Beam Therapeutics Inc. (BEAM) Q2 2010 Earnings Report, Transcript and Summary

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

Thank you. Good morning. Welcome to our discussion of Fortune Brands' Seconds Quarter Results. Please note that our presentation includes forward-looking statements. These statements are subject to risks and uncertainties and include those listed in cautionary language at the end of our news release. Our actual results could differ materially from those targeted. The presentation also includes certain non-GAAP measures that are reconciled to the most closely comparable GAAP measure in our news release or on our website in the Supplemental Information linked to the webcast page. Fortune Brands delivered a strong second quarter sales growth and double-digit growth in earnings, and we're on track for a strong full year results. In the quarter, we achieved broad-based share gains and levered well against lower-cost structures. We also benefit from the pull forward of sales by customers in our Home and Spirits segment, as well as favorable comparisons. Each of our three brand groups grew sales faster than our markets, delivering operating margins at or near the top of our Consumer segments and outperformed our expectations in the quarter. Fortune Brands is executing well in delivering compelling new products, global expansion initiatives and successful brand investment programs. Our consistently high quality and strong customer service are also helping us expand key customer relationships. In Spirits, we grew both net sales and case volumes at a mid-single digit rate in the quarter, as brands such as Maker’s Mark bourbon, Courvoisier cognac, Hornitos Tequila, Cruzan Rum and Red Stag by Jim Beam helped fuel growth. Our Home and Security brands grew sales at 13%, benefiting from share gains fueled by new products, new offerings across price points and expanded relationships with key customers. Strong growth in international markets in double-digit sales gains for the Titleist Pro V1 golf ball and FootJoy shoes helped drive our performance in Golf. Now let's take a closer look at the numbers for the quarter. Net sales were $1.9 billion, that's up 9%. Sales were also 9% on a comparable basis. That measure excludes excise tax, foreign exchange and acquisitions and divestitures. By brand group, comparable net sales were up 5% in Spirits, 12% in Home and Security and up 8% in Golf. Let me note that a few factors added to our strong underlying performance in the quarter. These factors included the pull-forward demand for Home products due to the expiration of the U.S. home buyers tax credit and the timing of Spirit orders in various markets. We estimate that these factors benefited the second quarter at the expenses of the third quarter by approximately $0.10 to $0.15 per share. Net income was $227.4 million or $1.48 per diluted share. We recorded a net gain of $0.50 in the quarter, and Craig will touch on the charges and gains a little later. Excluding the charges and gains, diluted earnings per share was $0.98, that's up 40% from $0.70 in the year-ago quarter. Reported operating income came in at $273.5 million. On a before-charges-and-gain basis, operating income was $263.7 million for the quarter. That's up 29%, reflecting a strong year-over-year growth in operating income in both Home & Security and Golf. Reviewing our assets and investment return measures, after-tax return on net tangible assets before charge and gains was 17%. Working capital efficiency came in at 36%. Asset-maturing inventories for our Spirits business, working capital efficiency was 19%. Return on equity before charges and gains was 8%, and return on invested capital before charges and gains was 6%. We believe the results we've delivered this year reflect how well Fortune Brands is positioned to compete in the current economic environment. The strategic initiatives we undertook over the past two to three years are helping us to the top line, the bottom line and on our balance sheet. During the economic downturn, we focused on the three Cs: the consumer; the costs, our costs; and cash. First, adjusting to the evolving consumer environment, we stay close to our customers and made sensible brand investments leading to share gains. The focus of our investments included brand building programs, new product development and expanded offerings across price points, all aiming at attracting consumers to our brand. We also continue to strategically expand to new markets and segments by investing in adjacent product categories and promising international markets. Second, we were proactive on cost and supply chain flexibility. This included accelerating several key productivity initiatives and reducing our manufacturing footprint, especially in home products. These initiatives has helped create favorable operating leverage as volume has returned. At the same time, we've reserved the flexibility to ramp up production as needed to meet future demand. And third, we've aggressively managed our cash. Company-wide cash management initiatives, including sharp focus on the use of working capital has helped generate strong free cash flow. These cash initiatives, along with the proceeds from the sale of Cobra and three local spirits brands in Germany, give us greater financial flexibility, enable us to focus our priorities to pay down debt. We continue to make sensible strategic investments to build on our strong foundation. Our investments are designed to further build key brands, compete effectively in the global marketplace, ensure we have lean and flexible supply chain and to position each Fortune Brands to outperform our categories over the long haul. We're prudently increasing strategic investment in all three of our businesses this year, and as we've discussed before, that includes a double-digit increase behind our highest return to Spirits brand. On the growth side, we're continuing to fill out our new product pipeline and pop up innovative new products across our businesses. These includes Spirit innovation, such as the new Fort Maker’s 46 launched just this month, which will add incrementally to Maker’s Mark 2010 volume at a premium price. We've also just launched Cruzan 9, an excellent entry into the growing spice rum category, and we're benefiting from launches earlier in the year, such as the expansion of our Cocktail Cube line, new RTD products in Australia, Teacher's Origin in India and the relaunch of Double Aged Jim Beam Black. And of course, there's Red Stag by Jim Beam, which has simply been a home run new product that's bringing new consumers to the bourbon category. Since its introduction in the second quarter of 2009, we've shipped more than 200,000 cases of Red Stag, along with Maker’s Mark, Red Stag has helped fuel our share gains in the U.S. Bourbon segment. In Home and Security, Moen is feeling growth with both new products in incremental innovations. We've just launched the innovative, first of its kind, Moen Spot Resist finish. And the brand continues to grow with new eco-performance faucets and showerheads. Energy-efficient windows and doors and new cabinetry styles across price points are also adding to our results. New products, coupled with our industry-leading lead times and after-sales service are helping us expand relationships with key Home Products customers. As a result, we're getting shelf space, winning new business and taking profitable market share. In Golf, the new AP2 and AP1 irons are feeling growth for Titleist. And the new ICON and sport lines are driving strong growth and share gains for FootJoy. We've just launched a new Vokey design, WedgeWorks exclusive line, which brings customization to wedges for the first time, and the new Titleist 910 drivers are being validated on tour prior to consumer launch later this year. In Japan, we've launched a new premium-priced Titleist driver and a new Golf ball line, specifically, for the Japanese market. And these products are off to an excellent start. Our strategic investments are also helping us expand the promising international markets. As a result, our Spirits brands are demonstrating some of their strongest growth trends in the BRIC countries, including sustained growth in India and a rebound in Russia. Moen will more than double its number of show rooms in China this year, and it continues to expand in China, India and Latin America. Moen and Kitchen Craft Cabinets are growing in Canada. Master Lock is gaining in Europe, Latin America and China, and our Golf brands are growing very strongly in the Pacific basin. On the brand-building front, we're investing to reach consumers in both new and traditional ways. We're increasingly relying on digital media across all of our brands. For example, in our Spirits brands, we've increased the percentage of media spend dedicated to digital media to about 35%. That's up from less than 20% last year. These investments include Jim Beam program, such as our innovative partnership with ESPN, our Kid Rock Digital Download Program and digital media for Hornitos Tequila. At the same time, we've lost the first-ever TV campaign for Hornitos. We're also seeing favorable brand-health results in response to Jim Beam's return to TV advertising, and Moen return to TV advertising earlier this year to capitalize on the more favorable consumer environment. We're also supporting our Golf brands with highly targeted advertising and marketing programs. The development of online communities of brand fans, as well as the industry's most advanced on-course ball fitting program. And now moving on to the supply chain organizational initiatives. We've also invested in aligning our organizations and supply chains to win in this marketplace. In Spirits, we created a more effective and efficient organization with six focus units: three in the U.S. and three internationally, as well as a U.S. sales organization aligned by distributor rather than region. At the same time, we're progressing plans to consolidate our U.S. Bally facilities. In Home Products, even as we've reduced our manufacturing footprint by about 40% over the course of the downturn, we initiated productivity enhancements, including lean manufacturing processes, product platform simplifications and improved purchasing and sourcing. We've taken a very proactive approach and substantially completed our major restructuring initiatives over a year ago. This has enabled us to focus on growing the top line. As a result of our moves in Home Products, we have lean and flexible supply chain, able to ramp up to meet consumer and in customer demand. For example, the expansion of our distributor's assembly model in cabinetry has brought assembly closer to key customers while reducing freight cost. We're pleased that our strategies have given us the flexibility to accommodate multiple recent customer wins in cabinetry and at Moen, and we're adding jobs to support these new programs. At our Golf business, cost of productivity initiatives, combined with the success of our trusted brands, has enabled us to deliver industry-leading operating margins. And to support the growth prospects for our Golf business in Asia, we've invested in a new ball plate in Thailand, that has just begun initial production. We've also completed a previously announced sale of the Cobra Golf brand earlier in the quarter. Now here's Craig with a closer look at our markets and the second quarter performance for each of our segments.

