Fortune Brands (FO)

Q2 2010 Earnings Call

July 30, 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.

Christine Farkas - BofA Merrill Lynch

Michael Rehaut - JP Morgan Chase & Co

Joshua Chan

Matthew McGinley

Vivien Azer - Citigroup Inc

Dennis McGill - Zelman & Associates

David MacGregor - Longbow Research LLC

Douglas Lane - Jefferies & Company, Inc.

Eric Bosshard - Cleveland Research



Good morning, my name is Demetrius, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortune Brands Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Bruce Carbonari, Chairman and CEO of Fortune Brands. Please go ahead, sir.

Bruce Carbonari

Thank you. Good morning. Welcome to our discussion of Fortune Brands' Seconds Quarter Results. Please note that our presentation includes forward-looking statements. These statements are subject to risks and uncertainties and include those listed in cautionary language at the end of our news release. Our actual results could differ materially from those targeted. The 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 delivered a strong second quarter sales growth and double-digit growth in earnings, and we're on track for a strong full year results. In the quarter, we achieved broad-based share gains and levered well against lower-cost structures. We also benefit from the pull forward of sales by customers in our Home and Spirits segment, as well as favorable comparisons.

Each of our three brand groups grew sales faster than our markets, delivering operating margins at or near the top of our Consumer segments and outperformed our expectations in the quarter. Fortune Brands is executing well in delivering compelling new products, global expansion initiatives and successful brand investment programs. Our consistently high quality and strong customer service are also helping us expand key customer relationships.

In Spirits, we grew both net sales and case volumes at a mid-single digit rate in the quarter, as brands such as Maker’s Mark bourbon, Courvoisier cognac, Hornitos Tequila, Cruzan Rum and Red Stag by Jim Beam helped fuel growth.

Our Home and Security brands grew sales at 13%, benefiting from share gains fueled by new products, new offerings across price points and expanded relationships with key customers. Strong growth in international markets in double-digit sales gains for the Titleist Pro V1 golf ball and FootJoy shoes helped drive our performance in Golf.

Now let's take a closer look at the numbers for the quarter. Net sales were $1.9 billion, that's up 9%. Sales were also 9% on a comparable basis. That measure excludes excise tax, foreign exchange and acquisitions and divestitures.

By brand group, comparable net sales were up 5% in Spirits, 12% in Home and Security and up 8% in Golf. Let me note that a few factors added to our strong underlying performance in the quarter. These factors included the pull-forward demand for Home products due to the expiration of the U.S. home buyers tax credit and the timing of Spirit orders in various markets.

We estimate that these factors benefited the second quarter at the expenses of the third quarter by approximately $0.10 to $0.15 per share. Net income was $227.4 million or $1.48 per diluted share. We recorded a net gain of $0.50 in the quarter, and Craig will touch on the charges and gains a little later. Excluding the charges and gains, diluted earnings per share was $0.98, that's up 40% from $0.70 in the year-ago quarter.

Reported operating income came in at $273.5 million. On a before-charges-and-gain basis, operating income was $263.7 million for the quarter. That's up 29%, reflecting a strong year-over-year growth in operating income in both Home & Security and Golf.

Reviewing our assets and investment return measures, after-tax return on net tangible assets before charge and gains was 17%. Working capital efficiency came in at 36%. Asset-maturing inventories for our Spirits business, working capital efficiency was 19%. Return on equity before charges and gains was 8%, and return on invested capital before charges and gains was 6%.

We believe the results we've delivered this year reflect how well Fortune Brands is positioned to compete in the current economic environment. The strategic initiatives we undertook over the past two to three years are helping us to the top line, the bottom line and on our balance sheet.

During the economic downturn, we focused on the three Cs: the consumer; the costs, our costs; and cash. First, adjusting to the evolving consumer environment, we stay close to our customers and made sensible brand investments leading to share gains. The focus of our investments included brand building programs, new product development and expanded offerings across price points, all aiming at attracting consumers to our brand. We also continue to strategically expand to new markets and segments by investing in adjacent product categories and promising international markets.

Second, we were proactive on cost and supply chain flexibility. This included accelerating several key productivity initiatives and reducing our manufacturing footprint, especially in home products. These initiatives has helped create favorable operating leverage as volume has returned. At the same time, we've reserved the flexibility to ramp up production as needed to meet future demand.

And third, we've aggressively managed our cash. Company-wide cash management initiatives, including sharp focus on the use of working capital has helped generate strong free cash flow. These cash initiatives, along with the proceeds from the sale of Cobra and three local spirits brands in Germany, give us greater financial flexibility, enable us to focus our priorities to pay down debt.

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