Beam Therapeutics Inc.
Q4 2007 Earnings Call Transcript

Published: 25 Jan 2008

[Operator:]

Good morning. My name is Constance and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter and year-end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. (Operator Instructions). Mr. Bruce Carbonari, President and Chief Executive Officer, you may begin your conference.

[Bruce A. Carbonari:]

Thank you. Good morning. Thanks for joining us to review Fortune Brands’ results for the fourth quarter and full year 2007. Before we begin, let me note that our presentation includes forward-looking statements that are subject to risks and uncertainties, including those that are listed in the cautionary language at the end of our news release, and that 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 the supplemental information page linked to the webcast page on our website. Despite the challenging environment of our home products business, Fortune Brands delivered on our key goals for 2007. The effectiveness of our proactive growth and return strategy, underpinned by the strength of our company’s unique breadth and balance, helped Fortune Brands deliver results that achieved our earnings target for fourth quarter, as well as for the full-year target we established at the beginning of 2007. That’s especially notable given the fact that the housing correction in the US has proven more challenging and persistent than anyone anticipated a year ago – or even three months ago. We’re pleased that our brands are performing well in their respective markets. In spirits we’re driving strong profit growth that reflects our focus on premium brands and building brand equity, which supports higher pricing in a growing market. Net of excise taxes, Jim Bean, Sauza and Maker’s Mark all drove double-digit revenue increases for 2007 in constant currency. World-wide sales of Jim Bean surpassed 6 million cases. It’s also notable that our second half acceleration of brand-building spending continued into the fourth quarter, that we expanded underlying full-year operating margins in spirits by more than one point, and that our spirits brands now generate about half of Fortune Brands’ total annual operating income. In home and hardware we’re aggressively positioning ourselves to outperform the challenging market. Our sales outpaced the estimated market performance by approximately 4 points for the year. In the quarter, Moen, Therma-Tru, Master Lock, Simonton, and our cabinetry brands continue to gain market share. At the same time, our proactive pursuit of high-return cost and productivity initiatives, many of which we began in advance of the downturn impact, limited the fourth quarter margin decline in home and hardware to just 50 basis points adjusted for one-time items. And in golf our brands set an industry sales record in 2007 finishing the year with double-digit sales increase for the fourth quarter. Successful innovations helped Titleist, FootJoy and Cobra achieve individual brand records as we also attained sales records in every product category and in all major markets for the year. Let’s look closer at the numbers for the quarter and the full year. For the fourth quarter net income from continuing operations was $191 million or $1.22 per diluted share. That’s down 23% from $1.59 in the year-ago quarter. Results included a net charge of $0.17 per share, which Craig will detail later. The year-ago quarter reflected a net gain for one-time items of $0.23 per share. Let me note these results exclude income from the divested wine business and the related gain on the sale of the wine business amounting to $0.06 per diluted share in both the current year and year-ago quarter. For one-time items, fourth quarter diluted earnings per share before charges and gains was $1.43, up 1% from $1.42 in the year-ago quarter. That includes income in the wine business through the data divestiture and comfortingly achieved our previously announced target for EPS before charges or gains to be in the range of up low-single-digits to down mid-single-digits. Our results were also a penny ahead of the first (inaudible) estimate of Wall Street security analysts. For the full year net income from continuing operations was $750 million or $4.79 per diluted share. That’s down 10% from $5.31 in 2006. Diluted earnings per share before charges and gains, again including wine, was $5.11, down 4% from $5.33 in 2006. These results were within the target range we estimated a year ago, which was for diluted earnings per share before charges and gains to be in the range of up low-single digits to down mid-single digits. Let’s take a look at our results on a continuing operating basis excluding wine. Fourth quarter sales were a record $2.22 billion, up 1%. On a comparable basis, excluding excise tax and foreign exchange, our total net sales would have been down low-single digits. Full year revenues were up half a percent to a record $8.56 billion. On a comparable basis, assuming we had owned Simonton through 2006 and excluding excise taxes and FX, we estimate sales for 2007 would have been off at a low-single-digit rate. Turning to operating income, operating income for the fourth quarter was $336 million, down 7%. Primarily reflecting adverse operating leverage in our home and hardware segment and restructuring and restructuring related items in home and hardware. For the full year operating income was down 5% to $1.38 billion. On a before-charges basis OI was down 3% for the fourth quarter and 4% for the year. Reviewing our asset investment returns measures for the year, including wine through the data divestiture, return on equity before charges and gains was 15.3%. After-tax return on net tangible assets before charges and gains was 22.5%. Working capital efficiency came in at 33.7% and return on investment capital before charges and gains was 9.2%. As we discussed, each quarter in 2007 we’ve been focused on two very important areas keys to our success. First, growing our premium spirits brand and, secondly, effectively managing through the US housing correction. In our spirits business we’re strategically focused on driving sustainable growth and revenue in addition to growth and volume. We believe this orientation fits well with our increased strength, in the premium aims of business, and our confidence in our ability to further build our high-return premium and premium brands. Quite simply, we believe stronger brand equity supports sustainable and profitable growth. That’s why our marketing efforts are more sharply focused than ever on creating consumer pull and generating (inaudible) for our brands rather than push marketing. To fuel consumer engagement and sales growth, our spirits business began 2007 with a new vision

