our Beam Global business is focused on the vision of building brands people want to talk about. It's all about building brand equity and creating consumer pull, and we are investing to put that vision into action.

The double-digit increase in brand spending that we implemented in the second half of 2007 continued into the first quarter of 2008. That boost in brand spend, supported key brand programs such as the relaunch and expansion of Sauza Hornitos Tequila line, the new "Freshness Within" campaign for Courvoisier, and the new "Damn Right" campaign from Canadian Club. Consumer sell-through does suggest that all of these brands are now outperforming their respective categories. We are especially encouraged that the investments we made behind Canadian Club are helping consumers take an entirely new look at the brand.

We plan to continue investing in brand building programs and engage consumers often in non-traditional ways. That includes campaigns for our two biggest brands to launch here in the second quarter. The next generation campaign for Jim Beam bourbon and the new "Expect Fresh" repositioning campaign including new packaging for Sauza Gold and Blanco, our core premium Tequila line. At the same time, we are continuing to invest and expand our presence in promising international markets. That includes the so-called BRIC countries, Brazil, Russia, India and China. There's huge upside in the markets, so we feel very good about the investments we are making and the early results we are seeing.

With regard to our Home Products business, we are successfully outperforming the market over the course of the housing correction. We continue to focus on the initiatives that have helped us navigate the downturn at both the top and bottom lines. To drive sales growth, we are continuing to invest in developing innovative new products, extending brands in to adjacent product categories and expanding into international markets. For example, we are now investing for the first time to launch our Moen faucets brands in India, that's on top of Moen's growing presence in China, Latin America and Canada. Our cabinetry brands are increasing their average sale price with new styles, evaluated finishes and organization solutions. And Master Lock continues to fuel growth with innovative new products and extensions into categories such as door hardware and industrial safety.

To protect our operating margins we are proactively focused on cost and productivity. That includes successful initiatives that are containing material costs, maximizing lean manufacturing techniques, and leveraging our industry-leading lead times. We've also been aggressive in reducing cost structures by creating more flexible supply chains and aligning our manufacturing capacities with marketplace conditions. During the current downturn, we've completed or initiated action to reduce our home and hardware manufacturing footprint by 25% of our total facilities. We've also reduced a number of positions in Home Products by approximately 20%.

With highly affective execution, many of our restructuring initiatives are delivering payback ahead of schedule and with better returns than originally anticipated. Importantly, we are also maintaining flexible production capacity and a healthy level of strategic spend to sustain growth on the recovery comes.

Let me underscore that we believe the housing downturn is a correction and not a fundamental change. The launch or demographics of our Home Products market remain very attractive and we feel well positioned to capitalize when the market recovers. In our Golf business, we are aiming to drive growth in two very important ways. Sustaining our track record of powerful innovations and further expanding our industry-leading golf brands internationally. Our investments in our Titleist Golf Club franchise are paying off in the hottest irons in the market. That's a new four model family of Titleist irons; the AP1, the AP2, ZM, ZB models. Already this year Cobra has launched new Speed LD drivers, new Baffler utilities and new irons in the Pro S9 and FP lines.

We’ve enhanced our market leading golf ball franchise with the introduction of the new DT Carry and DT Roll golf balls. In FootJoy the number one shoe and glove in golf continue to launch next generation products as well, including the new SuperLites line of golf shoes. With addition to our focus on the US market, the game of golf is growing rapidly in markets like Korea and China. International markets now represent about 40% of our golf sales. We are making important investments to capitalize on international growth opportunities such as those in Korea and China, by leveraging our powerful brands and establishing strong in-country distribution. We believe our innovation and international expansion programs position our golf business for a sustainable long-term growth.

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

Craig Omtvedt

Thanks, Bruce. We will start with spirits. Sales for the seasonally smallest quarter were 550 or $515 million, and that's off 1% from a year ago. These revenue figures are on a continuing operations basis, adjusted for the sale of the wine business. On a comparable basis, excluding excise taxes, FX, divestitures and our third party bottling contract, spirit sales would have been down 3%. However, as Bruce indicated earlier, had distributor inventory movements in the US been consistent with the prior year, our worldwide spirits sales would have been solidly higher. Operating income before charges and spirits came in at $130 million. That's down 3% and it reflects our planned double-digit increase in brand spending in the quarter, as well as the distributor inventory work down impact.

At the top line, net sales were off at a high single digit rate in the US due to the larger than usual distributor inventory movements. At the same time, sales were up double-digits in international markets. On a depletion basis, our net sales from distributors to retailers were higher in the US for our key premium brands. Internationally, our net sales were up double-digits in constant currency in the UK and up solidly in Australia and the global duty-free channel. Sales in Spain were lower due to the timing of shipments, as we had customers who bought in inventory at the end of the year in advance for the January price increase.

We drove strong double-digit increases in four key emerging markets, Brazil, Russia, India and China. Looking closer at the performance of our global premium brands; net sale for Jim Beam increased at a low single digit rate in constant currency and were up strong mid-single digits on a reported basis, as growth in Australia, Germany, the UK and duty-free more than offset the distributor inventory movements in the US. While first quarter depletions for Jim Beam were off in the US, we are expecting another strong year for Beam. To further underpin the brand's growth, we are rolling out the next generation of Jim Beam's marketing campaign here in the second quarter.

We saw excellent trends in the marketplace for Sauza, and that's despite lower shipments in the quarter due to the distributor inventory movements and tough year-over-year comparison. Depletions for Sauza were up globally and up strongly in the US We are especially pleased to see strong growth for the super premium Sauza Hornitos line on the heels of the brand's repositioning and repackaging campaign, which we launched at the end of last year. We also see brand building success stories emerging in Canadian Club and Courvoisier. Both brands increased net sales; Courvoisier by double-digits on strong increases in the US.

