高樂氏 (CLX) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Clorox Company fiscal year 2003 second quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

If anyone requires assistance during the conference, please press the star button followed by zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference call, Mr. Craig Sullivan, Chairman and CEO of the Clorox Company. Mr. Sullivan, you may begin your conference.

Thanks very much, operator. Good day, everyone. Thanks for joining our conference call for the second quarter. Also with me here in Oakland is Gerald Johnston, President and COO, Karen Rose, CFO, and Doug Hughes, our Director of Investor Relations. We're broadcasting this call over the Internet and a replay will be available for seven days at www.clorox.com.

My comments today will be brief as I spend just a few minutes providing some observations for you about the quarter. Following that, Gerry's going to give you a brief business update and Karen will come on to discuss the financial drivers and results and provide our outlook. Then we'll open it up for questions.

Before I begin as I usually do, I need to remind you that the material we're providing during this call contains forward-looking information and actual results may differ materially from what we're projecting. Information about factors that could cause actual results to differ materially from our expectations can be found in our filings with the SEC, including our 10-K filing for the fiscal year ended June 30, 2002.

So, let me get into the meat of the matter and let me start by saying that, we think we had a very, very solid quarter, as you saw in the press release. We even did a little better than we had expected. We delivered 40 cents per share on a GAAP basis and as a reminder, that included the 11 cents we absorbed on our Argentina business. I think we have a lot of reasons to feel good about our business so let me just give you some of the headlines.

Fist, we continue to make significant investments in our business, at the same time, driving a second quarter operating profit increase of 13%. We successfully turned on Project Delta. This was a big deal. That happened in December. Our Glad products joint venture agreement with P&G began in late December and we closed it on January 31. Our plans to strengthen our Latin America business is still working despite the political uncertainty in Argentina as the presidential election draws near. Our business in North America remains very strong with shipments up 5% and sales up 11%.

Now, if you exclude divestitures, if -- rather, if you exclude divestitures in those numbers and as our P&L demonstrates, finally, we are tracking well against all of the long-term financial targets we talked to you about in November. I've got to tell you, I've got to hand it to our people. They are doing a great job leveraging our strengths, focusing on the key priorities we laid out and in turn delivering results.

Now, as I've done in the past, what I'd like to do is just review the highlights of our second quarter performance again against the company's four priorities we established that we talked to you about in the past. First, behind our efforts to drive growth, we closed the quarter with a 36% increase over the prior year in advertising and non coupon sales promotion. We increased R&D spending by 14% behind new initiatives and we made a significant investment in the Glad Products joint venture. As you have read in the press release, we reported volume growth of 1% or 3% if you exclude divestitures. If we left it at that, I think you'd miss the real story behind our business.

In North America which accounts for about 85% of our business, shipments for the household products were up 5% and 6% respectively excluding divested businesses. Importantly, this is the sixth consecutive quarter that we delivered mid single digit or better volume growth in North America. So I think this is a pretty big deal. These volume results reflect the choices we've made, the choices we've communicated over the past year or so; to drive healthy and profitable growth long term on our business.

As a reminder, 18 months ago, we conducted a portfolio review and made a decision to exit certain nonstrategic businesses. Now, while these are the right long-term decisions for the company and the -- in the short term, they are impacting our top line by little more than two points. Last August, Gerry articulated our plans to restore health to our Latin America business. As I said, our folks in Latin America are working hard and made significant year over year improvements in operating margin, working capital and SKU rationalization. They're simply doing a great job in what as you know is a very difficult environment.

As you also read, we reported overall company sales of 4% or 7% excluding divestitures. Again, our North American sales were strong at a plus 8% or 11% if you exclude divestitures. Once again, sales growth outpaced volume growth in part reflecting our growth in consumer promotions.

Second, our priority to cut costs in the company drives significant gross margin and operating profit growth. Again this quarter, the Clorox Organization made further improvements in managing the balance sheet, achieving the lowest level of working capital than anyone on this team can recall and that goes back more than 25 years. Karen's going to talk a bit more about that when she gets into her remarks.

Third, we continue to make progress against our priority to get more customer focused. This quarter, Clorox was named vendor of the quarter for the second time in the last three quarters in Wal-Mart's department 13, which includes laundry, fabric care, dish care, home care, insecticides, air fresheners, brooms and mops. This was a big accomplishment that was particularly impressive when you consider who the other department 13 companies were, people like Proctor and Unilever and Colgate, SC Johnson, Church and White and Dial.

Finally, we're seeing results behind our fourth priority; how to execute the competition. Project Delta is a key part of this priority and I'm pleased to report our December goal line was virtually invisible to customers. This is another topic Karen will cover in more detail, but let me share this with you. Paul Beam, the Vice President of Divisional Merchandising Manager of Wal-Mart tells us that this Project Delta conversion was a nonevent for Wal-Mart which is exactly what we wanted it to be. The preplanning and follow through caused it to be virtually seamless. It was one of the smoothest that Wal-Mart ever experienced.

As I said, Karen's going to talk more about that in her outlook but clearly, we're feeling very good about our business, not only for this quarter but for the remainder of the year and we'll also talk about that. So with that, as a quick set up, let me turn this over to Gerry.

