Fortune Brands Profit Soars in Q4

Net income was $85.4 million ($0.55 per diluted share) versus $11.5 million ($0.08 per diluted share) in the year-ago quarter.Net sales were $1.90 billion, up 5%.

2/7/2011 --- Fortune Brands, Inc., the company behind leading consumer brands including Jim Beam, Titleist and Moen, reported results for the fourth quarter and full year 2010.

•  Net sales increased 5% for the quarter and 7% for the full year, reflecting growth across all three business units.
•  Diluted earnings per share were $0.55 for the quarter and were $3.16 for the full year, benefiting from strong operating performance, favorable foreign exchange and a year-over-year net gain.
•  On a before charges/gains basis, diluted EPS decreased 5% to $0.63 for the fourth quarter, reflecting the expected impact of higher year-over-year strategic investments to strengthen sustainable long-term growth for each business.
•  For the full year 2010, diluted EPS before charges/gains increased 16% to $2.81. The company's most recent expectation was for diluted EPS before charges/gains for 2010 to be toward the middle of its $2.60-2.90 target range.

"2010 was an excellent year for Fortune Brands. We outperformed our markets, we delivered on our operational goals, and our businesses emerged from the recession in very strong positions. In addition to this strong performance, we announced our intention to separate our three businesses in 2011 to maximize long-term value for shareholders," said Bruce Carbonari, chairman and chief executive officer of Fortune Brands.

"Our determination to go on offense during the economic downturn and boost strategic investment across our businesses made a big impact in 2010. Each of our businesses continued to strengthen its competitive position throughout the year, and Fortune Brands delivered strong double-digit growth in 2010 earnings. While we had anticipated full-year earnings toward the middle of our current target range, our earnings were stronger than that as all three businesses performed above our expectations in the fourth quarter. We also exceeded the high end of the earnings target range we originally established at the start of the year," Carbonari said.

•  "Our Beam Global spirits business closed the year with continued momentum. Reported fourth quarter sales also benefited from a change in the trading terms with a major customer in Australia related to the way we record excise taxes. For the full year, our spirits sales achieved a new record on solid growth in the U.S., good performance in Europe, and double-digit growth in emerging markets and global travel retail. Reflecting the success of our strategic investments, we generated strong consumer demand for brands including Jim Beam, Maker's Mark, Sauza, Canadian Club, Courvoisier, Teacher's and Cruzan. Notably, Maker's Mark exceeded one million cases sold for the first time ever with another year of double-digit growth. We also energized our categories with a record year of innovations, including Maker's 46, Cruzan 9, Teacher's Origin, Courvoisier's Connoisseur Collection and the continued growth of Red Stag by Jim Beam. As we've previously indicated, our lower spirits operating income before charges for the year reflected our double-digit increase in strategic investment that's positioning the business for strong and sustainable long-term profit growth.
•  "Home & Security sales and operating income grew in the quarter against its strong prior-year results, partly benefiting from pull-forward in demand for Simonton windows in advance of the year-end expiration of a consumer tax credit for energy-efficient home products. For the full year, we outperformed a relatively flat market with 6% comparable sales growth. We grew across all product categories as we benefited from successful strategic investments, new business wins, innovative new products and growth for Moen and Master Lock in international markets. Our successful proactive initiatives to reduce costs, enhance productivity, and create lean and flexible supply chains paid off in excellent operating leverage and strong double-digit profit growth in Home & Security for 2010.
•  "Our Acushnet Company golf business closed the year with strong fourth-quarter comparable sales gains across geographies and product categories, including a double-digit gain for Titleist clubs driven by the new 910 drivers and Vokey Design wedges. For the full year, the golf business strengthened its industry leadership behind sustained global growth for the Pro V1 golf ball, and successful new product innovations that fueled double-digit growth for Titleist golf clubs and FootJoy shoes. Our sought-after innovations, lower cost structure, global success in golf's pyramid of influence, growth strategies in key Asian markets and favorable foreign exchange drove golf operating income up double digits."

