Beam Therapeutics Inc.
Q1 2009 Earnings Call Transcript

Published: 1 May 2009

[Operator:]

Good morning, my name is Daniel and I will be your conference operator today. At this time I would like to welcome everyone to the Fortune Brands First Quarter Earnings Conference Call (Operator Instructions). Mr. Carbonari, you may begin your conference.

[Bruce Carbonari:]

Thank you Daniel, good morning. Welcome to our discussion of Fortune Brands First Quarter 2009 Results. Please note that our presentation included forward-looking statement. These 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 link in the webcast pages. Against the headwinds of the global recession, the severe US housing downturn and reduced consumer discretion spending each of Fortune Brands’ businesses performed at or above our expectations in the first quarter. Fortune Brands continues to pursue initiatives to succeed in the marketplace, reduce cost and enhance our free cash flow in navigating what we expected to be the most difficult quarter of the year. Profits in our Spirits business benefited from stable consumer demand in the US, higher pricing and favorable year over year inventory, distributor inventory movements largely offset by soft results internationally including the ongoing impact of the Australia R2D tax increase and the headwinds of unfavorable foreign exchange. On the before charges basis operating income in our Spirits business was modestly higher in the quarter. We took aggressive actions to combat negative operating leverage in our Home Products business driven by lower demand and unfavorable product mix. These actions included further reducing the manufacturing footprint for home products and driving down costs in all areas of the business. In the quarter our Home Products business announced the closure of three additional plants and the sale of a non-core product line and in our Golf business new products, international sales growth and cost of currency and lower costs partly offset the impact of reduced consumer discretionary spend, lower corporate custom golf ball orders and adverse foreign exchange. Taken together, our first quarter results reinforce our confidence in achieving our full year earnings target. Now let’s take a closer look at the numbers for the quarter. Net income for the first quarter was $7.4 million or $0.05 per diluted share. EPS was impacted by factors including lower sales, negative operating leverage in home products, adverse foreign exchange and a net charge of $0.25 per share for one-time items. Craig will spell out all the details of these charges in a moment. Excluding one-time items diluted earnings per share before charges and gains was $0.30, down from $0.75 in the year ago quarter. The $0.30 compares favorably to the view we provided three months ago, which was that we expected to deliver only modest EPS in the quarter. It also compares favorably to the first call mean estimate of Wall Street analysts, which stood at $0.18 per share when we pre-announced EPS on Tuesday. Net sales were $1.44 billion; that’s down 20%. On a comparable basis excluding excise tax, foreign exchange and the Cruzan acquisition sales would have been down 17%. The relative stability of our Spirits business continues to be a significant benefit. Compare while net sales were down 3% in Spirits and 5% in Golf tempering the impact of a 30% decline in Home and Hardware. Reported operating income came in at $60.5 million impacted by $60 million in pretax restructuring charges. On a before charges gains basis operating income was $120.7 million for the quarter. ROI before charges was underpinned by the performance of our Spirits business, which was up 1%. Reviewing our asset and investment return measures after tax return on net tangible assets before charges and gains was 17%. Working capital efficiency came in at 37%. Return on equity before charges and gains were 9% and return on invested capital before charges and gains was 6%. Across Fortune Brands we’re proactively positioning our businesses to best to compete in the global recession and to drive strong long-term growth when economic conditions improve. We’re doing this in four ways. First, we’re moving aggressively to adjust to the evolving consumer each of our businesses. For example, in Spirits consumers are drinking more at home and going out less. Our new company-owned US sales organization enables much faster decision making to respond to consumer trends and is helping us sharpen our sales tactics in the off premise channel. Also to enhance our position in this environment we’re also developing new products that appeal to at-home entertaining. In Home Products many consumers are either deferring or undertaking less ambitious remodeling projects so we’re working closely with our channel partners to leverage our broad product offerings up and down the price ladder. That included helping our dealer partners with programs such as expanded cabinetry offering and also expanding our already strong relationships with home centers for faucets, cabinets, windows and storage products. Second, we’re developing new products and brand building programs to inspire consumers and bring excitement to the marketplace. New products across Fortune Brands are enhancing our results. These include the new Titleist Pro V1 golf balls, the new Titleist 909 Series of drivers and fairway metals, the new FootJoy SYNR-G golf shoes, (rī)1 Whiskey, DeKuyper Burst Bar Shots, Larios 12 Gin in Spain, Garage Organization Products in Waterloo, expanded distribution of Master Lock’s Magnum Product line and the eco-friendly faucets and shower heads from Moen. We’re also supporting our Titleist Pro V1 golf ball family with increased advertising share of voice in the first quarter and we’re investing behind creative campaigns supporting Jim Beam Bourbon and Hornitos Tequila and Titleist NXT golf balls here in the second quarter. These programs include aggressively leveraging social media to help drive consumer demand for our Spirits brands. The third initiative

[Craig Omtvedt:]