[Craig P. Omtvedt:]

Thanks, Bruce. We’ll start with spirits and wine. I’d highlight that these results are on a continuing operations basis and that’s excluding the divested wine business. In the industry’s seasonal largest quarter spirits sales reached $859 million. That’s up 10%. Revenues in the quarter benefited from strong shipments of premium brands in the US, Australia, and the Global Duty Free Channel. They also benefited from favourable foreign exchange. Ono a comparable basis, excluding transition related sales in the year-ago quarter, fourth quarter sales in constant currency were up in the low- to mid-single-digit range. Fourth quarter operating income before one-time items came in at $246 million and that’s up 1%. Operating income trailed sales in the quarter largely due to the planned strong double-digit increase in brand spending that we outlined to you last quarter. For the full year, spirit sales were $2.61 billion. That’s up 4% to a record. Full-year operating income before charges/gains reached $725 million, up 8%. Operating margins for the year expanded more than 1 point to 28%, benefiting from favourable mix, higher pricing, and cost containment. Our total spirits portfolio grew revenues in the mid-single-digit range in constant currency for the year on slightly higher volumes. Our results reflected favourable mix shift as our global premium brands collectively grew at a much faster rate than our regional and national brands. Geographically, net sales for our spirits portfolio increased at a low-single-digit rate in the US and at a mid-single-digit rate in international markets on a constant currency basis. Strong growth in Australia, the Duty Free Channel, and emerging markets such as India, China, and Russia helped fuel our international performance. Looking closer at full-year performance for our major global brands, we’re pleased that several key brands posted double-digit growth in revenue, including our two largest – Jim Bean and Sauza – as well as Maker’s Mark and Teacher’s. That double-digit growth is on a constant currency basis net of excise taxes. Jim Bean, the world’s number one bourbon, surpassed 6 million cases on a low-single-digit increase in volume. That includes RTD product converted to 9-litre case equivalents. Jim Bean’s double-digit revenue gain reflected the success of our efforts to build brand equity, which in turn supports higher pricing. In addition to strong underlying demand, the brand also benefited from strong growth in Australia, where Jim Bean is the number one spirit of any kind. The introduction in Australia of Beam and Zero Sugar Cola and our new distribution arrangement through Coca-Cola Amatil further supported Jim Bean’s growth. Sauza, the world’s number two tequila, drove its double-digit revenue gain on a low-single-digit global case volume increase. The brand drove strong performance in the US, Canada, and Europe. Sauza also benefited from favourable mix shift and the initial sell-in of the recently re-launched wine of Hornitos super premium tequilas. Maker’s Mark continued its strong momentum with double-digit revenue growth and volumes that were up at a high-single-digit rate. Courvoisier ended the year up low single digits in revenue and volume benefiting from favourable mix shift to its high end VSOP and XO Marti’s. In both revenue and volume Dekuyper was relatively flat and Canadian Club was up low single digits. However, we did see favourable consumer trends on Canadian Club emerge late in the year. Laphroaig increased sales high single digits on low-single-digit volume growth, and Teacher’s scotch grew revenue double digits on high-single-digit volume growth and reached nearly 2 million cases on strong performance in India and Brazil. As we enter 2008 we feel better than ever about our strong position in the spirits market. We’re continuing to ramp up brand investments as our spirits group executes against its vision to build brands that people want to talk about. We expect the new brands position campaigns that were launched in late 2007 will benefit us here in 2008 and will focus on additional brand-building opportunities as well. Our confidence in the category is also underpinned by the attractive long-term demographics in the spirits industry. The continued consumer trend of trading up to premium brands, the thriving cocktail culture, and the fact that this is an industry that performs well in almost all economic conditions. For 2008 in spirits we’re targeting operating in spirits we’re targeting operating income before charges to grow at a mid- to high-single-digit rate. Turning to home and hardware, sales for the fourth quarter came in at $1.11 billion. That’s off 8% from a year ago. In a market that remains down double digits, our top line continues to reflect the successful execution of our share gain initiative. At the OI line, operating income was $63 million on a reported basis and down 14% to $139 million excluding charges that have been previously outlined by Bruce. OI before charges trailed sales largely due to adverse operating leverage. Our cost and productivity initiatives limited margin erosion to just 50 bips for the quarter, adjusting for last year’s non-cash commodity market-to-market adjustment that we highlighted to you last year. The US market dynamics that we saw in the first three quarters continued into the fourth. Primarily the fact that channels serving the replace/remodel market performed better than channels serving new-home construction. At the same time, we’re also benefitting from expansion in international markets that aren’t impacted by the US housing correction, including cabinetry in Canada, and faucets in Canada and Asia, and security products in Europe. Successful new products across categories, extension of brands into adjacent categories, and expansion with key customers further benefited our results. In a market where we revenue has declined in a double-digit rate, our quarterly revenues were off at a high-single-digit rate in our cabinetry, faucet, entry door, window, and tool storage groups. Meanwhile, Master Lock grew sales high single digits. Our cabinetry brands continued to gain share, benefitting from higher sales of upgrades and stable performance in the dealer channel, which drives more than half of our sales in the category. Moen, the number one faucet brand in North America, gained share and benefitted from higher sales of accessories and growth in international markets. At Therma-Tru share gains from sustained growth in the home centre channel and customer wins in the wholesale channel partly offset the impact of the market down charge. Simonton improved its sales comparisons and benefited from new products and productivity initiative. For our storage and security brands, demand for new product and international growth for Master Lock largely offset lower sales of tool sales product. Looking at the full year, home and hardware sales