Global depletion trends were also favorable in the quarter for super-premium and ultra-premium brands such as Maker's Mark, Knob Creek and Laphroaig. As we look to the balance of the year in spirits, we continue to expect this will be a good year. We believe the industry fundamentals remain strong and we've not seen the softening US economy have a meaningful impact on total consumer demand. We believe, we will continue to benefit from our strong premium positions in attractive spirits categories, our increase brand building investments, and our industry-leading margins. Let me also flag the fact that the lion share of our increased brand spending will be behind us going into the second half of the years. For the full year in spirits, we are continuing to target operating income before charges to grow at a mid to high single-digit rate.

Now turning to Home and Hardware. Home and Hardware sales for the quarter came in at $894 million, that's down 13%. At the OI line operating income before charges were $68 million and that's down 27%. Operating income trailed sales largely due to adverse operating leverage. While operating margins were up a 150 basis points in this business, we continue to expect full year margins to be off in the range of 100 bps, as we progressively benefit from our productivity and restructuring initiatives. Reviewing the performance of our Home Products brands, we once again benefited from our strength in the replace/remodel segment of the market, which continues to perform better than the new construction segment.

We are also benefiting from our growth initiatives that are extending certain brands into adjacent categories and into international markets. International sales grew at a double-digit rate reflecting the investment and the commitment. Sales of our cabinet brands were down at a low double-digit rate. Modest declines in our sales to distributors, which account for more than half of our cabinet sales, as well as growth in Canada tempered double-digit declines in sales to home centers, wholesalers and builders. Sales for Moen were off at a low single digit race. The number one faucets brand in North America benefited from growth in its accessories and commercial lines, as well as growth in Canada and Asia. These areas help to offset lower wholesale and retail sales.

Reflecting its commitment to innovation, Moen this month introduced several new kitchen and bath collections, as well as new showering and commercial products. These new introductions include faucets that carry the EPA water sense certification for water efficiency, as well as commercial products designed to perform great while reducing water consumption. Sales for our window and door brands were down at a double-digit rate, reflecting their higher exposure to new home construction than we see in our kitchen and bath brands. For our storage and security brands, new products and continued international expansion helped Master Lock sales climb high single-digits, while Waterloo was down to a double-digit rate.

Looking to the balance of the year, we are continuing to budget our Home Products market that declines at a low double-digit rate on a revenue basis throughout the year. We are also facing an uncertain overall US economy, which everybody is seeing, as well as some level of potential higher material cost inflation. As always, we are pursuing and implementing initiatives that are helping us outperform the market at the top line, control costs, and as Bruce mentioned before, protect operating margins. Against that backdrop, we are now targeting operating income before charges in home and hardware to be down at a high single-digit to high teens rate for the full year.

Golf; our golf business continued its strong momentum into the new year. Sales for our golf brands increased 8% to a first quarter record $396 million. Revenue gains were broad based across product lines and key global markets. Sales increased modestly in the US, grew solidly in Europe, and were up double-digits in Japan and Korea. Operating income for golf came in at $52 million, down 4%. Now the OI trails sales we expect last quarter, that's our stepped up investment to drive growth through innovation and international expansion as well as initiatives to protect and defend our intellectual property in the interest of long-term returns.

Reflecting the strength of our brands and the breadth of our industry leadership, sales grew in all product categories in the first quarter. Golf ball sales increased at a mid single-digit rate, driven by worldwide demand for the Titleist Pro V1 family of golf balls, as well as the roll out in international markets of our latest NXT and DT models. Sales of golf clubs rose at a double-digit rate, fueled by next generation Cobra iron models as well as the launch of our new Titleist irons which began shipping in March. The initial buzz in the marketplace about the new Titleist AP1, AP2, ZM and ZB irons have been extremely encouraging.

FootJoy increased sales at a mid single-digit rate on the success of new shoe and glove models and growth and international markets. Sales of accessories were up modestly. Again, looking ahead, we are pleased with our position in golf. We have the game's most powerful brands, excellent new products in the marketplace, and international expansion initiatives that are driving strong growth. That said, bad weather in the northern US has delayed the start of the playing season in key areas, and that's likely to reflect in second quarter results.

For the full year, we are continuing to target operating income before charges in golf to be up modestly. That target reflects our investments in our growth and intellectual property protection initiatives. Now before I turn things back to Bruce, a few additional items. Regarding restructuring and restructuring related items, we recorded $8.1 million or $0.03 per diluted share in the quarter. These charges principally relate to supply chain realignment and cost reduction initiatives in the Home Products business. We also recorded a one-time pre-tax charge of $7.3 million or $0.03 per diluted share or expenses related to our participation in the V&S auction process.

Looking at free cash flow, you saw we were better in the first quarter than a year ago, and we are continuing to target free cash flow for 2008, to be in our target range of $500 million to $600 million. Again I would remind everybody, that's after dividends and capital expenditure. Now let me turn it back to Bruce.

Bruce Carbonari

Thanks Craig. As we look ahead, we remain focused on our near-term goals, out performing our markets, investing in our brands, and leveraging our aggressive balance to deliver growth in returns. We continue implementing high return cost initiatives, as well as funding our long-term strategic investments. That includes our brand building investments in spirits and our international growth initiatives across all of our businesses, all of which support sustainable long-term growth. Additionally, our combined cash flows, the strength of our balance sheet, and a substantial share repurchase authorization give us excellent flexibility to create value. As we indicated earlier at our current stock price, we continue to see share repurchase as an attractive way to allocate capital.

