Beam Therapeutics Inc.
Q3 2007 Earnings Call Transcript

Published: 26 Oct 2007

[Operator:]

I would like to welcome everyone to the third quarter FortuneBrands earnings conference call. (Operator Instructions) Thank you, Mr. Wesley,you may again your conference.

[Norman Wesley:]

Good morning. Thanks for joining us to review Fortune Brandsthird quarter results. Before I begin, let me note that our presentationincludes forward-looking statements that are subject to risks anduncertainties, including those listed in the cautionary language at the end ofthe news release; and, that our actual results could differ materially fromthose targeted. This presentation also includes certain non-GAAP measuresthat are reconciled for the most closely comparable GAAP measure in our newsrelease or on the supplemental information page linked to the webcast page onour web site. Fortune Brands delivered solid third quarter results thatcomfortably achieved our earnings target. This was a quarter that once againdemonstrated the benefits of Fortune Brands unique breadth and balance, asprofit growth for our spirits and wine brands helped to offset the impact ofthe U.S. Housing correction. Our spirits and wine brands delivered record third quarteroperating income, even with a strong double-digit increase in brand-buildinginvestment to support new marketing programs. We're benefiting from higherprices on certain premium spirits brands, the favorable trend of consumerstrading up to higher end brands, and further synergies from our acquisition ofAllied Domecq brands. We're pleased that despite the challenges presented by thehousing downturn in the U.S.,we're continuing to significantly outperform the home products market. Welimited our sales decline in Home and Hardware to just 4%, which underscoreshow we're gaining share in a home products market that is down double-digits. That outperformance reflects the success of innovative newproducts, growth with key customers, extension into adjacent product categoriesand expansion in international markets. With successful new products anddouble-digit sales increases in golf balls and golf footwear, Titleist andFootJoy lead our golf brands to a third quarter sales record and gained sharein key product categories. Now, looking closer at the numbers. Reported net income was$209 million, or $1.33 per diluted share. That compares to $0.98 in the yearago quarter. It's important to remember that last year's number reflects a netcharge amounting to $0.32 per share. That charge principally related to therequired accounting for the increased value of V&S minority interest in ourspirits and wine business. Excluding one-time items in both the currents and the prioryear periods, diluted earnings per share before charges and gains was $1.35, up4% from $1.30 last year. These results were comfortably within the target rangewe announced three months ago, which was for diluted earnings per share beforecharges and gains to be in the range of mid single-digits, up mid single-digitsto down mid single-digits. They were also $0.06 ahead of the First Callconsensus estimate of Wall Street analysts. Net sales for the third quarter were $2.2 billion, off 1%.On a comparable basis, excluding excise taxes, we estimate sales would havebeen off 2% in constant currency. Operating income for the quarter came in at$376 million, off 1%. We are particularly pleased with our margin performancein the quarter, as operating margins expanded in spirits and wine, and welimited margin erosion in home and hardware to just 50 basis points in achallenging market. Fortune Brands overall operating margins were even with ayear ago. Looking at our asset and investment return measures, returnon equity before charges and gains was 16%. After-tax return on net tangibleassets before charges and gains was 23%; working capital efficiency came in at34%, and return on invested capital before charges and gains was 9%. Fortune Brands strength, stability and success are bothserved not only by our breadth and balance, but also by our adherence to asimple and effective four-point strategy. Investing first is to invest to growour leading consumer brands, improving operations to continuously enhanceproductivity and cost structures, positioning our business for stronger growthand higher returns, and leveraging the strength of our financial resources todrive shareholder value even higher. That last point includes a commitment to returning immediatevalue to shareholders by paying attractive dividends. In the quarter, weboosted the dividend another 8% to an annual rate of $1.68 per share. We'veincreased the dividend in each of the 11 years since the company began tradingas Fortune Brands, a reflection of our confidence in the long-term strength ofour business. In the quarter, we also announced the beginning of a smoothtransition of executive leadership that will provide continuity for FortuneBrands. As we announced in August, our President and Chief Operating Officer,Bruce Carbonari will succeed me as CEO in January and I will remain Chairman ofthe Board. Bruce has been a big part of Fortune Brands' success overthe past 17 years, and he brings a wealth of experience, a unique blend ofstrategic and operating expertise, and a continued sharp focus on shareholdervalue. On the subject of the sale process involving Vin & Spritand the Absolute vodka brand, there's nothing new to report. The Swedishgovernment has not yet announced the details or the timing or how it plans toproceed with the privatization of V&S. We look forward to participating inthe process once it's established. Now, before Craig walks us through the segment results, hereis Bruce to discuss our major operating initiatives.