Thanks Bruce. Starting with Spirits sales came in at $486 million, off 6% partly due to adverse foreign exchange. On a comparable basis excluding the impact of foreign exchange, excise taxes and the Cruzan acquisition sales were down 3%. Here in the US against a high single digit US revenue decline in the year ago quarter due to distributor de-stocking sales increased at a double-digit rate. Outside the US sales were lower by double digits but in line with our expectations. These international results largely reflected transitional issues in certain markets such as the Australia RTD tax, a change in our distribution in Mexico, the impact on volumes due to price increases in the UK and the soft global travel retail channel. Let me underscore that in Q4 of last year as Bruce mentioned earlier we moved to a new inventory management model that relies on leaner and more consistent US distributor inventory levels. As a result, we’re creating valuable efficiencies for our distributor partners and US inventory levels that are well balanced. Operating income before charges was $130 million, up 1% on both a reported and comparable basis benefiting from price increases and the timing of brand spend. Global volumes for our entire portfolio based on depletions were off 7% in the quarter. Depletion case volumes and again that’s shipments from distributors to retailers were flat in the US reflecting balanced performance across price points. While US depletions for Jim Beam and Sauza were slightly lower we saw double-digit increases for high end brands such as Maker’s Mark, Sauza 3G’s and 100 Anos. Hornitos Tequila, Canadian Club and Laphroaig also drove higher depletions in the US as did our value priced Vodka, Bourbon and Canadian Whiskey brands. In international markets while these results were in line with our expectations depletion case volumes were down at a mid-teens rate, largely reflecting again the transitional issues in select markets. Drilling down, results were soft in Australia where we continued to see the impact of the RTD tax increase implemented last May. Against a double-digit increase in the year ago quarter, results were lower in the UK and were also off in [inaudible] in the quarter. On the up side, we had modest growth in Spain against a favorable comparison and strong growth in India. We expect improved international results over the course of the year as comparisons ease in Australia and we get past the market specific transitional issues that I’ve just covered. Looking at the year to date performance of our key brands on a constant currency basis and excluding excise taxes and starting with Bourbon Jim Beam Global case volumes, again based on depletions were off at a single-digit rate and in line with our expectations for the quarter. In the US, depletion revenues for Jim Beam grew at a lower single-digit rate benefiting from higher pricing. International results for the brand primarily reflected lower volumes in Australia of ready to drink products due to the tax increase that, again, will annualize this month. Global depletions for Maker’s Mark increased at a double-digit rate on strong demand in the US and robust growth overseas. In Tequila, Sauza was impacted by lower shipments in Mexico in advance of our change in distributors. We believe our new relationship with Pernod Ricard in Mexico will be a positive development for the brand. In the US results reflected our brand building focus on Sauza’s higher end offerings. While Sauza Gold and Blanco posted soft results depletions for super premium Hornito’s were up at a mid single-digit rate while 100 Anos and 3G’s were both up double digits. I would also highlight that our new brand building program for Hornitos, the campaign titled Mischief is now rolling out in the US. For Canadian Club, global depletion case volumes were modestly higher reflecting growth in both the US and Canada. Volumes were lower for Courvoisier, Laphroaig and Teacher’s reflecting softness in the UK as well as tough comparisons in Brazil for Teacher’s. Case volumes for Cruzan Rum were up double digits on strong growth in the global travel retail channel and in Cordials lower results for DeKuyper in the US were partly offset by continued growth for sours in Europe. As we look to the balance of the year in Spirits we feel the progress we’re making in this business positions us well to deliver solid results for the year. We’ll benefit in the marketplace from our dedicated sales organization in the US, our new international distribution alliance, our new distribution in Mexico and our upcoming brand building initiatives. We continue to expect that we’ll deliver growth in underlying operating income for the full year in Spirits. Before moving on though a few points about the full year. As we indicated before, reported full year Spirits results will reflect both the continued impact of adverse foreign exchange and that amounts to an incremental $35 million to $40 million this year and net costs in the range of $30 million associated with our worldwide route to market initiatives. Beginning here in Q2 our comparisons will benefit from the annualization later this month of the Australian RTD tax increase. Lastly, given that our new inventory management model in the US is now supporting our distributors with more consistent and balanced inventory levels our quarterly US revenue numbers will continue to cycle against the quarter to quarter fluctuations in shipments that were reflected in last year’s results. Net-net; while the first quarter benefited from year over year movements our Spirits results in the US will face challenging comparisons in the second quarter, we’ll have favorable comparisons in the third and then we’ll have relatively stable comps going forward in the fourth and beyond. Turning to Home and Hardware; sales were in line with expectations at $606 million, 32% lower than the year ago quarter and somewhat softer than the overall first quarter market decline, which we estimate in the range of 20% to 25%. In our seasonally smallest quarter sales reflected the challenging home products market, unfavorable mix shift as some consumers moved to lower price points and customer inventory reductions in faucets. Sales were down double digits across all home products with the largest declines related to the bigger ticket cabinetry and entry door categories, which were down at a mid to high 30’s rate. Our results also reflect that the cabinetry