Fortune Brands, Inc. Q4 2009 Earnings Call Transcript

| About: Beam, Inc. (BEAM)
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Fortune Brands, Inc. (FO) Q4 2009 Earnings Call January 29, 2010 10:00 AM ET


Bruce Carbonari – CEO

Craig Omtvedt – SVP & CFO


Doug Lane – Jeffries & Co.

Michael Rehaut – JPMorgan

Ivy Zelman - Zelman & Associates

Eric Bosshard – Cleveland Research

Derek Leckow - Barrington Research

Lindsay Drucker Mann - Goldman Sachs

Ann Gurkin - Davenport & Co.


Good morning, at this time I would like to welcome everyone to the Fortune Brands fourth quarter and full year results conference call. (Operator Instructions) Mr. Bruce Carbonari, you may begin your conference.

Bruce Carbonari

Welcome to our discussion of Fortune Brands fourth quarter and full year 2009 results. Please note that our presentation includes forward-looking statements. These statements are subject to risks and uncertainties including those listed in the cautionary language at the end of our news release. Our actual results could differ materially from those targeted.

This presentation also includes certain non-GAAP measures that are reconciled to the most closely comparable GAAP measures in our news release or on our website in the supplemental information linked to the webcast page.

Fortune Brands is emerging from the recession in a strong position, and we closed 2009 with our best quarter of the year. Total sales turned positive in the quarter. Each of our businesses performed above our fourth quarter profit expectations and we delivered results above the top end of our full year target ranges for EPS and free cash flow.

While consumers remained cautious particularly when it comes to big-ticket discretionary purchases, we have continued to see stabilization in the home products market. That combined with the success of our strategic initiatives helped drive these results.

In the quarter we continued to benefit from our foundation of enduring and trusted brands, combined with our brand building and new product initiatives. We’re on offense in all of our businesses. We’re sharply focusing on outperforming our categories, investing to grow profitable market share, and leveraging our lower cost structures.

Let me give you a few highlights across the businesses, total spirit sales were higher in the quarter. Despite challenges in select international markets, sales benefit from gains for Jim Beam and Maker’s Mark in the United States and the weaker US dollar.

Our home and security business delivered its best performance in eight quarters, led by high single-digit sales increase for Moen, and strong double-digit gains for Simonton Windows. Notably our home and security business delivered operating income growth in the fourth quarter.

Our golf business faced the annual impact of lower operating leverage in the seasonally smallest quarter. Even so, double-digit sales increases for Titleist golf balls and FootJoy shoes along with strong in Asia helped our golf brands outperform the market.

Each of our businesses also demonstrated impressive management of cash and working capital. Cash management helped Fortune Brands generate $572 million of free cash in 2009, that’s after dividends and capital expenditures.

More on our cash story from Craig in a bit. Now let’s take a closer look at the numbers for the quarter and the year, net income for the fourth quarter was $11.5 million, or $0.08 per diluted share. Results reflected the impact of intangible write-downs and restructure related charges. Craig will discuss these in a moment.

Excluding charges and gains, diluted earnings per share were $0.56. I’m particularly pleased to report that’s up 3% from $0.64 in the year ago quarter. For the full year reported EPS from continuing operations was $1.60, up 55% from a year ago. EPS before charges and gains for 2009 came in at $2.43 versus $3.75 in 2008.

On the strength of our fourth quarter our 2009 results were above the top of our target range of $2.10 to $2.30. Net sales were $1.8 billion, that’s up 1%. On a comparable basis sales for the quarter were off 3%. Comparable is defined as excluding excise taxes, foreign exchange, acquisitions, and the impact of required accounting related to the spirits route to market initiatives.

Comparable net sales were down 4% in spirits, up 2% in golf, and down 4% in home and security. Full year net sales were $6.69 billion, 12% below a year ago. Sales were also off 12% on a comparable basis.

Reported operating income came in at $47 million. On a before charges and gains basis, operating income was $182 million for the quarter. That’s down 8% largely due to lower income in golf as well as year over year differences in incentive accruals across all of our businesses.

Full year operating income was $505 million, [inaudible] before charges and gains came in at $719 million for 2009. Reviewing our assets and invested returns measures, after-tax returns on net tangible assets before charges and gains was 15%. Working capital efficiency came in at 38%, asset maturing inventories for spirits, WC was 20%. Return on equity before charges and gains was 7% and return on invested capital before charges and gains was 5%.

Clearly 2009 presented us with a very difficult economy however I believe our 2009 results demonstrate how the people at Fortune Brands rose to the challenge. First we successfully adjusted to the evolving consumer and competed effectively in the marketplace.

Second, we reduced our cost structures, improved productivity, and enhanced our supply chain flexibility. And third, as discussed earlier, we effectively managed our cash making the right investments where we needed to while focusing sharply on our use of working capital and free cash.

Together these strategies have enable Fortune Brands to emerge from the downturn in a strong position. The success of these initiatives also demonstrates how we’re determined to play offense not defense. Let me dive a little deeper into the initiatives that helped us deliver our results in 2009.

As we’ve indicated before consumers were very cautious in 2009. To incent these consumers we thought it was important to invest in brands and products that consumers trust, develop innovations that delivered tangible benefits, and provide choices across various price points.

In the spirits industry, consumers shifted more from their purchases from restaurants and bars to retail outlets. In this environment we focused more of our brand building and promotional investment on initiates that directly connect with consumers and that contributed to the long-term equity of our brands.

While we held back on brand spend in the first half to the year as we transitioned our global routes to market, we boosted brand investment by double-digits during the fourth quarter holiday selling season in the US. These investments included a significant focus on the bourbon category, such as television advertising for Jim Beam, which we had not done in previous holiday seasons.

Maker’s Mark invested in unique holiday [inaudible] at sales advertising, and high profile advertising for the new nine year aged supply of Knob Creek bourbon that came online in the fourth quarter. We brought excitement to the marketplace in 2009 with spirit innovations as well.

First the introduction of Red Stag by Jim Beam attracted new consumers to the bourbon category. Boosted by its unique flavor profile and the brand’s partnership with Kid Rock, Red Stag blew away our forecast and became one of the hottest new spirits introduction in years.