[Bruce Carbonari:]

Thanks, Norm. As we have discussed in previous quarters, weare sharply focused on two major initiatives that are critical to our successin 2007. First, continuing to build our major premium spirits brands; andsecond, to navigate the downturn in the housing market. We continue to makeprogress in both of these areas and at the same time, we're delivering strongoperating margin performance in both businesses. In spirits and wine we're continuing to expand margins. Thatreflect or focus on the premium end of the category, favorable mix shifts,higher pricing for certain premium brands, and synergies from the successfulintegration of the Allied Domecq brands. In home and hardware, as Norm indicated, we have limitedmargin declines to just 50 basis points in the quarter. That's due to thesuccess of our share gains, productivity and cost initiatives, as well as the targetedprice increases we've implemented. These price increasing are offsetting thehigh commodity costs that adversely impacted margins in the first quarter. Regarding brand-building for our major spirits brand, wediscussed last quarter that we would be ramping up new marketing activities andboosting brands spin in the second half. As the world's fourth largest premiumspirits company and the largest base in the United States, we have an excellent foundation onwhich to build, with powerful positions in key categories. For example, we have the world's #1 position in bourbons atall premium levels; the world’s #2 tequila, the #2 Canadian whiskey in theworld, one of the world's leading cognac, and the leading cordial line in theUnited States, as well as the #2 super premium U.S. wine brand. As we've successfully integrated the brands we acquired fromAllied Domecq, we now see opportunities to boost brand investment and buildbrands people want to talk about. Our brand-building activity accelerated in thequarter to a strong double-digit increase and will continue into the fourthquarter. A lot of what we're doing is centered around connecting withconsumers in non-traditional ways and building word of mouth buzz so consumerscall for our brands. In fact, we are launching new advertising marketing, and positioningcampaigns to build equity for three major brands. That includes a relaunch ofour super premium Suaza Hornitos tequila line, featuring new advertising, newpackaging and two new product extensions. We're backing the Hornitos relaunchand the Fine Line of Tequila campaign with significant new brand spend, withmuch of that going to non-traditional mediums and online advertising. Justlast week, we launched Courvoisier's Find Greatness Within campaign, anintegral part of our long-term brand-building plans for this iconic cognacbrand. On the heels of Dario Franchetti's championship season in the CanadianClub Indy Car, we this month launched a brand new campaign for Canadian Club,the world's #2 whiskey. In addition, the United States Senate declared SeptemberNational Bourbon Heritage Month, and we supported the world's greatest bourbonportfolio with significant promotional activity at the point of purchase andonline, including the world's biggest distilled spirits ad that provided highvisibility in Las Vegas. We also launched new spirits product in the quarter,including Jim Beam’s Beam and Cola in Australia,Courvoisier Exclusive, an ultra-premium cognac designed for mixed drinks; andDekuyper Red Apple Liqueur, which should be a special addition to the fall andwinter cocktails. Brands are built over time, and we are confident in theprograms we've developed and pleased with the progress we have made in thequarter. Lastly, as has been previously announced, in the quarter we soldthe William Hill and Canyon Roadbrands and related assets to Gallo. That is a move that enables our Vin andBeam Wine Estates to focus resources where they can most impact profitablegrowth. When it comes to home products, it's clear that the housingdownturn will last longer than just about anyone predicted. Even so, we aredetermined not to be a victim to the challenging market. We're pleased with howwe're executing our plan to outperform the home products market and to positionourselves to capitalize when the market recovers. As Craig will detail in a moment, our third quarter sales inour home product segment were down just 4%, that's in a market that is down double-digits.Year-to-date, we have managed to limitour decline in home product sales, excluding acquisitions and divestitures, tojust 7%. We are outperforming the market by continuing to focus onthe fundamental strategies that have served us so well. It starts with consumerinsights to better understand how consumers make purchase decisions; that'shelping us develop and launch new products and expand relationships with keycustomers. We're also extending brands into adjacent product categories and we'recapitalizing on international growth opportunities. All of these initiativesare adding up to tangible share gains. We are also being proactive on the productivity and costside to promote efficiency, protect operating margins, and better align ourglobal supply chains to navigate the housing downturn and optimize process forlong-term growth. That includes increased use of lean manufacturing, a sharpfocus on inventory management, and reducing component and material coststhrough targeted global sourcing initiatives. Additionally, since our last conference call, we'veinitiated the consolidation of an additional facility that results in arelocation of certain window manufacturing. That is on top of the facilityconsolidations we discussed in previous quarters. We believe these proactive steps are optimizing our supplychain for the future, at the same time they're providing near-term benefits byappropriately aligning our costs and capacity as we navigate the challenges ofa housing correction that will, by all accounts, last into 2008. Many economists now suggest that the housing products marketcould be off by double-digit rates again in 2008. Regardless of the length ofthe downturn, we strive to continue to outperform the market and we continue tofocus sharply on both the growth and cost side of the business. We are currently putting together next year’s business planand as we customarily do, we will provide 2008 growth targets for home and hardwareand all of our segments in our January conference call. Now, with a closer look at our third quarter performance,here is Craig.