Thanks. Today I will provide with you a brief overview of what's going on in the business along with a discussion of positive results coming out of some of our growth initiatives.

As Craig said, overall, we continue to feel very good about the strength of our U.S. businesses. I attribute these positive results to our approved focus and execution against our core brands, better returns from our marketing investments and success from our new products. In home care, we saw continued solid shipment growth behind the strength of Clorox branded products including Clorox Disinfecting Wipes and Clorox Cleanup as well as the continued benefit from strong Clorox ReadyMop results.

Competitive activity is heavy in this new convenience mop category including the rollout of a third brand. We have now put in place what we believe is an appropriate program to effectively compete with ReadyMop over the near term as we have now lapped our first anniversary of its introduction. We're also launching a number of new home care products in this third quarter. I'll discuss those in a few minutes. But overall, the activity level in home care as expected remains high.

Moving on to laundry, the past quarter shipment trends have been soft on liquid and color safe bleach. In order to improve this trend, we are shifting some money from advertising to trade spending, starting in the fourth quarter to generate increased levels of trade merchandising support for bleach. We simply believe it's the right response for this brand in business to restore growth at this time. Periodically, we will make these types of shifts, depending on the competitive environment, although on most of our businesses, we are continuing to ship money to media.

Next, Glad. Our Glad business saw healthy growth in the quarter. We feel very good about the foundation we created for the base Glad business, particularly in the trash bag, wraps and container segments. We're now putting heavy attention against the joint venture, which has been finalized with Procter & Gamble.

I would tell that you our entire organization is extremely excited about the opportunities we see ahead of us in this venture and we're moving quickly to leverage the strengths from both companies. Now, for competitive reasons, we're not going to be discussing details or timing of this activity.

Now onto specialty products. You know this is a very important part of our portfolio representing about a third of Clorox sales. It includes our cat litter, seasonal products, dressings and sauces as well as auto care business. These businesses are really hitting on all cylinders. This quarter, the segment grew shipments by 6% excluding divestitures and that was fueled by our charcoal, salad dressing and litter business.

This is the sixth out of the last seven quarters that this segment has grown volume by mid single digits or better and that's an impressive track record. Our charcoal business, for example, showed strong, high-single digit shipment growth behind our efforts to extend the charcoal season and despite the difficult comp from a year ago quarter when there was unseasonably warm weather, our results on charcoal continue to deliver record shipments and record share. In fact this is the 17th consecutive quarter of Kingsford Charcoal share growth. Now, I'd like to reinforce here, specialty is a very important part of the Clorox portfolio and overall outlook.

Finally, regarding our total U.S. businesses, we continue to see the shipment trend toward untracked channels in this quarter. As we've seen for the last six quarters, the rate of growth for non track channels significantly exceeds that of track channels. As I mentioned at our last conference call, we developed a methodology to measure our all-channel growth which combines IRI store scan data and household panel data. While not perfect, we still believe it is a good indicator of consumption rates, particularly over time. Our current analysis shows that our all-out list 52-week dollar growth rates for our domestic category continues to grow at mid single digits. Our Clorox domestic shipments over this period were slightly higher, so our volume shipments are essentially in line with the dollar growth of our categories.

Now, I'm going to move to international. As expected, the household products Latin America other segment declined double digits this quarter primarily due to political and economic problems occuring in Argentina and Venezuela, along with some specific planned actions on our part. Now, even though Latin America continues to depress our total company, top line results, in fact, the impact this quarter was about two points, we're still seeing strong evidence that we are executing exactly the right business drivers to make those country businesses both healthy and profitable over the long term.

Some of what we're seeing in Latin America mirrors what we saw in the U.S. as we focused on our business model. Let me give you some examples. We now actually improved our cash management levels by implementing the right terms and collection policies in this difficult environment. We also significantly reduced low margin SKUs and noncore brands, now that's lowered shipments but that's improved our profitability. We expect continued progress here. But at the same time, we're strongly supporting our 19 core brands in the region.

We're also continuing to rationalize our customer base to improve service levels and to lower our costs. And finally, our folks have done a terrific job of successfully executing cost savings projects throughout the entire geography. Now, while we have a smaller Latin America business, we are seeing substantial improvement in virtually all of the rest of the lines of the P&L.

This quarter, Latin America's gross and operating margins have improved by more than 600 basis points. In fact, every country has made significant gross and operating margin improvements except for Argentina and our Latin America working capital requirements have dropped by more than a third. It's the biggest driver of the company's total improvement this quarter.

We continue to feel we're taking the right actions to improve our basic Latin America business fundamentals even at the expense of top line for now. When our turn around work is completed and those economies improved, we expect our business to be much more proprietor profitable and support future growth.

Now, I want to shift gears and discuss some of the progress we're making against growth, today focusing on our innovation work and some of the new products we're launching. In November, at our analyst meeting, we discussed a number of improvements we're making to increase our innovation output. That included getting even closer to the consumer to better identify key dissatisfiers and new product opportunities. Increasing the use of new product prototyping with early and frequent consumer feedback. Improving our new product processes. To reduce cycle time throughout the entire development process. Increasing technology partnerships to expand our portfolio technologies and developing more and bigger proprietary game-changing ideas. These changes have been being implemented over the last couple of years. We're now beginning to see the impact on our current new product pipeline. Let me give you a few examples.