This bourbon infused with natural black cherry was a winner from the start. We shipped more than 100,000 cases after Red Stag’s introduction in May, triple our initial projections. Sauza Margarita-in-a-Box also significantly outperformed our expectations. Supporting the trend of at home entertaining we’ve expanded our line of cocktail [cubes] to include Sauza Strawberry Margaritas, and now [inaudible Vohita] versions.

And we brought innovation to international markets as well with Larios 12 Gin and DYC Single Malt in Spain and new RTD products in Australia where Canadian Club RTD’s are making impressive strides. Our spirits business also completed a number of steps that brings us closer to customers and consumers, simplifying our organization and enhancing how we position, activate, and sell our brands.

We launched our new international route to market structure in April when we transitioned to our new alliance in 24 markets with the Edrington Group. Combined with our dedicated sales organization in the US we now directly control 75% of our spirit sales, up from just 8% in 2008.

Our new international alliance also enabled us to bring Teachers, [Laphroaig] and Courvoisier brands into the combined distribution portfolio. Internationally we have also simplified our structure reducing our number of international business units from four to three by merging two units in one European business unit.

In the US we entered into new performance based contracts with our largest distributors and we aligned our sales organization by distributor rather than region. And we’ve recently aligned our US businesses into fully integrated category business teams each with its own P&L responsibilities.

With these initiatives in place we see excellent prospects to elevate our performance in the spirits marketplace. In our home and security business we remain proactive in the marketplace and outperformed the category in 2009.

We gained share with the successful initiatives including expanding our customer relationships at major home centers, delivering innovations with cabinetry lines to fill price points, advanced faucet designs made possible by the new compact Moen Duralast cartridge, and introduced great security designs like the Master Lock speed dial, an innovative garage organization product.

We’re also proud to be industry leader in promoting energy efficiency and green products. Moen offers the most extensive like of eco friendly faucets and shower heads carrying the EPAs water sense designation.

Our Simonton Windows brands in particular has benefited from the government’s consumer tax credit for purchase of energy efficiency home products. We have also contributed to the success of the tax credit. In fact, President Obama has personally sought the counsel of the leader of our Simonton business promoting energy efficiency and we are working with the Administration and other industry leaders on policies to advance conservation and related job creation.

We continue to outperform the golf market on the success of our investments in two key areas, innovation, and international growth. On the innovation new product introductions are helping us gain share at the high end of the market. Pro V1 continues to grow share, as golfers have been unwilling to trade down from urethane cover technology.

We’ll soon launch the next generation versions of Titleist and NXT, NXT Tour, and DT Solo golf balls. Also to help golfers lower their scores, we’ll be conducting the industry’s most extensive golf ball fitting program in 2010.

Titleist clubs continue to gain share and command pricing premium. Sales of Titleist clubs were higher for the year on robust demand for the 909 Series driver, AP1 and AP2 irons, Vokey wedges and Scotty Cameron putters.

The new Cobra ZL driver is creating a lot of buzz. The ZL and the Cobra S2 driver that begin shipping this week both earned Gold Awards on the Golf Digest hot list for 2010. You’ll see an advertising focus on Cobra’s real technology on real performance brand promise in 2010.

And FootJoy continues to reinforce its industry leadership with innovative products such as the new icon and sports shoe lines. Internationally our investments to fuel our growth are paying off. With a strong foundation that includes teaching and educational infrastructure Korea offers very attractive growth prospects in golf.

Korean consumers are embracing the performance and quality offered by our brand. And we built the market’s finest team in the golf industry to drive sustained growth. As a result we outperformed the market in Korea with sales that grew more than 30% in constant currency in 2009. We’re also growing nicely in China off a small base and at levels, FX, total sales across Asia and Australia were up a double-digit rate for the year. To support these growth opportunities we’re currently constructing a new ball plant in Thailand.

To help all of our businesses deliver operating margins at the forefront of their categories we also worked hard in 2009 to improve operations, reduce cost structures and enhance our efficiency and supply chain.

In home and security we aggressively have taken costs out of the business. These moves create competitive cost structure while also retaining flexibility in our supply chain so we can ramp up when demand returns.

Over the course of the downturn we reduced the number of positions and facilities in home and security by 40% including seven announced plant closures in 2009. Beam global has implemented initiatives to enhance organizational efficiency and supply chain and unlocked substantial resources to reinvest in brand growth.

This includes a previously announced plan to consolidate US [inaudible] operations which will result in the closure of a plant next year. In our industry leading golf business has also aggressively managed costs including the closure in 2009 a shoe manufacturing plant and an overall 13% reduction in total work force since mid 2008.

As we enter 2010 assuming the year unfolds as [inaudible] we expect to [inaudible] investments to seize the competitive advantage. The strength and profitability of our brand give us an excellent opportunity to stay on offense in the marketplace and invest to build profitable market share. Now here’s Craig with a closer look at our markets and the fourth quarter performance for each of our segments.

Craig Omtvedt

Thanks Bruce, starting with spirits, the spirits market demonstrated its recession resistance in 2009 and performed in line with our expectations. We estimate industry volumes and value in the US were each in the range of flat to up 1% for the year, reflecting some degree of trading down and price promotion activity.

Markets outside the US were mixed, economic weakness continued to create soft industry conditions in Western Europe, Mexico and global travel retail. Australia, our largest international market, demonstrated low single-digit growth and collectively the BRIC markets grew as well.

Now let’s look at the fourth quarter itself, spirit sales came in at $746 million, and that’s up 3%. Sales were down 4% on a comparable basis and again as always that excludes the impact of foreign exchange, excise taxes, acquisition divestitures, and the impact of required accounting for our route to market initiative.

Geographically, comparable net sales were up 4% in the US, and down 9% internationally. Our US results benefited from higher sales of Jim Beam, Maker’s Mark, and Canadian Club. Outside the US sales declined sharply in Mexico and were lower in Germany and the duty free channel. Revenues were flat in Spain, the UK, and Canada and sales were up in constant currency in markets including Australia, India, and select Asian markets.

At the operating income line OI before charges increased 2% to $186 million for the quarter. Turning to the full year, spirit sales were $2.5 billion, off 1% and OI before charges was $607 million, down 4%. On a comparable basis full year sales and OI were off 3% and 4% respectively. FX adversely impacted OI by $8 million, somewhat less than we anticipated while OI benefited from lower year over year brand spend.