market, the overall cabinetry market is performing below the overall home products market as consumers pulled back from the highest cost remodeling projects. Here in the second quarter we’re carefully monitoring incoming orders and I’m pleased to report that April quarters met our expectations. At the OI line Home and Hardware recorded a loss of $23 million before charges due to adverse operating leverage and that was compounded by this being our seasonally smallest quarter. Let me note that this was in line with our expectations and these results were tempered by savings from our supply chain initiatives and lower cost structures. OI before charges in March was positive and we expect Home and Hardware to return to a positive OI before charges in the second quarter. With regard to margins; while OI before charges was negative we benefited from our cost initiatives and the margin loss on the year over year sales decline was less than the rate we’ve seen in prior quarters. Drilling down; at Moen gains at home centers were more than offset by volume declines and some de-stocking in the wholesale channel, which supports kitchen and bath dealers and home builders. While our Cabinetry brands continue to be adversely impacted by declines in home construction Cabinetry results were particularly soft in the dealer channel reflecting trading down as well as promotional activity in the category. Despite the unfavorable mix shift in Cabinetry we’re expanding our position at home centers, which are capturing an increased share of consumer purchases. Therma-Tru and Simonton were also impacted by unfavorable mix. Therma-Tru’s results also reflect the brand’s exposure to new home construction while Simonton benefited from an expanded offering at a major home center. Both brands are starting to see modest new demand from the Consumer Tax Credit for energy efficient windows and doors that was included in the stimulus package signed into law in February. While Master Lock and Waterloo felt the impact of the weak economy Waterloo did benefit from growth for it’s new Garage Storage Organization products. As Bruce indicated earlier we expect the home products market to decline in the range of 20% over the course of the year. We’ve outperformed the industry over the course of the downturn and we remain focused on continuing to outperform. We continue to believe that our share gain initiatives, excellent customer service and lower cost structures will help mitigate the impact of adverse operating leverage. Golf; Golf sales were $347 million, off 12% from record first quarter sales a year ago reflecting adverse foreign exchange and soft industry conditions in the US. Excluding adverse FX sales were down 5% on a comparable basis. While sales were lower in the US, international sales were up at a high single-digit rate in constant currency including double-digit gains in Japan, Korea, China and Australia. Operating income before charges was $35 million and that’s down $17 million from a year ago. On a comparable basis excluding adverse foreign exchange OI before charges was down 14% reflecting the lower sales and adverse operating leverage, partly offset by cost containment including savings associated with the recently completed workforce reduction initiative. Sales were lower across product category. Overall golf ball sales were lower, impacted by declines in corporate custom and the soft economy. At the product level, higher sales for Titleist Pro V1 golf balls were more than offset by lower sales of other golf ball models. The new Pro V1 family that began shipping in February is off to a strong start and Pro V1 market share is trending higher. In the challenging Club category a strong double-digit increase in sales of Titleist golf clubs was more than offset by lower sales for the Cobra brand, which had a challenging comparison due to the timing of new product launches a year ago. Momentum for Titleist clubs was fueled by the new 909 Series drivers, metals and hybrids, sustained demand for the AP Series irons and very strong sales growth for Vokey designed wedges. Sales of shoes, gloves and accessories were lower, again, reflecting soft industry conditions in the US. As we look ahead in Golf, the industry will face challenges of economic weakness particularly in the US and Europe. We continue to anticipate that rounds of play will decline at a low to mid single digit rate in these markets and that consumers will continue taking a cautious approach to discretionary spending particularly in the club and shoe categories. That said, consumers remain committed to the most technologically advanced products such as the Pro V1. Also our new Titleist club offerings are performing well in the market and we continue to grow strongly in key Asian markets such as Korea and Japan. While we continue to expect that FX will adversely impact full year results by approximately $25 million and we’ll continue to face negative operating leverage the success of our new product and international growth initiative combined with our cost containment program enhance our confidence in outperforming the challenging golf market in 2009. Now before turning things back to Bruce a few additional items, reviewing one-time items. In the quarter we recorded $38 million in after tax restructuring and restructuring related charges. These charges were primarily related to supply chain initiatives in Cabinetry, Entry Doors and Golf. We also recorded modest charges in Spirits related to the transition to our new international distribution alliance. With regard to our tax rate; our effective tax rate before charges for Q1 was 26.8% and we’re continuing to target a full year effective rate in the range of 27%. Lastly, turning to our balance sheet and financial flexibility; as Bruce detailed earlier we’ve raised our free cash flow target for 2009 with proactive measures that are strengthening our balance sheet and enhancing our financial flexibility at a time when a strong cash position is imperative. We continue to have more than adequate access to credit. We have more than $1 billion of cash and available financing under our revolving credit facility and aside from our revolving credit agreement, which comes due in October of 2010 we have no debt maturing before 2011. Additionally, we continue to be in compliance by a wide margin on the EBITDA to interest coverage covenant in our revolver and bank term loan. Now let me turn it back to Bruce.