[Craig Omtvedt:]

Thanks, Bruce. Starting with spirits and wine, the thirdquarter sales increased 2% to a record $665 million. Revenues were impacted bysecond quarter distributor buy-in ahead of the SAP conversion we discussed lastquarter, as well as soft revenue performance for select regional brands. Operating incomes moved 5% to $179 million, that's also athird quarter record. OI benefited from our focus on higher pricing on certainpremium brands, favorable mix shift to higher end brands, and acquisitionsynergies. Even with a double-digitincrease in brand spend in the quarter, OI margins before charges for thequarter expanded to 27%. Drilling down, our worldwide spirits and wine case volumesare up low single-digits year-to-date. Volumes are up in the low single-digitrange in both the U.S.and in non-U.S. markets. Again, I remind everybody one that our volume numbersare based on depletions. Our major premium bands continue to outperform our nationaland regional brands. Looking first at our two biggest spirits bands, casevolume for our flagship Jim Beam brand are up low single-digits year-to-date.Underscoring how we're building the kind of brand equity that supports higherpricing, revenues for Jim Beam are up high single-digits for the year. Suaza tequila volumes are up low single-digits year-to-date,while revenues are up in the mid single-digit range. As Bruce indicatedearlier, we are excited about new programming we've developed to further buildSuaza, including the just announced relaunch of the Suaza family super premiumHornitos. Looking at other key brands, case volumes for Maker's Markand Courvoisier, are up in the high single-digit range while Teacher's Scotchis up double-digits. Dekuyper volumes are off slightly while Canadian Club isflat. Volumes for our wine brands are up in the high single-digit range, led byvery strong performance for Clos du Bois, Geyser Peak and Wild Horse. As we enter the largest quarter of the year for our spiritsbusiness, we feel good about the health of our brands, and about our growthprospects. As previously discussed, we're further accelerating brand spend herein the fourth quarter to continue building our brands and to drive momentumbehind them. For the full year, we are continuing to target operating incomebefore charges in spirits and wine to be up in the mid to high single-digitrange. Now, turning to home and hardware. Sales in home andhardware came in at $1.2 billion off 4%. Again, that's in a market that's down double-digits.Revenues benefited from our share gains in a challenging market as well aseasier comparisons. Operating income in home and hardware was $184 million, down7%. On the operating margin front, we're still targeting to limit full yearmargin erosion to the range of around 150 basis points. Breaking that down,that's around 1 point on our base business, and about 0.5 point related to theaddition of Simonton. Each of our product lines showed progress in the quarter.Once again, our strength in the replace and remodel market, which drives the majority ofour home product sales, continued to serve us well. We also continued tobenefit from successful new products, expansion with key customers, extensioninto adjacent product categories, and growth in international markets. Sales for our cabinetry brands were off at a mid- ingle-digitrange. We benefited from favorable shift to higher end brands including Omega,Kitchen Craft, Diamond and Schrock. At Moen, sales were flat. The #1 faucet brandin North America benefited from extra selling days,solid growth with U.S.retailers and double-digit gains in international markets, all of which offsetlower sales to wholesale distributors, who largely serve the new constructionsegment. A similar story at Therma Tru, where our door sales werealso flat. The #1 brand of residential entry doors benefited from sales growthin the home center channel and also outperformed the market with wholesalecustomers. Sales at Simonton Windows continued to be off with the market. Salesof storage and security products were up low single-digits, as strong gains forMaster Lock more than offset modestly lower sales for Waterlootool storage products. As we look to the balance of the year, we continue to feelwell-positioned in a challenging market. We will benefit from the share gains,productivity and cost initiatives Bruce discussed earlier, as well as our focuson the replace and remodel segments ofthe market, which continues to perform better than new construction. Additionally, our comparisons ease in the fourquarter. While we expect to continue to outperform the market, we've revisedour full year target in home and hardware to reflect the sustained nature ofthe housing downturn. We are now targeting operating income before charges in homeand hardware to be down at a low double-digit break for 2007. Turning to golf, sales for our golf brands reached the thirdquarter record $319 million, that's up 7%. Operating income of $30 million wasflat, adversely impacted by expenses for new product launches, patentlitigation and related costs. In golf balls, sales grew at a double-digit rateas we continue to gain market share and benefit from favorable mix shift. In addition to continued growth for the Titleist ProV1family, the new Titleist NXT Tour and NXT Extreme are off to excellent startsas are new Pinnacle models introduced in the quarter. Sales of golf clubs wereoff modestly against a strong double-digit increase in the year-ago quarterwhen sales benefited from the timing of new product introductions. FootJoy golf shoes drove a double-digit increase in sales onthe success of new models in the eComfort, Contour and Real Fit lines. We justrelaunched the DryJoy line with new advanced features in styles and initialmarketplace acceptance is excellent. Sales of golf clubs grew double-digits,and accessories saw go strong growth as well. As we look to the balance of the year in golf, our intensivenew product development initiatives continue. Also, keep in mind that thefourth quarter is the seasonally smallest and historic smallest quarter andhistorically generates a small profit or loss in our Golf segment. For the fullyear, we are now targeting operating income before charges in Golf to berelatively flat, impacted by the cost factors I just mentioned. Now, before turning things back to Norm, a few additionalitems. First, reported third quarter results reflect a $2.2 million inafter-tax restructuring charges, amounting to $0.02 a share, and that's relatedprimarily to supply chain initiatives in home products. Looking to the fourth quarter, regarding credits, I'mpleased to report that we've reached closure with the IRS regarding selectmatters associated with our 2001 and 2002 tax returns. Pending congressional jointcommittee approval here in the fourth quarter, we will return approximately 85million in tax provisions to income. Regarding charges, as Bruce indicated, we are activelyworking to optimize our cost structure and we expect to incur additional fourthquarter pretax charges in the range of $15 million to $20 million associatedwith the supply chain initiatives we've already discussed. Second, stemming from our routine true-up of our effectivetax rate, we are now targeting a before charge as gains rate 32.2% for 2007,and that's versus our prior rate of 33%. About 50 to 60 bips of the reductionresults from the true-up of taxes against our global profit mix and theremaining 20 to 30 basis points relates to general tax initiatives. Lastly, fine-tuning our estimated free cash flow for theyear, we are targeting free cash flow in the range of $500 million to $550million; again, that's after dividends and capital expenditures. Now back to Norm.