I would highlight here that brand spend was lower not only for us, but across the industry as well. Consistent with our goal operating income for the year was relatively flat on an underlying basis. Turning to depletions, here in the US depletion case volumes were down 2% for the year reflecting higher pricing for certain brands depletion revenues were flat.

In markets outside the US full year depletion revenues were off at a high single-digit rate. Our international performance was consistent with the market specific dynamics we’ve discussed in prior quarters. Full year volumes were higher in our largest international market Australia, as well as India and select European markets. Our volumes were flat in Brazil, off slightly in Spain and Canada, lower in Germany, and down at a double-digit rate in the UK, Mexico, and duty free.

Looking at full year performance for our key brands, and as usual this is on a constant currency basis and excludes excise taxes. Our industry leading bourbon portfolio continued to deliver solid results. Global depletion revenues for Jim Beam were up at a low single-digit rate, as the brand benefited from strong pricing in the US were depletion revenues grew 7%.

That US performance also reflects favorable mix driven by Red Stag and growth for Jim Beam ryes. In Australia volumes for full strength Jim Beam were up low single-digits and ready to drink products trended favorably towards the end of the year following annualization of the tax increase on RTD spirits products.

In Germany the number three bourbon market, Jim Beam gained market share for the year. Maker’s Mark continued its strong performance in 2009 with double-digit depletion revenue growth in the US and in targeted international markets, led by Australia.

In tequila, volumes for Sauza were off at a low double-digit rate due principally to a factor we’ve discussed before and that’s the high trade inventories we had in Mexico earlier in the year, as well as the challenging Mexican economy. I’m happy to say that the inventory issue is now behind us and as such, we’re targeting improved results in Mexico here in 2010.

In the US depletion revenues for Sauza were off at a mid single-digit rate with Hornitos and Three Gs relatively flat at the high end of the category. While Sauza Gold and Blanco were lower, we’re encouraged by favorable market share trends for the Gold and Blanco in the fourth quarter.

In rum volumes for Cruzan grew at a double-digit rate on expansion in the duty free channel. In cordials continued growth for Sourz in Europe partly offset lower volumes for DeKuyper here in the US.

In the soft cognac segment case volume for Courvoisier were down at a double-digit rate. Even so depletion revenues were off single-digits in the key US and UK markets. In the UK in particular where Courvoisier leads the category the brand increased market share and grew volumes of ZFLT to a new high.

Canadian whiskey, while case volumes for Canadian Club were off at a low single-digit rate, depletion revenues were higher in the US and Canada, the brand’s two largest markets. Depletion revenues were up at a mid single-digit rate for Windsor Canadian which sells nearly a million cases in the US.

In scotch, while softness in the UK dragged results for Teacher’s and Laphroaig lower, Laphroaig grew nicely in the US and Teacher’s continued its strong growth in India. As we look to 2010 in spirits we expect relatively stable market conditions with overall global growth flat to up 1%.

Here in the US we currently believe industry revenues will be similarly flat to up 1%. Internationally we anticipate continued growth in Australia as well as growth in the emerging BRIC markets. At the same time Europe is likely to be flat to off at a low to mid single-digit rate and Canada and Mexico will likely be soft.

Against this backdrop we enter 2010 with a sharply focused spirits organization determined to play offense by building our biggest brands, leveraging our routes to market, and capitalizing on the best market opportunities.

We see excellent opportunities to build on the progress we’ve made in key areas over the course of 2009. As Bruce mentioned earlier we believe the front end of a recovery is an excellent time to invest in our brands and we intend to use cost savings to boost brand investment in spirits close to a double-digit rate here in 2010.

That includes a significant year over year increase in the first half. As discussed during the year we pulled back on spirits brand spend in the first half of last year as we completed our international route to market transition. As such given our higher year over year brand spend in the first half along with annualization of our higher route to market costs our year over year OI performance will clearly be more challenged in Q1 and Q2.

With regard to spirits operating margins in 2010 we’re targeting margins before charges to continue to run in the range of 24% as we fuel brand investment with cost savings. Now turning to home and security, as Bruce said it was clearly a challenging year for the home products industry and we estimate home products industry sales declined 20% or so in 2009.

That said, we continued to see signs of stabilization. Construction of new homes is starting to bounce back particularly at the entry level, inventories are down year over year and housing starts turned positive in the fourth quarter.

Sales of existing homes which influence replacement or remodel projects have also turned higher year over year. Inventory of unsold homes are declining though foreclosure sales remain a significant piece of housing activity.

And lastly on the R&R front, we estimate R&R spending remained down in the quarter but it was better than we anticipated. On the downside, the industry is still experiencing the impact of trading down and lower discretionary spending for big ticket products. That particularly impacts cabinetry which continued to lag the broader market as many consumers defer large scale remodeling projects or pursue more modest kitchen renovations.

Turning to our performance our fourth quarter results reflect not only firmer market conditions but share gains across our business. Looking back over the year results for our home business improved as the year progressed. The business closed the year with its smallest sales decline in the past eight quarters as Moen and Simonton actually returned to sales growth in the quarter.

Fourth quarter sales came in at $824 million, off just 3% as we gained market share in several key categories. I’m particularly pleased to report that operating income before charges in home and security grew in the quarter up 5% to $43.5 million. OI benefited significantly from our cost reduction and supply chain improvement initiatives.

Drilling down Moen returned to growth with broad based sales gains. The number one faucet brand in North America delivered double-digit gains at home centers on the success of new products and expanded offerings across price points. Moen also posted modest gains in the wholesale channel while delivering robust growth in both China and Canada.

While cabinetry sales were off in the range of 10% our cabinetry market share trended very favorably in the quarter. Sales growth at home centers and with large builders partly offset lower sales to kitchen and bath dealers and wholesalers who serve smaller builders.

Simonton Windows continued to drive substantial share gains. Simonton sales were up in the range of 20% on favorable product mix and strong demand for new energy efficient products driven to a large degree by the US consumer tax credit.

At Therma Tru sales were off at a low single-digit rate as home center gains partly offset lower sales in the wholesale channel. Sales of security and storage products were off at a low double-digit rate reflecting a soft commercial market for security products and weakness at Sears.