Looking to the balance of the year, our Home Products brands continue to face a very difficult economic environment. In our Golf business, we are seeing a delayed start to the playing season in many northern US markets due to bad weather. On the upside, our new golf carts are being well received in the marketplace, and we expect US spirit shipments to bounce back in the months ahead. Taking these factors into account, we are targeting EPS before charges and gains for the second quarter to be down at a high single-digit to mid teens rate. That's versus EPS before charges and gains for continuing operations number of a $1.51 for the second quarter of 2007.

We expect second half results to be better than the first half, as we drive growth in spirits, outperform the Home Products market, progressively benefit from our company-wide productivity initiatives, and as our strategic brands investments annualize. For the full year, we are continuing to target results within the range we established at the beginning of the year. However, given the uncertain US economic environment, we are narrowing our full year target range. We are now targeting EPS before charges and gains to be in the range of flat to down at a high single-digit rate. That's versus $5.06 for 2007.

Thanks again for joining us. Now Craig and I will be happy to respond to your questions.

Question-and-Answer session

Operator

(Operator Instructions). Your first question comes from the line of Ann Gurkin with Davenport and Company.

Bruce Carbonari

Hi, Ann.

Ann Gurkin - Davenport

Just wanted to start with the Spirits business. Has Pernod contacted you to start talks about exiting the distribution with Fortune?

Bruce Carbonari

No there has been no discussions on that.

Ann Gurkin - Davenport

No discussion. Okay, are you seeing any difference in geographic perform in your Spirits business?

Bruce Carbonari

Geographic performance?

Ann Gurkin - Davenport

In the U.S., any weaknesses or stronger areas?

Bruce Carbonari

Generally in the U.S. we have seen - the markets haven't seen any significant changes in the market. We have seen some change in on-premise versus off-premise. On-premise slowing down, off-premise accelerating. There are geographic slowdown areas that I would say correlates with the housing; Florida, California, particularly. Especially on-premise. But otherwise, no.

Ann Gurkin - Davenport

All right. Switching to Home business which you alluded to the higher cost pressures. Are you able to raise prices across your portfolio to pass through some of these costs? Are you absorbing some of these costs?

Bruce Carbonari

We are doing a lot of different things Ann. First off, we are doing some material substitution. I would say pricing is getting more and more difficult. Unless we had a sudden rise and a significant rise, but slow increases are hard to pass on. And the environment being what it is, it's very tough to get price increase. So we are doing different things; material substitution, [accelerating] productivity initiatives, trying to offset some of the material cost inflation.

Craig Omtvedt

The other thing Ann is, I will add to that a little bit. As we've said before, our expectation at least for now is that material cost increases are going to be in line with what we normally would expect. We are seeing some pressure in copper; we are seeing some pressure in steel and even some pressure in particle board. But I think the things that Bruce outlined are addressing those. The one potential we have over the balance of the year is that we got some contracts, some of our China sourcing contracts that are coming up for renewal. And with what's been happening with the strengthening of the Renminbi, that's likely to put a little bit of pressure on there, but as usual. I mean we'll be doing everything we can to manage our way through that. But we got those things factored into the guidance that we've given for the full year.

Ann Gurkin - Davenport

Okay. And then your guidance for the full year, what does that include for share repurchase?

Craig Omtvedt

At this point, I'm not quantifying that. It's going to be an open market purchase as Bruce indicated in his comments. The authorization came right on top of the blackout period, so we only made a very limited start and not meaningful. We are going to be in there with open market purchase. But as we've done, as we did in prior years, and I'm not going to speculate on just how much we are going to buy, over what period of time, but what we will do at the end of each quarter is share with you just exactly what we've accomplished.

Ann Gurkin - Davenport

That revised guidance does include some level of share repurchase in it?

Craig Omtvedt

At this point the guidance that we are giving for overall Fortune Brands includes some level, but more than anything else the share repurchase program is giving us more confidence in achieving the guidance we've given.

Ann Gurkin - Davenport

Great. Thank you.

Operator

Your next question comes from the line of Jonathan Feeney.

Jonathan Feeney - Wachovia Capital Markets

Good morning, thank you.

Bruce Carbonari

Good morning.

Jonathan Feeney - Wachovia Capital Markets

I want to follow up on the parent -- any macro effect at all on the spirits performance. When you look at the inventory draw-downs specifically you highlighted certain on-premise trends I think you said California and someplace else.

Bruce Carbonari

Florida.

Jonathan Feeney - Wachovia Capital Markets

Florida. Was this inventory drawdown consistent with your seasonal expectations, and could it be reflecting some bearishness on the part of your distributors in this environment?

Bruce Carbonari

We don't think so. Obviously we talked to them during the course of the last several months, as we saw this thing being drawn down. Seasonally it comes down at end of the year. The fourth quarter is the big holiday season. There is a big build up before the quarter and see what the sell through is. And after that then there is some managing and rebalancing of the inventory. It was further down than we normally would have expected, and I think that's all it is. Because the depletion still looks strong.

Jonathan Feeney - Wachovia Capital Markets

Turning just to home building -- I mean building products for a second. I guess one of the silver linings of a little bit slower growth is the ability to pull more cash out of that business. Are there opportunities to reduce capital expenditure and reduce the non-income statement, commitments to this business more aggressively now that it seems like you are talking about a little bit weaker environment for a longer period than say we were six months ago.

Craig Omtvedt

Obviously that's correct. Our normal run rate for capital expenditure would be in the range and this is aggregate Fortune Brands, would be in the range of $250 million trying at $275 million. And we've taken that down as we outlined in our previous call to say that this year we are targeting that Cap Ex will be in the range of 200 to 225.

And as you've outlined, at this point there is no need to be adding capacity expansion in our Home business and we are not. The one other thing that I'll highlight is that, as we've indicated many times, we are maintaining strategic spend in the business for new product initiatives, and so to a degree that requires additional capital to be able to produce those new products. That's what we did back in 2000-2001 and it served us well when things turned around.