On technology partnerships, in the second quarter, we began shipping a product improvement we discussed in November; Glad's Food Freshness Bags. This technology is targeted at addressing the number one consumer product need, that of keeping food fresher longer. The product's called Glad Fresh Protect 2. They are storage bags that incorporate a plastic from Dow which improve the bag's breatheability, significantly reducing dehydration of foods keeping fruits and vegetables fresher longer. This should be a positive in this tough segment of the business.

At our analyst meeting, we also highlighted another technology we were working on to address consumers' desires for cleaning products that were easier, faster and more convenient. Starting in January, we began shipping two new very unique products designed to fill this need; Clorox Bathroom Cleaner with Teflon and Clorox Toilet Bowl Cleaner with Teflon. These formulas remove tough stains as you'd expect from our cleaning products. But additionally, Dow's Teflon technology adds surface protection agents that leave behind an invisible protective shield that doesn't allow dirt and grime to stick to it. These products keep surfaces clean longer and make touchup cleaning far more effective. In tests, consumers reacted positively to these products. In fact, they liked them so much, they wouldn't give them back to us.

Now, in addition to these two new products, we're also launching a number of line extensions in home care this quarter. The first of these is Soft Scrub Orange, which brings the popular orange scent to the liquid abrasive cleaner segment. We're also launching Clorox Flushable Wipes and Clorox Wet Floor Wipes. These products leverage our leadership in disinfecting wipes and convenience mopping providing consumers with fast, convenient touchup and cleaning options.

In auto, we're launching Armor All car wash wipes. This is a large premoistened wipe with a cleaning solution designed to clean and shine painted car surfaces without streaking. Much like Clorox ReadyMop, Car Wash Wipes eliminates the mess and time associated with the bucket and hose. It allows consumers to clean their cars in about half the usual time.

As you might expect, we feel good about all of these new items. Along with the potential for future new products coming out of our game-changing ideas group. That concludes my business updates, now I'm going to turn it over to Karen who will provide information on Project Delta, review the second quarter financial results and discuss our outlook.

Thanks, Gerry. Now, regarding Delta, in December, we turned on the first phase of this project, and that included SAP and SEBL software as well as processes to present customer planning, logistic, the order to cash process and some of our financials. So this phase included all customer facing activities and bottom line as Craig said, all systems are now go.

We quickly re-established our pre Delta order shipment turn around time and now we've lifted our blackout window on new product shipments. So, while there are always challenges associated with a large scale implementation like this, and no one would say it was 100% perfect, our Clorox Organization has just done a magnificent job addressing all of the issues and I want to personally thank all of them who have been involved in this successful effort.

Regarding any business impact, it appears that this implementation did not significantly change shipment demand for either quarter two or for quarter three. While this was some inventory buildup by customers early in quarter two, this extra inventory was worked through by the end of December.

Now in this current quarter, the January to March quarter, we expect to be quickly moving through the stabilization period to normal business operations in the new environment. Our next phase of Delta, which includes processes and systems to support our manufacturing and procurement operations as well as the rest of our financial systems will be phased in beginning later this calendar year. So more on that in the days to come.

Now turning to our financial progress, as Craig and Gerry highlighted, this was another quarter of strong financial results, improved P&L quality, stronger balance sheet and also record second quarter cash flow. Now, since I know that many of you listening may have questions about two things in particular, let me start there. The first question is about the three-point sales to volume gap and the second is why did we beat our own guidance?

Now, part of the sales to volume gap or about one point is what we expected and also what we communicated in our period guidance and that is positive product mix and lower coupon spending offset by currency effects. So this was expected.

Virtually all of the earnings favorability came from activities that improved our revenue per case adding up to the other two points to favorable sales to volume gap. First, we have lower trade spending of about 3 cents per share related to closing out retailer promotion programs trapped by our legacy systems. Before moving over to new trade programs to be tracked by our newly installed SEBL software, our sales folks were closely managing the final stages of this changeover and we're being very careful to make certain there were no negative spending impacts that would carry over as we started up our new systems and quite frankly, they did a terrific job in managing this conversion.

Beginning December 1st, we began tracking our promotion program spending on our new Delta systems. Now as we become more comfortable with the power of this software, we will have greater and earlier insight into promotion spending in the future.

The second area of favorability worth about 2 cents comes from accelerated benefits related to process improvement and cost savings initiatives impacting revenue. These are projects being trapped as part of our cut costs everywhere priority. One piece of this is due to new promotion spending guidelines that are resulting in greater spending effectiveness and efficiency in our trade promotion programs. We're also seeing lower deductions and reduced product returns driven by improved product quality. Again, our organization has done a great job implementing these new initiatives. So, in a nutshell, we derived about 3 cents from our legacy trust promotion programs and 2 cents from various revenue-focused cut costs everywhere projects.

So I'll turn now to other highlights in our financial performance this quarter versus last year, including our gross margin and balance sheet and cash flow. As a reminder, we've posted supplemental financial information on our investor relations website under the heading of quarterly results. This information should help you understand in more detail drivers of unit growth as well as income statement and balance sheet changes.