Thanks, Bruce. Now starting with Spirits and the overall market. We continue to expect that the global Spirits market will grow in the range of 1% to 2% for the year. Here in the first half, we believe the global market performed slightly better than that. Here in the U.S. in the first half, the market was up in the range of 2% to 3%, and we've seen some positive signs of consumers returning to the on-premise channel as well as modest return to premiumisation. We believe both bode well for the pricing and mix environment in the future. In Europe, the markets in the U.K. and Germany are up about 1%, while Spain is off, but improving. The market is flat in Australia, and we're seeing strong growth in Russia, India and Duty Free. Regarding our numbers for the quarter, our Spirits sales for the quarter came in at $631 million, that's up 5% on both a reported and a comparable basis. Our case volumes were similarly up 5%. Our second quarter results benefited from the timing of sales in various markets and higher bulk sales, that together, boosted our Spirits revenue by approximately 2% in the quarter. Geographically, comparable net sales for our brands were up low to mid-single digits in the U.S. and up mid-single digits, internationally. Our results outside the U.S. benefited from double-digit sales growth in the U.K., Spain, Germany, India, Brazil, Russia and Duty Free, and that was partly offset by soft results in Australia and Mexico. At the operating income line, OI before charges came in at $147 million for the quarter and that's up 4%. On a comparable basis, OI was up at a similar rate. The benefit of bulk sales and favorable manufacturing variances offset both the increased strategic investments we've previously discussed, as well as, targeted price promotions to enhance our long-term competitive position. Looking at the performance of our key brands on a year-to-date basis. Net sales in constant currency, and excluding excise taxes, are higher for each of our three Spirits consumer categories. In Bourbon, our industry-leading portfolio is up at a low-single digit range. Strong performance for Jim Beam in the U.S. is largely offsetting soft market conditions in Australia. Red Stag, Jim Beam Black and Jim Beam Rye are all contributing to the brand share gains in the U.S. Maker’s Mark is running solid growth in the U.S. and in promising international markets. And Knob Creek continues to grow at a double-digit rate. I would highlight that's up against supply constraints in the prior year. In our mixables category, which includes tequila, rum, vodka, gin and cordials, our sales are up low-single digits. According to the latest Nielsen sell-through data, Sauza is outperforming the competitive U.S. tequila market in both dollars in volume. Cruzan Rum sales are higher as the brand gains momentum and market share in the U.S. EFFEN Vodka and our economy vodkas are performing well. Larios gin is up double digits on strong performance in Spain. And in cordials, DeKuyper sales are off in the U.S. while Sours is up in Europe. In the Classics category, which again includes our cognac, Canadian and Scotch whiskeys, our year-to-date net sales are up double digits. Sales of Courvoisier are up at a strong double-digit rate on broad-based growth across key markets, and that includes the U.S., U.K. and Duty Free. Canadian Club sales are up modestly. Strong results in India, Brazil and the U.K. are helping drive double-digit growth for Teacher's Scotch. Sales of Laphroaig are up double-digit rate on strong shipments in the U.S. and the U.K. and Whiskey DYC is up mid-single digits in its core Spain market. Looking at the rest of the year in Spirits, and as we've discussed before, we continue to increase brand and strategic investments to help drive profitable growth over the long-term. And we're pleased with the progress we've already made to build momentum behind our brands to innovate and to gain market share. That said, while we feel very good about the things we're doing in our Spirits business, second half operating income in Spirits will reflect a hit -- and I'll remind everybody, that's a hit of approximately $10 million to $15 million from FX at current rates. As a result of that adverse FX impact, our OI margins will likely be 50 to 100 basis points below our targeted run rate of approximately 23%. Even so, that continues to put us in the top tier in the industry. Turning to Home & Security, we discussed last quarter that we expect that the overall Home products market would be up at a low-single digit rate in 2010, and that remains our expectation. That said, the shape of the market this year is a little different than we originally anticipated. Spending in the Home Products market on replace-remodel and new construction and cabinetry was frankly stronger than we expected in the first half. Given the pull forward in demand due to the expiration of the home buyer tax credit and continuing signs of consumer caution, we believe the markets growth in the second half will be at a more moderate pace than it was in the first. Our full year assumptions about the market now reflect new construction spending, up in the range of 10% to 15% with overall replace-remodel spending continue to be flat to up low-single digits and spending for cabinetry off low-single digits. Looking at our numbers for the quarter. Home & Security sales came in at $878 million, up a healthy 13%, reflecting better year-over-year market conditions, broad-based share gains and pull forward related to the home buyer tax credit here in the U.S. Operating income before charges in Home and Security was $83 million, and that's up an outstanding 89%. We're pleased that our lower cost structures benefited the bottom line as we leveraged our incremental volume at 38% in the quarter and has now 44% in the first half. As we indicated what happened last quarter, we began to see the adverse impact of higher raw material costs in Q2. Here in the back half, higher cost for materials such as brass, zinc and resins, as well as for ocean freight, will be an increasing headwind. Drilling down, we drove growth across all of our product platforms. Sales for Moen grew at a strong double-digit rate on broad-based gains across channels including retail, wholesale, accessories and international markets. The number one