And given the fact we view this as a correction and not a shift in long-term demographics, we are maintaining the strategic spend. The other thing I would highlight is that what we are not going to do is take out a dollar of cost now to protect diluted earnings per share and find out that a year or two from now we've got to spend $2 to put it back in.

Jonathan Feeney - Wachovia Capital Markets

Sure. Just one last question about strategically on the Spirits business. I think you've probably answered this a million times, but I guess -- when you think about -- it seemed like there was a, looking over the past three or four years there is a real momentum to building spirits out as the focus area. Not that you didn’t focus on the other areas, but let's say (inaudible) in that deal. And the lead up to, then in spread trade now. I mean it certainly means -- it shows discipline on your part that you allowed someone else to pay that price for the assets. But now as I look over the next three to five years is getting disproportionately larger in spirits still part of the plan for Fortune Brands, and if so where can you look to build out the spirits portfolio at this point?

Bruce Carbonari

Our focus remains on growing our Spirits and Home business. We have, again as I mentioned earlier, tremendous amount of flexibility with our balance sheet. But our first priority here is to grow organically. We get our best returns by doing that. We have great portfolio, we are the fourth largest Spirits business in the world, and we invest behind those brands and continue with the momentum that we were getting out of the brands today. We're going to have great returns.

Now if we can add on certain select categories either enhancing the strength in our categories in bourbon or Tequila or the cognacs of the world, we will do that. And also if we have an opportunity to look at various vodkas or rums where we aren't that strong, we will do that as well. And I would think we have the financial flexibility to do that. The other thing is we also will be looking in the home business. So we think there's going to opportunities there in the next near term to do that as well. Probably next 12 or 18 months we see opportunities there.

So our focus has not changed, because the absolute deal wasn’t a -- obviously of great brand and so forth, but it wasn't a must-have acquisition. So we are very disciplined to that process and we'll continue evaluating and add on acquisitions. But we are going to continue to invest organically as well. Again that's the best returns we get in this business.

Jonathan Feeney - Wachovia Capital Markets

And I'm sorry just to follow-up on that. I realize fair point that it wasn't a must-do, but at the same time it's like the number over the past five or 10 years the number of really attractive properties that were huge came to market and now it seems like I don't know what big properties are out there that could conceivably come to market. So we are more focused on organic opportunities. Could you highlight at all what organic opportunities, what spirits, what flavors, where is the opportunity to say launch some new brands or expand what you have?

Bruce Carbonari

Sure. Just look at what we did last year. Again in the second half of the year we added a double digit increase in brand spend behind three major initiatives, all of which we are getting great results from. Canadian Club, the "Damn Right" campaign. There is a product that hasn't really had a lot of support over the past, and since we bought it from Allied and we did a lot of research who is the consumer of that brand. And actually what we realized there that the consumer insights work basically said that this was a brand that if you go to the silent generation drink, your father drank it or your parents drank it.

Jonathan Feeney - Wachovia Capital Markets

That’s for sure.

Bruce Carbonari

And we took that and we created this "Damn Right" campaign in saying we are enforcing that point that, you know, that's a great generation and the fact that they are drinking it, we should be proud of that and we've re-enforced that, and now what you're seeing the "Damn Right" campaign, but that has had fabulous response. And our numbers in our Canadian Club have been dramatically changed.

We are doing that with the Hornitos and we are following up with [Now] in the second quarter the Gold and Blanco investments behind that, so our whole Sauza line. We are going to reshape the packaging, reinforce the messaging, and we are doing that as well with the Jim Beam campaign. So there is a lot of opportunity here. This is a fabulous industry returns-wise, and it's a fabulous industry because it has a lot of head room. In a space as that room, we compete and have strength today, not only domestically in the United States, but also in the BRIC countries and in Europe, and we are starting to see those results that's why we put investment behind the numerous things that we've said.

If you recall, I've talked about the brand market combination research that we did, and we have prioritized these and we are going down the list boom, boom, boom and investing it and we are seeing very positive results behind those investments.

Craig Omtvedt

The other thing I would add here is that beyond the brands themselves is the fact that with the Allied acquisition it gave us greater scale in a number of markets, and so that's affording us the opportunity to leverage that scale not just with the acquired brands but with our existing products. So from that standpoint we feel comfortable about what we've got for organic growth opportunities.

Bruce Carbonari

And I would add one other thing. I think it's important. There is a great opportunity to create consumer pull. Your skill gives you great strength on distribution side, and that's wonderful and we are the fourth biggest in the world and may be we are happy being that big. But you need consumer pull, and you look at brands that have emerged and really accelerated, it's all come out of the consumer side, not so much the scale side. And I think that formula is one that we are very attracted to and investing behind.

Jonathan Feeney - Wachovia Capital Markets

Thank you very much.

Craig Omtvedt

Okay, thanks.

Operator

Your next question comes from the line of Dennis McGill.

Dennis McGill - CSFB

Good morning, guys.

Craig Omtvedt

Good morning.

Dennis McGill - CSFB

I was wondering if you could start out by just kind of outlining what your macro assumptions are as you look towards the back half of the year?

Craig Omtvedt

Yeah, I can. It's first of all within the home industry. And again we are not economists, so what we are doing is we are working off of what other research groups are providing to us, the Harbor joint center for housing studies and others.

Dennis McGill - CSFB

Okay.

Craig Omtvedt

But the projection right now is that the overall market for Home Products is going to be down low teens this year, and our expectation is that it's going to continue through the balance of the year. We are expecting that we will as we've done continue to outperform the market. But we are clearly anticipating that we've got an overall market that's going to be below double digits. We are looking at repair and remodel that's going to be down kind of low single to mid single-digits, and a new construction market that is going to be down in the range right now of 30, 30-plus percent for the whole year.