were $4.55 billion, off 3% from the prior year period. Revenues benefited from the first full year of results for Simonton, which we acquired in 2006. On a comparable basis, assuming we had owned Simonton in all of 2006, home and hardware sales were up 8% for the year. Full year operating income for home and hardware was off 17% to $599 million before charges and lower by 28% on a recorded basis. Regarding margins, while we were tracking to our target of 150 basis points through the first nine months, targeting that we had limited to 150 points of deterioration, we ended up down 220 basis points primarily due to the softer than expected market in the fourth quarter. In 2008 we’ll continuing focusing on outperforming the market and focusing on cost and productivity to promote efficiency, protect operating margins, and align our global supply chain to navigate the housing downturn. We estimate the home products market in 2007 was down low double digits on a revenue basis and we’re budgeting for similar market decline in 2008. We’re targeting to again outperform the market at the top line, to again minimize margin decline, and we’re targeting that operating income before charges in home and hardware will be down mid-single digits to a mid-teen rate. Now golf. Our golf business closed another record year with strong momentum. Fourth quarter revenues reached $245 million, up 13%. The top line benefited from growth in all product categories lead by a double-digit increase in sales of golf balls, as well as favourable foreign exchange. As is common in the seasonally smallest quarter of the year, operating income was negative, a loss of $6.7 million, down $1.9 million from the year-ago quarter. The line was impacted by the close out of certain golf products in advance of new product launches, R&D in brand building expenses, modest restructuring costs, and patent defence litigation costs. For the full year our golf revenues hit a new industry record of $1.4 billion, up 7%, on individual record performances for the Titleist, FootJoy and Cobra brands. Those results reflect the success of our industry-leading innovations. Record results in all product categories and records in all major markets, including the US, Canada, Europe, Korea, Japan, China, and Australia. Golf ball sales increased at a high-single-digit rate as we benefited from favourable mix shift to the next generation Titleist Pro V1 and NXT families that we launched in 2007. We continue to gain market share in golf balls, adding about 1 point in units and 2 points in dollars at on- and off-course US golf shops. Successful innovations, including the Titleist D1 and D2 drivers, the Cobra LV4 drivers and UFI irons, the FootJoy Realfit and the new DryJoy golf shoes further added to our results in 2007. Sales for the Cobra brand advanced at a double-digit rate for the year. At the operating income line, full year OI in golf was level with a year ago at $166 million. OI trailed sales for the year largely due to investments in R&D and our significant ramp up of investments in international markets. As we enter 2008 we look forward to capitalizing on the unparalleled strength of our brands. Our development of advanced technology products, our industry-leading sales organization, and our growth initiatives around the world. We’ve already launched several next-generation products this month, including a new four-model iron family from Titleist, and there’s more to come. We see excellent opportunities in international markets where golf is growing rapidly in popularity and we’re determined to capitalize on favourable long-term demographic trends in the US as well. Similar to our approach in 2007, we’ll continue to invest in the growth of our brands, to expand in international markets, and also to protect and defend our intellectual property in the interest of long-term returns. Including these initiatives, we’re targeting operating income before charges in golf to be up modestly in 2008. Now, before turning back to Bruce, there’s a few additional things I’d like to cover. First, our one-time items. In the quarter we recorded a net charge amounting to $0.17 per diluted share. That includes $57 million in after-tax restructuring and restructuring-related charges. These costs are primarily attributable to the consolidation of facilities in cabinetry and window production, closure of a cabinetry component operation, as well as our exit from two low-return categories – mainly the decorative columns product line in the US and the entry door market in the UK. Again, as Bruce indicated, cash on cash we expect these initiatives to pay back in about a year. Let me also point out that due to accounting requirements we have about $10 million to $15 million of after-tax charges that will carry into the first half of 2008. The fourth quarter restructuring charges were partly offset by a $28 million gain associated with the sale of the US Delmore distribution rights. Second, our free cash flow for the year came in at $520 million reflecting broad-based cash generation across our businesses. Again, I remind everybody that’s after dividends and capital expenditure. For 2008 we’re targeting free cash flow after dividends and capex in the range of $500 million to $600 million. Next, regarding our effective tax rate for 2007, we ended the year at 30.6% on a continuing operations basis before charges gained. That’s lower than anticipated. Driven by one-off items are a mix of 2007 profitability and the absence of the wine business, which is being reflected in discontinued operations. During 2008 we’re still finalizing our targeted rate, but expect we’ll be somewhere in the range of 32%. Staying with taxes for a moment, last quarter I shared with you that we had reached closure with the IRS regarding a capital loss carry forward position associated with our 2001-2002 tax returns. Pending congressional joint committee sign off, which we now anticipate sometime in the first half of 2008, we will return approximately $85 million in tax provisions to income. In addition, the joint committee’s sign off will allow us to recognize an additional $100 million of gain related to the recent sale of the wine business and the US rights to the Delmore. Regarding corporate G&A, as you’ve seen, we came in at $59 million; about $15 million below last year due to cost controls and accrual reductions related to expected lower incentive payouts. Looking to 2008, we expect corporate G&A to be at a run rate of $70 million to $75 million. With a debt to EBIDTA ratio of 2.5 times and a debt level $1.5 billion below last year, we ended the year with our balance sheet in extremely good shape. Lastly, I’d highlight that we provided a schedule attached to our news release laying out continuing operations numbers for each quarter of 2007 to help all of you with a better understanding of our continuing ops numbers. With that, let me turn things back to Bruce.

