高樂氏 (CLX) 2003 Q3 法說會逐字稿

Good day and welcome to the Clorox fiscal year 2003 third quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later there will be a question-and-answer session, instructions will follow at that time. If anyone should require assistance, please press star followed by zero on your touch-tone telephone. As a reminder, this 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.

Thank you very much, good day and thanks much for joining us on our third quarter conference call. Also with me here in Oakland is Gerald Johnston, president and CEO, Karen Rose, Chief Financial Officer and Steve Ostenfeld. He's returned to investor relations for a while while we search for a long-term replacement we previously served as director of (indiscernible) we're delighted to have Steve back. We're going to be broadcasting this call over the Internet and a replay will be available for seven days at www.clorox.com.

I'm going to start off today by spending a few minute providing observations about the query. Gerry will follow up with a business update and Karen will come on to spontaneous discuss some of the key financial drivers and results and give you a look into the future. Then we're going to open this up for questions as we normally do.

Before we begin, I do need to remind you the material we're providing during the call contains forward-looking information and actual results may differ materially from what we're projecting. Information about factors that can 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 year-ended June 30, 2002.

As you saw in the press release, and as expected, we had a very good quarter. We delivered 50 cents a share on a GAAP basis, and that was consistent with our forecast. As we noted in the release, we delivered this even while absorbing about 7 million in unforeseen administration expense related to the stock performance incentive plan that we now think is going to pay out. Karen's going to talk a bit more about this in detail in a few minutes, but recent share price appreciation indicated we should recognize this expense or potential expense in quarter 3.

Now, on the top line, third quarter was our toughest comp. this fiscal, as we (indiscernible) the introduction of Clorox ReadyMop, which we introduced.... That said, volume and sales came in about as we had expected. Third quarter volume was flat while sales were down 1%, and up 2% if you exclude divestitures. We continue to feel good about our business and I'll share some of the quarter headlines.

First we continue to make significant investments in the business. We increased advertising and sales promotion again this quarter. Last quarter, I told you that we'd received government approval for the Glad joint venture with Procter and Gamble, and in the third quarter the folks that signed this project made great progress getting the joint venture up and running. In fact, as you may have read, they're preparing for a big product launch during the first quarter of fiscal 2004 of Glad Press 'n Seal. Our plans to strengthen Latin America remain on track, and Gerry's going to talk about that in a few minutes.

Once again, as our P&L demonstrates, we drove further cost savings across the business and achieved best in class working capital once again at minus 1.8% of sales. I think this quarter is proof once again that Clorox people are staying focused on our key priorities to ensure we deliver results. As they typically do, I'm going to take a couple of minutes to review the highlights of the quarter against the company's priorities we laid out for you earlier in the year.

First, we continue to make progress against our priorities to drive growth. We closed the quarter with a 15% increase in advertising and sales promotion as we invested to support key brands and new products. Innovations remains the key tothis strategy. We launched six new home care products. In addition to the five we told you about at our last conference call, we also launched new Formula 49 Cleaning Wipes.

Consistent with our long-term strategy to drive growth through innovation, Q3 marketing spending was up over 33% against the prior year. Again, volume growth was flat for the quarter, or up 2% excluding divestitures. In North America, which accounts for about 85% of our business, shipments excluding divestitures were up 3%.

But this doesn't really tell the whole story behind our business. As I've said before, throughout fiscal 2003, our volume results will reflect the choices that we've deliberately made to drive healthy, profitable growth long term for our business. As a reminder, about two years ago we conducted a portfolio review, which we told you about at the time, and we made a decision to exit certain non-strategic businesses. These are the right long-term decisions for our business. In the short term. they were impacting our top line by a little more than two points.

As we began the fiscal year, we established plans to restore health to our Latin America business. As Gerry's going to tell you, we're continuing to see real results in this business, thanks to the tremendous efforts of all of our folks down in Latin America. Second, a priority to cut costs everywhere continues to deliver great results. Despite raw material price increases during the quarter, gross margin expanded by 300 basis points. I think this demonstrates the true value of our cost savings program and Karen's going to be talking a bitmore about that.

Third, again in this quarter we achieved significant recognition behind our efforts to get more customer focused. Wal-Mart named Clorox Vendor of the Year in department 13. As a reminder, department 13 is a very competitive area that includes laundry, fabric care, home care care, insecticides, dish care, air fresheners, brooms and mops, and encompasses companies like P&G, Unilever, Colgate, SCJ, Reckitt Benckiser, so we're very proud of this. This is just one example of how we're succeeding with our customer partners, and we have lots of others, both on the food as well as the non-food side.

Finally, when it comes to our priority to out-execute the competition, the process and systems improvements we're seeing with Project Delta are the single biggest enabler of this strategy. As I told you last time, our December go-live for Phase I was quite successful. We've now spent more than a quarter working through stabilization, and I'm pleased to report that Phase I stabilization is on track and progressing as expected. We also just completed the design stage for our Phase II implementation, which addresses systems and processing related to purchasing and manufacturing. This week we began our first round of Phase II testing.

