Fortune Brands Announces Third Quarter Results

Deerfield, Ill., Oct. 24 - Fortune Brands, Inc., the company behind leading consumer brands including Jim Beam, Titleist and Moen, today reported results for the third quarter of 2008.

In an increasingly challenging economic environment, sales growth for brands including Jim Beam, Maker’s Mark, Courvoisier, Titleist and Master Lock, plus productivity initiatives and cost controls, helped the company deliver results within its previously announced earnings target range. Reflecting the benefit of a net gain due to previously announced one-time items, reported earnings per diluted share increased 66% to $2.21 for the quarter. Excluding one-time items, diluted EPS from continuing operations was $1.11, down 17%. Net sales were off 10% at $1.92 billion.

“Despite the adverse impact of the sustained U.S. housing correction, the global credit crisis, and weakening consumer confidence, we delivered on our third-quarter earnings target and also made significant progress positioning Fortune Brands for future growth,” said Bruce Carbonari, chairman and chief executive officer of Fortune Brands.

Spirits results in the quarter benefited from the timing of shipments in the United States, higher pricing, and favorable product mix, partly offset by the continued adverse impact of the excise tax increase in Australia on ready-to-drink spirits products. Despite softer-than-anticipated conditions in the home products market, Moen, Master Lock and the company’s cabinetry brands continued to gain share. Double-digit sales gains for the company’s golf brands in key Asian markets partly offset soft U.S. and European demand for golf products.

Focus on Winning in the Marketplace

“As we carefully manage through the current environment, we remain focused on managing our costs, generating cash flow and maintaining a strong balance sheet,” Carbonari said. “We’re continuing to contain costs and protect operating margins through productivity initiatives and by aligning manufacturing capacity with marketplace conditions, including further capacity reductions in home products.”

“At the same time, our teams across Fortune Brands remain focused on outperforming our markets, and we believe challenging times provide opportunities to gain competitive advantage and win profitable market share. To capitalize on these opportunities in the current environment, we’re very carefully targeting investments to build our brands through development of new products, new markets and expanded customer relationships. These initiatives are paying off in several ways. For example, we’re driving revenue growth for our major premium spirits brands that outpaces case volume growth, we’re fueling double-digit growth in key emerging markets for brands in each of our businesses, and we’ve developed a tremendous lineup of new golf products.”

Significant Third-Quarter Progress in Spirits Business

“In the third quarter, we also made significant progress to proactively position Fortune Brands for future growth,” Carbonari continued. “Most notably, we efficiently unwound our spirits partnership with V&S Group on very favorable terms: We repurchased the minority interest in our spirits business at an attractive valuation; we received a $230 million pre-tax payment from Pernod Ricard to accelerate the end of our U.S. distribution joint venture with the V&S brands; we established our new spirits sales and distribution platform in the U.S. and globally; and we acquired Cruzan Rum at an attractive price, giving us an excellent position in a growing premium category. Taken together, these moves enable our highly profitable spirits business to look to the future with more clarity, a simpler sales structure, and prospects for strong long-term growth.”

For the third quarter of 2008:

• Net income was $335.9 million, or $2.21 per diluted share, up 66% from $1.33 per share in the year-ago quarter.

• Excluding one-time items in both the current and prior-year periods, diluted EPS before charges/gains from continuing operations was $1.11, down 17% from $1.34 in the year-ago quarter.

• Net sales from continuing operations were $1.92 billion, down 10%.

• Operating income was $254.8 million.
• Return on equity before charges/gains was 12%.
• Return on invested capital before charges/gains was 8%.

“We’re pleased that during the third quarter we increased the dividend 5%, the 12th consecutive annual increase since we began trading as Fortune Brands,” Carbonari added.

Outlook for Fourth Quarter and Full Year

“It’s clear the current economic environment will present near-term challenges as consumers navigate the global credit crisis and as the U.S. housing correction continues,” Carbonari said. “Consumers are taking a very cautious approach, especially to big-ticket discretionary purchases such as major remodeling projects. Even so, we’ll benefit from the fact that nearly 60% of our profits now come from the relatively stable distilled spirits category. We have powerful brands, great new products in the marketplace, and proactive share-gain and productivity initiatives across categories that will continue to serve us well in this environment.

“In the fourth quarter, results for our spirits business will reflect the one-time impact of a strategic initiative related to building our new route to market in the U.S. Associated with the enhanced U.S. sales organization established earlier this month, our spirits business is introducing a new distributor partnership program to further improve our service and add value for our distributors. As part of this program, we’re implementing a new inventory management model that will rely on leaner and more consistent U.S. distributor inventory levels going forward. While lower year-over-year distributor inventories will result in a one-time adverse operating income comparison in the fourth quarter, we believe supporting faster inventory turns for our U.S. distributor partners creates valuable efficiencies for them and for us, and will further improve our competitive position in our largest market.

“Given that the current economic environment has become more challenging and uncertain than anyone had anticipated, we are approaching our earnings targets with caution,” Carbonari said. “For the fourth quarter, reflecting the economic environment and the impact of our spirits initiatives, we’re targeting earnings per share before charges/gains to be down at a low-30s-to-high-40s percentage rate versus $1.39 a year ago. Nearly half of the anticipated fourth-quarter decline is attributable to the Australia RTD tax issue and our spirits route-to-market initiatives. For the full year, we are now targeting 2008 results to be down at a high-teens-to-mid-20s percentage rate compared to $5.06 in 2007.”

Reflecting the benefit of the $142 million after-tax payment from Pernod Ricard, the company also announced that it is now targeting free cash flow for 2008 to be in the range of $475-550 million after dividends and capital expenditures.

“As we look ahead, although near-term challenges will carry into 2009, we feel very good about our ability to manage through this environment and very positive about Fortune Brands’ long-term prospects,” Carbonari continued. “Our long-term confidence is underscored by several important strengths: We have powerful consumer brands, we compete in consumer categories with very attractive long-term fundamentals, we generate strong cash flow, and we’re undertaking important initiatives to outperform our categories and position the company for strong performance over the long haul.”