[Bruce A. Carbonari:]

As we look ahead we remain focused on growth and returns as we pursue a simple four-point strategy to drive value. It starts with driving growth by positioning our brands and businesses to outperform their respective markets. Second, we pursue business improvements by operating lean and flexible global supply chains and business processes. Third, we promote organizational excellence to develop winning cultures and associates. And finally, fourth, we seek to enhance shareholder returns by leveraging our breadth and balance and financial strength to drive value. In executing this strategy in 2008 we’re determined to continuing growing our premier spirits and golf brands and to continue to outperform in the home products industry. Also continuing to invest for the future in all of our businesses. That said, in an environment in which the US home products market is expected by many economists to decline double digits again in 2008, we’re budgeting accordingly. Based on our initial estimates, we’re targeting EPS before charges and gains to be in the range of up at a low single-digit rate to down at a high single-digit rate. That’s versus an EPS before charges and gains for continuing operations number of $5.06 for 2007. In the first quarter 2008 we’re targeting diluted earnings per share before charges and gains to be in the range of flat to down at a high single-digit rate. That’s compared to an EPS before charges and gains for continuing operations number of $0.81 for the year-ago quarter. While the US housing correction will continue to present challenges in 2008, we look to the future with confidence. We enter the year with enhanced flexibility on our balance sheet and higher returns following the sales of our wine business in the fourth quarter. We also remain sharply focused on growth returns and we continue to invest for the future; to build our brands, create innovative new products, expand into new markets, and optimize our supply chains. Combined with our unique breadth and balance, we believe these initiatives will continue to benefit us in 2008 and beyond and position us extremely well for when the housing market recovers. Thanks again for joining us. Now Craig and I would be happy to respond to your questions.

[Operator:]

(Operator Instructions). Your first question comes from Peter Lisnic of Robert Baird.

[John Hilsonteron (sic):]

Good morning. It’s actually John Hilsonteron (sic) for Pete. First off, thank you guys for kind of providing all the discontinued ops, or the kind of schedule for the previous quarters. That’s helpful.

[Bruce A. Carbonari:]

Yeah, we thought that would help you a lot.

[John Hilsonteron (sic):]

Looking at spirits, your operating income forecast for ’08. Just within that are we correct in kind of assuming brand spending is going to be up kind of double digits within that forecast or is brand spending pulling down a little bit?

[Bruce A. Carbonari:]

Yes, you can. I think everyone’s well aware, we’ve outlined this before, we had lower spend in the first half of ’07 because of the fact that we were taking the time to make sure that all of our programs were what we wanted them to be. That ramped up in the second half of the year and was more in line with our second half sales growth. So with the continuation of those programs we’re currently targeting that we’re going to be up high single digits to double digits with brand spend in ’08.