Second quarter gross margins expanded by about 340 basis points. This was our fifth consecutive quarter of gross margin expansion with varied strong improvement in most of our business units. Now about 100 basis points of this improvement was due to the favorable system conversion results that I mentioned above. But about 240 basis points were related to the significant progress our people have made during the last year against our cut costs everywhere initiatives including what I mentioned a moment ago.

Just to give more color to this, we continued to see benefits delivered from all parts of the organization, including the closing of the litter and charcoal plants that we announced last year and other things like improved truckload utilization. Also, a procurement group is using reverse auctions to lower colorant costs. Our SKU reduction efforts also continue to deliver cost savings from reduced outside warehousing expenses to enabling longer, more efficient manufacturing runs.

As expected, we invested a lot of the savings back into the businesses quarter. Advertising and noncoupon sales grew by 36% behind increased media spending for new products as well as the core business. We also increased R&D spending this quarter by 14% behind new product development resources as well as increased expenses associated with the Glad joint venture.

As we announced earlier, this quarter we concluded a review of our operations and concluded that we had an impairment in Argentina. The competitive pricing environment there continues to be fierce as manufacturers vie for a bigger share of a smaller consumption pie. As we updated our fiscal year plans, it became clear we needed to be more aggressive in pricing to maintain our strong share leadership positions. That resulted in lower revenue than we had been modeling, and thus we derived a lower value for the business.

This quarter, we recognized a $30 million asset impairment charge impacting the current quarter by 11 cents and now will be impacting the back half of the fiscal year by about 3 cents due to the higher effective annual tax rate. At this time, we do not anticipate an additional impairment expenses this year, barring any major operational disruptions caused by political, economic or competitive conditions.

Moving onto our balance sheet we continue to improve our working capital balances this quarter with working capital as a percent of sale as minus 2.0% and that's a 230 basis point improvement versus prior year. Our Latin America operations which made tremendous improvement in lowering the receivables balances were the biggest driver of this change. Details of particular balances and days sales outstanding are provided on our website.

Looking at cash flow, I should point out that the numbers are preliminary, we continue to deliver strong results this quarter with cash provided by operations coming in at $199 million, up a record 15% from a year ago quarter. So for the first six months of the year, cash provided by operations as a percent of sales hit 20% and that should continue to put us in the top third of our peer group.

So let me just step back and summarize what we've been seeing as it's pretty consistent progress against all of our targets. This is the sixth quarter in a row of mid single digit growth in the U.S. It's the fifth quarter in a row of significant gross margin improvement. In FY '02, we increased advertising expense for the year in 9% in FY '01 and now we've continued to see increases in the first two quarters of FY '03, just as we promised. In FQ '02, we increased our operating margins from 18.2% to 18.8% and now we've seen an improved operating margin in both quarters one and two of FY '03.

We've had eight quarters in a row of year on year working capital improvement and our cash provided by operations has hit a record in four out of the last six quarters so we're meeting all of our operating targets on a consistent basis.

Let's move onto our guidance. I've heard from some of you that our movement to GAAP guidance and GAAP reported results has caused some confusion. As you saw in the press release, we've tried to address this by highlighting items occuring in the quarter and the year ago that result from impairment, restructuring or divestitures. We've also put this information on our website. We hope that these items that we've highlighted help you in understanding the true strengths of our ongoing operations. Related to guidance, we're going to continue to provide sales-appropriate operating information as well as arrange for EPS.

So for the full year, we now expect to GAAP EPS to be in the range of 221 to 227. That's an increase from our previously communicated 218 to 223 range. This improvement reflects some of the Q2 favorability falling to the bottom line for the year. Not all of it is dropping to the bottom line as we will be investing some in some new product launches in the second half.

Now just as a reminder, the full-year range includes 6 cents per share from our first quarter charge associated with our decision to sell our Brazil business. It also includes the 11 cents per share Argentine goodwill impairment charge recognized in the second quarter, as well as 3 cents in the second half of the year to reflect the Argentina impairment impact on our annual tax rate. So the GAAP earnings in our guidance isn't the clear statement of the health of our ongoing businesses, given that there is 20 cents of nonoperating charges included in the full-year number.

For the full year, we continue to expect our top line to be up low singles both as reported and before divestitures. We expect divestitures to impact volume and sales by about two points. We continue to expect our international business to be down driven by the significant volume contraction in Latin America from continued economic softness as well as our rationalization of our low-margin products. This will depress our reported top line growth for the year by two points as well. So that's a total of four points off of our annual growth due to the choices we've made to improve the strength of our overall portfolio.

For the year, total company sales should be higher than volume given the favorability we experienced in the first half of the year as well as the improvements we're seeing from trade promotion efficiencies. We expect our cost savings initiatives to improve our margins in every quarter, but we are expecting this to be partially offset by rising raw material costs for the rest of the year.

We also plan to increase advertising and noncoupon promotion spending as we continue to invest more behind our core brands and new products. We plan for selling and admin costs to decline modestly as a percent of sales for the full year, although, we will see an increase in the fourth quarter. We continue to project our annual operating margin in the range of 20 to 21% of sales. This depends on cost savings progress, increases in raw materials and product mix. Now that's up significantly versus last year's 18.8%.

Our tax rate for the year is increasing to come in between 36 and 37% due to the nondeductibility of the Argentina impairment charge.