faucet brand in North America gained share in both the Replace-Remodel and new Construction segments in the quarter. Our Cabinet brands continue to outperform the market with high-single digit growth. Cabinet product mix improved, and we saw gains across our customer base, including particularly, robust growth with builders as the market benefited from the home buyer tax credit. Sales for our windows and door brands were up at a strong double-digit rate, while Simonton and Therma-Tru benefited from share gains with the consumer tax credit for the purchase of energy-efficient products, particularly, helping Simonton. Sales of security and storage products grew at a mid-single digit rate as Master Lock continue to expand internationally, and water leak grew in the home center channel. As we look to the back half of the year at Home & Security, consumers remain cautious, and the strength of the market will depend to a large degree on the face of the overall economic recovery. We'll also be facing more headwinds than we saw in the first half. First, as we called out last quarter, we'll see the impact of the expiration of the U.S. home buyer tax credit, which as we said pulled demand forward into the first half. Second, as I just mentioned, we'll face higher year-over-year cost for commodities and transportation in the second half. Third, we have incremental strategic investments, and that includes cost for displays related to new business we've won that will contribute to results in 2011. And fourth, performance improvement programs will start to annualize in the second half making comparisons more challenging. As a reminder, in the fourth quarter, we'll be comping against Q4 '09, in which operating income actually increased year-over-year against Q4 '08. All that said, the market remains better than it was a year ago, and we still expect the market to be up low-single digits for the year. Even with the diminishing operating leverage here in the second half, we now expect full year OI before charges margins will be up in the range of two points versus 2009. We also continue to expect that we'll leverage in the range of the 30% for the full year that we outlined before. Summing things up in Home & Security, we feel very good about things we're doing in the marketplace and on the supply-chain front, and we feel well positioned to continue outperforming the Home Products market. Now looking at Golf, we continue to expect that world-wide spending on Golf equipment will grow at a low-single digit rate for the year. After soft industry conditions in the first quarter, we saw more favorable trends in Q2 as year-over-year industry shipments improved in most product categories. The second quarter is seasonally important in the Golf industry, and we're pleased that we outperformed the category with growth across all product categories and in all major geographies. Our reported second quarter Golf sales were $389 million and that's up 6%. On a comparable basis, and constant currency and excluding Cobra, sales were 8% higher. Geographically, our comparable sales were up at a high-single digit rate in both the U.S. and in international markets. In constant currency, sales in Europe climbed at a mid-single digit rate, while Japan, Korea and China were all up double digits. Operating income before charges and the gain on the sale of Cobra came in at $54 million, up 29%. OI benefited from favorable product mix, as well as lower cost structures. Sales of Golf balls increase at a high-single digit rate benefiting from double-digit growth for the Titleist Pro V1, as well as shipments of the newly introduced NXT and DT SoLo model. Sales of Titleist clubs were up at a mid single-digit rate on strong acceptance for the new Titleist AP1, AP2, CB and MB iron. Let me also note the Titleist has been the most played iron, wedge and putter on the PGA Tour so far this season. And of course, Titleist continues to lead the bulk count across the world-wide professional tours. FootJoy is building strong momentum as the brand's footwear sales increase at a double-digit rate for the second consecutive quarter, benefiting from new sales and models, including the new flagship ICON line, as well as the new Sports Series. Sales of gloves and accessories grew modestly. We entered the back half of the year in a very strong position in Golf. We have excellent product in the market, our inventories are in good shape. We're excited about what we have in our new product pipeline, and our international investments are paying off in strong growth. We do see an opportunity to build on our momentum and extend our industry leadership by continuing to invest in our brand building, new product development and international growth initiatives. In addition to continuing higher year-over-year investments, let me remind everyone that due to the seasonality of the category, the third quarter is traditionally more challenging, and the fourth quarter historically generates a loss in Golf. Even so, we expect our full year margins in Golf will be a point or so better versus the prior year. Now before turning things back to Bruce, a few additional items. Reviewing gains and charges in the quarter, we recorded net structuring and related charges amounting to about $0.01 per share related to completion of previously announced supply chain initiatives. On the gain side, a couple of items. The gain on the sale of Cobra amounted to $10 million or $0.07 and a gain of $68 million or $0.44 per share related to favorable settlement of routine income tax audits in the U.S. and Spain. All told, these items add up to a net gain of $0.50 per share in the quarter. With regard to our tax rate, we continue to target that our full year rate will be in the 26% to 27% range. And then turning to cash flow, we're now targeting to generate free cash flow in 2010 in the range of $525 million to $600 million. Our target includes our anticipated higher earnings, as well as ongoing cash flow management efforts. The increase from our prior target of $375 million to $475 million reflects the benefit of asset sales. As a reminder here, our measure reflects cash flow from operations, less net capital expenditures. I'd also note here that the target represents an earnings to free cash flow conversion rate well in excess of 100%. Now back to Bruce.

