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Fortune Brands, Inc. Q1 2010 Earnings Call Transcript

Fortune Brands, Inc. Q1 2010 Earnings Call Transcript

Fortune Brands, Inc. (FO)

Q1 2010 Earnings Call

April 29, 2010 10:00 am ET


Bruce Carbonari - CEO

Craig Omtvedt - SVP & CFO


Christine Farkas - Banc of America

Dennis McGill - Zelman & Associates

Peter Lisnic - Robert W. Baird

Eric Bosshard - Cleveland Research

Michael Rehaut - JPMorgan

Lindsay Drucker Mann - Goldman Sachs

Doug Lane - Jeffries & Company

Ann Gurkin - Davenport


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

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

Bruce Carbonari

Thanks, Christy. Good morning. Welcome to our discussion of Fortune Brands first quarter results. Please note that our presentation includes forward-looking statements. These statements are subject to risks and uncertainties, including those listed in the cautionary language at the end of our news release. Our actual results could differ materially from those targeted. This presentation also includes certain non-GAAP measures that are reconciled to the most closely comparable GAAP measures in our news release or on our website in the supplemental information linked to the webcast page.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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