Moving on to third quarter. We expect earnings to be in the range of 49 to 52 cents. On a reported basis, volume is expected to be flat to down slightly as we lapped the introduction of ReadyMop in the year ago quarter. We know that Clorox ReadyMop added about two points to our overall category growth rates all of last year, and in particular, third quarter is a strong base period. In addition, we expect divestitures and Latin America softness to reduce overall growth by about two points each, during the quarter.

We expect sales to lag volume in third quarter due mainly to introductory expenses related to our new product launches. We expect modest improvement in operating margin as strong gross margin improvement is partially offset by growth investments. Again this quarter is being hit by one cent in our tax rate for the Argentine impairment.

Moving onto fourth quarter guidance, we expect volume and sales to be up low to mid single digits behind our third and fourth quarter new product initiatives. We expect the impact from divestitures and Latin America softness to begin to moderate some. They'll reduce overall growth by about one point each in that quarter. We expect earnings to be in the range of 67 to 71 cents. This range reflects increased spending behind fourth quarter new product launches. It also reflects two cents due to Argentina tax impact.

You'll recall that last year we converted to only reporting GAAP in the fourth quarter when we reported 63 cents EPS. Now during that year ago fourth quarter, we had several puts and takes that all netted to about zero on the bottom line so the 63 cent we reported last year we feel is an appropriate base against which to compare the fourth quarter performance.

As a reminder, for the rest of the year, our earnings announcements will be delayed by approximately one week as we work with both other legacy and new SAP systems to close the books. Now let me turn this back to Craig for some closing comments.

Thanks, Karen. Hey, before I open this up to our Q&A, I want to just recap what I think you ought to take away from this call today. Again, I'm going to frame this in the context of the four priorities we keep talking about with you and our organization.

First, behind the priority to drive growth, as you will see in our P&L, we are investing in brand building and stepped up our investment in innovation. I can tell you that we feel great about the new products filling our pipeline during the second half of the year. The early stages of our growth plans are tied very closely to cut costs everywhere. And I think as we communicated before, we've made tremendous progress in this area. There's lots more opportunity, we think. Those of you who follow us know that this is the engine that's going to drive growth in Clorox for sometime to come and is going to give us the resources that we can use to invest in our growth initiatives.

Our initiative to get more customer focus is working well for us and we're quite proud of the recognition that we received from Wal-Mart. Finally, and this is a big deal in the context of our priority to out-execute the competition, our people absolutely delivered on the first phase of our systems and process project. That's under way and it's up and running. We feel good about that.

To sum it up, we had a great quarter. We're delighted that the second quarter results came in so strong for the company. I am absolutely convinced that the focused areas that we've chosen are the right ones for the business. They are working for us. Things are clearly headed in the right direction and we're confident we can deliver on our expectations for the year. So with that as our final wrap up, let me open this up for questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Carol Wilke of Merrill Lynch.

Thanks. I have a question about the sales and volume perfect spread outlook for Q3. You've had four quarters now you actually had the GAAP the way you wanted with sales bigger than volume even with the ReadyMop last year, even in those two quarters it was launched in ramping up your sales were bigger than volume. So is it just being conservative in terms of the amount of promotion or is there something that's really needed that is going to have that swing back the other way with volume being up more than sales because of the new products?

Couple things are going on in the quarter. We are expecting a little less favorable product mix. We also this quarter, the 100 basis points or the couple of cents that I attributed to the conversion of systems, you know, will likely not happen or certainly won't be as big, but also we're going to be spending behind new product initiatives and those typically carry with them, you know, more significant trade promotion spending. And that's what we're seeing for the quarter.

I guess what surprises me is I would imagine there was a lot of trade promotion behind the launch of ReadyMop but you still had the favorable volume sales spread?

But ReadyMop carried a higher dollar ring per case, and that's really what was going on there as well.

Okay, got it. Thank you very much.

Our next question comes from Wendy Nicholson of Salomon Smith Barney.

Hi. I guess the first question, is there any update you can give us in terms of management succession and how the search for the new CEO is going?

And the second question is on the gross margin. It sounds like some of the things that led to the huge margin expansion in the second quarter are permanent, really. The systems conversion and better cost management. So I guess I'm surprised that the second half guidance doesn't reflect more gross margin expansion. Are you setting ourselves up for more upside surprises to earnings?

Why don't I handle the raw materials right now.

Go ahead.

Yes, you're right. Many of the things we've put in place are in fact permanent or structural improvements in our overall cost structure. Things like shutting down plants, et cetera.

In the second half of the year, we are, in fact, seeing and expect to see raw material price increases. You know, as an example, just a benchmark, linear low density resin, we right now is in the high 30s in terms of cents per pound. By the end of the year, we're targeting that that could be in the mid to high 40 cents per pound and we're taking that into account in our forecast and that is pretty consistent with others in the industry in terms of what they're-expecting.

So, that kind of raw material increase in costs will moderate the gross margin improvement, all though we still expect to be seeing margin improvement every quarter.

But how quickly is that resin price going to change impact gross margin? Are you already seeing it now or is that several quarters away? In other words, how far forward have you bought?

It's more in Q4 that we would expect those changes. I mean, we're beginning to see a little bit of it now, but it's really more significant in Q4.

Okay.