Thanks, Craig. Looking to the full year for Fortune Brands and consistent with a view we've discussed throughout the year, the face of the economic recovery continues to be gradual and uneven. We're pleased with the success of our share gain initiatives and the momentum we built with the new products, new customer business and strong operating leverage. Our strategies are delivering, and we remain confident that Fortune Brands will produce strong earnings growth in 2010. As a result, we plan to continue investing behind our brands, including higher year-over-year support for long-term growth initiatives in the second half of 2010. In addition to the pull forward of sales in the second quarter, we anticipate the back half of the year will be impacted by certain headwinds we've previously discussed. Those include higher costs for raw materials and transportation, the stronger U.S. dollar, annualizing cost-savings and increasingly challenging comparison to last year's improving results. However, even with these headwinds, we continue to believe that the markets for each of our three brand groups will grow at a low-single digit rate for the year. Factoring in our strong year-to-date results, as well as the challenging dynamics we anticipate in the second half, we're raising our full year earnings target. We're now targeting that Fortune Brands will deliver diluted earnings per share before charges and gains in the range of $2.60 to $2.94 for 2010. We're aiming to outperform our markets and believe that Fortune Brands is well positioned as we benefit from our strategic investments, share gains, lower cost structures and enhance productivity. Thank you again for joining us. Now Craig and I will be happy to take your questions.