[John Hilsonteron (sic):]

Okay. And then just in terms of (inaudible) I understand you’re really priming the pump there for future growth, but at what point do the sales trends kind of reflect that? I mean, it seems like you’re definitely investing in the brands and revenue is growing faster than (inaudible) suggesting half a million, but is that something in the second half that the sales increases should become more proportionately brand spent?

[Bruce A. Carbonari:]

Yeah, I think in generally you can’t look at it as a broad-brush approach. We’ve spent a lot of time selectively looking at each of our brands and the portfolio brands that we have in the categories. So we are trying to, in many of the cases of the brands that we bought within the Allied acquisition, are positioned then in the right appropriate place. So we are in some cases taking pricing action as well as trying to create more pull with selective brands. It would be hard, John, to put a paintbrush across it. I’d say it’s very targeted and very selective based on which country we’re in and which market we’re in and which particular spirit we’re dealing with.

[Craig P. Omtvedt:]

And John, the other thing I would highlight here just to add to that is the fact that we would always expect that we’re going to leverage the sales so that you’ll see OI growth faster than sales. That’s a function of the fact that people continue to trade up to the more premium price product that gives us better margin. Then on top of that, when you layer in the price increases, we should always see operating income growing faster than sales.

[John Hilsonteron (sic):]

Okay. Thank you. I’ll get back in cue.

[Craig P. Omtvedt:]

Okay. Good.

[Operator:]

Your next question comes from Bryan Spillane, Banc of America Securities.

[Bruce A. Carbonari:]

Hi, Bryan.

[Craig P. Omtvedt:]

Hey, Bryan.

[Bryan Spillane:]

You know, just a follow up on the spirits segment. There’s been a lot of debate or speculation about just how strong the spirits industry has held up in light of the consumer weakness. I appreciate your comments about how spirits have performed well in all economic environments, but even this morning Discus (sic) is out saying that they’re expecting the industry to be weaker in ’08 versus ’07 in the US. So can you just pop it all to maybe more specifically if you’ve seen anything different in the industry today, has there been any change in maybe the premium spirits versus low end spirits? And then also, probably internationally, more specifically in Asia, whether or not you’ve seen any change at all in the environment over the last couple of months.

[Bruce A. Carbonari:]

Bryan, this is Bruce. What we see, and let’s talk about the US first, is we’ve been in this band of case growth and volume growth of between 2% and 4%. This year is a little slower than what we saw in ’06. We’ve got 2.5 to maybe a little higher than that rate. If you look back over the last 10 years you see it balancing in that range. When you peel back the onion there we see a continuation of people trading up to the higher premium spirits, whether it be premium or ultra premium. We have not seen any trading down here at all in the last several months. When you go to the international markets, again it’s market by market, but we see a continued trend towards western spirits. A strong trend towards western spirits. In many cases it starts with brown spirits. When you look at cognacs and scotches and so forth. Very strong in India and China. And then the continuation will follow, we believe, with the white spirits. So we have not seen any fundamental changes there either.

[Bryan Spillane:]

Okay. That’s great. And then your expectations in terms of profit growth for ’08 do or do not expect any change in trends. You expect the market to continue to hold up.

[Bruce A. Carbonari:]

Yes, we do expect the market to hold up again in that 2% to 4% bandwidth range on volume and the pricing to be in the continuation of the move into premium.

[Bryan Spillane:]

Okay. Great. Thanks a lot, guys.

[Operator:]

Your next question comes from Ivy Zelman of Zelman.

[Ivy Zelman:]

Good morning, guys. I wanted to congratulate you, Bruce, on your new role. Nice to hear you on the conference call. The focus today obviously with home under pressure you’ve done a great job in outperforming the market. I think if you can help us on two questions on home one would be, how did home improvement do relative to the separation of new construction, and what are your assumptions for the home improvement market in ’08 within the broader home outlook. And then separately, just on recent press releases out on the Callaway winning the patent on the Pro-V One, if you can tell us if that’s a big deal or not or what we should expect that could mean for you, if anything at all. Thank you.

[Bruce A. Carbonari:]

Sure, Ivy. Thanks. Let’s start with the home market. Going back, and this is the overall market I’m going to be talking about here in the US, we saw the new construction market in ’07 being worse than what we had anticipated. Down mid- to high-20% range.

[Craig P. Omtvedt:]

Yeah, high 20’s.