Let me see if I can -- I'm not sure I can give you a lot of information on the succession topic. I will tell you, you know, based upon reading some of the analyst reports and then reading those, it looks like that's a little bit of overhang on the company and I personally don't understand that. I think I've said this before. This company's going to continue on the path that we've been continuing on.

We've got a strategy in place that as you saw in the last quarter at the end of last year that you see in this quarter that it's working for the company and that has been signed up for by the management and clearly by the board. That's not going to change no matter what happens here. You know, the board is committed to making the right decision on whoever succeeds me. The process is in place and we're working against it. It's being led by the Board. Other than that, I don't have much to report. As soon as we know, you'll know. But this is, we're doing this very, very carefully, taking our time on it, and based on what I can see and the way the Board is handling this, it's being handled quite well. I'm confident about the outcome.

I guess, you know, not to be too direct, but I guess one issue everybody seems to be focused on is that you personally are selling a lot of stock. I guess some people could interpret that as sort a vote of, you know, no confidence or low confidence about whomever come as long and replaces you. Can you comment on whether you are going to sell more stock in '03? I'm sure I'm being unfair in those comments but I guess that's another issue that's out there.

Well, you are being unfair, I think, a bit. You know, this selling stock has nothing to do with anything other than I need to have a better asset allocation of my portfolio and I have part of this is some work that I'm doing with a financial advisor. I won't mention the name otherwise we'll get everybody mad that I'm not using your company.

But, I first of all, own a fair amount of stock or have a lot of stock under option, and we filed a -- I filed a 10-5B1 last year for the express purpose of taking it out of my hands. In some ways I'm sorry I did that because the problem was that every time you looked at your screen, you saw me selling about 6700 shares of stock. I probably would have been better off to make the decision but did I it that way to be sure we were squeaky clean on this. This has nothing to do with my confidence on the company. I have a lot of confidence in the company. It's simply about, you know, diversifying my portfolio and that just simply makes sense and I think anybody would do that.

Fair enough, Craig. Thanks.

Our next question comes from Amy Chasen of Goldman Sachs.

Hi. I have two questions. First is sort of a little bit philosophical I guess, because I'm guessing you guys are not ready to give fiscal '04 guidance yet, but give that this year is including about 20 cents in asset impairment and other charges that won't be repeated, can we kind of add that back to the number and then grow the earnings roughly 10% on top of that to come up with some idea of what fy '04 could look like? Is that a fair way to look at it?

My guidance would be to do anything you want, but we're not going to give guidance on '04. I really don't want to comment on '04. We're comfortable giving you what we've given you on '03, but you know, we've got a lot of work to do around our plans for '04. Our folks are working on that now. At the appropriate time, we'll come out with the '04 guidance.

Let me ask it another way. When you gave your guidance of minimum double digit growth, was that on a GAAP basis or on an operating basis?

Amy, here, let me talk to this a moment. You know we set targets that we communicated to all of you in November, and we're still holding ourselves to those targets. Those are operating targets and so even though, you know, we obviously have not completed our FY '04 plans, the operating plans of the company are going to be put in place with those targets in mind.

Then, obviously when we put together the plans and we have got the operating plans in place, we're going to have to take a look at overall guidance from a GAAP perspective that will take into account not just the plans, but we'll take into account the share repurchase impact, we'll be watching our Latin America businesses. If it looks as though, you know, the stabilization that we're beginning to see and some of the, you know, better returns coming out of there that we're beginning to see, if that looks as though that's solid, you know, we won't have to provide guidance that will, you know, take into account potential impairments. So there a number of factors that will come into place but I still go back to those targets because those are ones that we stand by.

That's great. So I mean, it's possible that FY '04 could be an above average year on a reported basis, it sounds like.

You never give up, do you?

We just can't say what it's going to be at this point.

Okay, fair enough. Karen, just one more question on the redeployment of your free cash flow. Free cash flow continues to come in at least well above my expectations. Other than share repurchase, I mean, at some point, you are going to really start to be getting up against the Henkel position and, there's only so much stock you can buy back-and can you talk about what you guys may do with that cash?

I think that's something that -- the good news is we've got great cash flow. We need to be very careful about how we invest that cash flow to drive the returns to the company. This is a subject, frankly, we're in the process of discussing and doing some work on with the board. That's all I'm going to say about that at this point.

Okay, thank you.

Our next question comes from Andrew Mc Quilling of UBS.

Thanks very much and congratulations on a nice quarter. Craig, your comments regarding the improvement and trade promotion effectiveness sound pretty encouraging. Can you talk about in North America the benefit, you know, from a sales versus volume perspective you saw in the quarter in North America and how you expect these benefits to look over the coming three quarters?

You know, I think Karen talked more of the specifics about that. I may hand part of that this to Gerry but I think one of the things we've been saying all along is that we've been doing a lot of work around a lot of analysis around our spending mix. Both advertising promotion as well as the money that we invest with the trade and one of the things we found out from that is that, you know, we needed to shift some money in more brand-building kinds of activities.

One of the things that I think clearly is showing up in that is that it's working. You see that clearly in the North American business where we're growing, you know, solid mid single digits.

And I guess the follow-up, you know, Frank Tatasio showed slides on looking at the return on trade spending. Have you benchmarked it relative to your competitors and do you see more significance for more than just maybe one year?