[Operator Instructions] Your first question comes from the line of Judy Hong with Goldman Sachs.

The first in Home, can you just quantify for us how much of the pull forward in sales, really aided the $0.20 growth in comp in the second quarter.

Something in the range of, kind of, low to mid- single-digits. Obviously, it's a tough number to estimate with precision, but that's our best estimate of where it came out.

So as we think about the second half, obviously your guidance and your commentary about the market outlook does imply the growth slowing down. We've heard some of your peers the June and July trends were softer. Could you just give us some color as it relates to more recent trends in terms of the marketplace and then how you see the shape of growth in the back half of the year.

In the second quarter, we saw high single teens, the 18% growth levels in the first couple of months. That's then after, sort of, a carryforward or the end of the tax credit. In June, we saw more high-single digits. And now in July, we're still seeing up but more single digits.

Just on the Spirit side, clearly, it seems like at least in the measure channel, you've stepped up some of the promotional-related activities, your pricing looks down year-over-year. Are you satisfied with the volume pickup that you're getting? And then as you think about the second half, how do you think about, sort of, trade-off between volume and profitability?

Well, overall, our mix of value and volume in the United States is basically on par. If you look at, probably, the drug channel, Nielsen's there, you'll see that that's a much more promotional in competitive environment. We have also some unusual dynamics there. We've added some distribution on lower mix items, especially in Florida and somewhat in California. Our economy vodkas are becoming a bigger piece of the pie, so a bit of that's mix, more than price, as you look forward. Again, that's about 15% in the market, and in general, that's a much more competitive, those are the bigger boxes. It's really measures Florida, California and a bit of Texas, which in those particular markets we have, the much larger grocery store chains and drug chains. So that is a bit more competitive, but a lot of that is also the mix of the business that we've -- new business we've won.

The only thing I'll add there just coming back to your point in terms of how we evaluate the decisions. Clearly, I mean, we look at all of this on an ROI basis and a fair amount of what we're doing is not just, kind of, responding to some of the competition. It's really looking at where we want to be positioned for the longer term. Obviously last year, I mean we had a very healthy year in terms of the price increases that we took, but as we look at where we are right now, we think that the trade off right now between price and mix is about where we would expect to be and as Bruce just outlined, when you look at where we are globally, our first half volume and value are comparable to each other. Our expectation for the full year, I think as we said on the first quarter call, was that for the full year for us, we'd be down somewhat on price, but that would be offset by mix and the net would be that we'd be up modestly, and that continues to be our expectation.

Your next question comes from the line of Eric Bosshard with Cleveland Research.

Can you talk a little bit about the share gains and the Home side of the business? And I guess specifically, why and what you're doing to achieve this? And how the second half is going to look in those areas relative to what was achieved in the first half?

We're seeing pretty much across all of our business is share gains. The stronger ones are Moen and at the Cabinet business. And Moen is really through line reviews and new sets, we're getting some of our innovations placed and the consumers are responding extremely well to them. On the Cabinet side, as I think you're familiar, the cabinets, basically these are businesses that we won, maybe, three to six months ago, we set the stores, we trained the designers and we're starting to see that go through, that's the core in Home Depot with Thomasville in Canada program, back then the program in Lowe's, some of those wins. And we expect to add momentum to continue. Why we're getting there in the Cabinet side is we believe our distributive assembly model that we've been talking about, we've invested in during the downturn, is really giving us a competitive advantage in the marketplace, both from the service side and the quality side, as well as, from a cost side. So that's playing well in both the Lowe's and Home Depot worlds and we're winning the business.

In terms of the incremental contribution to growth in the second half, you'd outperformed the market in the first half. Does it continue with that type of level? It appears you're saying the second half market's going to grow slower than the first half, but will there continue to be the Alpha relative to the market in the second half like we saw in the first half?

Overall, Eric, our expectation is that it's going to be more modest, but obviously, it's going to be a function of what happens with consumer spending and whether or not the consumers come back into the marketplace.

I'd also tell you that in the second half, we have one more new business and we have some cost related to that, to set that up. So that's offsetting some of our leverage and operating performance as well.

Then secondly on the Spirits side of the business, as you've gone through this transition over the last 12- or 18-plus months, and you've made the incremental investments that we've heard you talk about, kind of, quarter-over-quarter. Can you give us a sense, or what you're looking at to evaluate the payback or benefits of those efforts in the Spirits side?

Generally -- I'll let Craig talk a little more on the detail. Obviously, we look at everything on an ROI basis, and we look at it not from quarter-to-quarter but on a longer term positioning of brands or in certain markets. We have looked at basically a number of, we call them BMCs, our priority BMCs, and we have identified those as the highest potential growth and highest potential returns. And in some cases, we got ahead of ourselves a little bit on price. And in some cases, we didn't support the brands like they should've been. So we're realigning the priorities of the investments and supporting those that have excellent growth opportunities and excellent return prospects. And we started to have a good -- I'd say now a year ago, maybe a little bit longer than a year ago, and we've seen some great results. We're also stimulating those by some innovations like Red Stag, Maker’s 46, the Cocktail Cubes, things we've talked about, really support those programs and creating additional buzz along with both the digital media spends we have and the traditional type of spends we have as well. So all-in-all, we're very pleased with the turn in performance especially in the United States and what we're seeing also in India, very strong growth in India.

Eric, I guess the way I'd outline it you is we've really taken a hard look, spent a lot more time looking at end consumers and what is the price elasticity, where do we stand, and so we've made some decisions in terms of pricing there. But for us right now, it's really a combination of three dynamics that lead then to the overall ROI expectation, but one is where we're positioned from a pricing standpoint with every day and what we want to do with promotion, making sure that we're expanding distribution and then our overall brand building initiatives and giving them the emphasis that we want. And I mean as an example and one of the things that we've talked about on previous calls is just the move we're making to more digital media and Facebook and other kinds of things to be able to reach out to people. So our expectation right now is we've got a lot of energy to what we're doing and a lot of excitement in what we're doing and that we're going to get the ROIC on all of this.

Next question comes from the line of Peter Lisnic with Robert W. Baird.

Yes, this is Josh Chan filling in for Pete. Just wondering on the Home & Security's pricing front, given some of the commodities arising, how realistic do you think it is to be able to pass through some of the price increases to your consumers?

Well, we already have in select instances. I think that this year, we're going to absorb a fair amount of the higher commodity cost that we've talked about, and then well, obviously, as we get to the end of the year, we'll take a harder look at what we may do as far as 2011. But I think in terms of how we're positioned in the marketplace right now and where we're going to be with overall results for the year, I think we're in pretty good shape.