Before I turn this over to Gerry, I want to address some activity you're likely to see over the next few weeks. We have several officers who have stock options that they've held on to for nearly 10 years, the full life of the grants. At most, there are only about two months this year when the window will be open so that they can exercise and sell the options before they expire. We expect the window to be open from mid-May through mid-June, and again in August. So you're going to see a number of form 4 filings in the next several weeks.

I think it's important to note that, after these options are exercised, and any shares are sold, each officer will still comply with Clorox's stock holding guidelines, which are described in our proxy where we require officers to hold stock in excess of several times their salaries. In addition, these option exercises represent only a small percentage of the options each officer holds. In Gerry's case, for example, he'll be exercising only about 4% of his total stock option grants outstanding.

I also want to comment briefly on a subject that I know is on all of your minds, and that's CEO succession. As you know, back in November, we announced that I would be retiring. At the same time, we discussed our plans to have an orderly transition, as we indicated that we would be doing a search both inside as well as outside the company for my replacement. I simply want to let everybody know that the process is moving along in a careful and orderly manner. I am personally actively involved in this process as are the members of the board's search committee. While I'm hopeful we'll have this completed around the end of our fiscal year, that is on June 30, there's no imagine to come that date. That is, it could go beyond that time.

But I do want to give everybody assurance that as we move forward, the bored and senior management of this company, everybody here, we're extremely committed to the targets we have in place for ourselves and we've communicated to you. We don't expect any senior management changes to effect the targets and goals we've committed to going forward. And with that, I'm going to turn this over to Gerry.

As Craig mentioned we feel very good about the quarter's results. Now, sales growth was lower than we've experienced in recent periods and lower than we projected going forward. But we did expect this lower growth since we're (indiscernible) the launch of ReadyMop a year ago in Q3. As I think many of you know, this was the largest new product introduction in Clorox's history and it raced our base period of comparisons. Looking at the rest of our portfolio, the results in total were really very healthy. Let me walk that some highlights from the Q3 segment results.

To put my remarks in context, I believe much of the progress we saw in and really continuing the trend we've seen over the last 18 months is due in great part to what I will call attention to the basics or doing those tactical activities to keep our core business healthy. Here are some examples from home care. As Craig noted we had six new product launches in the query, five of which we told but last quarter. But we also recently announced the introduction of Formula 409 wipes. As many of you know, we've had outstanding success with our Clorox Disinfecting Wipes. 409 Wipes leverages both our well known Formula 409 equity and product performance with the convenient wipe format in order to deliver great 409 performance.

I think it's also worth further mentioning the Clorox Disinfecting Wipes new product success story of the last several years. Despite being challenged by a number of new entrants in this category each year, Clorox Disinfecting Wipes has grown at double digit rates in four out of the last five quarters ,and continues to maintain nearly a 50 share of the growing cleaning wipes category. So, summarizing on home care, this emphasis on new products and line extensions, one of the hallmarks of our success in the '90s, supported with the right levels of marketing investment and a focus on our core brands, is a good example of paying attention to the basics.

Now, let me switch to our specialty business where strong results were also driven by a focus on fundamentals. Every one of our major businesses in the segment, charcoal, food, auto, cat litter, grew at healthy rates. In total, the entire segment grew 5% on the interfaces, and 9% excluding divestitures. More impressive, this segment, excluding divestitures, has grown at least 4% for seven out of the last eight quarters. Now, I know a number of you don't really follow these categories as closely as other portions of our business, but they do represent 40% of domestic sales in Q3, a significant portion of our portfolio. So achieving this type of top-line growth on these businesses is quite important while also contributing meaningful profit growth. I think it's a great example of how we apply big company capability and fundamentals to niche categories.

Now, let me give you a better picture of how it's done. Let me drill in on one of the businesses, cat litter. On every one of Clorox's key financial measures, the litter team has performed well. From a top-line view, this business was up double digits in the quarter, excluding the Johnny Cat divestiture made earlier this fiscal year. That makes 10 out of the last 13 quarters where, excluding divestitures, litter has delivered mid-single-digit or better top line growth. Now, from a margin standpoint, litter's on track to update more than 500 basis points of gross margin improvement for the second year in a row.

Looking ahead, through initiatives such as expansion of direct plant shipments, litter is going to be one of the bigger beneficiaries of activity in our cut-costs-everywhere program. All of that leads to a business that in fiscal '03 will not only be more than twice as profitable as it was two years ago, but also been a big contributor to the company's outstanding working capital improvements.

A driving great results on each line of the P&L and balance sheet is only done with focused attention on each part of the business. I think much of the same can be said about our international business, more than half of which is in Latin America. Despite tough economic conditions, the folks in Latin America have remained focused on positioning the business for profitable growth as conditions improve.

So what happened this quarter? We had over 600 basis points of gross margin improvement for the second quarter in a row, as well as the best working capital improvement in the company. How did they do it? By driving unnecessary costs and complexity out of the business, and by executing against the right business drivers to make the businesses both healthy and profitable. For example, we've improved our cash management levels by implementing the right trade terms and collection policies in this difficult environment, having a big impact on working capital reductions.

We've also significantly reduced low margin and non-core brand shipments, even at the expense of top-line growth, but really improving profitability. At the same time, we continue to support our core brands with advertising in each country.

