Amidst the greatest economic crisis since the Great Depression, the people of Fortune Brands rose to the challenge. Even though the downturn pulled sales and earnings lower in 2009, results trended favorably as the year progressed. We stayed true to our shareholder-value-creation model by investing sensibly in the health of our brands, our new-product pipeline, and extending our brands into adjacent categories and promising international markets. We also contained costs and streamlined supply chains. As a result, your company outperformed the marketplace across many key product categories, and we delivered operating margins at the forefront of our industries.

Throughout 2009, we focused on two major goals: outperforming our markets at both the top and bottom lines; and positioning the company for strong growth when the economy recovers.

We pursued these goals through three key initiatives across our businesses:

Together, these strategies are enabling Fortune Brands to emerge from the downturn in a very strong position.

Earning Consumers' Trust During Challenging Times

During the economic downturn, consumers clearly changed their purchasing behavior, focusing on trusted brands that deliver real value. Many pulled back from big-ticket discretionary purchases (such as major remodeling projects and golf clubs), while others shifted more of their spirits purchases from restaurants and bars to retail outlets. Still others focused purchases on lower price points, particularly in certain home products and spirits categories.

To succeed in this environment, we saw it as critical to reinforce the strength of our brands, deliver value at various price points, and drive demand in targeted and creative ways. This included developing innovative new products and targeted brand-building programs to keep consumers excited about our brands and products. As consumers shifted shopping and buying behavior, we matched our initiatives to seasonal consumption patterns and the distribution channels where consumers were most active.

In Spirits, we brought excitement to the marketplace in 2009 with new-product innovations. The introduction of Red Stag by Jim Beam attracted new consumers to the bourbon category. Sauza Margarita-in-a-Box appealed to consumers increasingly entertaining at home. We brought innovations to international markets with Larios 12 gin and DYC Single Malt in Spain, and Canadian Club ready-to-drink products in Australia. While we held back on spirits brand investment as we transitioned to new international distribution structures, we boosted brand investment by double digits during the seasonally important fourth-quarter holiday selling season in the U.S.

Our spirits business also completed a number of steps that are bringing us closer to customers and consumers, simplifying our organization, and enhancing how we position and sell our brands. To bolster our sales and distribution, we enhanced our organization and our routes to market: We executed a smooth transition to our new 24-market international sales alliance with The Edrington Group (owner of brands such as The Famous Grouse, The Macallan and Brugal); simplified our international spirits business structure by merging two units into one European business unit; initiated new long-term incentive-based contracts with our largest distributors in the U.S.; and aligned our U.S. sales organization by distributor rather than region. As a result of the changes we've made in sales and distribution, we now directly control more than 75% of our spirits sales, up from just 8% in 2008.

We believe we can perform better in the spirits marketplace, and with these initiatives in place, we see excellent prospects to profitably grow our key brands and elevate our long-term performance.

In Home & Security, we remained proactive in the marketplace and continued to outperform the category. We gained share with successful initiatives, including: expanded customer relationships at major home centers; advanced faucet designs made possible by the new, compact Moen Duralast cartridge; revolutionary security products like the Master Lock Speed Dial; and innovative garage organization products from Waterloo. Even though the economy challenged big-ticket remodeling purchases, we still sold more than $1 billion of kitchen and bath cabinetry. As consumers shifted cabinetry purchases to home centers, we strengthened our position by developing new cabinetry lines to fill price gaps and new styles to appeal to today's consumer.

We've also emerged as an industry leader in promoting energy efficiency and “green” products. For example, Moen's industry-leading line of eco-friendly faucets reduces water consumption by 30%, and the energy conservation benefits of Simonton Windows helped the brand gain share as consumers capitalized on an energy-efficiency tax credit.

We continued to outperform the Golf market in 2009 on the success of our investments in two key areas: innovation and international growth.

New-product innovations helped us gain share at the high end of the market. The Titleist Pro V1 golf ball continued to grow share as golfers remained committed to the product's technological and performance benefits. Advanced-performance Titleist clubs gained share and commanded premium pricing. And FootJoy reinforced its industry leadership with innovative products such as the new ICON and SYNR-G shoe lines.

Internationally, we've invested to develop the golf industry's finest sales organization in Korea, as well as in growth initiatives in Japan, China and Australia. In local currencies, our golf sales across Asia and Australia were up at a double-digit rate in 2009. To further support these growth opportunities, we're constructing a new ball plant in Thailand to complement our U.S. golf ball production.

Improving Cost Structures and Managing Cash

To help all of our businesses deliver operating margins at the forefront of their categories, we continued to reduce cost structures and enhance the efficiency and flexibility of our supply chains.

These included tough but necessary decisions over the course of the downturn to take significant cost out of our businesses as sales volumes declined. These moves – including a 40% reduction in the number of positions and facilities in Home & Security and more modest reductions in Golf – have resulted in competitive cost structures while also retaining flexibility in our supply chains so we can ramp up as demand rebuilds. Our spirits business has also implemented initiatives to enhance organizational effectiveness and supply chains, dedicating savings to reinvest in brand growth.

Lastly, we aggressively managed our cash to strengthen our balance sheet and financial flexibility. Our aggressive cash-management initiatives included lower capital expenditures and a significant reduction in working capital. After careful consideration, we also reduced the annual dividend rate to $0.76 per share, a prudent action that aligned our dividend with our historical payout ratio. The combination of these measures enabled us to generate our strong free cash flow for 2009.

Confidence in the Future

Fortune Brands' performance continues to be built on a foundation of powerful, enduring and profitable brands – in categories with attractive long-term fundamentals. Moving into 2010, we see the front end of a recovery as an excellent time to stay on offense in the marketplace and invest to build profitable market share. We also recognize the consumer won't recover overnight, and we're sure to face continued challenges. However, the success of your company in navigating the historic challenges of 2009 enhances our prospects in 2010 and beyond. The 24,000 people of Fortune Brands are inspired by the confidence demonstrated by your ownership of our stock, and we will always remain focused on earning –and rewarding – your trust.

Sincerely,

Bruce Carbonari
Chairman & Chief Executive Officer
Fortune Brands, Inc.

February 23, 2010

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