Yes, in particular, we've made some price moves based on steel with our Therma-Tru brand and also because of zinc and copper on the Moen brand, and those are already in place in the marketplace.

And then switching over to the Golf margin, I believe you said that margin would be up about a point or so from last year. You're over a point more than last year for the first half, so I assume you'll probably get more favorable mix too, so why can't the margin be even higher than that?

Well, it may be. I mean we'll see what the year brings, but right now, it's largely a function of just the continuing investment and, in fact to a degree, the expanded investment that we're making globally behind the brands.

It's also the shape of the Golf business. The first half of the year traditionally is the highest volume half and as you load in for the new products and for the upcoming season, and the sell-through really comes in the third quarter and the fourth quarter traditionally, pretty much all the Golf businesses had a loss there as the season slows. So you don't get the leverage that you do in the first half of the year.

Your next question comes from the line of Michael Rehaut with JPMorgan.

Basically, the question is getting to the sales outlook for Home & Security. You've had a great first half. Obviously, some of that's with easy comps and the pull forward in the second quarter, but with a low single digit growth outlook for the industry and your share gains on top of that, I mean I'm still thinking that you guys could do low- to even mid-single digits in the back half of the year. Is there something that -- would you tell me to temper that down or particularly, will you think about the pull forward in demand?

Well, I think time will tell, but again, it's going to be a function of "Where's the consumer here in the back half?" But to think about something in kind of the low- to mid-single digit range is not an unreasonable view of the world.

And just getting back to the Golf margin question before, as you've kind of hit on some of the headwinds in general in the second half, it seems like some of those are more concentrated in Home & Security in terms of the raw materials. But in terms of the Golf margins, again, are you just being conservative given the first half margin gains so far?

I would say you've got two factors in the second half going back to the question that was asked previously. It's a combination of both additional investment spending that we're doing globally to support our longer-term growth as well as what is going to be what we see as the negative impact of FX here in the back half impacting our Golf business. So I'm hoping that we're being conservative, and obviously, I mean as you look at what happens with kind of a seasonality of business, I mean we've got the manufacturing variances that come into play. But as a starting point, you'd say, "Well, okay, but you've got seasonality every year." So I kind of wash those two out at this point. So for me, it's principally, right now, the strategic investments as well as the FX impact.

The Spirits business, given some good amount of the positive momentum you've seen in some of the new products and even some of the established products given the changes in the distribution set up, have you changed your view in terms of how you can grow that business over the next few years. I mean I think -- and correct me if I'm wrong, but globally, you've thought of the Spirits business as an industry maybe in the low single digits. Do you guys think you can do a few points better than that given some of the positive momentum you have right now?

Well, yes. I think that this year, we're looking at low single digit growth for the market. I think the market itself will pick up steam here in the next couple of years. Our performance in the market, based on what we've seen already, has definitely gotten better, and we're at a point where we're outperforming the market, and that was the reason why we did all the different things that we did over the last couple of years, and we expect that to continue. We have a great innovation pipeline. We have a route to market and sales organization that I still, although they're now a year, a year and half into existence, they've been performing better than our expectations. I think we're just going to build on that. We've got a real good team over there, and we're pretty excited about how we're talking to the consumer because we are talking to them differently than we have in the past. I also think that the promotional environment will get better. That means there'd be less promotion, and also pricing will come back to a more historical rate over time.

Your next question comes from the line of Doug Lane with Jefferies & Company.

Real quick on the Golf, shouldn't the divestiture of Cobra buy you a point or so of margin expansion alone? Does that mean you're actually taking down the margins for Titleist and FootJoy in the second half?

No, what it really means is that we're in a transition year. As I think everyone's aware, while we sold it in the second quarter, I mean we've got support arrangements better in place in terms of selling, in terms of assembly and while we're getting reimbursed for some of that, it means that our fixed cost structure is remaining in place while we provide that support, and so we'll be leaning that out toward the tail end of the year, and then that'll move into 2011.

So the real benefit to margins won't be till next year.

Well, and we'll see what's going to happen I mean because at the same time, what we're really focused on is where we're going with this business longer term in terms of the growth rate. I mean as we've said, we've got stepped up investment in that business, and that's something that we intend to continue I mean particularly out in the Pacific.

And can you tell us what the currency benefit was in the Golf business in the second quarter?

Yes, I'm estimating that the -- well, the currency benefit was -- again, what I have here is kind of blended, backing out both Cobra and FX, and the two in the second quarter were year-over-year, a modest negative, so not that big a factor in the second quarter.

And then lastly, did you mention what your depletions were in the U.S. Spirits business in the quarter?

We didn't. I'm not sure if we have that here. While he's looking at that, let me just kind of come back to Golf for a moment because I think the point we've made before and I'll make again, is that our expectation is that our expectation is as the Golf business kind of comes back and more normalizes and consumers are in the marketplace, that's a business that could give us a high single digit OI margins, potentially 10%, and that's the way we're thinking about the business right now because clearly, we do intend to continue to invest behind the growth of that business.

We do not have the depletion numbers here in front of us. It's 4% year-to-date.

Your next question comes from the line of Vivien Azer with Citigroup.

First question on Home & Security, do you guys have an estimate for housing starts? I know you guys have offered one in the past. Is that unchanged?

Yes, we're looking at about 600,000, that range. It might be 575,000, 625,000, in that range for the year.

So if I'm right in recalling that you guys had offered 500 to 600 [500,000 to 600,000] in the past, what is it that's giving you more confidence because based on the commentary I've been hearing this morning, it sounds like the second half could be pretty challenging.