[Norman Wesley:]

Thanks, Craig. Forthe remainder of the year, we expect Fortune Brands to continue benefiting fromglobal growth of our premium and super premium spirits brands, plus sustainedmarket share gains in the challenging home products market. We believe FortuneBrands is on track to deliver solid fourth quarter performance as well as fullyear results within the target range we established at the beginning of theyear. For the fourth quarter, we are targeting diluted earningsper share before charges gains to be in the range of up low single-digits todown mid single-digits, and that's against the $1.42 we delivered in the fourthquarter of 2006. With three quarters now behind us, we are in a position tofurther refine our target range for the year. For 2007, we currently expectdiluted earnings per share before charges gained to be down in the range of lowto mid single-digits, and that's against $5.33 in 2006. Now Bruce, Craig and I will be happy to take your questions.

[Operator:]

Your first question comes from Todd Duvick - Banc of AmericaSecurities.

[Todd Duvick:]

I'm just wondering what your tightening up of free cash flowtarget for the year is? If you can tellus what you expect for the fourth quarter and if you can tell us what the freecash flow priorities are in the near term?

[Craig Omtvedt:]

Well, as you can see in the press release that we put out,our year-to-date free cash flow for the nine months is at the $225 millionrange, and so looking at the fourth quarter, we are currently targetingsomething in the range of up to 275 to 325, so that would be comparable to theapproximately $300 million that we generated here in the third quarter. As you can appreciate, that's going to come from just amyriad of factors that affect the free cash flow. Obviously at this point, we're continuing topay down debt.

[Todd Duvick:]

Given Norm's comments about the Vin and Sprit situation,given that there really is no firm timetable in place right now, paying downdebt in the near term is definitely positive from a bondholder perspective. Atwhat point do you maybe shift over to share repurchase or just accumulate cashon the balance sheet?

[Craig Omtvedt:]

Well, that's clearlynot something we would speculate on. As we indicated a year or so ago, or twoyears ago when we did the Allied deal, we said that in the near term, ourpriority was going to be to pay down debt and that wasn't just to achievecredit ratios, that was just to position us for optimal flexibility. I think we're at a point now where pay down debt is adefault position, not an absolute priority, but it continues to be our focus atthe present time. We've always said that as you think about our longer termfocus on cash flow, our first priority has always been internal CapEx justbecause of its returns. Second has been acquisitions or share repurchase asappropriate, and third has been the dividend. So the longer term priorities and focus hasn't changed, butin terms of optimizing our flexibility, debt paydown is where we want to beright now.

[Operator:]

Your next question comes from Peter Lisnic - Robert Baird

[Peter Lisnic:]

In terms of the commercial paper markets, any materialimpact on your ability to access those markets or any balance sheet risk alongthose lines?

[Craig Omtvedt:]

No. Just to step backa little bit, when we hit the height of the frenzy, on what I'll call thecredit crunch, we obviously ended up with shorter durations of issuance inorder to protect as a much as we could rates, but we had no problem withissuance. We definitely saw a blip up in rates for a period of time, but that'sbeen settling back. So at this point, things look pretty comfortable in term ofcommercial paper market.

[Peter Lisnic:]

So no real change to the cost of credit either then?

[Craig Omtvedt:]

Well as I said, it was higher during the height of thefrenzy there. I mean, we saw rates on commercial paper jump up to north of 6%,but our run rate had been more along the line of 540 and so at this point, weare trending back towards that level, so we're trying at this point.

[Peter Lisnic:]

And if I could on the spirits business, plus 2%, can youbreak that out between price and volume?

[Norman Wesley:]

First off, are youtalking about for the quarter?

[Peter Lisnic:]

Yes.

[Norman Wesley:]

We are looking at the quarter. But we really look at the year-to-datenumbers. We have, if you recall like the last quarter, we had a lot of volatilityin the second and third quarter because of the SAP implementations. As you lookat year-to-date, we still see a growth level between 2% and 4% for the spiritsbusiness.

[Craig Omtvedt:]

There's been somecontribution of price, but you also then have to look at mix. There are mixshifts going on as well, so it's not so simple as to just break it down as faras price and volume.

[Peter Lisnic:]

If you wouldn't mind expanding then on some of the softnessthat you've seen in your regional brands. I assume part of that, to some extent, has been by choice but the otherpart has just been people are just trading up like you said in your openingcomments, Norm.

[Norman Wesley:]

They are. We see and continue to see this trend that premiumis growing much faster than the regional brands, and this is basically theconsumer driving that decision and calling out for brands rather than justtaking what's off the shelf. It's a good trend, it's a positive trend. We havea mix of 70% premium versus 30% regional.

[Craig Omtvedt:]

Let me jump in with just maybe one other comment here justcoming back to the sales, because we said we were up 2%, but year over year,pricing had minimal impact here in the third quarter. The other thing I would highlight is that we've hadtransitional things going on year over year, we had the Pernod bottlingcontracts last year, we have got FX, and then we had some issues with just theway accounting is required on what were intra-company sales year over year. IfI take all that noise out, what we could have been talking about here is saleson an underlying basis, that would have been up in the 3% range.

[Norman Wesley:]

Both of the premium and regional mix that we're seeing, thepremium is still pretty much a 2X a sales per case value, and the margins areat the premium level.

[Operator:]

Your next question comes from Bryan Spillane – Banc ofAmerica Securities.

[Bryan Spillane:]

First for you, Craig, looks like you've brought down yourexpectations on cash flow from operations or operating cash flow. Can you justtalk through what is driving that? Is it working capital or is there some otherdynamic that is driving that?

[Craig Omtvedt:]

Actually, we really haven't brought down our expectations. Atthe beginning of the year just because of the variables, as you can appreciatewe start with a bit of a broader view of what cash flow can be. But just aswe've done with dialing in on where we think our operating income performanceis going to be and other factors, diluted earnings per share, we've just simplydone the same thing with free cash flow. I think that to say that for the year, we are targeting the500 to 550 versus approximately the 575 last year is not an extreme adjustment.The other thing I would remind you of is that this year, we're dealing with $100million more of interest payments than we had last year with the payment thatwas made this year. I think as you are aware, our interest payments on our eurodebt are made on an annual basis, so we didn't have any interest or cashoutflow in 2006, and we obviously do here in 2007. So I think overall, as youlook at the numbers, we are in reasonably good shape.