I don't know. We have our own analysis internally where I think a return on investment was up, what, around 8 points or something in our spending, but in terms of benchmarking our competitors, very difficult to do. Almost impossible to do because it's hard to get on the internals on our numbers. We know some of our competitors aren't even public companies, SC Johnson is an example, but to get into the internals of their numbers is impossible.

Let me pick up there. I think that we're going to continue to work this trade spending efficiency as an ongoing activity and I think we can continue to make progress. From a guidance standpoint in November, we said volume and sales over time we expect to be growing at about the same rate. And that's just a -- but at any one moment in time, you may have it go one way or the other.

We do think it's critically important that both in the areas of unsalables and deductions and trade spending efficiency, these are all positive things that are going in the right way. But we're going to have to have competitive activity that goes on in a particular point or any particular point in time that -- or new product introductions that will be offsets to some of these things. I think he best way to think about it is over time we're hoping volume and sales sort of go along at the about the same rate.

And the volumes go up more than they would otherwise.

Right.

I guess the next question,you know, you mentioned the resin price increases. Obviously, the market's been very worried about the mid to high 40s numbers for LOTD resin. Can you talk about how you stand competitively and what's the likely response of your private label competitors to these types of resin moves?

Well, I think as we've talked over time, Andrew, for resin in particular, and also for some of the other major commodities that we purchased, we put in a lot of mechanisms that help stabilize the pricing for us. You know, some of these mechanisms help us in lagging the markets so we have time to react and manage it properly. You know, many of our competitors buy at spot prices.

So although I don't know the particulars of individual companies, for example, I would expect that a private label company would be hurt right now with the up-tick that we would expect in resin because I don't believe that they would have the ability to put in place the overall structure that we have. So, you know in this kind of a time frame, we may, in fact, enjoy some advantages.

I think one of the things we said in the past when we got into this business early on, we wanted stability into our resin cost, we thought we had to in predictability. If you look back, I don't know, six or eight months ago, we probably didn't benefit as much from lower resin prices, but on the other hand, because we've got, you know, a high percentage of our resin hedged, we're probably better off today than our competitors, so I think in a way it's good news for us.

Terrific. Thanks very much.

Our next question comes from Ann Gillen of Lehman Brothers.

Hi. Just a quick follow-up on the trade promotion and the more efficient lift that you seem to be getting. I'm just wondering if you can elaborate on either what businesses are responding or what channels in retail are responding so favorably?

Yeah. I think that the businesses, it varies. One of the benefits of having a portfolio like we have, that spans a number of different categories, is that they have different competitive environments, and we may get more benefit in a particular category at a particular time which might offset competitive activity going on somewhere else. I think that's a real benefit of the portfolio that we have and we see the benefits of those. But at any one point in time, that could shift a year from now. It could be the opposite of what it is today. We do try to manage that very carefully.

I personally don't see a big difference from a channel standpoint. I think you and I talked about this. From a channel standpoint, I don't see a big difference in terms of efficiency. It may be that tracked channels that we're doing a slightly better job of getting what we want for the money that we're spending, and in the non track channels, it may that be we are not spending money if we are not getting what we want and that probably is sort of a generalization that I could give you that is true.

From sort of where we go from here, I think we may be on the front end of this trade spending efficiency from an industry standpoint because of the analytical tools that we have and the focus that our organization has on this thing. Because I think we can make continued progress in this area and in many ways, some of the pain that we took over the past several years, two to three years, and some of our price rollbacks got our price value proposition in the right place and so now we're just dealing with a competitive situation here or there that might affect how we spend in a particular point in time with a category.

You just answered my next question, so thank you. It does sound like some of this you would characterize as somewhat proprietary?

I'm not getting into all of the details. We feel good about the analytical tools that we have in terms of evaluating what we're getting along with the level of training and attention we're placing against our sales folks dealing with our customers on this issue.

Okay. And just a follow up on the resin question. It does sound like you are being appropriately conservative about whether you will be able to pass on any increases to the shelves. Is that the right read?

Yeah, I think that is the right read at this point.

Great. Thanks much.

Our next question comes from Joe Altobello from CIBC World Markets.

Good afternoon. Just two quick questions. First, talk about the laundry business for a second. I think you talked about a little weakness in the bleach area. Can you give us a little more color there in particular are you seeing increased competition from private labels and lower priced brands? And second, one question on the advertising spend, not to beat this to death, but what's the budget for the second half of the year as far as growth and advertising spending?

I think we're not going disclose the specific numbers, we expect do have a continuing increase in the level of advertising in the second half of the year overall but I don't think we're going to give the specifics of the exact amounts that we're going to be spending as we go through, but it will continue to increase.

Going back to the bleach topic, over the past quarter, we have seen some softness. Some of it's coming from private labels and some of it's coming from other activity going on with competitive-type products in the category. You know, we've been in this bleach business a long time, and we've had lots of things come in and out of the category and we know how to manage against that.

At times it may be equity building and other times you may need to be more agressive in terms of what kind of support you get from customers, but after reading and looking at, including some analytical tools that we have over this past quarter, we've made some decisions that we'll be shifting some funding to get more aggressive with our customers right now, and we think that's the best defense, along with other activities that I'm not free to describe right now.

So increased trade spending in the third quarter?