We're also continuing to rationalize our customer base in Latin America to improve service levels and to lower costs, eliminating those where we're not making acceptable returns. And finally, we're successfully executing substantial cost savings projects throughout the geography. Simply put, this focused attention on the basic drivers of the business has produced much better results.

When you add in our Asia-Pacific business, international has nearly doubled its operating profit versus a year ago. These results give us confidence in our ability to grow these businesses as the economies improve by generating funds to reinvest in top-line growth at a later date. The last area that falls right in the bull's eye of focusing on core business is the continuing optimization of the Clorox portfolio of brands and businesses.

As previously communicated, it's our intention to continue to rationalize portions of the portfolio where Clorox is not the highest value owner. Over the last year you've seen us divest the Himalene [sp?] Institutional Bags andWraps business, Maxforce Institutional Insecticides, Johnny Cat cat litter business, among others. Each of these didn't have a good long-term strategic fit with the rest of the Clorox portfolio. In the last two months we've completed two additional divestitures, the SBP insecticide business in Brazil as well as the sale of the Black Flag aerosol insecticide business in north and South America. Although in total, these accounted for less than 2% of Clorox's total sales, they're examples of continuing focus on our core business and exiting those that are non-core. In summary, this focused attention on the basics of our business has helped drive our solid results this quarter.

Whether it's through well-executed product launches, increased advertising, executing cost savings initiatives, lowering investments in working capital or eliminating businesses that are non-core, we feel we're taking the right steps to ensure our business remains healthy for the future. There's another reason why paying attention to our core brands and the basics is so important. As we've all seen, many historically strong retailers are showing flat to declining year-over-year sales, making it challenging for consumer products he companies to grow.

Growing in this environment requires delivering better value and capabilities to our trade customers. I think our vendor of the year award from Wal-Mart is evidence of our good work here and in the past. The leading brands are also critical, because when retailers need to fight for consumers, such as in today's environment, they tend to do it with leading brands, leading brands that bring consumers into their stores, leading brands that retailers choose to merchandise to build foot traffic and generate higher dollar sales. With Clorox's position of Number 1 and strong Number 2 brands, that is most of our portfolio, we're well-suited to grow our business even when the retail environment is soft. Now, more than ever, it's critical that we remain focused on the basics and our core brands. With that, I'm going to turn it over to Karen.

Thanks, Gerry. I'll provide some details on our financials for this quarter and then I'll turn to our outlook. Starting at the top, as expected, our volume was flat as we anniversaried Clorox ReadyMop. Sales were a little bit behind volume, also as expected. This was a slightly reversal of the trends that we've seen in the last few quarters, and it's due to a couple of planned activities. The first of these involves our Clorox Liquid Bleach business.

As we indicated in our last call, we've made a strategic shift of our investments to move some money from advertising to trade spending, and that's accounted for as a deduction from sales. Now, bleach is one of those products where trade spending provides a very, very positive payback for us, and this had a modest impact in quarter 3 but we're beginning to see good initial results of this move, and as we noted last time, we expect most of the impact to be seen in the next quarter, that is quarter 4. But the other thing causing the gap is also the high level of new product activity. We announced several meaningful new products in the quarter, and they all have high introductory trade spending behind them.

We continue to post significant gains in gross margin, showing year on year improvement of about 300 basis points. This was the sixth consecutive quarter of gross margin expansion and it's on top of our strong year -ago performance. We actually grew gross margin slightly ahead of our own internal projections, despite the impact of increases in raw material pricing, notably resin, that we experienced in the quarter.

Now, the favorableness stems from our continued focus on cost-savings activity, and that includes aggressive attention to procurement efficiency, to logistics management, we closed a Charcoal plant and sold a litter plant a year ago, as well as our SKU reduction efforts. All of the cost savings we saw in the quarter were worth about two-thirds of the improvements that we saw at the gross margin line.

I should also mention that cost of goods sold was impacted as well by the Glad joint venture. In this case, it meant some added expense. We have begun to amortize Procter's contribution to the JV in our cost of goods sold. I should mention that our outlook had assumed that this would fall into our other expense line. So there's no change to overall expense from what we expected, it was just a shift in the P&L.

As expected, we invested a lot of our gross profit savings back into the business. As Craig mentioned, advertising and non-coupon sales promotion expenses grew by 15%. And that was behind increased media spending for new product, as well as the core business.

We also increased our R&D investment by 33%, and that was behind incremental new product development resources, as well as our increased R&D investment in the Glad joint venture. The favorableness we saw in our gross margin was absorbed by expenses in our SG&A line. Our SG&A was higher than we expected, due to two items: One, we increased our bad debt reserve due to the Fleming bankruptcy, and also we absorbed expense associated with the stock performance incentive plan that we've mentioned before.

As we've indicated to you both in our remarks and also in our 10-Q, we have had a liability associated with the potential vesting of these awards in fiscal '03. It's a plan that goes back to 1999. Actual final determination of this expense takes place in June. Now, accounting rules have precluded us from recognition of the expense until there was more certainty around the vesting. But with the recent rise in our stock price, we determined that there was sufficient evidence and certainty that we would vest at the 50% level, so we recognized that part of the expense in the third quarter, and it amounted to about $7 million.