So when you blend those out for the fact that new constructions a third of the market and repair and remodel is two-thirds; that brings us to be down the below double-digits. In the golf business we are expecting that we will see rounds of play basically flattish to maybe down a little bit, up a little bit. And in Spirits our expectation is that the U.S. market is going to be in line with the overall longer term growth profile of volumes being up kind of 2% to 4%, but our expectation is that for this year they are going to be at the lower end of that range.

Dennis McGill

Okay. So it sounds like putting all that together, you are certainly not expecting that the back half of the year is starting to see some sequential improvements. It sounds like the trends out there stay pretty tough.

Craig Omtvedt

Yeah, I would say from an overall market standpoint, we don't really see things changing. What gives us confidence about the back half of the year is that we will derive progressive benefit from the restructuring and other costs initiatives we've put in place. We stepped up brand investment that Bruce outlined both in golf as well as spirits. The lion share of that increase spend will have occurred by the end of the first half year. So going into the second half we'll have some increases, but they'll be more normalized.

We've got new product timing that's going to benefit the golf business, won't get into specifics on that for competitive reasons. And then obviously with the share buy-back program, that will provide a benefit. But as I've outlined before we are looking at that more as a support for delivering our numbers, then layering it in. It also assumes that just coming back to the economy that it's going to be a challenging U.S. economy through at least the tail end of the year.

We aren't kidding ourselves, I mean we are looking at the fact that that is going to continue to be a slugfest. But there's another reason why it's important to have the number one or two position in markets, because we feel that that gives us an advantage over others. And I think we've demonstrated a consistent and careful approach to managing our costs. But as we outlined, we are not going to cut a dollar this year and find that it costs us $2 to put it back in. We are going to continue the investments, so that when things turn around as we've done before, we are in a position to take advantage of it.

Dennis McGill - CSFB

It's very helpful and seems very realistic. On the Home side you talked about reducing the manufacturing footprint. Did I hear you right that the capacity is down 25% from the peak?

Bruce Carbonari

No our facilities are down 25% from the peak.

Craig Omtvedt

That’s both manufacturing, distribution facilities and others.

Bruce Carbonari

Everything.

Dennis McGill - CSFB

And so is that representative of taking capacity down in addition to trimming shifts and all the other levers that you can pull?

Bruce Carbonari

Yes.

Dennis McGill - CSFB

Okay. And if you are able to talk by segment, are there are certain categories where you've been more aggressive?

Bruce Carbonari

The segment within home?

Dennis McGill - CSFB

Yes.

Bruce Carbonari

No, actually it's been across the board. When you have a market that's decreased the way as fast and as quickly as this one is, it's pretty much across the board. We have different mixes in our businesses between new construction and remodel and repair, and the businesses that are more new construction oriented have obviously been hit harder.

Dennis McGill - CSFB

Okay, switching to Spirits. Do you have any sense on the timing of how quickly you will be able to repurchase the 10% stake?

Craig Omtvedt

That's in process right now. We wouldn't try to speculate as to just how long that will take?

Dennis McGill - CSFB

But you have already begun the negotiations?

Craig Omtvedt

We have.

Bruce Carbonari

Yes.

Dennis McGill - CSFB

Okay. And then just one last one. You brought up the BRIC economies as they are doing well, it sounds like across all your product categories. Of total revenues, how much would you say is from emerging markets?

Craig Omtvedt

At this point, that's not a number that I have at hand, but it's less than 5%.

Dennis McGill - CSFB

Okay, thanks for all of the color, guys.

Craig Omtvedt

Thanks.

Operator

Your next question comes from the line of Alexander Paris with Barrington Research.

Alexander Paris - Barrington Research

A couple of questions. In the Spirits business, the distribution or the inventory reduction, I could see with a pretty bad Christmas the spirits could be bad, too and so the inventories were maybe built up a little bit too much. But did you see any sign of just trading down from your premium and super premium among consumers? Settling for cheaper brands?

Bruce Carbonari

Yeah, let me just clarify one thing. Actually, we had a good Christmas season. The opening comment there, just to clarify that. And we have not seen trading down. Actually, the premium side of the business continues to grow stronger than the value side, and we've seen this trend for quite awhile now. Our basic research says that the cocktail is still an affordable luxury. People aren't willing to give that up, and we have seen very little trade down at this point.

Alexander Paris - Barrington Research

Looking at International, somebody started asking about emerging markets. But just give a rough estimate, what is International in the quarter as a percentage of your total revenues?

Craig Omtvedt

I'm not sure we have that at hand Alex, but hang on a second. Let me just take a quick look here.

Bruce Carbonari

Let me get back to you. I can tell you that spirits is about 40%.

Craig Omtvedt

Alex I do have it here. It's turned out that for the quarter, total International across the company represents about 30% of our sales.

Alexander Paris - Barrington Research

And Spirits you said was 40 and Golf you said earlier was 40, and then Home and hardware is something much less.

Bruce Carbonari

Yes.

Craig Omtvedt

As it works out, I will give you the numbers because I've got them here. Home was in the range of about 15% in the quarter, Golf was about 40, and Spirits was actually up closer to 50.

Alexander Paris - Barrington Research

And all this investment in overseas growth, would that be less in Home and Hardware just because of the nature of the market and more focused in Spirit and Golf.

Craig Omtvedt

Yes.

Bruce Carbonari

Yes. It's focused on Spirits and Golf. Some are very selective investments for faucet business and barring Master Lock business overseas.

Alexander Paris - Barrington Research

And of your Spirits business International, how much goes through the joint venture?

Bruce Carbonari

It's about 15% of our total sales.