Yes, well, I think the effect of the tax credit was greater than anybody anticipated. If you look at the housing numbers, they just kept on building through the April, and actually, we built more than we sold, and I'm talking about it as an industry. So in fact, we could create increased inventory in the system. So I think it's the first half that really was greater than anticipated than it is that the second half is going to be better than we think.

And then with respect to your Spirits business, I only have the ACNielsen data, and I appreciate that that's a small percentage of the total category in the U.S., but it seems to me that you guys are kind of driving the promotion at least in the bourbon category, and it's certainly paying off in spades with respect to your market share. But I was surprised to see that the top line didn't come in a little bit stronger even given the levels of promotion and the tracked channel dollars sales growth. So in thinking about kind of the component of your sales and on-premise versus off, can you tell me kind of what the offset was that there?

First off, what you're looking at is about 15% of the market. It represents the big boxes in California, Florida and Texas. And California and Florida, especially Florida, is a heavy promotional market mostly because of the economic conditions there, and we don't feel like we're leading this at all. We're responding to some of the actions that were taken by certain competitors a couple of quarters ago. And the other thing is that, as I said earlier, it's a lot of mix. We don't talk about a lot, but we have an Economy Vodka portfolio that is well-positioned there, and as the consumer has traded down, we have been attracting them to those brands: the Wolfschmidts, the Kamchatkas, the Dark Ice. Those are brands that we have. So in fact, we're being rewarded for that, and it's not taking away from any of our other business because we don't have basically a portfolio in the middle of the vodka category. The last piece, and this is more of a California and Texas statement, is that there is an oversupply of agave right now in tequila, and that's causing some pricing and promotional activity as well throughout the industry and in Mexico as well.

Your next question comes from Matt McGinley with ISI Group.

Craig, when you look at the pricing, you're talking about pricing sales and brand investment, and looking at that on an ROIC basis, where have you gotten those bang for the buck since you've been doing all these transitions in the Spirits business for the past year or so?

Well, I think clearly, I mean just look at where we are with the bourbon category and coming out with Red Stag and where we are with Knob Creek and others and Jim Beam Black, it's obviously -- I mean bourbon is our largest category, and it's certainly paying off. On some of the other product offerings, our expectation is it's going to take a little bit longer, but as I said earlier, I mean we're pretty pleased with the way things are tracking right now.

And as you think about the brand investment that you talked about starting in the fourth quarter for this first half, did you spend more dollars in the first quarter or the second quarter or was it pretty evenly paced as you look at the two?

I would say the first two year-over-year, we're pretty evenly paced.

And you've got to remember, a year ago, in the first quarter and beginning of the second quarter, we had cut brand spend quite a lot. So we're comping against those numbers that were a lot lower a year ago.

On the housing side, when you think about it, the lag associated with the tax credits or better existing home sales, what do you think that lag is from the time that somebody closes on that house or when that tax credit occurred and when you see that volume trickle through to your business?

I think your question is -- so in the tax credit, there's a carryover effect until it actually close and I can do the work and whatnot. Is that with your question is?

Yes, like how long does it take from the time you see that close to when you see the actual sale?

Well, if it's a new home, it's already happened, so it's in there, and we saw a lag effect in as, I said, the pattern of orders continued to be strong through April and then May after the tax credit, and that was basically finishing up the house. And a lot of our products are at the end of the building cycle, if you will. Cabinets and faucets go in last, if you will, so we saw that. We think that's pretty much behind us now, and we're back into a market that's sort of has been pulled forward, if you will, and we're seeing more new construction drop pretty hard and the -- more remodeling business still remaining at the low single digit rate.

So the big drop that you saw would've been in the new construction, but the existing home or I guess the non-new construction related would've probably still been helping you a little bit?

Yes, it still is, and I think the order patterns there are still fairly good. Now when I say that, the big ticket, big remodeling projects are still weak, but it's more, if I can call it, light remodeling, just maybe not doing the whole kitchen over but doing your cabinets over and the countertop or just refreshing your faucets rather than blowing out a wall and doing the major renovations that you saw three or four years ago.

The next question comes from the line of David MacGregor with Longbow Research.

You talked about raw materials as a headwind. I was wondering if you could quantify that for us.

Yes, I can. It's what we've told everybody at the end of last quarter was we were anticipating that raw materials for the last three quarters, our Q2 two through Q4 would be -- and that includes ocean freight as well, transportation, that would be up in the range of $45 million to $50 million for the year across the company. That's tempered back a little bit, and so I would say right now that we're looking at something in a range of kind of $40 million to $45 million, and the first quarter was basically neutral.

Also, with respect to the pull forward, you've kind of alluded to inventory build in the channels. Can you just give us your assessment of where retail inventory levels may stand today and how that may impact third quarter?

Sure. First off, a majority of our products don't have inventory in the channels mostly because we make kitchens at the time and windows at that time and so forth, so it's really about faucets and doors. We think the retail inventory is in good shape. I think they've done a great job managing the inventories through this, so we don't think there's a bubble there at all. Now the wholesale side, which really supported the new construction part of the business and the growth, and that's really the pull forward part, I think that what we're seeing now is them rebalancing their inventories. And when I said earlier that we're seeing more single digit growth now instead of the double digit growth that we had in the April-May side, we think some of that is just rebalancing their inventories as well.