Even so Master Lock and Waterloo are both benefiting from new products and expansion into adjacent segments. For the full year home security sales were $3 billion down 20% and down 19% on a comparable basis. On a before charges basis OI came in at $139 million, that’s compared to $348 million in 2008. As we look to 2010 several factors will influence the US home products markets.

First, replace and remodel is likely to be adversely impacted by continued consumer caution when it comes to big ticket remodeling projects, again particularly those involving high end cabinetry. We currently estimate consumer spending on replace remodel which we expect will account for about 75% of the market in 2010 will be down in the low to mid single-digit range.

Second, we expect new construction which this year should make up about 25% of the market will continue to grow in 2010. However that said, much of this growth will involve smaller, value oriented homes featuring fewer faucets and windows as well as smaller kitchens.

As a result while new home starts may rise in the range of 25% our current assumption is that spending on home products related to new construction will be up in the range of 20%. Rounding things out we expect the cabinetry market will be down at a low to mid single-digit rate.

While there’s a wide range of views, our current assumption is that the home products market in aggregate will be flat to up modestly. I would highlight that this is up from our estimate of three months ago.

Bottom line here we feel well positioned to continue to outperform the market and gain share. Over the course of the year we’ll benefit from our cost and productivity initiatives which will help to offset higher commodity costs and strategic investments. Given our market assumption we currently anticipate full year margins will be flat to up modestly.

Here in the first quarter which as you all know is our seasonally smallest sales quarter OI before charges in home and security may be negative but we expect better than last year. Longer term we remain confident that this is a business that can get back to margins approaching 15%.

Now golf, where we outperformed a very challenging market in 2009, while participation in golf remains solid in the US over the course of the year, golfers did reduce their overall golf related spending be it on green fees, the halfway house, or discretionary purchases such as game improvement clubs.

As we’ve discussed before corporate spending on golf declined sharply adversely impacting our market leading corporate custom golf ball business. Markets outside the US continued to present our best growth opportunity in golf.

While European markets have been relatively stable and we continue to perform well there, we’re seizing sustained growth opportunities in Asia and we’re seeing our investments pay off in strong market share gains. All told, we estimate 2009 worldwide golf equipment spending declined in the range of 12% to 15% versus 2008.

Our fourth quarter golf sales came in at $227 million, up 7% and 2% in constant currency. Fourth quarter sales benefited from double-digit gain increases for golf balls, shoes, and gloves. Geographically constant currency sales increased at a low single-digit rate in the US as well as in international markets.

Our international sales benefited from another strong double-digit increase in Korea. While sales were up $15 million over last year, operating income before charges for the fourth quarter was down $8 million from last year’s $18 million loss. Two points here, first the fourth quarter is our seasonally smallest in golf and we normally record a loss.

Second, with respect to the increased loss it was a function of negative year over year FX hedge gains, our mix of product launches, and differences in year over year incentive accruals. For the full year our golf sales were off 11% and down 7% in constant currency, better than the industry wide decline.

While sales were off in the US more than 10%, our golf sales increased outside the US at a low single-digit rate in constant currency. Our percentage of golf sales for markets outside the US reached 44% here in 2009.

Golf ball sales were down at a double-digit rate for the year. Excluding the hard hit corporate custom segment of the ball market, our golf ball sales were off single-digits. Our Titleist golf ball franchise held its own in this environment performing strongest at the high end.

The market leading Pro V1 gained share in the US in 2009 as consumers remained committed to the Pro V1’s urethane cover technology. In clubs, the Titleist brand modestly increased sales on the benefit of new products and US share gains in metals, wedges, and putters.

In fact our Vokey design wedge share at on and off course US golf shops increased more than ten points in value in 2009. Sales at Cobra were off at a double-digit rate as the game improvement segment felt the impact of reduced discretionary spend.

Sales of FootJoy shoes were off at a single-digit rate for the year. The brand gained momentum as the year progressed and we believe is well positioned going into 2010. Sales of gloves and accessories were off at a single-digit rate.

Moving on to OI full year operating income before charges in golf came in at $60 million versus $125 million in 2008 reflecting the impact of the adverse operating leverage of the current tough environment. FX adversely impacted OI by $21 million and that was in line with our expectations.

Looking to 2010 we expect that worldwide spending on golf equipment will be up at a low single-digit rate. Additionally we entered the year with inventories that are in great shape both on and off course. As the golf industry leader we’ll continue to focus on outperforming the category with trusted brands and powerful innovation and accelerating our growth initiatives in attractive international markets, particularly in Asia.

With regard to margins our long-term goal for golf continues to be to achieving operating margins in the high single-digit to 10% range. Now before turning things back to Bruce, a few additional items.

First, with regard to our positive results and upside to our EPS target we benefited primarily from four factors in the fourth quarter. One, we gained share on top of a home products market that performed better than expected, spirits benefited from more favorable FX, our golf business outperformed the market, and we also benefited modestly from our year end true up of effective tax rate.

Reviewing charges for the quarter as we’ve discussed before GAAP requires us to annually evaluate goodwill and certain intangibles on a current fair value basis. During the quarter we recorded a non-cash after-tax intangible write-down of $67 million primarily reflecting a mid single-digit industry growth expectation going forward for the Tequila category.

We also recorded after-tax restructuring and restructuring related charges in the quarter of $22 million. These related to cost reductions and supply chain initiatives across all three of our businesses. For the full year net after-tax restructuring related charges totaled $72 million, $2 million below the prior year.

At the present time we expect only modest charges in 2010 and are related to carryover impact of initiatives launched in 2009. With regard to our tax rate, our full year effective rate before charges/gains came in at 23%. For 2010 we’re still finalizing our numbers but at the moment, we’re looking at a rate in the range of 26% to 27% largely reflecting the absence of tax advantage transactions that benefited us in 2009.

Turning to cash flow as Bruce indicated we generated $572 million in free cash flow in 2009 and that’s after CapEx and dividends. Our company wide cash management initiatives as well as the reduction in the dividend contributed to our strong free cash flow.

I would highlight that the $572 million is about $150 million above the target we gave you in October. The improvements came on multiple fronts. First net income was better than expected, second, CapEx came in $40 million lower than targeted, and that was due to the timing of payments and select projects that are getting shifted into 2010.

Third, our receivable collections were stronger in our new spirits international route to market configuration and lastly, second half working capital initiatives came to fruition faster than expected. Going forward to be consistent with how the majority of the market thinks of free cash flow we’ll present free cash flow as cash flow from operations less net capital expenditures.

We will no longer deduct dividends. On that basis our target for 2010 is $375 million to $475 million representing an earnings to free cash conversion rate of more than 100%. Looking at our balance sheet and financial flexibility and while our focus continues to be on debt pay down, we closed the year in a very strong position.

As we’ve discussed we generated strong free cash flow, we had two very successful bond issues in June and November, we’re in an undrawn position on our revolver, and we continue to be investment grade rated.

We’re currently coming down the home stretch regarding renewal of our revolving credit arrangement and we expect to finalize next week. Our new revolver will be $750 million with a three year term. Lastly we’ll be contributing approximately 1.6 million shares of treasury stock to our defined benefit pension plans next week.

We clearly see this as an excellent value for the pension plans. I would highlight that its also EPS neutral and will eliminate the need for any further significant funding this year. Now back to Bruce with some final comments.

Bruce Carbonari

Thank you Craig, Fortune Brands ended 2009 with strong brands, efficient cost structures, and teams built to win. Our goal in the year ahead are to return to growth in earnings per share before charges and gains, outperform our market and growth from returns, and generate strong free cash flow.

We’ve been proactive in the marketplace and also on the cost side throughout the downturn and we see the front end of a recovery as an excellent time to invest to fuel further momentum and gain long-term competitive advantage across our businesses.

We intend to boost brand building investment in 2010 with a level dependent on the extent of the consumer recovery and our earnings growth as the year unfolds. While we are encouraged by the macroeconomic improvement in the fourth quarter we believe consumers will remain cautious while employment, credit markets, home values, and consumer confidence continue to mend.

Accordingly we’re currently targeting to deliver EPS before charges and gains for 2010 in the range of $2.30 to $2.80. We begin 2010 with the assumption that the markets for each of our three brand groups will be flat to up at a low single-digit rate.

We also expect that higher costs for energy, and raw materials will likely offset the expected benefit of foreign exchange. Looking at the first quarter earnings could be lower year over year reflecting the impact of substantially higher brand investment in spirits versus the low level in the first quarter of 2009, as well as the final quarter of incremental costs associated with our international route to market transition.

Over the longer term we’re strongly positioned to accelerate growth as we benefit from our attractive consumer categories, powerful brand positions, flexible supply chain, and the leverage of our lower cost basis as consumer demand builds.

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

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Doug Lane – Jeffries & Co.

Doug Lane – Jeffries & Co.

You mentioned just staying on the cash flow for a minute, you mentioned debt reduction but can you talk about what your attitude is today on raising the dividend again, buying back stock, and what the landscape is on the acquisition front.

Bruce Carbonari

Let me start with the acquisition front, again we are being very selective about what we’re looking at. There are certain areas that we are very attracted to and I think we’ll continue to be as disciplined as we have in the past around acquisitions.

So yes, we are looking. Its got to fit right and its got to fit both from a financial standpoint but obviously from a strategic standpoint. Dividends of course is a Board of Directors decision. You know what we had done in 2009 and we look forward to building our dividend over time. We’ll see how 2010 plays out and we’ll look at that as the year unfolds.

Craig Omtvedt

The only other thing I would add to that is just as it relates to the dividend as we’ve said throughout the year and when we took it down we’re not looking at it per say as just okay that’s a new base and now we’ll continue the long slow build back over time. Obviously as Bruce said it’s a decision for the Board but its also something that as we look at where we are with earnings, we’ll definitely be looking at where we stand with pay out ratio and dividend yield.

So, its something that we’re clearly looking at with a wide range of thoughts.

Doug Lane – Jeffries & Co.

And is stock buyback even in the cards, at least near-term.

Craig Omtvedt

I would say for the near-term no, its something we always look at but near-term, no, I think that for the moment getting our balance sheet more strongly positioned, maintaining strong investment grade is clearly from all the work we’ve done something that we view as the absolute best interest of our shareholders.

Doug Lane – Jeffries & Co.

And finally on acquisitions, can you give us some characterization of deal flow, quantity, quality, anything along those lines.

Bruce Carbonari

I would tell you that deal flow is about normal. Actually I would say it’s a little slower than I would anticipate. I think I said probably a couple of quarters ago that at this time we thought we’d see, be seeing more deals. We’re seeing about the average. The problem is the quality of the deals. Again we’re seeing businesses that have not faired that well through the downturn so, again, I mentioned this last time, its hard enough to do an acquisition but to do a turnaround and an acquisition at the same time increases the risk profile.

So, we’re just being patient and disciplined and we’ll look as they come.


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

Michael Rehaut – JPMorgan

First on the home and hardware margins you talked about getting margins back up to like a 15% level over the longer term based on your current cost structure a lot leaner now than it was a year ago, what level of revenue do you need to get to, in order to get back up to that 15% operating margin level and maybe if you can share what your assumptions for like housing starts would be to get up to that level.

Craig Omtvedt

That’s something that we’ve shared repeatedly here and as we said before it will be margins approaching 15% but first and we’ll kind of do this in a step fashion, our view is that if we were to get let’s say our revenues back up to kind of the high $3 billion-ish kind of range, approaching $4 with housing starts in the kind of million range and repair and remodel that’s maybe flat to down a bit, we’d be around the 10%.

Then get back to kind of the high $4 billion range with housing starts in the range of say $1.3 million to $1.5 million or so with repair and remodel back at its more normal rate of kind of mid single-digits that we would be back approaching the 15%.

Michael Rehaut – JPMorgan

And then I just had a question on the supply chain in the home and hardware segment, wondering if you were seeing any signs of restocking of inventory, and whether or not that’s in your current assumptions or if that could be incremental to your sales guidance for 2010.

Bruce Carbonari

We’ve seen very little, a couple of the businesses, first of all a lot of our business like cabinets and windows, we build to order so there of course specific jobs so there isn’t much finished goods in the system. We did see a little pickup in Moen in the fourth quarter but we’re comping against fourth quarter 2008 which if you remember people were in a heavy destocking mode then.

But we haven’t seen a significant pickup.