[Bruce A. Carbonari:]

And that the remodelling market was actually a little bit better than we had thought, down low single digits. Going into ’08 we think that the new construction market will still be down in the 20% range, but we’re going to see a little bit softer remodelling markets and that’s built into our assumptions. Maybe mid- to high-teens, down that particular range. We see a little bit of softening now in the fourth quarter and that was with what in fact we didn’t anticipate that it would drop off in the fourth quarter like it did. That was why we did some of the restructuring that we did, just to get ready for a more challenging market in the restructured, on the remodelled side of the business. As far as the litigation, that’s far from over. We have a kind of dispute going on with Callaway. As you may know, a jury in Delaware last month delivered an inconsistent verdict in the patent case. This patent case is between, obviously, Callaway and our Acushnet company, which holds the Titleist brand. It’s focused around the multi-layered solid construction, solid construction of the gold ball. There’s a couple things that I think we tried to do in our press release, but unfortunately Callaway’s press release got out there before ours. This is a jury verdict that came out. We are going to appeal it. It didn’t have all the evidence in the case. A couple of key things that weren’t there is that the patent office, the initial office action, determined these patents to be invalid. That was not submitted or able to be used during the case. The other is that the golf ball actually was out being sold before these patents were issued. So we think we have a very strong case and obviously we’re going to fight this and continue to fight it. It does not have at this point a material impact on our business.

[Craig P. Omtvedt:]

Ivy, just to come back home for a second on the assumptions for ’08, when Bruce said down kind of the mid-teens he was really talking about overall. So when you break it out right now we’re saying that for new constructions down kind of in the mid-20’s, repair and remodel down in the range of mid-single digits, and then overall coming back to his number of the overall market being down low double digits.

[Ivy Zelman:]

Okay. And Craig, just on that front, on the home improvement, looking at it a little bit more detail, if you could. Realizing you’re selling to the wholesale channel as well as the DIY channel, I would imagine if you could help us understand where the pressures might be greater. Are you seeing more pressure at DIY than you would be at home improvement and what your outlook is there.

[Craig P. Omtvedt:]

Well, let me turn that to Bruce.

[Bruce A. Carbonari:]

Yeah, let me do that. Ivy, what we’re seeing is a little inconsistency there. We’ve seen a drop off more in the home centre businesses where our DIY business, which is greater than 50% of our business, still remains fairly strong. So we have kind of mixed messages out there, if you will, and we’re trying to withstand that better as well.

[Ivy Zelman:]

Bruce, realizing the consumer bigger ticket items it’s perceived as more risk and the windows business and doors business where people are saving for hopefully dollars of energy savings, they might still be looking for upgrading and doing improvements to the home. Can you give us a little difference within home where there might be some good performers? I think you mentioned Simonton did well and a little bit more detail on that breakdown? Then I’ll go back in the cue. Thank you.

[Bruce A. Carbonari:]

Okay. Actually we’ve seen share gains in all of our businesses. And of course our business is, in our mix there is a mix of the new construction and the repair and model. We’re a little stronger on the repair and model side. Our businesses predominantly are businesses that are focused on the female consumer in the home, which is much more active and continues to have an aspiration to improve their kitchens and bathrooms and also, obviously, the exterior of their homes. There’s a lot of people still in the market. We’re continuing to bring new products out and keep them excited. And we’re seeing that continue to work well for us as we gain share in the challenging market. As far as channels go, we’ve seen obviously the ones that are more directly to do with construction have a lot more challenges during the course of ’07. We expect that to continue into ’08. The remodelling channels, as I said, the dealers, the small kitchen-bath boutique shops, and the larger home centres have performed better during the course of ’07.

[Operator:]

Your next question comes from Eric Bosshard of Cleveland Resource Company.

[Eric Bosshard:]

A couple things. First of all, I know it’s your tendency to give a broad range in terms of full-year guidance, but I don’t know. Craig or Bruce, can you just talk about what you’d look at or what we should think about in the market that determines if you end up at the high end of that range or the low end of the range?

[Bruce A. Carbonari:]

Are you specifically talking overall?

[Craig P. Omtvedt:]

Or the earnings per share?

[Eric Bosshard:]

I’m talking about the earnings per share guidance.

[Craig P. Omtvedt:]

The range obviously is, we have a market, specifically our home market, that is a market we’re trying to get as good a handle as we can on it. It’s a moving market. So we thought appropriately that we would take a more conservative approach to our forecasting and give you a wider range so that in fact we’re up front with you that there’s some volatility in this particular market. That’s really the heart behind it.

[Bruce A. Carbonari:]

Yeah. I kind of don’t want this to sound cute, but at the end of the day higher or low is going to be a function of our success in executing all the various initiatives that we’ve outlined. So at this point, let’s face it, we both know that the stars don’t always align to have everything be a home run. So at this point if everything works out then we could be at the high end and to the degree we’ve got things that go against us or the timelines aren’t quite what we expect, so on and so forth, then we’d be at the lower end.

[Eric Bosshard:]

Then let me ask the question better, perhaps. Is home where the greater uncertainty and volatility exist in ’08? Is that accurate? Is that the right way to think about it?

[Craig P. Omtvedt:]

Yeah, I would definitely say that the market conditions are a lot more volatile than the spirits and golf business. Yeah, definitely.