[Bruce Carbonari:]

As the year progresses comparisons [inaudible] a number of adverse factors will annualize and we’ll realize the benefits of our market share and cost initiatives so we believe we have the most challenging quarter of the year behind us. Looking ahead we anticipate consumers will remain cautious when it comes to discretionary spending and that the home products market will continue to be very challenging. We will also continue to face the headwinds of adverse foreign exchange. That said, we will remain focused on outperforming our categories in the current environment and positioning Fortune Brands to emerge from the downturn an even stronger company. Fortune Brands will benefit from our position in the relatively stable Distilled Spirits category, our company-wide brand building initiatives and our strength up and down the price ladder across our businesses. Specifically in Spirits we’ll benefit from our new international distribution alliance that began in April and our dedicated sales organization in the US. It’s also important to note that the Australia tax increase on ready to drink Spirits products will annualize later this month. In Golf, our strong lineup of new products and successful investment in international growth support our leadership in a challenging industry environment. In Home Products we’ll continue to leverage our lower cost base, excellent customer service and strong brands as we seek to continue to gain share in a difficult market. Supported by these advantages combined with our first quarter results we have this week reaffirmed our full-year earnings target for diluted earnings per share before charges and gains to be in the range of $2.00 to $2.50. This full year target reflects our continued expectation for lower results in Home Products and Golf segment due to the very challenging conditions in those markets partly offset by the underlying growth in Spirits. Thank you again for joining us. Now Craig and I will be happy to take your questions.

[Operator:]

Your first question comes from Ivy Zelman of Zelman and Associates.

[Alan Ratner:]

It’s actually Alan on for Ivy. My first question; I was hoping to get a little bit of detail on what you’re seeing from your customers in the home segment, specifically with respect to receivable collections and any type of distress you might be seeing either from the builder component of your business or wholesalers?

[Bruce Carbonari:]

In the Home side we have multiple channels as you said with builders and we do sell some directly to builders but most of our products do go through the wholesale channels or two-step approach to the builder. In all those cases we really haven’t seen much change at all there as well; on the retail side same thing, not much change. We do have business with the dealers in the Cabinetry side there. We’ve seen some of the smaller dealers come under pressure. We’ve actually seen a couple close. But again, if you look at how we’ve defined our mix of customers over the year in the dealer channels we have what we call the A and B dealers. So a lot of the C and D’s who are lower volume and historically had not strong positions are ones that are really under pressure now and we don’t have a great portfolio of those. We’re stronger in the A and B dealers.

[Craig Omtvedt:]

Alan, I’d jump in an add too this is an area that we’ve been extremely watchful of over the last year and we’ve made sure that we’ve stayed on top of things and kept the aging of receivables where one would expect it to be. The good news at this point while there’s clearly some stress out there we continue to have timely payments and we’re continuing to stay on top of it.

[Alan Ratner:]

That’s definitely some good news there. My second question also on the Home segment in 2008 you guys were pretty successful in passing along the commodity cost increases that were very prevalent in the market and now that we’ve seen a little bit of a pullback there I’m just interested what you’re seeing on the pricing side? Obviously it’s competitive but I’m curious if you’re getting some pushback now that the commodity costs are pulling back a big.

[Craig Omtvedt:]

First of all, let me jump in here a little bit because in the first quarter we actually year over year had a bit of a hit on commodities and that was particularly in the particle board area. As you outlined, we do at the present time expect we should see some improvement over the course of the year but we’ve seen an uptick in copper. We obviously at this point are kind of watching what’s going on with the price of oil and so on and so forth. On the price side and again, it is competitive so we really won’t drill down too deep. But we have taken price increases selectively where we felt we needed to and we have had reasonable success in putting those through. On the flipside, though, obviously as we did select price increases last year they were tied to what was going on with commodity cost and so at this point we’ve got a little bit of giveback going on there. All in all I don’t see anything that’s really moving the needle one way or the other.

[Alan Ratner:]

One housekeeping question; you guys stated in your 10K that given exchange rates and where they were at the end of the year if that were to extend through to 2009 that that would negatively impact EPS by about $0.30 to $0.35. I’m just curious if there’s any update on that given where exchange rates are today assuming that that holds constant through the end of the year?

[Craig Omtvedt:]

Yes. Actually, looking at where we are right now I think that we’ll tick down a bit from that. I would put us right now more in the bandwidth of around $0.30 for the whole year.

[Operator:]

The next question comes from Eric Bosshard of Cleveland Research Company.

[Eric Bosshard:]

Two questions; first of all, Bruce, you’ve said a couple times now that 1Q seems like it will be the bottom and if you exclude the comparisons part of why it would be the bottom just on an operating basis can you, again, talk about what you’re seeing in the channel or what you’re doing that you think allows this to be the bottom?

[Craig Omtvedt:]

I don’t think we said it was the bottom. You are talking Home I assume, Eric, right?

[Eric Bosshard:]

Yes.

[Craig Omtvedt:]

What it is, this is seasonally the smallest quarter in Home and that obviously with the decrease in volume based on just where the market is we believe will be our toughest quarter in Home. The market itself there are some positive signs out there but I don’t think anybody in their right mind would call the bottom at this point. But there are a lot of stabilizing things that are going on that are encouraging; mortgage rates where they are, the re-fi activity being as strong as it is, a lot of the foreclosure homes being flushed through the system. But we’re still sitting there with a lot of inventory in the system. We’ve seen a little bit more stability in home prices but again market by market and consumer confidence is yes a little bit of an uptick but still at a relatively low level so there’s a lot of mixed signals out there. We’re taking a very cautious approach to this and we’ve done that continuously through this period. We’ve been very aggressive about taking cost out of the system in the supply chain side and we’re ready to do more if in fact this isn’t the bottom. But there are some mixed signals, which I think and I hope are positives in the long run.