Michael Rehaut – JPMorgan

And then if you could share what we should be expecting for interest expense, corporate expense and those other expenses in 2010.

Craig Omtvedt

I let you kind of build your own number, but we are, our average blended rate here in 2009 is in the range of about 4.5% and I would say that with where things are right now and where we’re going to be with the renewal of the revolver etc., I would say that we’re probably looking at something in the range of kind to 5% to maybe 5.25% as an overall blended rate for 2010.

Michael Rehaut – JPMorgan

What about the other and the corporate expense.

Craig Omtvedt

Corporate expense should be down a bit. We had a lot of call it year over year true up impacting numbers this year. But I would say that this is a starting point and we’re still finalizing budgets but for corporate use something in the let’s say in the range of perhaps $80 million and then for kind of other income and expense, I think at least a starting point since its kind of miscellaneous items just use maybe 5 to 10.


Your next question comes from the line of Ivy Zelman - Zelman & Associates

Ivy Zelman - Zelman & Associates

With respect to your home segment you really beat the market hands down and just kind of curious if you can point to some of the I guess reasons behind that. Obviously windows was a benefit with tax credits and then secondly when we look at maintenance spend versus really repair and remodel when you talk about the market overall for the fourth quarter could you break it down for us because I know that we agree with you about the discretionary items are going to be more challenging so I’m wondering if you can delve a little bit deeper into your thoughts on the break out.

Bruce Carbonari

Where we saw improvement more than we expected really it came out of the home center and the entry level homes in the fourth quarter. So we believe both Moen, cabinets and Simonton we gained share and in some cases fairly significant share. So a lot of it was the market being better but also that we performed better in the market.

We didn’t see so much that trend in the door business, again that’s more new construction. A little bit more trading down there from high end fiberglass to smooth fiberglass as well as steel and our security business was off a bit because of the commercial market.

Your second question was—

Ivy Zelman - Zelman & Associates

Maintenance versus repair and remodel because you talk about the overall market being down 20 and just looking at if you could differentiate the two segments.

Bruce Carbonari

Its hard to give you specifics there, our business and the Moen business is the most repair orientated business but just by the price point and the type of faucets we saw that the repair business was fairly strong. That was stronger than the remodel side. The remodel side again we’re seeing smaller projects, more home center centric type of projects that are going through in the kitchen area and in the bathroom.

Not so much is going at the walls or replumbing the area and so forth, so we expect, or we think its more small remodeling projects, cabinets in cabinets out type of thing as well as the repair business that’s carrying the day.

Ivy Zelman - Zelman & Associates

And just to clarify when you talk about the repair business and the entry level you’re referring to existing homes as opposed to new construction, correct.

Bruce Carbonari

Yes, as the repair business would be all existing homes but the entry level, we did see a pickup in the entry level homes, they’re a smaller type home but the production builders did pick up a bit in the fourth quarter for us.

Ivy Zelman - Zelman & Associates

So it was new construction that contributed to the surprise in the entry level.

Bruce Carbonari

A bit, I would say it was more home center than new construction.


Your next question comes from the line of Eric Bosshard – Cleveland Research

Eric Bosshard – Cleveland Research

Two things, on the spirits business can you talk about what you see going on from a market share perspective and I’m interested in the additional brand spending that you’re talking about in 2010, the expectation does that allow you to hold market share, gain market share, give us a sense of kind of in total in the portfolio what we should be thinking about.

Bruce Carbonari

I think I explained this before but we had prioritized certain brand market combinations, this would be Jim Beam United States or Jim Beam Germany, or Maker’s Mark UK, those type of brand market combinations and what I expressed to everyone was that we had a prioritization of the top 20 that had the best return on investment for us.

Both with our core brands and some emerging brands. What we see in our business right now is that we are starting to move the needle on those. We put an investment behind those and are focusing the organization and we are tracking more to the market and in some cases above the market. So that’s the first sign that our investments are working, that our new organization structure is working.

So we’re very excited about that and we want to fuel that going forward. So for us in particular we’ve seen the fourth quarter, again bourbon which is a category that’s doing better than some other categories that we are gaining share there and then in tequila which includes the family of Sauza, we in the first half of the year weren’t performing very well and we’ve closed that gap here towards the back half of the year and we see some momentum going into next year.

So that’s basically how we’re framing it.

Craig Omtvedt

I guess I would add to that is you look at what our strategy has been over the last few years, our real orientation has been one of kind of revenue growth as well as good returns. And I think that’s evidenced by the fact that as you look at Jim Beam even here in the US our depletion revenue growth was up 7% for the year.

As we look at the market going forward we think its going, price is going to be more challenging and we think that volume is going to become a more important part of the overall program to provide returns. And that’s part of the reason for kind of coming back and having the organization taking control of the sales organizations to the degree we have globally as well as the additional brand investment we’re talking about which as we outlined in the script, we intend to help fund with cost savings.

Bruce Carbonari

Let me frame this a little too for you, it might be helpful, we’re talking about a $20 million range type of investment here and it really is dependent on how the consumer behaves and what our earnings look like for the year. So keep that in mind. I just wanted to put a relative size to it.

Craig Omtvedt

And just to be clear when we talk about 20 we’re basically for now saying that’s full and aggregate.

Eric Bosshard – Cleveland Research

And I guess historically it seemed like you raised price in Beam and used that to fund investments to strengthen the brand or grow volume or improve share and it seems like pricing I think you commented is a little bit more challenging and that leads to my second question, is the margin outlook in terms of how it works in this business, is the assumption I think you commented you expected flat margins, I’m just wondering how you fund the additional investment if you can’t fund it through it price as you did in the past.

Bruce Carbonari

We’re looking at 2010 and some of the initiatives that we did in 2009 really play to that. We leaned out our organization, we combined our European offices, two of them into one, we leaned out our corporate office here, all those savings along with the consolidation of our bottling facilities this year will all contribute to cost take out that will be reinvested into the brands and then we expect to stay in the range of 24% return on sales.

Craig Omtvedt

And to the point here obviously as we generate more volume and obviously that’s the key part here because we’ve looked at all of this with an orientation of return on investment and so to the degree that we generate the incremental volumes that we’re talking about then the bottom line obviously is our expectation is to leverage the cost structure we have and then just kind of doubling back here for a second, the things that we’ve done here in 2009 as Bruce outlined will carry forward to give us the cost saving benefits in 2010 and then the consolidation of our bottling operations is something that’s happening in 2010 and as such the cost savings benefit of that will show up in 2011.