Alexander Paris - Barrington Research

Only 15?

Craig Omtvedt

A third of the International.

Bruce Carbonari

A third of the International.

Alexander Paris - Barrington Research

Okay. Is Canada generally -- you do yourself?

Bruce Carbonari

Canada, yes, we do.

Alexander Paris - Barrington Research

Okay, I think that’s it. Just one other question, talking about Home and Hardware, I imagine the worst the environment gets the cheaper the prices and the better the opportunities. Have you seen pricing starting to come down significantly on potential Home and Hardware acquisitions?

Bruce Carbonari

We are hoping. I think it's going to start soon. It's got to. I think people were hoping that this was going be a "V" and now it's going to be more extended. And the results and the realignment of their businesses are happening or have been happening. I think we'll start seeing that in the next 12 to 18 months.

Alexander Paris - Barrington Research

Having peaked back in 2005, do you think somebody is getting the word by now.

Bruce Carbonari

We think so.

Craig Omtvedt

They go down hard, Alex.

Alexander Paris - Barrington Research

Okay, thanks a lot.

Bruce Carbonari

Okay, thanks Alex.

Operator

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

Peter Lisnic - Robert W. Baird

Craig, I guess the comment on China sourcing, can you help us get an understanding of what that means in terms of either revenue or cost structure, in terms of what you are sourcing from China?

Craig Omtvedt

I mean, I won't break out the dollars for competitive reasons. But as we look at it right now, I don't view it as an extreme exposure. Right now though just to quantify it, to put a number on it but this is early days. We could be talking about something in the range of kind of $20 million, $25 million of risk. So in the grand scheme of things it's not a major needle mover, but if indeed we took that hit, $25 million it would be $0.10 dilute the earnings per share. But that's something that's been in the crosshairs for a while, we are looking at it. We will be sorting out how we deal with those long-term contracts, and obviously we got other cost initiatives that we continue to look at. But it's built into our numbers right now in terms of the guidance we gave you.

Peter Lisnic - Robert W. Baird

Okay. And that 20- 25, is that more labor or is that raw materials?

Craig Omtvedt

But the contracts are for manufactured components. So it's the all end costs.

Peter Lisnic - Robert W. Baird

Okay. And then if you looked at the incremental raw materials that you might be incurring in the back half of the year. Is it the same kind of number, $20 million to $25 million kind of hit or can you give us a ballpark on that one.

Craig Omtvedt

No, to [pick it] kind of by giving just some kind of numbers in total across the business, I think that if I'm talking 20 to 25 for China, then maybe I'm talking something like kind of at the end of the day it could be kind of in the range of maybe 35 or so. But again you got to remember, we are going to be pushing for limited price increases in select areas, we've already outlined that. We are looking at other things we can do in terms of material substitutions and others.

So at the end of the day, I think what we are looking at is a manageable situation, and I kind of net down that gross number I gave you to say that just for materials alone maybe we are in the range of kind of the 15 to 20.

Peter Lisnic - Robert W. Baird

Okay, that's helpful.

Craig Omtvedt

We've build that into our number.

Peter Lisnic - Robert W. Baird

Okay. All right, that's helpful. And then if you look at the buyback and how we should think about that, your net debt-to-cap is around 43% or so, and assuming it you still want to stay in the investment grade, how far can you stretch leverage or how comfortable are you with stretching leverage I guess, in terms of executing on the buy back fronts.

Craig Omtvedt

Candidly, at this point, we are more focused on balancing the share buy-back opportunity with what may be some of the acquisition opportunities that may come down the pike here. And so that's more of the balancing at this point. So we are clearly taking a phased approach to the share repurchase, and obviously we were monitoring where we are in terms of credit ratios. But at this point we believe that we've got lots of flexibility, but our default position continues to be one of maintaining investment grade.

Peter Lisnic - Robert W. Baird

Okay. And it sounds like there are some acquisition opportunities that are in the pipeline and potentially close.

Craig Omtvedt

I don't want to speculate on that, and that's not what I was saying. I was giving you kind of the more broad view. What may or may not be there in the pipeline is just not something we would comment on. But I think we've demonstrated over the years that we take prudent approach to how we manage the balance sheet in our financial flexibility, so that we are in a position to be able to do the things we want to do.

Peter Lisnic - Robert W. Baird

Okay, fair enough. And then last question on Home and Hardware, you've talked about the brand spend initiatives and Spirits and Golf. I'm wondering how brand spend looks in Home and Hardware relative to a year ago. I would assume --

Bruce Carbonari

Yeah, it is Peter. We have fine tuned it. Obviously things are associated with certain markets and certain channels we've kept. When you look at our cabinet business, our dealer channel still continues to be doing very well, and we continue to support that. The new construction side and the co-ops there, you know, I actually dial those down. Our overall brand messaging has come down modestly. But we’ve been selective about where are we doing it. We want to be very careful. We have great brands and we don't want them to be diminish in the consumer's eyes during this period.

Unknown Speaker* 104

Okay. All right, that's all have I. Thank you very much.

Craig Omtvedt

Thanks.

Operator

Your next question comes from the line of Omar Aleem with Cleveland Research.

Bruce Carbonari

Hi Omar.

Omar Aleem - Cleveland Research

Good morning, guys.

Craig Omtvedt

Good morning.

Omar Aleem - Cleveland Research

A couple of things. You obviously mentioned the channel inventory in spirits and growth expecting to improve in the next couple quarters. The improvement in the coming quarters, should we expect that to match the growth rates we've seen in Q2, Q3, Q4, '07 as the growth improves?

Bruce Carbonari

I missed the Q, what was your reference there?

Craig Omtvedt

Omar, we need you to repeat that. We lost part of what you gave us. Ask another question.