[Eric Bosshard:]

The guidance for growth for Home from here it’s not at the levels of decline you saw in 1Q. Is that therefore kind of exclusively a function of comparisons? Is that how that should be interpreted?

[Craig Omtvedt:]

In large part, Eric, it should be. As we look at what was the, as an example, the rate of decline last year in new construction? As you well know it really trailed off in the back half of last year. So with a steeper decline there in the back half and more stability or a less dramatic decline this year it just naturally makes the comps better.

[Bruce Carbonari:]

Eric, I would tell you that we are assuming that the recession, the home recession, will continue throughout the year.

[Eric Bosshard:]

Then related to this, the decremental margin we saw in the first quarter; are the steps that you’ve taken to improve the cost structure should we see because I guess the 1Q decremental margin was a bit similar to 4Q or even a little bit better? Should we see a similar decremental margin as we saw in 1Q in Home throughout the year or should it improve from that level?

[Craig Omtvedt:]

Eric, I think that’s a tough thing to call at this point. It’s going to be more a function of mix. But on a standard basis then yes I definitely would expect that over the course of the year there’s the potential for improvement.

[Eric Bosshard:]

My second question; in the Spirits business, the Spirits margins contracted in the back half of last year or kind of all of last year and I know there were a lot of moving parts and the margins were up in the first quarter. Can you just talk about kind of what’s going on within that you’re making this incremental investment in the direct selling effort, which certainly makes sense? Can you just talk about what contributed and the sustainability of that profitability level that we saw in 1Q out of Spirits?

[Bruce Carbonari:]

Let me talk strategically first and let Craig handle the details. Again, as you suggested, we do have a lot of moving parts. Again, the RTD Australia hit us in the second quarter last year and will annualize now this month here. Again, we invested in the new route to market back on October 1st of last year. We put the US sales organization in so that was an incremental cost and then now as of April 1st international route to markets. So there are a number of moving parts. Craig, I don’t know if you want to get into a little bit more of more specifics.

[Craig Omtvedt:]

Eric, this is a discussion we’ve had in the past. The quarters are difficult to call just because of what can be just kind of the moving in terms of timing and expenses, the mix associated with the product that’s shipping, so on and so forth. I wouldn’t make too much out of the first quarter at this point. I would just say to you that at this point our expectation has been that we’re looking at overall margins for the year that really should be in the mid 20’s range.

[Bruce Carbonari:]

What I will tell you, though, which I think is encouraging is that especially the US market is holding up quite well. As we said, we see it as up 1%; a little bit maybe when you look at control states a little stronger then that. But we’re also seeing a little bit of pricing, ability to get pricing in some of the select brands. We have seen a bit of trading down, a little bit more in what I would call the White Spirits that are mixed products, vodka especially but that side kind of stabilized. The fourth quarter and the first quarter were very similar so we didn’t see a continued decrease of people stepping down so that we encouraging as well.

[Operator:]

Our next question comes from Michael Rehaut of J.P. Morgan.

[Michael Rehaut:]

My first question if I could just on Home and Hardware; a lot of restructuring actions taken the last couple quarters. I apologize, maybe if I’m a little rusty if you’ve covered this earlier. But is there any type of dollar amount given in terms of expectations for cost savings?

[Craig Omtvedt:]

What I will tell you is that as we look at the charges we’re taking and I don’t have that specific summary in front of me but we could obviously go through it in more depth later. But our expectation right now as we look at the projects of 2008 and here in 2009 that we are looking at cash paybacks that are in the range of 15 to 18 months so the paybacks have been pretty reasonable.

[Michael Rehaut:]

Also on the Home and Hardware I thought I heard at the beginning when you did your more detailed segment review, Craig, that the market fell about 20% to 25%. But then later in I think you had said that there are some areas where you are gaining share. I was wondering if you could just kind of reconcile if your sales fell below the market and if there were certain segments that perhaps you lost share, others that you’ve gained or were there inventory corrections, a little more detail there?

[Craig Omtvedt:]

What we’ve got in part as you look at the sales numbers is some level of phasing in terms of products that were shipped. The real discussion of share gains here is going to be more on an overall running rate basis and where we expect to be for the year. But in terms of trying to break that out between specific companies for competitive reasons that’s not something I’d do here.

[Michael Rehaut:]

Just in terms of the original comment of down 20% to 25% and your sales were down 32%, I guess X-currency down 30%; any help there just in terms of, because it does appear that you did lose share, if there were any specific areas?

[Bruce Carbonari:]

I think a couple things; first quarter is seasonally the smallest quarter. The second is in the Cabinet side of the business as we mentioned in the R&R side, Repair and Remodel side of the business, the big ticket kitchen remodeling projects we’ve seen a significant decrease in that activity and we’re seeing more cabinets in cabinets out, which means that there’s no electrical, plumbing, major renovations going on, which is higher sales per ticket. So when you look at the market I think our Cabinet business is in the remodel side of the market, that whole category, not just us; the whole category is performing worse than the whole market of R&R.