For the fourth quarter:
•  Net income was $85.4 million ($0.55 per diluted share) versus $11.5 million ($0.08 per diluted share) in the year-ago quarter.
o  Comparisons were favorably impacted by lower net charges in the current year quarter ($0.08 per share) versus the year-ago quarter ($0.58 per share).
•  Excluding charges and gains in both the current and prior-year periods, diluted EPS was $0.63, down 5% from $0.66 in the year-ago quarter.
•  Net sales were $1.90 billion, up 5%.
o  On a comparable basis - excluding excise taxes, foreign exchange and acquisitions/divestitures - total net sales were up 4% for the quarter.
o  Comparable net sales by business unit were: spirits up 6%; home & security up 2%; golf up 10%.
•  Operating income was $157.2 million.
o  Operating income before charges was $181.0 million.

For the full year 2010:
•  Net income from continuing operations was $487.6 million, or $3.16 per diluted share, up from $1.60 in 2009.
o  Comparisons were favorably impacted by a net gain in 2010 of $0.35 per share, principally due to tax-related items, versus a net charge of $0.83 per share in 2009.
•  Diluted EPS before charges/gains was $2.81, up 16% from $2.43 in 2009.
•  Net sales were $7.14 billion, up 7%.
o  On a comparable basis, net sales for 2010 were up 5%.
o  Comparable full-year net sales by business unit were: spirits up 5%; home & security up 6%; golf up 4%.
•  Operating income was $763.9 million.
o  Operating income before charges was $812.2 million.
•  Free cash flow was $690 million.
•  Return on equity before charges/gains was 8%.
•  Return on invested capital before charges/gains was 6%.

"While the breadth and balance of Fortune Brands' current structure have created substantial shareholder value, we see the potential for even greater value by separating our businesses into focused companies," Carbonari continued. "Our 2010 results reinforce our confidence that this is the right time to separate our three businesses to maximize long-term value for shareholders. Our proactive strategic initiatives and targeted investments have strengthened each business, and each business emerged from the downturn stronger than even we had anticipated. We expect each business will be equipped to compete and grow on its own with the management, infrastructure, capital structure and growth and returns prospects necessary for success.

"The initiative we announced on December 8th to separate our businesses is on track for completion in the second half of 2011, subject to final Board approval. We are moving forward with our intention to become a focused high-return spirits business and to enact a tax-free spin-off to shareholders of our strong Home & Security business. We are exploring the sale or spin-off of our industry-leading golf business."

"As we look to our performance expectations in 2011, we begin with assumptions that the global economic recovery will continue to be gradual and uneven and that the markets for each of our businesses will grow at a low-single-digit rate. We're determined to stay on offense in the marketplace, and we're targeting that each of our businesses will continue to outperform its respective market," Carbonari said.
•  "Our Spirits business will benefit from our increased investments in key initiatives, including developing our best market opportunities, fueling our innovation pipeline, leveraging our enhanced routes to market, and profitably growing our Power Brands and Rising Star brands.
•  "Results for Home & Security will reflect our many competitive advantages, including the growing benefit of our new business wins in cabinetry, new-product innovations across all categories, international growth for Moen and Master Lock, and our lean and flexible supply chains.
•  "In Golf, we expect to continue outperforming with new product innovations from Titleist and FootJoy - including the next-generation Pro V1 golf ball, Titleist 910 drivers, fairways and hybrids, the new DryJoys Tour golf shoes and FootJoy outerwear - as well as our international growth initiatives in promising Asian markets.

"While we're on track to complete the proposed separation of our businesses in the second half of the year, we estimate that diluted EPS before charges/gains for Fortune Brands would grow at a high-single-digit to high-teens rate for the full year absent the separation of our businesses," Carbonari added.

"With respect to quarterly phasing, results for Fortune Brands will face the most challenging comparisons in the first half of 2011. Specifically, our first-half comparisons will be impacted by: our very strong Home & Security gains in the first half of 2010, including the substantial pull-forward in sales related to expiration of the homebuyer tax credit; higher costs for commodities and investments across our businesses to support new business wins and new product launches; and the seasonal impact of the divestiture of Cobra last year. Even with these factors, we believe our brands are very well positioned to outperform and set the stage for another year of strong growth," Carbonari concluded.

The company also announced that it is starting 2011 with a free cash flow target in the range of $450-525 million. The company is targeting an earnings-to-free-cash-flow conversion rate of 100% or more.