[Bryan Spillane:]

So there's no change in your expectations? Because I thoughtthat the range that you had for cash from operations, so before free cash flow,now it's 900 to 975, and for some reason, I thought you had a wider rangepreviously.

[Craig Omtvedt:]

When you look at that in some ways, that just becomes afunction of mechanics, but in terms of how I think about the free cash flow andhow we forecast it, it's really at the free cash flow level that really mattersto us.

[Bryan Spillane:]

Cap Ex, it looks like you are bringing your CapExexpectation down for the year? Is that true?

[Craig Omtvedt:]

A little bit,obviously we have got the benefit of the asset sales here for the vineyards anda couple of brands that Bruce mentioned before. As we look at where we aregoing to be with the underlying spend, right now with where we are with all thechallenges people have and other initiatives, I think that is coming down abit.

[Norman Wesley:]

In the home side especially.

[Bryan Spillane:]

Bruce, if you could just give us some color on the spiritsbusiness? It's great to get the color by brand, but just regionally orgeographically, if you can give us some color what geographies performed wellrelative to others?

[Bruce Carbonari:]

We continue to see the U.S.market to be solid; good, strong growth, a real strong mix of the premiumversus the regional, as I suggested. For Australia,it's a very strong market for us, and continues to be a very excellentreception to our new product that I mentioned, the Beam with the Sugar Zeroproduct. Indiacontinues to be a growth emerging market for us, and we're doing well withTeachers' there and some of our other brown liquors. Europeis solid, UKand Spain alittle bit more challenging than other parts of Europe. Iwould say China,we're very, very young and maybe a little behind in China.Brazil is doingvery well with Teacher's as well, but we have a small entry level into theBrazilian market. But again, Europe is solid, U.S.is solid, and I would say Indiaand Australiaare probably the two fastest growing markets right now.

[Bryan Spillane:]

In terms of where you are putting the marking investmentnow, is most of that stepped up investment happening in the U.S.market or is it spread more evenly?

[Bruce Carbonari:]

It's spread. I thinkI mentioned this last call, that we went and spent some time since theacquisition really defining our priorities as far as we call brand marketcontributions, BMC, so we prioritize the brand and then we prioritize themarket which we believe that brand will work best in. Then we are supportingthat with the brand advertising, so it's global. It's not widespread across theboard, it's very selected and very targeted to an audience, and to a geographicmarket for a specific brand.

[Operator:]

Your next question comes from the line of Robert van Brugge -Sanford Bernstein.

[Robert vanBrugge:]

A question about the spirits category in the U.S.We've recently seen some renewed strength in the beer category. Are you seeingany slowdown in the shift out of beer into spirits or possibly some tradingdown from the spirits category into beer?

[Bruce Carbonari:]

We have not. When welook at the monthly numbers you see volatility all the time, but as we lookover the year, we have not. We continue to see in the trends that we've seenall year, and that's what I mentioned earlier is the premium brands doing verywell, the regionals not doing as well. So the cocktail culture is alive. Ithink the innovation that all of us have brought to that culture continues tobe motivating the consumer to continue to purchase a premium level of spirits,so we don't see that trend, no.

[Norman Wesley:]

I would just add, it's kind of hard to pinpoint that in ashort period of time. I have seen in the last couple of quarters that the beercompanies have done a bit better. I'm not sure if that's hard to pinpoint thatto say that we really see that as any kind of a trend.

[Robert vanBrugge:]

Also, a question about the home and hardware business. Doyou have any view of how the repair and remodel market spending is trending inthe back half of this year? Your view of next year versus the new constructionmarket? Not necessarily for your brands, but for the market overall?

[Bruce Carbonari:]

Yes, this will be more of a market comment. We entered theyear thinking that the new construction market was going to be better thanactually it has turned out, and we thought the R&R market was going to be alittle worse than it's turned out. The remodel market has been basically flatto slightly down. We've seen that continue now through the second and thirdquarter. So it's been very positive from our standpoint. We have a mix of two-thirds,one-third to repair and remodel versus new construction, so it bodes well forus. Going out as far as there's a lot of forecasting out there.We are working on our plans right now and we will present our view of themarket in the next call, but obviously the new construction will continue to bechallenged, and obviously the R&R side is one that there's a lot of varied viewsout there, so it's hard to call right now.

[Operator:]

Your next question comes from the line of Andrew Sawyer - GoldmanSachs.

[Andrew Sawyer:]

I was wondering if you could you talk a little bit about aswe think into 2008, and if the market remains difficult from a home andhardware perspective, this year you did a lot with productivity; you took somepricing, but how should we think about the leverage you guys can pull to helpmanage through the environment if it does remain challenging?

[Bruce Carbonari:]

In general, obviously 2008 is going to be more difficultthan we thought when we first walked into 2007. This market has a lot ofinventory in both the new construction side and the existing home side. We asan industry are going to have to figure out how we rebalance that. Obviously the new construction side, we've seen the buildersbe much more proactive than they can be by reducing production and so forth,and we've seen a little bit of stabilization now between probably seven to eightmonths of inventory out there on the new construction side, whereas theexisting home inventory continues to keep on increasing and I think it's acrossten months now. We are in this phase of the cycle here where consumers arein a freeze. What I mean by that is they still have the passion to move orupgrade their home. Mortgages are still relatively affordable, but the problemis they want to buy cheap but get full price on what they are trying to sell. That'spretty typical in a market that's in decline. So in general, we are in thisconsumer freeze period right now. Craig, I think what I'll start with as far as Fortune Brandsgo, our focus here is not really to predict the market but outperform themarket. Well before any of this began, the structure of the businesses that wehave, the balance of the businesses that we have and the balance between repairand remodel and new, the balance betweentraditional channels and home centers, and the way we have developed our coststructure to being maybe more variable than fixed. That's allowed us to havethe flexibility during this market that is critical when you have a market thatcan be cyclical.

[Craig Omtvedt:]

I think the onlything I would add to that is, fundamentally nothing has changed in terms of ourview of the overall home category. I mean, we continue to see the long termdemographics as very positive. So clearly, what we are dealing with right nowis a correction. Candidly, we think a long overdue correction to take some ofthe excesses out. We'll speak more definitively to what our plans are for nextyear in January, after we conclude the whole budgetary process that we aregoing through right now. But the real challenge right now is one of balancingwhat we want to do to take costs out, to support the profit performance in '08but at the same time, be sure that we are doing things that keep us positionedfor the long haul. I mean, the last thing we want to do is take a $1 out in '08and find that it's going to cost us $2 to put it back in, in '09. So, that'sjust kind of philosophically what we're going through right now, but as Iindicated for this year, I think that we've done a pretty strong job ofminimizing or holding to as low as possible the margin deterioration positionfor the year. We'll just have to get through the budgetary process andwe'll give you a better view in January.

[Andrew Sawyer:]

Craig, should we use a 32% to 33% tax rate for '08?

[Craig Omtvedt:]

Actually, we'll see how that plays out but I think withwhere we're at right now with mix of business, early days, I would say nextyear is 32% or better. So I think if you want something for just now, use the 32%.

[Andrew Sawyer:]

On this patent litigation regarding the Pro V1, what is therisk here, and can you guys put some context around that?

[Craig Omtvedt:]

At this point, I meanthere is no risk. We've settled on that, obviously the terms are confidential,so that's not something that we can speak to. But obviously, when you look atthe results here in the third quarter, we were down a little bit because of thepatent litigation and related expenses; but when you consider that volume wasup and when you consider that basically, what we're talking about in terms ofif OI had been relative to the sale, we are only talking about $2 million here,and part of that was launch expense. So the bottom line is it's a manageableissue.

[Operator:]

Your next questioncomes from the line of Omar Al-Madani.

[Omar Al-Midani:]

The core home demand, I know you mentioned repair and remodelwas flat to slightly down. Is it fair to assume 3Q was similar to 2Q in termsof was there any delta either way?

[Bruce Carbonari:]

Between the secondquarter and the third on R&R?

[Omar Al-Midani:]

Yes.

[Craig Omtvedt:]

Basically they were the same.

[Omar Al-Midani:]

And your expectationsfor the fourth quarter? Obviously, this is the market.

[Norman Wesley:]

Yes again, we don't talk about forward views, the market thelast couple of quarters has been very stable.

[Craig Omtvedt:]

We read pretty much what you do, and there's lots of peoplewho have estimated no appreciable change in the trend in repair and remodel inthe fourth quarter of '07.

[Omar Al-Midani:]

In terms of the share gains is 3Q accelerated from thesecond quarter? Is that right?

[Bruce Carbonari:]

Yes, they continue. We are getting them in different areas,but yes, they continue pretty much across the board. It isn't one company-specific,we are seeing it in the door business, in the faucet business, the cabinets. Itis right across the board, and in different channels and different markets.

[Omar Al-Midani:]

Turning to spiritsfor a second, the SAP timing on revenue growth, what was the SAP timing in 3Q?The shift there?

[Bruce Carbonari:]

We launched the piece of SAP on August 1st of this pastquarter. With that, there was some volume in Q2 as our distributors in our three-tiersystem, our distributors loaded up just to make sure that we didn't have a hiccup,which we didn't have as we launched this. What has happened since then is justflushing and getting the inventory rebalanced.

[Norman Wesley:]

It's difficult when you are talking about a broad base ofdistributors and product lines, it's difficult to pinpoint exactly how much thebuy ahead was versus how much of it we gave back.

[Omar Al-Midani:]

In terms of your spirit spending, I know you talked about double-digitshere in the third quarter versus probably down a bit in the first half, if Irecall correctly. When you think about the fourth quarter, is the spending a similaryear over year increase as 3Q saw or will there be an acceleration?

[Bruce Carbonari:]

Well first off, the fourth quarter is the biggest quarter inthe spirits business as the holiday season approaches. What we had said was itis a continuation of the increased brand spend that we had in the third quarterto the fourth quarter.

[Craig Omtvedt:]

But it will be, thefourth quarter from just kind of a perspective, quarter-over-quarterstandpoint, year over year, the fourth quarter numbers for brand spend will besignificantly higher than they were in the third quarter.

[Omar Al-Midani:]

Year over year?

[Craig Omtvedt:]

I'm saying fourthquarter year over year will be significantly higher than the same comparablethird quarter year over year.

[Omar Al-Midani:]

Your full year EPS guidance, a little bit lower than prior.Anything in September? What was the delta that has caused you to change that asa margin?

[Norman Wesley:]

It was really finetuning; I mean, we had three quarters behind us so a little bit more finetuning, that's all.

[Operator:]

Your next question comes from Peter Lisnic - Robert Baird

[Peter Lisnic:]

Do you guys mind talking a bit about commodity costs? I think there was mention that it was essentiallyoffset in the quarter, but what the outlook might be like for fourth quarter? Reallymore specifically maybe for '08, I knowyou don't want to give a forecast for '08, but just where the trend might bewould be helpful.

[Craig Omtvedt:]

Well let’s go in reverse order and let's just talk abouttrends, at least at the moment, looking into next year. As you look at themetals market, we'll look at copper, zinc, related commodities. We are seeingwhat I would describe at relative stability, at the moment/ I mean, we are seeingit blip up a bit and down back and forth, but relative stability. So as we lookat next year right now, I think basically we would describe that as manageable. Then you start to look at plywood, and you look at lumberand other items that are really important to us. We view those as manageable aswell. So early days, I mean we are still sorting ourselves out, but we don'tsee anything that's presenting what we think is going to be a huge challenge atleast for next year at the present time. Now, coming back into the fourth quarter you are right; whatwe've done is offset the price increases, but the year over year has somemoving parts in terms of last year. We had mark-to-market in it for our faucetbusiness. As it stands right now, I think we are in a somewhat better positionfourth quarter this year than we were last year, but at this point, it would behard to put a real tight number on that.

[Peter Lisnic:]

Going back to the question about margins in '08 in home and hardware, you frequentlytalked about your ability to extract 300to 400 basis points from productivity in home and hardware, and I would imaginewith Simonton being relatively earlydays in the grand scheme of things, that, that sort of target, you are stillrelatively comfortable with? Is that another way of looking at how you can protect thedownside in '08 if the market becomes markedly worse?

[Craig Omtvedt:]

Yes, I think it is.We continue to run with the target of taking out 3% to 5% of costs of salesthrough productivity every year, and that hasn't changed.

[Norman Wesley:]

Good times or bad, that's our targets.

[Operator:]

There are no further questions at this time.

[Craig Omtvedt:]

Thanks again for listening today. As we approach the end ofthe year, we will continue building our brands and executing what we believeare the strategies that have helped us succeed in our markets. Fortune Brandsis on track to deliver full year results within the target range we establishedat the beginning of the year and we will review 2007 results and our outlookfor 2008 during our conference call in January. Thanks again for joining us.