In the fourth quarter. Not in the third quarter.

Okay.

In the fourth quarter starts. How long that goes is not to be determined right now. But we will have increased spending starting in the fourth quarter.

Great, thanks.

Mm-hmm.

Our next question comes from Constance Manetti of Prudential Securities.

Hi, could you talk about two things. One, can we have an upgrade on how things are going with impress, but secondly, can you tack a little bit about the churn in Latin America when you'll have pretax profits instead of losses, and how the change in working capital may have affected your overall gross margin?

I'm not sure we have this. This is Craig. Let me take the first one and Gerry can maybe handle the Latin America question. I'm not sure we have a lot to report to you on you used the word, impress. The bottom line is we signed up a joint venture with Procter & Gamble. We announced that at our November meeting. I think I mentioned in my comments that that is now closed. We got through the FDC, it's been closed. We are investing in that business. You see that in the P&Ls. We're putting resources particularly in R&D. I think that's one you've got to stay tuned on. We're not at liberty to talk about how, you know, what specifically we're doing for obvious competitive reasons.

Okay.

Now, on the Latin America front, we actually are improving the Latin America situation right now pretty substantially in terms of operating profits. And when you get beyond the impairment charges and just look at the sort of the management profit or the operating profit of the individual countries, we feel good about the progress that we're making.

And in particular, I think also we have both administrative cost improvements, cost savings improvements. We're lowering some of our costs to serve with our customer, some of those kinds of costs and in addition we've got lower working capital because we're managing sort of all of those aspects right now. So we feel very good about both not only impairment may be masking some of that, but very good about what's actually happening in the businesses right now.

Now Argentina is a difficult situation. But even in Venezuela where it's the political situation is causing all kinds of volatility there's good progress even being made there.

So ex impairments, is there a pretax profit or is the business at a loss?

There is pretax profit.

Management profit line?

Ex impairment.

Okay, great. Thanks.

Our next question comes from Andrew Shore of Deutsche Banc.

Craig, hi. Two questions. The first is I know you mentioned a couple of times about improved efficiency and trade promotions. I'm just wondering does that mean you actually know now which 50% is wasted?

This is the never ending story with Andrew Shore. I thought you had the answer to that and you were going to sell it as a proprietary vehicle.

The question I have is about succession, as well, I thought this was a good point that somebody asked me. When you try to have continuity and strategy, I wonder why would you bring in an outsider? You typically bring in outsiders when you want to change the strategy? Is this only a format you have to do to placate the board?

We don't do anything here to placate the Board. We have a very active Board who is very involved with the management. We don't run the company on that basis, and I think you probably know that.

Also, we didn't say we were going to bring in an outsider. What we said was that we are carefully, you know, that I am going to retire, that's the starting point, that what we are going to do this in a careful and orderly way. It's frankly the same process the board used with me back in '92 if you remember that. We announced to the outside, I think it was in late '91 or early '92 that Mr. Chip Weaver was retiring and we were going to look both inside and outside the company for his replacement.

In this case, we went with right or wrong, an insider and that's exactly what we're doing here. The Board feels that, you know, this for the best practice, I guess, right or wrong, we feel the best way to do this is to look at the universe and make sure we have the absolute best person to replace Sullivan. That's about all I can tell you.

Okay, great. Thanks, Craig.

Our next question comes from Rebecca Senteman from Allstate.

Thank you for taking my question. Two quick ones on gross margin. First, can I assume that there was no raw material impact in the quarter?

It was minimal. Yep.

Okay, great. And secondly, I don't know, could you quantify at all the impact that the charcoal plant maintenance had on margins?

It was, for the quarter, it was negative. We had expected it in the first quarter but it was negative in the second quarter. I don't have that particular detail at hand. Maybe if I could ask you to call up Doug Hughes a little bit later, he'd be able to get that for you, but you know, obviously, overall we came in pretty strong at the gross margin line.

Okay, great. Thank you very much.

Our next question comes from Linda Boltonwiser of Fond Stock.

Thank you. You had mentioned that the working capital improvement in Latin America accounted for a good portion of the total improvement for the whole company. Excluding Latin America, was there cash generated from the reduction in working capital?

Oh, yeah. Definitely. We saw working capital improvement across the rest of the business. It was just, you know, on a pro rata basis, they have the biggest pro rata improvement.

Okay. And my second question is, in terms of the discussions the board has had regarding the future of the company, has the topic been raised in terms of selling your whole company?

I wouldn't even know how to respond to that. I think the Board would if you were to talk to the Board, what they would tell you is that they think this is an ongoing enterprise that's doing extremely well. You know towards end of the day, if somebody came along and offered the shareholders, you know, an amount that made sense for to us combine with somebody else, they would have to look at that as they would look at any business proposition. But that's not, you know, on ongoing discussion.

Okay, thanks a lot.

I think it sounds like we're about wound up here and at the risk that Andrew Shore may come back on or Wendy Nicholson may come back on to ask what I'm going to do for the rest of my life, I think we ought to close out the conference call. I thank everybody for joining us this morning.

We hope we got your questions answered and I hope you got the sense that all of us here at Clorox feel very strongly that we're doing the right things for the business and we're delivering the kinds of results that we set out to do and expect to do. Stay tuned for our next quarter. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.