Now, we still have the possibility of reaching the 100% vesting level, which would be mean another $7 million expense this fiscal year. But we won't have certainty of that until June 30. Because of the increased expense associated with the stock performance plan and the inclusion of the JV expense and cost of goods sold, we're slightly lower in operating income than we had projected. This unfavorableness is partially offset by favorable other income expense. Other income expense was impacted by three things: One, a classification of the JV expense in cost of goods sold instead of other expense where we had originally expected to account for it; and then the other two include settlement of a claim with the State of Florida that we had anticipated in our fourth quarter, and also an insurance settlement on one of our Charcoal plants.

Moving onto the balance sheet, we continue to maintain negative working capital this quarter, with working capital as a percent of sales at -1.8%. That's a 240 basis point improvement versus the prior year balance. Our Latin America operations, which made tremendous improvement in lowering their receivables, was the biggest driver of the change. Details of particular balances and the days sales outstanding are provided on our website.

In addition, starting with this quarter, we are reflecting on our balance sheet assets associated with Procter's contribution to the Glad joint venture. In total, we're talking about an increase of about $125 million, that includes 30 million for equipment and about 95 million in intangibles reflecting the technologies are bringing to the business.

Looking at cash flow, I should point out here that the numbers I'm about to provide are preliminary. They probably won't significantly change, there might just be some potential reclassifications. Our cash flow from operations was approximately $83 million. Now, this includes a contribution we made to our pension plan. In our second quarter 10-Q, we alerted you that we were considering a $54 million contribution during the third quarter. We've now done that, and also now we are potentially going to make another contribution of approximately $37 million in July, after the close of this fiscal year.

Both of these contributions, while not mandated by regulatory requirements, have been made because we felt it was important for our employees to have the comfort to know that their retirement plans are appropriately funded. Based on current returns, by making these contributions now, we are not obligated to make another contribution to the plans until the beginning of our fiscal year 2008.

Back to cash flow. For the first nine months of the year, cash provided by operations totaled about $490 million and as a percentage of sales, was over 16%, which should continue to put us in the top third of our peer group. So let me summarize what we've seen to date, because we've seen consistent progress against all of our targets and we remain on track for the full year. We've seen six of seven quarters in a row of mid- single-digit shipment growth in the U.S. Now, that excludes divestitures. This was the sixth quarter in a row of significant gross margin improvements. In fiscal '02, we increased advertising expense for the year from 9% in fiscal '01 to 9.8% of sales and now our year-to-date number is that we're about 11% of sales for advertising.

In fiscal '02, we increased our operating margin from 18.2% to 18.8%, and now year-to-date our operating margin has improved by 280 basis points, and we remain on track to deliver an operating margin between 20 and 21% this year. We've had nine quarters in a row of year on year working capital improvement, and our cash flow continues to be very strong. We continue to project meeting our targets of increasing return on invested capital by 100 basis points this year.

So let me move on to our guidance now. For the fourth quarter, we continue to expect our top-lines, both volume and net customer sales, to be up low- to-mid-single digits. We expect the combined effect of divestitures and Latin America softness to reduce overall growth by more than one point during the quarter. We expect solid growth margin improvement once again, and that's despite significant increases in raw materials and also despite a strong year-ago improvement.

We expect to see increased investment in both our R&D and our advertising expenses. Although our SG&A is declining overall for the year, we expect that in the fourth quarter it will increase as a percent of sales, and that's due to a favorable adjustment in the year-ago base period. Overall, we continue to expect earnings to be in the range of 67 to 70 cents per share. Now, this estimate also reflects 2 cents due to the unfavorable Argentina tax impact that we've mentioned earlier. Overall, based on our fourth quarter expectations, we expect GAAP EPS to be in the range of $2.22 to $2.25 for the fiscal year.

Finally, I also want to make a couple of comments about fiscal '04 itself. I want to be sure that when you begin to build your models for the next year that you're properly taking certain things into account. We're in the middle of putting together our plans, and although they're not yet complete, we're continuing to see the same general trends in our business that we have exhibited over the last 12 to 15 months. We expect at this time that when our plans are finalized, they will project that we will be meeting our annual targets for sales to grow in the 3 to 5% range and earnings to show double-digit growth.

At this point, we're estimating a wide range due to the preliminary stage that we're in, but our current estimates range between 247 and 257 for the year. That said, we expect that there will be an uneven flow among the quarters. At this point in time, we're planning a significant amount of new product activity in our first quarter. And although these items won't launch until mid- quarter or later, we do expect them to drive modest volume improvement in quarter 1 with further acceleration i to Q2.

Now, many of you have probably seen some of the press on Glad Press 'n Seal. As Craig mentioned, we're very excited to be moving forward with that product, which will be the first new product resulting from the joint venture with Procter. We're going to have heavy introductory expenses for that product, as well as for other new products that will impact first quarter. In fact, we expect first quarter marketing spending to be the heaviest quarter of the year when compared to our base. We will also be making a significantly higher quarter 1 investment in R&D versus the last year.

As reflected in our P&L, we've gradually increased our spending in R&D during fiscal '03 behind initiatives such as Press 'n Seal and others to come, and now the most significant year-over-year change will be felt as we enter our first quarter. In addition to greater marketing and R&D investments, there are two other factors in Q1 to keep in mind. First, we expect raw material costs to impact first quarter more negatively than any other quarter. During fiscal '03, our costs started out low and continued to rise as we went through the year. During fiscal '04, we're expecting the opposite. That is, they will start out high and we are projecting them to decrease somewhat as we go through the year. Said another way, the highest prices expected in '04 will be in Q1, comparing against the lowest prices in fiscal '03.

Now, it's too early to predict with certainty what the remainder of fiscal '04 will look like in the commodity market, but there will be better comps later in the year as prices have risen throughout fiscal '03. Also, our projections for cost savings as we go through fiscal '04 should mitigate the effect of the higher commodities, just as we've seen during the current fiscal year. Also, as many of you have already recognized, first quarter is the toughest comp we will have all year. In particular, for operating income.

I think you know that in any quarter, some items are better than forecast and some fall short. In total, they usually tend to even out. Quarter 1 earlier this year was one of those rare quarters when every variance went the right way. As we noted at the time, coupon expenses associated with introducing ReadyMop were much lower than we had initially anticipated. Annual maintenance costs for our Charcoal plants did not occur until the second quarter. We had outstanding late quarter shipments driven by very successful merchandising opportunities. And our mix of products sold was very favorable margin-wise. All of these items added up to a combined positive impact of 8 cents in the quarter, seeing all within the growth profit lines.

Now, we also experienced a six-cent expense associated with Brazil, which partially offset the one-time favorableness, but this was below the operating line. Because of the three things I've just noted regarding our first quarter plans, that is higher investment spending behind new products, the worst comparison in commodity costs that we expect to see in '04, and a very strong prior year quarter, we expect first quarter to be our weakest earnings quarter. And that's despite underlying positive momentum on our top line and also continued realization of significant cost savings. Although it's preliminary, we're currently projecting EPS in the range of 57 to 62 cents.

You know, I might add that we could have delayed investments in new products to dress up the P&L, but that isn't how we manage our business for long-term growth. We really look at what our annual plan delivers in putting together our forecasts. As I said, our plans are sill being formed, but we remain very confident about the outlook for the business. Our cost savings remain on track.

We expect to see strong growth on our businesses due to our focus, our investments in our core, and our new product program. We also expect to see continued discipline around the balance sheet. We'll be able to provide more detailed information about first quarter and the full fiscal year when we get back to you in August. Now, let me turn this back to Craig for some closing comments.

Before I open this up to questions, I just want to take a second or two to recap what I think you ought to take away from today's call. Number 1, we're obviously pleased with the quarter's top line results, especially given the tough comps that is we were up against that we were facing in the prior quarter. We continue to invest in brand building. I talked about that, Gerry did, and so did Karen.

We're investing in innovation. We're feeling very good about the new products that we just launched. We're feeling good about the ones to come. Once again, the results of our initiative to cut costs everywhere is showing up in our P&L as we drove cost savings across the company. It's also showing up on our balance sheet. So, year to date, we've continued to see positive trends across our business, and Clorox people are focused, and they're delivering real results. We're very confident we can met our targets for the remainder of 2003 fiscal year.

Now, just piggybacking on some of the things Karen said, and turning to fiscal '04, we do anticipate we're going to have another strong year. On the top line we're expecting to achieve volume growth every quarter, and we expect it to accelerate in the second half as we get the impact of divestitures behind us. We've been investing in game change innovations and we have plans to launch several new products in '04m and clearly we're very excited about the Glad Press 'n Seal launch in quarter 1. This is a big deal for the company. This and other Q1 product launches should set the stage for strong top-line results next fiscal year.

Continuing with the great success we had with our priority to cut costs everywhere, we've identified a number of '04 projects we expect will deliver a third consecutive year of significant cost savings. So, net net, we expect to achieve earnings targets again in fiscal 04. With that, let me open this up to your questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch-tone telephone. Due to time constraints, we ask that you limit yourself to one question. Our first question comes from Carol Wilke of Merrill Lynch.

Thanks. My question has to do with the pattern of the spread between volume and sales growth. It looked like in the first half of fiscal '03 your sales growth was actually faster than volume growth, and this quarter was a point different the other way. It looks like in the outlook, at least for the first quarter, you mentioned that you expect volume to be up, but no mention of sales. So I realize there's going to be a lot of promotion, but how big of a gap do you think there's going to be as you go through next year, because you will launch new products over the course of the year, do you expect that to close again? Or is it just going to really depend on the timing of promotion and new products? And then, just a part of that, as more of a bigger picture question, are you seeing that the promotional environment and the promotional activity needed to get a new product out has actually been increasing over the past several quarters?

Let me take that question to begin with, Carol. First of all, in the first half of this year, we did see a favorable sales to volume gap, and it was driven primarily by two items: One was clearly the efficiency and effectiveness that we were seeing in some of the new trade spending programs and guidelines that we put in place for our sales organization under the CCE initiative. So that was a part of it. But we also had some, what I'll call one-time favorable items that impacted that line that we've talked about in our prior conference calls. For example, in the first quarter, the coupon adjust in a minute we made for Clorox ReadyMop impacted that line.

You'll remember in second quarter we also talked about closing out the trade spending programs that had been tracked by our legacy system and we had favorableness associated with that. In this particular quarter here, as I mentioned in my remarks, sales and volume tracked more closely. We still continue to see favorableness associated with trade spending due to our CCE, cut costs everywhere initiatives, but it was offset by trade spending associated with new product introductions. It's very, very early for us to be commenting exactly what our volume and sales pattern will be in fiscal '04.

I will tell you, though,, in first quarter, remember that last year, meaning fiscal '03 first quarter, was when we saw those significant coupon adjustments due to ReadyMop. So the prior year comp is going to provide a base there that will be negative when we compare this year's sales. But right now, it's very early for me to tell you exactly what the sales versus volume gap will be in any given quarter.

Carol, let me add on one point on the promotion activity for new products. We don't see, at least for us, any particular increase in cost for introducing any specific new product in the environment that we're in right now. I think that's particularly important because you've got to have the right products that you're introducing, and so we don't see any specific increase.

The level of new product spending, though, in any one quarter, will be dependent on the level of new product activity we have in that particular quarter. So you could see more or less in any one particular point in time.

And can I just ask one more other question? You clearly had a lot of new products launched this quarter that did well, the reported number, obviously, in home care was impacted by comping ReadyMop. If you took out ReadyMop from the home care, can you give us directionally how strong your volume was? Because it sounds like the product-

It was mid-to-high single digits.

Thanks very much.

Our next question comes from Wendy Nicholson of Smith Barney.

Hi could you talk a little bit about any new products you've got planned for the Glad business, aside from the Press 'n Seal? Because when I look at Nielsen data, and I realize it doesn't capture, you know, much more than 50% of your distribution, it seems like every single category in plastic bags is declining, and even though you're spending a lot, your shares are going up, for example, in garbage bags. Still the categories are declining. So do you think more new product activity, or even more spending reverses that trend, or are we just fighting for a bigger piece of the declining pie?

Wendy, let me see if I can get at it a little bit. First of all, this category's another one where you just get -- you don't get the full impact of what's going on in the category because of non-track channels. And so just like the other categories, this happens to be a category that's growing in non-tracked and declining in tracked.

So you have to look at the whole category, which is what we tried to do. There is some softness, though, because if you have a category that doesn't have much innovation and some private label growth,, you're going to have revenue issues. I think one of the very reasons why both Procter and us came up with this idea of a joint venture, was to, over time, be able to change the rules in that with regard to innovation.

The problem that I've got is, we're excited about the future. We just can't give you the specifics about what does new product activity look like other than what we're willing to announce as we go along here. I believe that innovation's going to be critical to this category in order to build revenue in the category, to bring innovation to the category. We have a lot of optimism about how that looks over time. I just can't give you more specifics on timing or which segments of the category, other than it's certainly more than what we've just talked about right now. It literally could look at all segments of the category.

Okay. Can you tell us, again, if I look at Nielsen and only the information we get, it looks like all of the categories kind of on average are declining about 5% in sales. Is that more than offset? I mean, is the category still growing more than that, if you add in the non-tracked channels?

Hold on just a second, I think we may have to look this up, because I don't have that data right in front of me. And I can follow-up with you later on that. Maybe we do that.

The last question, can you comment on whether the sale of, I guess, Black Flag, does that imply or suggest that you're also interested in selling Combat, or are you sort of just getting out of the whole category?

I'm glad you asked that, because I almost put in my remarks something about Combat, because it does become apparent that we're exiting what I'm going to call some unprofitable, non-strategic aerosol insecticide businesses in certain locations. I've got to tell you, we love the Combat business. It's a very niche category. We are the high-share owner of the bait segment of the category particularly in the U.S., and it's a nice little business. We don't spend a lot of time talking about it, but we have no intent on taking any action on Combat.

Thanks.

Our next question comes from Amy Chasen of Goldman Sachs.

Hi. My first question is about cash flow. Karen, it looks to me like you slowed the rate of share repurchase in the quarter. Can you talk a little bit about that? And along those same lines, when you think we may hear something about your long-term strategy to redeploy cash flow? I frankly expected that we would hear something today or sometime around today.

We didn't intentionally slow down share repurchase in the quarter and, in fact, we expect to be back in the market next week. You know, there are restrictions about how you can purchase shares within the window of time during the day, and it just so happens that we weren't able, always, to purchase the way -- as much as we wanted to, but we will be back in the market next week. You know, we'll probably be talking about cash flow and share repurchase activity again at our August conference call. It's a little preliminary for us to talk about anything more regarding our balance sheet and cash flow policies until we actually get our fiscal '04 plans fully pulled together.

Okay. And with the share repurchase, would you expect that we would get back to that kind of three- to- four-million-shares-a-quarter level? You know, in the near future?

You know, it's hard for me to exactly predict, but as I say, this was not an intentional slowing of share repurchase. We're going to be pretty much on track with things by the time we reach the end of this fiscal year.

Okay. Just shifting gears, on the incentive plan accrual, it sound like there's a decent shot that for the full year the expense is going to be 14 million, 7 in each quarter. Number 1, is that right? and then number 2, what was your prior expectation going in?