Bruce Carbonari

And one last thing I guess we do expect to see a pricing back in the marketplace as the economy starts to recover and a shift more towards again the premium and the premiumization in this market. We just don’t see it in 2010 though.

Eric Bosshard – Cleveland Research

And then secondly in the home business I think you talked about market growth of the sort of flat to 3% type range and you talked about long-term margins returning back towards 15%, can you give us any help on what you think the profit growth or the magnitude of the margin recovery or the incremental margin should look like in that business in 2010.

Craig Omtvedt

Well as we said we’re coming in with an expectation overall that for Fortune Brands that we’re looking at having our diluted earnings per share performance in the range that we talked about and so at this point I wouldn’t go beyond that.

Eric Bosshard – Cleveland Research

[inaudible] expectation that margins expand in the home business in 2010.

Craig Omtvedt

I would say right now with what we’re looking at for raw material costs that any margin, and then also the fact that as we look at consumers trading down and being more cautious in their spend that we haven’t yet fully annualized on that. You look at the production builders which we think is going to be the bigger piece of the increase in kind of new home construction.

So I would say to you that any margin expansion at this point in 2010 is going to likely be modest. But at the same time if we’re seeing a stronger market we would expect to see the contribution on those incremental sales kind of running in the range of say 30% or so.


Your next question comes from the line of Derek Leckow - Barrington Research

Derek Leckow - Barrington Research

Let me just say congratulations on beating all of your targets last year, certainly as I look at the guidance for this year and I think about what you just talked about regarding that $20 million investment that’s $0.10 to $0.12 per share of EPS right there, what kind of hurdle rates or what sort of payoff are you expecting from that investment as we move out to 2011. I’m just trying to take a look at what you talked about relative to your brand building investments that are scheduled to I guess increase by about $20 million.

Bruce Carbonari

Let me clarify that, we call them really strategic investments so they aren’t all brand, some of it is investments from the golf business into our Asia markets, again Moen into China and India also are included in those as well as brand. So it’s a combination, basically calling it strategic investments.

Derek Leckow - Barrington Research

Right but across the entire business right, this is across each segment, you kind of quantified it as that level of spending.

Craig Omtvedt

Yes but we wouldn’t put specific guidance on that at this point in time. What we’re trying to do is just give you a feel of the things that are going on.

Derek Leckow - Barrington Research

But as you look at the returns on investment that you’re targeting for that, are these sort of items that pay off almost immediately in the following year or are they designed to be longer term in nature, what sort of—

Bruce Carbonari

Its kind of a mixed bag because some of the Asian investment, international investments are more longer term. The brand investments a lot of the investments we are going to make are behind things we already have momentum on and we’re going to try to maximize those so those would be a shorter return.

Derek Leckow - Barrington Research

Within the home and hardware or home and security segment I think you talked about targeting roughly a 4% or so operating margin and that rate of margin would also kind of correspond with relatively flattish leading indicators for the housing industry, is that how you’re thinking about that now.

Bruce Carbonari

Yes, as we’ve said the US housing market we see basically flat to up low single-digits. That’s a combination of an R&R market which is about 75% of the market which is we believe will be off low to mid single-digits and the new construction market in absolute numbers will be up in the maybe mid 20’s but what’s being built is important here because what we’re seeing is entry level which means for our building products company, less products going in.

So less windows, less cabinets, less faucets because of the size and shape of the house that’s being built. So the mix of new construction is important.

Craig Omtvedt

But I think the other thing, let’s not lose sight of here is the fact that we’ve got a more cautious approach. You’ve got other people out there with much stronger views of what will be the recovery in home and as we outlined a moment ago our expectation is to the degree that we get that leverage and we see a stronger market that we should be at a brand contribution level leveraging about 30% on incremental sales.

Derek Leckow - Barrington Research

That’s right, you are pretty good at keeping the targets fairly low given the size of the outperformance this year in 2009 so you said negative margins though in Q1, so as the replenishment cycle begins within home and security I think what you’re saying is there are some front loaded costs involved in that.

Bruce Carbonari

No, its seasonal. The first quarter is a small season, first and fourth quarter in housing are the smallest, the spring and the fall are the biggest, so its really a matter of the size of the market is the biggest piece of it.


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

Lindsay Drucker Mann - Goldman Sachs

Just first on Moen, that high single-digit sales increase is pretty striking, well ahead of what we would have expected so can you talk about how much of that is true end demand improving and how much may have been pipe fill for new products or shipment timing. I believe you were actually lapping a price increase that made a tough comp for you actually from last year. So just some clarification on that.

Bruce Carbonari

I would say that the majority of it is performance in the market but there is some inventory build. If you recall fourth quarter last year a lot of our wholesalers and retailers were destocking as the uncertainty of the economy was happening. So, that gave us an easier comp just from their inventory standpoint and I think that when they saw some improvement in the market, they started to build a little bit of inventory.

But I don’t want to over exaggerate that. We think its maybe a point or maybe two points of that high single-digit increase. As far as new products loading and [launch] no, nothing unusual there as far as preloading of any type of new products. Our product development cycle really starts, we’re bringing stuff out more so now through the next two, three months as getting ready for the spring season so there’s not a load in associated with that.

Lindsay Drucker Mann - Goldman Sachs

Would you be surprised to see a similar rate of growth across the year for Moen next year.

Bruce Carbonari

I hope so but one of the things that we did see if you break down the market, that the repair business did accelerate and has been accelerating in the second half of the year. So what’s interesting about the faucet business is obviously you have the new construction or you have remodel but you also have the big repair element.

So people’s faucets that are broken or need to fix whatever will still be engaged in the market because its something that you have to repair. So we think the mix of business is a little bit more favorable to repair which is fine, it really doesn’t matter to us.

But as far as the condition of the market and the recovery of new and remodeling I think that’s, we haven’t seen those be the driver of their business right now.