[Eric Bosshard:]

And within home it seems like the new construction is relatively clear and so the remodel seems to be the source of volatility. A follow up on a comment you made earlier, 4Q clearly was a surprise to you and others in terms of the remodel side. Can you just talk a little more about what you’re seeing and based on that what you expect from that to take place in ’08?

[Craig P. Omtvedt:]

Well, let me deal with the numbers first and then Bruce can deal with the overall kind of business environment. The fourth quarter in homes certainly was softer than we expected, but it wasn’t singularly a function of repair and remodel. That certainly was part of it, but so was new construction as well. So that certainly baked into our numbers. But as you look at our other businesses, as you look at spirits and you look at golf, they were largely in line with what our expectation was for the fourth quarter. So coming back to your point, just from the standpoint of our execution, we’ve got the issue of whether or not we’re able to pull off everything that we’re planning to do within home. So you’ve really got two dynamics that work here this year

[Bruce A. Carbonari:]

And Eric, let me just expand a little bit on the remodelling side. The fourth quarter and the first quarter are our seasonally slowest quarters, normally. Third quarter is where the consumer isn’t as active in doing their kitchen over actually because they have the holiday season they’re addressing. So it’s off a basis that’s fairly low anyways. I think just the amount of people cutting back on promotions and whatnot during the time that the consumer wasn’t there also I think helped slow down this period of time. We’re really going to get the signals about how the year will play out, I would say, probably as we get towards the spring. Once again, obviously the new construction market starts heating up and the sales market starts heating up then, but also the consumer becomes more active in the remodelling market then as well.

[Eric Bosshard:]

And then just one follow up, if I could. Craig, with the balance sheet improved to where it is now, and I understand what’s going on with Vin & Sprit, but have you thought about, are share repurchases something that are back on the table for ’08?

[Craig P. Omtvedt:]

Well, clearly with the balance sheet the way it is, at the end of the day we don’t do V&S. We’ve got a very strong balance sheet and we’ll be assessing all of our options. As you well know, nothing’s changed in terms of our long-term dynamic in terms of how we look at the call on cash. First there’s internal capex, then we look at acquisitions and share buy-back, and for us everything’s driven in terms of what we think provides the best return to the shareholder and is IRR driven. Then we default to the third category, which is dividends. So clearly if we don’t do V&S that’s something that’s back as part of the dynamic, but I wouldn’t speculate on what we would do or wouldn’t do. That’s a discussion with the board.

[Eric Bosshard:]

Perfect. Thank you.

[Operator:]

Your next question comes from Ann Gurkin of Davenport.

[Ann Gurkin:]

Good morning. Regarding Vin & Sprit, will you comment at all whether you think this auction process will be completed by mid-year?

[Bruce A. Carbonari:]

No. We’ve been asked by the Swedish government not to comment at all during this confidential stage. As a practice, when we are involved in any type of auction process we don’t comment during the process. So we are not going to be going back and giving you little bits of information along the way here. What I can tell you again is this is a process that is a little bit different. I’ve said this time and time again where usually it’s a follow-through business. This is a privatization process which involves the Swedish government. So they are really calling all the shots and running the process and we respect what they’re doing and we’re going to follow by the rules.

[Ann Gurkin:]

They’ve commented that they have to be completed by year end, which to me seems like a long time frame. That’s why I was curious. Okay. In terms of innovation, are you pulling back at all on your level of innovation in the home space?

[Craig P. Omtvedt:]

No, what we’re doing is we’re doing more selective. Obviously each business has its own development process. We are cutting back on certain things that I’d say were maybe longer term, longer stretch, higher return items that are maybe four or five year higher risk profile items. But the amount of things that we have in the near term, and you know us well enough that we have quite a pipeline of new products, is that a quarter of that is still, we have surgically gone into each of the businesses and looked for opportunities not only to continue to position ourselves better for when this business recovers, but also position on a growth side, but also on the cost side, as well.

[Ann Gurkin:]

Okay. And then with respect to golf, have you factored in an economic slowdown in that business?

[Craig P. Omtvedt:]

Yeah, we’re looking at the business around the play has slightly increased over the last couple of years. We expect that to be about the same. We’re getting a lot of growth on the international side of the market. We have some very explosive markets right now and we’re investing heavily behind those markets that continue to, you know, we have great positions and great brands here. So we want to position them well on these international markets as well.

[Bruce A. Carbonari:]

So, Ann, we’re basically for US rounds of play budgeting the way we have for the last couple of years.

[Ann Gurkin:]

Okay. That’s great. Thank you.

[Operator:]

Your next question comes from Andrew Sawyer of Goldman Sachs.