This is Craig. I think that -- I would not conclude, I think it's a good question, but I wouldn't conclude that it will necessarily be 14 million. I think we're pretty comfortable at this point that -- and our comfort level is obviously reflected in the fact that we took the $7 million, Amy. But I don't think any of us necessarily think that we're going to be taking that number up to 14 million. Now, that's a function of our stock and our peer group and also the S&P 500. I think for now we think the number we took is about right.

Oh, okay. I'm sorry. So I guess I'm just struggling with how I should think about this. I had assumed that it fell in the fourth quarter. So I'm just trying to get a sense for whether I should just assume it was a shift from the fourth quarter into the third, or whether there's going to be an incremental expense in addition in the fourth quarter. I thought I heard you say that earlier.

I think you should assume that we moved it from fourth to third ,because we had more confidence around the idea that this was going to pay out. And, you know, is it possible that we could have an expense, an additional expense on these incentive programs, in the fourth quarter? Yes, it's possible.

But is it fair to say it would be fairly minor?

No. If we have additional expense, it would be another $7 million. It's just that it's hard for us to assess the probability of that right now. You know, within our fourth quarter, we've got a lot of up sides and down sides that we're managing, and we think we can manage all of them within the range of EPS that we've provided.

Okay. One last quick question. Would you be willing to quantify the Glad spending on the introductory launch of the Press 'n Seal?

We're not giving that out at this point Amy for obvious competitive reasons.

Is it the same product as the Impress product that P & G had test marketed?

I think we'd prefer not to give much more detail. This is actually a lot earlier than we normally talk about a new product, and we'd prefer not to give out much detail about all the specifics there. But the basic technology and press technology is quite similar to the product proposition that will be in the marketplace.

Normally, we don't -- we just think it's good policy, we don't normally give out information on new products, Amy, as I think you know, until they actually start to ship. In this case, we decided to talk about it today because I think it's pretty common knowledge out there at this point. It has been presented to the trade, there was an article in a couple of publications recently,so we felt we should at least give you a heads-up on it.

Great. Thank you.

Our next question comes from Andrew McQuilling of UBS Warburg.

Thanks very much. I have a two-parter also. I guess first, the cut-costs- everywhere savings for fiscal '03, can you talk about the size of savings you now anticipate, and can you say anything about fiscal '04 in terms of savings levels?

You know, what we've said is that we will be providing a full reconciliation of all of the savings that we achieve at our August conference call. So we'll add them up for the year and inform you then. Then we'll give you some sense of what's coming. What we have said, though, Andrew, is that of the $250 million that we expect to achieve between fiscal '03 and fiscal '05, that what we see here in the current fiscal year is more than one-third of that total. So it's a little front-loaded.

Terrific. And Karen, I guess the next one is, can you talk about the increases, maybe I guess in terms of gross margin points, the drag from increases in raw material in the March quarter, what you expect in June year on year, I guess in basis points?

Yeah. In the March quarter, we had a drag of about 50 basis points. Okay. In the fourth quarter we aren't saying specifically, but I would expect, based on what I know, that it will be somewhat heavier than that.

Somewhat heavier, and I guess somewhat heavier also in September?

Yes.

Would you talk about what your budget for, I guess spot resin pricing or some kind of benchmark for resins would be June, September, can you do that?

Yeah. You know, during this quarter right now, we know that it's in the mid to high 40s per pound, and we're expecting that's going to probably continue through the September quarter. You know, it might come down off of the high 40s to the mid-40s but these high levels are clearly going to continue for a while here. You know, I know that folks have cited the change in the price of a barrel of crude oil, but natural gas prices are really what drive resin, and they have continued at a pretty high historical level right now, for historical levels.

Terrific. Maybe one last one. You mentioned that it is a tougher retail environment for some retailers. Could you talk about the overall volume trends that you're seeing for your business now? I guess through the 52 weeks ended September '02, the category was doing mid singles. Can you talk about the overall trend for your businesses I guess on a category basis that you're seeing now?

It depends on which period of time because we try to look at tracked and untracked.

We tend to like to look at a longer period of time, because the shorter windows may not be reflective when you're looking at the kind of data that we look at for non-tracked. We continue to operate at about the rate of category growth, including non-tracked in our business, as what the categories will do, or slightly better than that.

Terrific. Thanks very much.

Our next question comes from Linda Bolton-Weiser of Fahnstock.

Thank you. Just another question on the guidance for FY '04. I guess I'm curious as to whether you are including in your projection any sort of assumption for charges? Because I guess I'm reading it as, on an operating basis, that you're really guiding to very modest operating growth of only one to 5%. Can you shed a little light on this?

During this year we did experience some impairment charges, significant impairment charges, associated with Argentina. And we also had some charges associated with our discontinued operations in Brazil. You know, you have these types of things, plusses and minuses, you have gains on disposition of businesses. You have things like we saw in the quarter, for example, this settlement of the eminent domain claim with Florida. You have pluses and minuses below the operating line, year in and year out, with business. And so our expectations for any year have to include that we will experience something unknown at this point in time, but something below the operating line to, you know, account for those types of activities. It could be, as I say, it could be disposition of facilities, it could be any of those nature of things.