Just for the model, there's an $18.8 million other income number on the P&L this quarter. Can you just give us some insight on what that might represent?

Yes, $18 million. Part of that includes what was just settlement related to the Spanish tax audit. Most of that was just return of provision down in taxes, but we've got a reimbursement for a portion of the payment that was actually made, and that's flowing through other income and expense.

Your next question comes from the line of Dennis McGill with Zelman & Associates.

Bruce, you gave us some good color on sort of the trends through the quarter and into July for the whole Home business. I think you touched on this, but I wanted just to double check. Can you talk about the differences between the new construction, that trend and what you saw on the home improvement side? Is the delta mostly new construction? Are you seeing slowing on home improvement as well?

It's mostly new construction. We really haven't seen a slowdown in the home improvement side. Basically, it's been tracking pretty smoothly.

And then a second question related to Home, given the strength on the leverage this quarter with the upside in revenue, does that make you sort of rethink the medium-term ability to get back to 14%, 15% margin? Do you think it could happen sooner? Were you surprised at the magnitude of leverage this quarter? Just any thoughts you might have there on seeing some of these cost saves come through.

Sure. Well, we were very pleased obviously with the leverage we received, actually, the last two quarters, and that just reinforces us that the things that we did the last couple of years are working, and that the model we expected to deliver, if we get back to the volumes that we had outlined, that we would be approaching 15%. That gives us good confidence that we can get there. Now we just need the volumes to get up there, but we finished our restructuring about a year ago, and we'll do little things here and there with our major restructuring. And always when you do that, you try and not only take cost out, but you try to build a model for the future. And one of the things that we really focused in on was flexibility, and we did that not only just in how the supply chain and the sales worked, but also in the product platform structure and a design-to-assemble and design-to-manufacture side. So all that is working probably better than expected, but we're staying somewhat on those lines of approaching 15% mostly because there will be some investments, and along the way, we do need to scale up both on human side. On the capital side, we're in pretty good shape because of the flexibility we've built into the models. But we have more confidence to those numbers now is a better way to say it.

Also, the other thing I'd add to that is that with the point that we made in the prepared remarks that our expectation would be to be up in a range of maybe a couple of hundred bps here and for the full year in terms of margin improvement, I mean that would -- well, I think, to a degree, it would tend to signal that our run rate right now is maybe a little better than we were targeting. But at the same time, we've got a fair amount of restructuring, cost-saving productivity improvement benefit that's coming into this year, and our function will be "Where are we going to be with raw material cost over the next few years?" So I think that is not unreasonable to think that maybe we could get there a little sooner, but time will tell.

We have time for one more question, and that question would come from the line of Christine Farkas from Bank of America Merrill Lynch.

A couple of clarifications on Spirits, if I could. You mentioned Spain. Your business was up, and if I heard you correctly, the underlying market was down. I'm just wondering if there are particular products or distribution gains, firstly, if that's correct, and what drove that?

Yes, one of the things that we identified was half of that pull forward in sales was in the Spirits side, and in Spain, they had a VAT tax that went into effect, and we filled out. Our orders were accelerated before that tax went into place. So I think that's where the pull forward is about. It's in Spain.

Speaking -- with Spirits, you talked about on-premise getting a little bit better. I'm curious. Does that mean it's gone from down mid-single to down low single digits? Is it now positive? Can you maybe clarify a little bit about the trends there?

Sure. Yes, it really flattened out, I would say, for the last three quarters. This quarter, we saw it pick up, so it's in the positive.

But only slightly.

It's only slightly...

Only slightly would be our estimate.

That's still probably one of the stronger data points we've heard on on-premise, so that's favorable. With respect to hitting the halfway mark now for the year, have your plans changed for brand spending? I know it was pretty detailed with respect to how you laid out the year, but are there areas where you might be picking up, might be pulling back? And does that net out into your guidance at all?

No, actually, we walk into the year with a pretty aggressive plan. We had internally, toll gates, if you will, that said "Okay, if we achieve this level of success, both on top line and bottom line, we'll release more money." At this point, we've hit all those, so the original plan that we had in place is what we're going to be executing against.

And it's one of the reasons why I called out the FX because as some people might do where they expect to say "Well, we've got to cover that in cut." We're not cutting. I mean we're committed to the brand building that we're doing to, as I said, making sure the products are properly positioned, that we're gaining distribution and creating the awareness.

And obviously, the initial success we've had with our investments seem to be paying off maybe a little bit quicker than we had thought, so we're just going to keep on feeding it.

Remind me, Craig, the FX hit that you're seeing for the second half of the year or for the full year, is that a bigger headwind than you previously guided to or a smaller headwind?

Yes, it is and particularly in Spirits. I mean the number that I called out -- I want to say I think I'd called out something in the range to kind of $15 million to $17 million.

Now I would like to turn the call back over to Bruce Carbonari for closing remarks.

Thank you. On behalf of the 25,000 people of Fortune Brand, thank you for the opportunity to share our results with you. We're very pleased with the progress we made in the first half of the year, and we look forward to speaking with you again in October when we report our third quarter results. Thank you.

Thank you for participating in today's Fortune Brands Second Quarter Earnings Conference Call. This call will be available for replay beginning at 1 p.m. Eastern Standard Time today through 11:59 p.m. Eastern Standard Time on August 4, 2010. The conference ID number for the replay is 86367394. Thank you. This now concludes today's conference call. You may now disconnect.