Lindsay Drucker Mann - Goldman Sachs

And then just on spirits looking over the past two years its been two years of kind of tough sales trends for you down 3% or 4% on a comparable basis and underperforming your biggest peers, I was hoping if you could help me get a better understanding of what’s really driven that lagging versus your peer set and is it just that brand investment that’s going to help you close the gap.

Bruce Carbonari

I think it’s a combination of a lot of things. If you go back a couple of years and a lot of the things that we’ve really, are initiatives to correct that, you have a number of things that have happened. First of all if you, we didn’t control our sales organization which was a big deal. Secondly I don’t think we were from a marketing standpoint as efficient as we needed to be and as focused as we should be on a higher return item and on the penetration of our bigger brands.

And then one of the big factors that was, that you have to add into that was the RTD impact for the excise tax in Australia. That was a very, very profitable business that took a very hard hit with the excise tax going up for consumer purchases almost 70%. So the differentiation between beer and the RTD product in Australia now is fairly significant and we’ve seen, not only us, but the whole RTD industry there in Australia saw a significant impact on the volume and that was a very high margin product for us.

Lindsay Drucker Mann - Goldman Sachs

And then just quickly back to the potential deals, you said there was some stuff that you were attracted to, can you just give a bit of detail on what buckets those might fall into and what the criteria is for the financial and strategic set for you.

Bruce Carbonari

Again we keep on saying this publically but our priorities are really spirits and home and security. We don’t really see acquisitions in the golf industry because of just our leading positions in that market. And if you look at the spirits business its going to be more things that will fill in certain product portfolios. We are very deep in bourbon, in tequila, but adding rum, adding more depth in vodka, would be things that we would be very interested in.

And also international positioning would be very important to us especially in the emerging markets. We have some really great momentum in India and Brazil and we’d like to capitalize on the teams that we have there and be able to position those, accelerate those as well. In the home and security business I think again its going to be closer to home type of acquisitions, things that we both have strategic interest in and also leverage because of our existing positions in the cabinets or faucets or windows and doors.

In the security side there we just see a lot of different avenues there because of our organic adjacent market strategy we’ve been able to penetrate some of these new markets and maybe an acquisition might help there just to fill out the overall positioning of the products. So there’s a lot of different areas.

Again if we go back to our philosophy its basically organic first, we fund organic growth because we have really strong brands and we have to keep them alive and keep on moving into adjacent markets. And then we look at acquisitions and pay down debt and even share payback kind of the same level, we actually look at and comparing those against each other and then dividends in third position.


Your final question comes from the line of Ann Gurkin - Davenport & Co.

Ann Gurkin - Davenport & Co.

I wanted to ask some questions on spirits if I may starting with how did the industry fare during the holiday selling season, how did we end up in the US.

Bruce Carbonari

Pretty much what we saw the rest of the, similar to what we saw the rest of the year. I would say in general in the US was up maybe a percent, a little bit of trading down similar to what we saw in the prior two quarters. A continuation of the off premise versus on premise trend as well. Promotion activity was about what we expected for the holiday season. I don’t think it was abnormally high or abnormally low, so pretty typical of a holiday season. So I would say there really wasn’t a lot of difference in the spirit business itself.

I think what was more interesting to be honest with you was how the sector performed versus beer. If you saw for the year I think we were up a percent or so in the US, beer down 2% to 3%. So I like that trend obviously and I like to see the spirits industry continue to perform well against beer. So that was a very favorable factor during the course of 2009 and we think it will continue into 2010.

Ann Gurkin - Davenport & Co.

And then inventory levels any major change in the US.

Bruce Carbonari

No, we’re basically at the same inventory level we were a year ago, number of days in our suppliers.

Ann Gurkin - Davenport & Co.

And your stepped up brand investment is that any reflection on a need to reset the pricing to drive that volume, is that, in other words the prices are too high in spirits for the consumer right now, is that a reflection of that at all.

Bruce Carbonari

No it’s a combination of a couple of things, one is first of all in the first half of last year we really took our spend down a bit because of all the transitions we had going in the international route to market and some of the leadership change too that we had going in the organization. So we were just a little bit cautious about that so we need to get those back up to a comfortable level.

And second is we’re seeing some pretty good momentum in some of the things that we’ve been trying to do with the BMCs and we want to keep on fueling those because those are giving us really good returns. So that’s basically what the strategy is.

Craig Omtvedt

And to the point of price obviously we had a fair amount of price that benefited us in 2009 as we came to the end of the year we really did look across select markets and in select markets we’ve done some repositioning of our prices. But that’s not part of what we’re discussing when we’re talking about the brand investment.

Ann Gurkin - Davenport & Co.

And your comments you talked about the 2010 outlook for spirits of worldwide growth flat to up 1%, can you work out volume and price behind that number.

Craig Omtvedt

I would say to you right now our view overall is that that and it depends on who you talk to or who’s numbers you want to look at but I would say that what we’re going to see is to the degree we’re going to see upside is going to be volume so as we think about that zero to 1% I would skew more toward being up with, or that coming from volume rather than price.

I would say to you right now that price and mix I think is a reasonable starting point to say flat to just up a tad is probably more realistic to think about price and mix.

Ann Gurkin - Davenport & Co.

And then in the first quarter you’ll expect to incur more expenses for absorbing route to market costs, can you give us a number on that.

Craig Omtvedt

Yes, the annualization here will be about $10 million in Q1. As we outlined previously the aggregate investment globally is in the range of around $50 million. That was in the range of 30 or so, 35 US and then kind of the 15 or 20 or so internationally.

Bruce Carbonari

And that will be it. It will be annualized as of April 1.

Ann Gurkin - Davenport & Co.

And that $10 million you include in your earnings outlook for Q1 versus last year.

Craig Omtvedt


Ann Gurkin - Davenport & Co.

Spain, how did that finish out the year, how did consumer demand and inventory look for spirits in Spain at the end of the year.

Craig Omtvedt

I would say the inventories looked good. I think we’re starting to see some level of stabilization but Spain is still obviously a challenging market when you look at the level of unemployment that they have right now along with what we’ve seen in terms of the people moving away from drinking in the bars.

So there’s no question its still a challenging market.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Bruce Carbonari

On behalf of everyone at Fortune Brands, thanks again for joining us. We’re pleased to move into 2010 in such a strong position and we look forward to discussing our first quarter results with you in late April. Thank you.

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