[Craig Omtvedt:]

Let me break this out a little bit further for you too because at this point there are really two factors that are playing coming into the first quarter. The first was the phasing that I mentioned and then secondly playing off of Bruce’s point with what’s happening here in terms of some of the larger projects not being taken on. What we’re looking at it lower average selling prices. But just broadly speaking without getting into specifics in terms of first quarter you look at where we are with Moen. They are up a bit. You look at Cabinets; we’re holding but certainly had a little bit of exposure with dealers and you look at Therma-Tru and Simonton holding and then Hardware up a bit.

[Michael Rehaut:]

One last one if I could sneak it in. In the Home and Hardware space and perhaps in the Spirits and Wines also but I’m more thinking Home and Hardware. Given the turmoil and the fact that your yourselves have a balance sheet with some decent liquidity any opportunistic M&A that you’re looking at right now where lesser capitalized, smaller player in a segment or two that you compete in there might be an opportunity or how are you thinking about that?

[Bruce Carbonari:]

Michael, as you remember it hasn’t changed. We’re very disciplined about the M&A side of our business. Again, our priority is organic growth but if there is a logical extension or add-on to our businesses we’ll take a hard look at it. What we’re seeing right now; there is a lot of activity out there. But some of the businesses that we’re seeing are not as robust having gone through the restructuring yet that we’ve gone through so they have a little tougher horizon in front of them and we’re going to be very selective about that. Again, as I said earlier, cash is king right now and that provides us both the opportunity to invest in our business that we have today but also look at these selective opportunities. But right now the priority is to pay down debt and if we do find one of these diamonds we will act on it.

[Operator:]

The next question comes from Stephen East from Pali Capital.

[Stephen East:]

Craig, looking at the inventory it’s down year over year but the days outstanding spiked up quite a bit. Could you talk a little bit about what’s going on there and then what your expectation is for working capital cash generation for the full year?

[Craig Omtvedt:]

Turning to the inventories you’re right, it is down and one of the biggest factors for being down year over year was just the FX translation but we did put up a bit more inventory in Spirits or our maturing stocks. Then we’ve got [Agabi] that we’re going to be working our way through here over the next eight or nine months. We also had a bit higher inventory levels in Golf that were associated with product that carried into the year. In terms of just the inventory overall as Bruce outlined we’ve got a number of actions that are underway right now in support of increasing our cash flow for the year and all of those are underway. That includes looking at our DTO’s, that includes looking at just where we are with our inventories and in fact it even includes looking at what we’re doing with the amount of inventory that we’re laying down in Spirits this year as we synch up what has been the amount put down in prior years with what our re-forecasts are here going forward. So, that’s what’s going on, on the working capital side. In terms of the cash flow, as Bruce outlined before, we came into the year with an expectation that we were going to deliver something in the $100 million to $200 million range. Now as a result of both our actions to improve organic cash flow along with the dividend reduction that we took, which while it’s 150 on an annualized basis it’s about 110 this year. The benefit of those two is that we’re now targeting for free cash flow for the year to be in the range of $400 million. When you look at the first quarter you obviously see that we were a net cash user, which is consistent with our [inaudible] for the business.

[Stephen East:]

Then on [inaudible] efficiency Bruce you mentioned around 37%; is that a stable expectation or do you think you can drive that lower as you get to the end of the year?

[Bruce Carbonari:]

Yes we think we can drive it lower. I think what’s important there; when you look at the number you go wow, that’s a big number. But the reality is it’s the age, the Spirits inventory that really drives that number to be as high so yes there is opportunity, obviously not in the aging side of the business but in other businesses and we expect to drive that down.

[Craig Omtvedt:]

Just to help you a little bit there as you start to look across the business with Homes we’re running in kind of the mid to high teens in terms of working capital efficiency and in Golf we’re in the range of around 30%. You can really see to being up at the 36%, 37% level is really principally Spirits.

[Bruce Carbonari:]

And the aged spirits.

[Operator:]

The next question comes from Lindsay Mihn of Goldman Sachs.

[Lindsay Mihn:]

I was trying to get a better understanding of why your Spirits margin was so favorable in the quarter. Based on the disclosure you had for US down double digits last year in sales and up 9% this year does that mean that the inventory build was worth about ten points for the US division?

[Craig Omtvedt:]

Candidly, I haven’t tried to calculate that number so I can’t confirm that for you. But what I can tell you, though, is that as you look at the first quarter it’s a function of where we were with mix of product as well as where we were with our overall cost structure and the timing of expenses and we’ve got some price in there. But again, there’s a seasonality to margins and as I indicated to I think it was Eric who had asked about it, as we look to the full year our expectation is that we’re still looking at margins that are going to be in the mid 20’s. So begin where we were for the first quarter is just abnormal for us in terms of what will be the year run rate.

[Lindsay Mihn:]

I think you mentioned that you expect to invest $30 million this year in your route to market initiatives and prior as I recall you had said $30 million in the US and then maybe $15 million to $18 million in international.

[Craig Omtvedt:]

We’re netting out the numbers here. What we’re doing is we’re saying we’ve got the costs associated with the sales organizations but our whole effort with US distributors in terms of the conscious plan and approach to take down inventory levels we netted out of that number. So when you look at the US at 30 or so or 30 to 35, you look at international in the 10 to 15 range and then we net down to that to come to something in the range of the 30 as a result of the distributor inventory program.