Omar Aleem - Cleveland Research

Okay. Sure. The channel inventory you explained in Spirits business and that growth would be expected to improve in the next couple quarters. As we start to see that, should we expect that the gross rates to kind of match the rates we saw in the back half of last year?

Bruce Carbonari

Yes, I would say so. Again, we are really looking at focusing on depletions. And inventory will balance itself over time. But our depletion rate is accelerating in support of some of the brand investments that we've made and also some of the strength that we are seeing in our bourbon category. So we expect that to continue. Again, it's not all about volume. We are looking at this business maybe through a different lens than has been looked in the past or at least some of the Allied brands as they were managed before. So it's a combination of both the brand and the dollar value that we are getting. So it's a balance again between that price equation and the volume equation.

Craig Omtvedt

But at the end of the day, I mean we are expecting that full year revenue growth is going to be in line with what we've had in prior periods.

Omar Aleem - Cleveland Research

Okay, great. Second question, just in terms of inventories, inventories grew I think 8%, [78%] in the quarter, first of sales contraction. When can we kind of expect the growth rate in inventories to more closely match sales?

Craig Omtvedt

First of all, as you look at the first quarter we had a couple of things going on. One about half of the increase that you saw was just simply a function of foreign currency translation, and then secondarily, we had an increase in the kind of the bulk inventories in our Spirits business as we were laying down more inventory to support our longer term sales projections. So as you think about where we are at with things, I would broaden the comment and just talk about our overall working capital efficiency. And as you look at the first quarter, we blipped up a bit from last year from 31 to about 33. And as I look to the full year, we'd expect to improve somewhat on the 33%. But only somewhat at this point.

Omar Aleem - Cleveland Research

Okay. Great. Thank you, guys.

Bruce Carbonari

Yup.

Operator

(Operator Instructions) Your next question comes from the line of Bryan Spillane from Banc of America.

Bryan Spillane - Banc of America

Good morning.

Bruce Carbonari

Hey Bryan.

Bryan Spillane - Banc of America

Just two quick questions; clarifications. First, in terms of Spirits wholesaler inventory reductions, that is done at the end of the first quarter? So your 2Q guidance assumes that you ship the consumption?

Craig Omtvedt

Yes.

Bruce Carbonari

Yes.

Craig Omtvedt

Or potentially a little better.

Bryan Spillane - Banc of America

Okay. So whatever happened in terms of inventory reductions happened in the first quarter and is behind you.

Craig Omtvedt

Yes, correct.

Bryan Spillane - Banc of America

Okay. Great. And then second question, just in terms of your expectation for beverages going forward, does that include any expectation that raw material cost or input costs have moved up.

Craig Omtvedt

Yeah, it does. I mean we obviously have included some increased cost for glass. Obviously the impact of corn is something that we won't see in our cost of goods sold for at least four years, because obviously that's going into aging product. But the impact of things that will hit us currently is in our numbers.

Bryan Spillane - Banc of America

Okay. And then finally, Craig, if you could just give whatever additional color you can give in terms of the dynamics around negotiating to buy back the 10% stake in V&S from Sweden. From what we can see on the outside, there is the fair value that's listed in your 10-K at this point, $542.9 million. If you could talk a little bit more about; one, what fair value actually -- is it a fair market value? Is it a fair private market value? Is it an enterprise value? So is there debt associated with arriving at that calculation? Just something to give us some guidance in terms of whether it's a absolute multiple on top of your beverage segment EBITDA or is it something different than that?

Craig Omtvedt

I will let Bruce answer that.

Bruce Carbonari

It's Bruce. Yes, yes, yes, yes. I guess if I could. It's a negotiation and we are in the middle of it so I really can't speculate on how and what each party is determining their valuation on. So like all acquisitions or different types of deals we do, we really don't talk about them when they are going on.

Craig Omtvedt

But obviously Brian, there are factors that come into play there I think looking at kind of liquidity, lack of liquidity on it. The fact it's a minority interest and it's not something that has an open market aspect to it. Those are all things that come into play and they did when we first valued it at the time they came in.

Bryan Spillane - Banc of America

And it does include a debt component. So when we are thinking about enterprise value, there is a debt component attached to it as well?

Craig Omtvedt

Yes, that’s right.

Bryan Spillane - Banc of America

All right, that's helpful. And Bruce, I think you did a good job of selling Feeney Canadian Club just before.

Craig Omtvedt

If that didn't do it, the ads should.

Craig Omtvedt

Thanks guys.

Bruce Carbonari

Okay.

Operator

Your next question comes from the line of Scott Scher with Clovis Capital.

Scott Scher - Clovis Capital

Can you talk about the last time that you had an adjustment in inventory at the distributor level.

Bruce Carbonari

Every year we do at this time of year. It's a seasonal adjustment, it just have to be deeper than we expected this year.

Scott Scher - Clovis Capital

What's the normal adjustment?

Craig Omtvedt

Well, it ebb and flows. It's not something that has a set target every year, but ordinarily what we see just to give you kind of broad brush, is, that distributor inventories come down in the first quarter. They blip up a bit in the second quarter, kind of carry a bit maybe up or maybe flat or down a little bit in the third, and then we see them pick up in the fourth is the normal ebb and flow that we see. And as Bruce outlined this year just was a little higher than normal.

Bruce Carbonari

If it has any significant impact we try to point it out and in this quarter it did.

