This summary is based on the first quarter fiscal 2007 earnings call conducted by Fortune Brands Inc. (FO) on April 26, 2007.
Key Investors Issues
- Net income declined 31% to $120 million or 77 cents per diluted share.
- Sales were down 3% to $1.95 billion.
- Price increases have been successfully implemented to offset higher raw material costs.
First Quarter Highlights
Net income was $120 million or 77 cents per diluted share down 30.7% from $170.3 million or $1.15 a year ago due to the impact of the housing downturn and higher commodity costs.
- Sales came in at $1.95 billion, down 3% from the prior year due to one-time factors that adversely impact sales comparisons in spirits and wine.
– The firm continued to benefit from the unique breadth and balance, a solid profit growth for spirits and wine brands partly offset by home products brands.
- In spirits and wine, the firm’s largest profit contributor, the company realised mid-single digit growth in both global depletion case volumes and operating income on strong consumer demand for the premium and super premium brands.
In the home products market, new construction activity was below original assumption, and replaced remodel activity above original expectations.
- Operating income was $260 million, 15% below a year ago resulting in a 1.8 points reduction in operating margins.
- Free cash flow at $277 million was $100 million below the prior year due to interest payments on the fixed rate debt issued in the first quarter of last year.
Effects of the housing downturn:
- In order to limit the impact of the downturn on results, the firm adopted an action plan focusing on four categories, share gain initiatives, productivity initiatives and select pricing increases to offset higher commodity costs.
- To outperform the market and gain share, the firm will continue to introduce new innovative products and provide outstanding customer service.
- It is also extending brands into adjacent categories and new markets which is expected to win new business, including expanding the cabinetry, faucet, and security home centers, winning new business with kitchen and bath dealers.
Moen introduced new collections at home centers as well as innovative new showering platform, continuing to grow a successful bath accessory line as well as the luxury ShowHouse brand.
- In cabinetry, the firm introduced several new styles and finishes, going beyond the kitchen and bath creating solutions for the home office and entertainment rooms.
- Therma-Tru had the largest product launch ever including its true defense line of weather and impact resistant door systems, expansion of its finish right technology on lines of doors, introduction of dramatic new decorative glass offerings.
- The firm also consolidated the manufacturing footprint by closing two facilities, one in cabinetry and one in tool storage and reduced overhead in administrative structures throughout home and hardware including implementation of hiring freezes and spending reduction.
In total over the past year, the firm has reduced hourly and salary positions in homes products area by more than 10%.
- Price increases have been successfully implemented to offset higher raw material costs and benefits from this will accrue in the second quarter.
- The company is going to market with an elevated focus on the entire bourbon line-up supported by dedicated sales draining and new sales tools and leveraging the racing program to drive sales, especially in NASCAR race markets.
- The firm produced the new DeKuyper liqueur and announced the launch of three new tropical flavors, mango, papaya, and pineapple coconut.
- For Canadian Club, it is entering the first full season for the Canadian Club racing program and introducing a new Canadian Club ready to drink product in Australia.
In wine, the firm is launching an innovative program, to help educate consumers about fine wine and includes a philanthropic component to help fight heart disease in women.
- The company transitioned to the new distribution in Australia, where Coca-Cola is now handling its brands and those of Max yum partner.
- The target investments and enhanced focus were also achieving excellent growth in opportunity markets including India with Teacher’s, Jim Beam, Russia Jim Beam and Sauza and China Jim Beam and la Courvoisier.
Other Development In Spirits and Wine:
- The Swedish government is advancing legislation to sell several state-owned companies, including the VNS group which is the parent company of Absolut vodka and the firm has a partnership on three levels.
- It shares distribution on brands through the future brands joint venture that it co-own and VNS is an equal partner in the venture that distributes brands in key international markets.
- As a business partner with VNS, the firm has a natural interest in following the privatization process being established by the Swedish government and will take a close look at the opportunity to build on the successful partnership.
Business Segment Highlights:
