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Fortune Brands Q3 2010 Earnings Call Transcript

Fortune Brands Q3 2010 Earnings Call Transcript

Fortune Brands (FO)

Q3 2010 Earnings Call

October 28, 2010 10:00 am ET


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

Craig Omtvedt - Chief Financial Officer and Senior Vice President


Judy Hong - Goldman Sachs Group Inc.

Ann Gurkin - Davenport & Company, LLC

Christine Farkas - BofA Merrill Lynch

Michael Rehaut - JP Morgan Chase & Co

Peter Lisnic - Robert W. Baird & Co. Incorporated

Vivien Azer - Citigroup Inc

David MacGregor - Longbow Research LLC

Dennis McGill - Zelman & Associates

Eric Bosshard - Cleveland Research

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Good morning, my name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Third Quarter's Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Bruce Carbonari, Chairman and CEO of Fortune Brands. Sir, you may begin the conference.

Bruce Carbonari

Thanks, Kayla. Good morning. I'd like to welcome everyone to the Fortune Brands Third Quarter Call. Please note that our presentation includes forward-looking statements. These statements are subject to risks and uncertainties including those listed in cautionary language at the end of our news release. Our actual results could differ materially from those targeted. And this presentation also includes certain non-GAAP measures that are reconciled to the most closely comparable GAAP measure in our news release or on our website in the Supplemental Information linked to the webcast page.

Fortune Brands' third quarter results were in line with our expectations, and the company remains on track to deliver strong results for the full year. Our results reflect the headwinds we publicly projected three months ago, including the acceleration of demand into the second quarter due to the expiration of the U.S. homebuyer tax credit and the timing of spirit orders. Higher cost of raw materials and increased strategic investments, we're making for long-term profitable growth. These investments which include support for new businesses we've recently won, new product innovations, long-term brand building and international growth initiatives are already delivering results. Importantly, our brands continue to perform very well in the marketplace and are well positioned for the future.

In Spirits, new products and successful strategic investments are fueling of momentum in the United States, as we see the positive impact of recent initiatives. We're also making progress in challenging global markets and growing strongly in priority emerging markets, such as India and Brazil.

Even as the Home Products market has softened, we're outperforming the market and also winning profitable new business in the cabinetry, faucet and garage organization categories that will enhance our prospects in 2011 and beyond. Our initiatives have positioned us very well to accelerate growth when the housing market recovers.

And in Golf, we've driven year-to-date growth in all product categories. We're continuing to expand strongly in key Asian markets, and the fourth quarter launch of the advanced-technology new Titleist 910 driver will build on a very successful year of new product introductions.

Now let's take a closer look at the numbers for the quarter. Net sales were slightly higher at $1.7 billion and reflect the adverse impact of the pull-forward we've discussed. Sales were up 1% on a comparable basis. That measure excludes excise tax, foreign exchange and acquisitions/divestitures. By brand group, comparable net sales were up 2% in Spirits, up 1% in Home and Security, and up 3% in Golf. On a year-to-date basis, comparable sales for Fortune Brands are up 6%, driven by 5% growth in Spirits, 8% growth in Home and Security and 3% growth in Golf.

Net income was $102.6 million or $0.60 per diluted share. Results included modest charges and gains, and Craig will touch on those a bit later. Excluding charges and gains, diluted earnings per share was $0.72. That's off 6% from $0.77 in the year-ago quarter. Note that we do not see the estimate pull forward of the -- we did see the estimated pull forward of a $0.10 to $0.15 bps from of the third quarter into the second quarter. Thus, if sales balance out, earnings per share before charges and gains would have been up solidly. Year-to-date, EPS before charges and gains is up 24%.

Reported operating income came in at $176.8 million. On a before charges and gains basis, operating income was $206.4 million for the quarter. That's down 3%, reflecting our increased strategic investments, higher raw material costs and the pull-forward of demand in the second quarter that we've previously discussed. Year-to-date, OI before charges and gains is up 17%.

Reviewing our assets and investment return measures, after-tax returns and net tangible assets before charges and gains was 17%. Working capital efficiency came in at 36%. Absent maturing inventories in Spirits, WC improved to 18%. Return on equity before charges and gains was 8%, and return on invested capital before charges and gains was 6%.

Looking ahead, we continue to build on our long and successful track record for actively managing our brands in both good and challenging times. As we discussed before, during the downturn, we focused sharply on consumers, cost and cash. We continue to see the results of our focus here in 2010, including strong performance in the marketplace and the benefits of lean and flexible supply chains as demonstrated by our share gains and cash conversion rate in excess of 100%.

We believe our proactive approach has enabled Fortune Brands to emerge from the recession in a strong position to outperform the current environment and to enhance the company's future prospects to help maximize long-term shareholder value.

Let me take a few moments to dive a little deeper and focus today of the few of the things we're doing to win in the marketplace, including how we build on our strong foundation of trusted brands with increased investments to seize competitive advantage in our consumer markets.

First, in our Spirits business. We've invested in building and gaining control over our global routes to market. We've also invested in our new product development pipeline and in our marketing capabilities. These investments have enabled us to bring new products and new brand-building marketing programs to market much faster. Our Innovations have brought exciting new energy to the bourbon category. Red Stag by Jim Beam is attracting new consumers to bourbon. We're continuing to expand the Red Stag distribution in the United States and preparing to launch it in key international markets. At the same time, Maker's 46 is off to a tremendous start. And the relaunch Jim Beam Black is adding to our gains in the category.

Let me add that Cruzan 9, an excellent new spiced rum is tracking at double our initial expectations. In our international business, the new Teacher's Origin scotch whiskey is adding some strong growth in India. DYC 8 and Larios scrub [ph] are doing well in the challenging Spanish market. Importantly, our innovations are also driving favorable mix. These are all value-added line extensions that sell at a premium to the core product. And we are even more in the pipeline. Courvoisier is the first of the four major houses of cognac to introduce their product with a declared age statement. Courvoisier 12-year-old and Courvoisier 21-year-old are hitting store shelves this month. Look for the new and upgraded single-barrel reserve in the months ahead. And we have even more innovative plans for introduction throughout 2011.

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