[Lindsay Mihn:]

I’m still confused. So 30 to 35, 10 to 15 that gets you to 40 to 50.

[Craig Omtvedt:]

Let’s use your numbers. You’ve had 30 for the US, you had 18 for international and then if you back out the benefit that we’re deriving here this year because we don’t have the de-stocking in the first quarter. Use 18, 15 to 18; that brings you down into the 30 million range net.

[Lindsay Mihn:]

I see. Any of those investments; did they flow through in the first quarter? Was there anything meaningful or is most of that Q2 through Q4?

[Bruce Carbonari:]

The US would have; international no.

[Craig Omtvedt:]

We had some impact in the first quarter from the US and more of the lion’s share of this is going to come in Q2 and Q3.

[Lindsay Mihn:]

On the Home and Hardware side I think, Craig, you mentioned that you had seen April orders were in line with your expectation. Can you give us a bit more color on whether that marks perhaps an acceleration or sort of status quo in terms of momentum and any color on the different products?

[Craig Omtvedt:]

Actually at this point as Bruce outlined earlier for the moment we’re looking at more stability in orders. So as a result it’ll be better than the first quarter and I’m not going to get into specifics month by month. But we’ve seen we had stability to our outlook in February, we had it in March and we’ve got it here again in April but I’m not going to try to make a call on what that means.

[Lindsay Mihn:]

Lastly, the decision to go a bit tighter on your Cap ex and working capital; can you outline some of the areas where you are cutting spending?

[Bruce Carbonari:]

Sure. We are looking at areas where, again, we had traditionally been in a two-year to three-year payback window. We tightened that up. We also looked at some spending on things like visitor centers and things that were more marketing or it’s probably a bad word fluffy rather than return-based. So those are the areas we cut back on. There are some tough decisions. Some of them are really just deferrals. We’ll look at them again next year. Some of them were where do we want to put our resources and priorities? Is this the right place to do it right now and IT projects would be an example of that.

[Craig Omtvedt:]

So in part, what we ended up doing was just putting higher hurdle rates on some of the projects that people were proposing to say that in this time we want to be absolutely sure that we’re going to see the returns we’re looking for and so we’ve put off some projects.

[Bruce Carbonari:]

What I would tell you though is anything that was long-term strategically important to us we’re still doing.

[Lindsay Mihn:]

Any cuts in Spirits or is it mostly Golf and Home?

[Bruce Carbonari:]

Yes; there were cuts across all the businesses.

[Craig Omtvedt:]

Actually we’ll derive some benefit in Spirits simply because of the fact we’re putting down less inventory. We’re going to have less cooperage expense for the barrels.

[Operator:]

Your next question comes from Ann Gurkin of Davenport.

[Ann Gurkin:]

First I want to start to get more details on a statement in your prepared remarks about capturing value enhancing opportunities. Can you just elaborate on what that really means?

[Bruce Carbonari:]

I think, Ann, what we’re talking about there is we are looking at some of our brands…First of all, let me step back. The consumer right now is transitioned to be more value orientated. I think that’s an important distinction between price orientated and value orientated. What we’re seeing with the consumer is that they in fact are looking towards trusted brands, brands that give them the quality and the durability for example that they would expect and they’re staying away from if you will the fringe areas. That doesn’t mean that they won’t pay for it. It just means that they’re really evaluating the value proposition of it. I think that’s what you were referring to.

[Ann Gurkin:]

I didn’t know if it also referenced an overall larger picture for the company of looking for acquisitions or looking to drive increased returns on the business through the two operations.

[Bruce Carbonari:]

You were talking on the cash management side. Yes; again, our priority is to pay down debt. If we see something that is very appealing and it makes sense and we can create value greater than paying down debt we will do it. It’s hard right now with the multiples in the Spirits business and with a lot of the activity going on in Home and the restructuring and what not to see a lot of those very clearly. So we’re being patient and we’re being disciplined. As you probably imagine, there’s a lot of activity out there and a lot of speculation out there about a lot of different things. But we’re sticking to our guns on how we look at things and we’ll patiently go through it.

[Craig Omtvedt:]

The other thing I’d highlight right now is that in this environment remaining investment grade continues to be important to us. As we look at opportunities it naturally says that the hurdle rate has gone up on those as well.

[Ann Gurkin:]

Then I have a couple questions regarding the Spirits business. What are you modeling for, particularly the second half outlook for international Spirits growth on a depletions basis?

[Bruce Carbonari:]

Right now we’re looking at basically that US will be up in the range of about 1%. I’m sorry, on a volume basis. Western Europe will be relatively flat, maybe slightly down, Mexico basically flat, Russia is going to be tough but again Brazil, India, China we see continuing to grow those emerging markets but at a little bit lower rate than maybe we saw a year ago. The other one too and I think it’s important is global travel channel we think is going to be difficult all year just because of the reduction in travel.