[Andrew Sawyer:]

I was just wondering if you guys could talk a little bit about multi-year planning basis for home and hardware. At what point are you guys thinking there might be an upturn? I know you mentioned pulling back a bit on some of your longer term investments. Could you frame up to us how you’re thinking about adapting to this industry as it potentially rebounds? Also on a side note to that, are you seeing any sort of industry consolidation or smaller players exit as we’ve gone through this difficult period?

[Craig P. Omtvedt:]

Let me address the first one. To be honest with you, we spent about 90% of our time focusing on the near term. Obviously our heart and soul is focused on outperforming the market as it exists today. To be able to call when it’s going to come back is hard to do and we wouldn’t be doing that at this point. So we really spent our time focusing on ’08. We also obviously looked to see longer term if some fundamentals have changed in the market. We don’t see that. We still see that this market, once it flushes out the inventory and gets back to a more normal rate and the consumer gets back into the party, that this is a market that should be in the 1.8 to 1.9 housing starts and that’s a very healthy level for this market. When and where we get there and calling it specifically, we didn’t spend a lot of time doing that. We really spent most of our time looking at ’08 and focusing on ’08. Your second question was?

[Andrew Sawyer:]

Just in regard to any industry consolidation, marginal players, exiting, that sort of thing.

[Craig P. Omtvedt:]

No, we haven’t. I think everybody is trying to figure out how to compete in this market. I don’t know what’ll happen here in the near term, but obviously there’s some people who can’t respond as well as some of the people like ourselves and the position that we’re in. But we haven’t seen that. I also would tell you that it’s probably a little early yet on seeing any of the type of M&A activity that you would expect to see. I think people, at least people we talk to, are still smirking off of old numbers and old multiples. That will change over time and then bring an opportunity there.

[Andrew Sawyer:]

And then just quickly on spirits, it seems from my (inaudible) you’re seeing a narrowing in the performance gap between Jack Daniels and Jim Bean, especially in the US. Can you just comment on what you guys are seeing there? They seem to be attributing it to some economic softness and people trading down out of Jack, but you guys have also put some money to work there. Could you just talk about how that dynamic is playing right now?

[Craig P. Omtvedt:]

Sure. I assume you’re talking about the US market here?

[Andrew Sawyer:]

Yes.

[Craig P. Omtvedt:]

Yeah, we have a great portfolio of bourbon brands, not only from just Jim, but you go right up the stream to small batches and Maker’s Mark and Knob Creek and so forth, and we are putting that portfolio to work differently than maybe we’ve done in the past. And we aren’t relying on the traditional push methodologies that have really been part of this industry for a long time where we should just introduce some new concepts and some of them are catching on. Some of them are working for us. We are testing those continuously and challenging ourselves to think differently about the business. I think we’ve been rewarded for that.

[Andrew Sawyer:]

Thanks a lot guys.

[Operator:]

At this time we have time for one final question. From Todd Duvick of Banc of America.

[Todd Duvick:]

Good morning. Most of my questions have been answered, but I thought I’d take another run at one, Craig, and ask you to comment on an old standard. With respect to V&S, I understand that there’s very little that you can say, but there are press reports out that indicative bids were due this week. Can you confirm whether that was the case?

[Craig P. Omtvedt:]

Candidly, I can’t. Given, as Bruce outlined before, the confidentiality that’s been requested by the Swedish government, we are at this point not commenting out of respect for that request.

[Todd Duvick:]

Okay. Fair enough. And then, Craig, with respect to the balance sheet, obviously you’ve done a lot of work in terms of reducing debt over the last year or so and are certainly in a very strong position. With respect to a potential V&S acquisition, can you just reiterate your view on the importance of a credit rating and your preference, even though I know that credit rating is really out of your hands?

[Craig P. Omtvedt:]

Sure. This is going to be absolutely consistent with what we’ve said previously. Our default position is one of wanting to be investment grade rated. We think that long-term that is exactly the right place for us to be. As I’ve outlined before, that’s both from liquidity as well as from a cost-of-capital standpoint. But we have always consistently said never say never so that we evaluate the situation and make the decision that we think is the right longer term decision. So that’s where we continue today. I think the fact that as you look at where we are with our 1231 balance sheet, obviously with the sale of wine we’ve paid down $1.5 billion of debt this year. So you’re right, we’re in a very good position. Those have all been conscious decisions and I think it reflects the fact that we’re prudent in the way we approach the balance sheet and our overall debt to cap structure.

[Todd Duvick:]

Okay. Very good. Thank you, Craig.

[Bruce A. Carbonari:]

Thanks, Todd. Thanks again for joining us. We look forward to delivering in 2008 against our near-term goals, investing in our brands, outperforming our markets, and leveraging our present balance to deliver superior growth in returns. We look forward to speaking with you again in April. Thank you.

[Operator:]

Thank you for participating in today’s fourth quarter year-end earnings conference call. This call will be available for replay beginning at 1