Scott Scher - Clovis Capital

And then just one follow-up question people asked a couple of times about the buy-back, how much of the buyback is in the numbers, how much is not, how high can you go on debt ratios. It seems in terms of the buyback that you announced a large buy-back, but then you kind of caveat it and said, well, we will do the buy-back but we would prefer to buy brands. Can't you do both? And you are suggesting you think your stock price is very cheap, are you going to get to the end of 12 month and you've really not bought back much of the buyback. So is it sort of -- it's there but you are not going to be aggressive or is it there and you actually going to do it and you believe it and you are going to do as much as you can when the stock is cheap. Unknown Speaker* 149

Bruce Carbonari

I think first off we always have the shareholder in front of us first. And if we see an opportunity to buy back shares more aggressively, we'll do that. If we see an acquisition that balances the share buyback, we'll do that and has a better return for the business. So the flexibility we have right now is to do the best thing we can to create value for the shareholder. And with that, right now, we think the shares are very attractive and we will be active in the market.

Craig Omtvedt

Let me jump in on this, too because for some people share buyback is an accretion discussion. And that's not the way we approach this. We've always looked at share buy-back from the standpoint of what's the IRR proposition and how does that match up against other opportunities, and so just as we have done in the past, you look back in 2004, 2001 through 2004 when we are more aggressively buying back shares before we postured ourselves for the allied acquisition. We had authorizations that were out for say $10 million or so and then we worked against that. We had some years when we bought back 100% against the authorization and other years where we didn't.

But at this point going back to what I said earlier, it's a case of balancing what is the best IRR proposition for us, and right now the default position is buying back the shares. But if we see something that we think is dramatically better for us, then obviously we are going to consider that just as we always have.

Scott Scher - Clovis Capital

And in one follow-up question you said that the marketing the excess marketing, brand building, things on your Spirits business were weighted to the first half of the year and they'll slow down the back half of the year. Give us a sense to what the impact is from a dollar standpoint there? How much you spend in the first half and how much of that was resolved in the back half. .

Craig Omtvedt

We never break out dollars for competitive reasons. But the bottom line here is that, approximately kind of 70% or so of the year-over-year increase is coming in the first half.

Bruce Carbonari

To keep in mind that the second half of last year we increased brand spend significantly.

Scott Scher - Clovis Capital

And do you think -- that the last question. Do you think that's going to continue for multiple years? I know you bought the brands and you are trying to do what you can to accelerate the top line, is this something you will have to continue to do into '09-2010 or do you feel you are seeing momentum in these things and brand building stuff we won't be talking about it into next year.

Bruce Carbonari

It all has it to do with growth in returns. If we think we can get good growth in the near term and adequate returns from doing it, we will do it. Otherwise we won't. And right now with the early stage of what we are doing, we did it in the second half of last year, we are doing in the first half of this year. We are going to let that annualize, we are going to digest it and then we will evaluate it from there.

Craig Omtvedt

The thing I will highlight here too is the fact that, we don't just have a hunch to go out and spend. We got a campaign in place, it's targeted, and we look at what it is we expect to do and we set our own targets for growth both in volumes and revenues. And that's what everyone is held accountable for.

Bruce Carbonari

It took us a year, roughly a year to a year and a half to get all that sorted out before we started launching in the second half of last year.

Scott Scher - Clovis Capital

The question I would ask is longer term, as the quality of your brands equal to a better than the industry such that you can grow at the industry rate without excessive brand building or do you have to spend a lot of money to stay even with the industry growth. What's your perception on that as you sit here today?

Bruce Carbonari

'

Well again, I think we are trying to outperform the market, and in doing that we are going to do it in a lot of different ways, one of them was brand building. And if we see that we can get the returns and again, I think in the Spirits business and the Spirits space, if you can show top line growth the cash spits out on the bottom line. So if we can find a way to accelerate the growth faster than what the market is giving us, we are going to invest behind it.

Craig Omtvedt

But to answer your question specifically, we don't believe we are chasing the market or have to chase the market. Hello?

Scott Scher - Clovis Capital

Yes. Thank you.

Craig Omtvedt

Okay.

Operator

Our final question comes from the line of Alexander Paris with Barrington Research.

Alexander Paris - Barrington Research

I think you probably asked this question and probably didn't answer it. If for example Pernod were to successfully negotiate a buyout tomorrow on the U.S. distribution, could you say roughly how that would affect your sales or operating earnings, on an annual basis?

Craig Omtvedt

Yeah I'll cover that in two parts. First of all, within Future Brands it's been a distribution opportunity of sharing of costs and reducing distribution costs. Over the years we've not seen that going to market with Absolut has had a meaningful impact on our revenues. So it really has been a cost story. And obviously if the joint venture went away, we've got to revisit our cost structure. We have not given specific numbers and we are not going to until we really know what it is we are looking at. But when we first did this deal back in 2001, the annualized savings that we derived were something in the range of $15 million to $20 million in terms of lowering our costs. And so that's a number that we'll kind of let you kind of build for yourselves as to how you want to think about it. But at the end of the day, this isn't something that we are losing sleep over.

Alexander Paris - Barrington Research

And I would presume whatever the buyout the return on those funds would offset decent part of those costs.

Craig Omtvedt

Well, obviously, if there was such a thing that certainly would help because we use it to lower debt and how we derived interest savings.

Alexander Paris - Barrington Research

Okay. Thanks very much.

Craig Omtvedt

Okay.

Operator

There are no further questions at this time. Mr. Carbonari do you have any closing remarks?

Bruce Carbonari

Yes. Thanks again for joining us. We look forward to speaking with you again in July. In the mean time, we remain sharply focused on the initiatives that are positioned in Fortune Brands to sustain long-term growth. Thank you.

Operator

Thank you for participating in today's first quarter earnings conference call. This call will be available for replay beginning at 11:00 AM Eastern Standard Time today. Through 11:59 PM Eastern Standard Time on April 27, 2008. The conference ID number for the replay is 41988377. Again the Conference ID number for the replay is 41988377. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you. You may now disconnect.

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Source: Fortune Brands Inc. Q1 2008 Earnings Call Transcript
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