[Ann Gurkin:]

With respect to consumer behavior in Spirits are you seeing…I know you’re seeing consumers consuming more at home. Are you seeing absolute consumer purchases dropping, like consumers aren’t buying as many bottles of bourbon say as they did? Are you seeing any kind of change in behavior there?

[Bruce Carbonari:]

No, we’re really not. There was in the fourth quarter a little bit of price let’s say stepping down from a super premium to a premium or a premium to standard stepping down one level. We basically in the first quarter didn’t see any continuation of that trend.

[Operator:]

Your last question comes from Karen [Lamar] of Federated Investors.

[Karen Lamar:]

I think in your comments you indicated that one of the charges included something in Spirits; can you first give a little color on that?

[Craig Omtvedt:]

Are you talking about our restructuring nonrecurring charges?

[Karen Lamar:]

Yes.

[Craig Omtvedt:]

We’ve got about $3 million pretax there that’s just associated with our initiatives on the Maxium international distribution repositioning.

[Karen Lamar:]

So is it related to your overall efforts internationally?

[Bruce Carbonari:]

Yes. We shifted from the four-way joint venture of Maxium to a two-way joint venture and that new route the market system is much simpler for us as well as gives us better control over a number of markets that we didn’t have before. So that’s part of the restructuring to get us from the old to the new.

[Karen Lamar:]

Should we consider it in addition to the 15 or $10 million to $15 million then that you were planning on spending? I’m just trying to reconcile that to your original projections I guess.

[Craig Omtvedt:]

Yes. We look at them as separate. There’s the restructuring charges to bring about the structure we want and that’s what this is. The $15 million or so that I’m talking about is what is going to be ongoing increased run rate cost of the business. Just for background there we made the same decision internationally that we made in the US and that was that we weren’t going to skinny down to maintain the costs we had in the past. We looked market by market and said what do we need for an organization to really drive the business? As a result we’re making those investments to support the business going forward.

[Karen Lamar:]

Then also in Home did you imply there may be some charges in Q2? I think you gave us some comments that suggested that you expected positive operating income Q2 before charges. Were you just sort of hedging yourself or is there something that we should plan for?

[Craig Omtvedt:]

No. As I’m sure you are well aware we’ve announced restructuring in the fourth quarter of last year and we’ve got the additional actions that we took here in the first quarter. We took charges in the first quarter and obviously we do that in a line with the accounting standards and so we’ve still got charges that depending on how things typically flow will carry out here into the balance of the year. But we took $0.25 worth of charges in the first quarter and as things stand right now associated with the initiatives we have we’ve got another $0.15 to $0.20 worth of charges to take over the balance of the year. I don’t have right here in front of me the specific breakout between company but we could get you a better sense of that. And obviously we continue to review for further opportunities so clearly there could be additional charges over the course of the year. I mean, there definitely will be but there could be on top of what I’ve already outlined.

[Karen Lamar:]

That’s what I was trying to get at. Your guidance assumes obviously quite a bit of improvement in the fundamentals for the rest of the year. Can you broadly talk to what you’re assuming has to happen, whether it’s GDP or restocking or just kind of gives us a little bit more color on what you’re assuming and maybe for each business unit but in particularly in Home because you are assuming an improvement versus Q1?

[Bruce Carbonari:]

I think first of all in your initial statement that we’re seeing it better in the remainder of the year I think what you’re seeing out of the first quarter is the seasonality of our businesses especially Home. So when you build the rest of the year out we’re assuming that basically it’s going to be a recessionary period throughout and that consumers will remain cautious particularly in the discretionary spending categories. We are not looking at a hockey stick or anything so you have a number of things that will happen during the course of the year. Obviously comparisons will get easier. We have the annualization of the RDD. We have some annualization of the US sales organization for our Spirits business so there’s a number of things that are happening through the course of the year that will make that and plus our cost initiatives and cost takeout initiatives that we took in the fourth quarter and now in the first quarter. We’ll start reaping the benefits of those. Craig, do you have anything to add?

[Craig Omtvedt:]

Yes. I think the thing I’d also add is just to maybe go back a little top line here for a moment. What we’ve outlined in Home is an expectation that the overall market will be down about 20% for the year so that naturally is an improvement over the first quarter. And as I mentioned earlier the comparisons will improve because the real down slope in Home came in the back half of last year. So with what we’re now targeting for this year the comparisons there naturally ease. In Golf our expectation is that we’re going to see rounds of play that are going to be down kind of low to mid single digits over the balance of the year. Then lastly, within Spirits as Bruce outlined we’re anticipating that kind of global volume is going to be flat to maybe down modestly. Then we’ve got all the things that are now going to annualize over the year. We’ve got FX that’s going to be less of a burden. We’ve got RTD that annualizes here in April and then we’ve got all of these other supply chain initiatives that are going to annualize as we progress through the balance of the year so we’ve got a lot of things that naturally are going to play in our favor.

[Operator:]

I would now like to turn the call back over to Mr. Carbonari for closing remarks.

[Bruce Carbonari:]

Thanks again [inaudible] continue to pursue our priority initiatives to outperform the current economy and environment and to position Fortune Brands for strong long-term growth. We’ll review our second quarter results with you in July, thank you.

[Operator:]

[Operator Instructions]. This concludes today’s call; you may now disconnect.