So you can't infer from the guidance that we've given exactly what our operating plans will be. We're still pulling that together ourselves. But we have to include in that, if we're going to be providing you with GAAP guidance, which we think is appropriate, we have to include the full range of things that might happen next year.

Are you able to provide guidance about charges as soon as you become aware that you may need to take them?

Yes.

Okay. Okay. And I guess just one other question. On the CEO search. You know, I've heard that you've had difficulty locating outside candidates and coming to find an outside candidate. I'm just wondering if that could be because you are not giving a new CEO the potential freedom to set new goals for the company, and if that might be an impediment to attracting an outsider?

I frankly don't know exactly how to respond to the question because, you know, I guess the best way to say it would be that's new information to me. You know, at the end of the day, as I mentioned, and probably all I'm going to say about this is, this process is moving along quite well. We're doing it very carefully, as I've said before. And, you know, we're going to make a decision on our timing. We think that decision will be made, you know, close to the end of our fiscal year. As I said in my comments, I think it could go beyond that, but you know, this is a great company. And as you might expect, it's a pretty darn attractive job. And we've got folks to look at both inside, as we've said with Gerry, and outside the company.

Okay. Thank you. That's helpful.

Our next question comes from Connie Manetti of Prudential Securities.

Hi. I have some questions on the first quarter '04 gross margin. Given the number of one-time events last year that contributed so handsomely to the expansion there, would you expect the gross margin in the first quarter of '04 to decline, given all of the factors that enter in? Or is the decline more related to spending for new products?

You know, it's too early to give you precise guidance on that. It could be down, you know, if you think about where we had the one-time adjustments in first quarter. For example, the coupon ReadyMop, or coupon for the Clorox ReadyMop, you know, year on year, that would be negative pressure on growth margins for the comp. And, you know, obviously introductory spending for new products hits the sales line, because it's typically against the trade in the early stages. So but it's just too early for us to talk to you about what growth margin will be exactly. We clearly know that we will be seeing cost savings from our CCE initiatives as well, but we have to quantity them.

Then the follow-up to that is: If we take a look at your guidance, both for the first quarter and the rest of the year, it implies that for the last nine months of the year, that earnings increase at a rate of 20 to 25%. Do you think that that's -- I don't know the right way to ask it. But do you have so much confidence in the first quarter's new product launches that you can comfortably anticipate that kind of earnings growth for the next nine months?

You know, we've put together a full-year plan which is the way we typically look at our business, okay. And we know that the range that we've given you takes into account all the various expenses that we expect for next year. It has a range of projects behind it. And so, as we go through the year, you know, we'll be providing you with further guidance. But, you know, we wouldn't have put out a full-year range if we didn't think that it was something that, you know, we could live with. We do know, Connie, that as we get past first quarter in particular, we have easier comps in EPS.

If I could just ask one follow-up: Are you making Glad Press 'n Seal or is P & G making it?

We have a joint venture, as I think we've discussed in the past, it's one entity in a way. I mean, we are a 90% owner and P & G is a 10% owner. We're in this together.

You've got now a big portion of the assets on your books right?

That's correct.

Okay. Thanks.

Our next question comes from Joseph Altobello of CIBC World Markets.

Thanks, good afternoon. Karen, could you clarify something I thought I heard you say, that the September quarter would be the lowest quarter in terms of EPS for the year? That struck me as odd, since the December quarter usually seasonally is the lowest. Second, with the $54 million you guys contributed to the pension, and $37 million coming in July, what is the impact, if any, to the pension costs you'll be running through the P&L throughout fiscal '04?

Okay. What I meant by calling first quarter the lowest, I meant in terms of the year on year change. Okay, So not that it is the smallest quarter of the four, but it is in relationship to prior year.

Okay.

So that's what I meant there. The pension contribution, obviously helps our expense for next year. Okay. We have had -- we have been using a rate of return of 9 1/2%. We are right now working with Hewitt Associates, our consultant, on determining what the appropriate rate of return is on our pension assets for the coming year. It's likely going to fall in the eight to 8 1/2% range. So the combination of the contributions we're making will help pension expense next year.

Could you quantify how much the contributions will help it?.

Not at this stage. We have to take a look at the total picture once we have decided what the appropriate rate of return is for our assumptions.

Okay. Great. Thanks.

Our next question comes from Bill Steel of Bank of America.

Thanks. Karen, a couple of quick questions. Could you quantify the bad debt expense in the quarter? I'm sure you could, would you? Sorry, wrong word.

No, that's all right. You know, the additional bad debt expense that we recognized was about $2 million.

And how about the Florida settlement and the insurance on the Charcoal, what were those?

The Charcoal was expected in the quarter and I think that was about $5 million. We had anticipated that in our outlook. The Tampa settlement was, I think, about $3 million.

Three million. And how about the joint venture hit to cost of goods sold, about basis points or whatever?

It was between $ 1 1/2 and $2 million.

Thank you very much.

Operator?

Our final question is a follow-up from Andrew McQuilling of UBS Warburg.

Thanks very much, I guess you're tired of hearing from me.

We normally only give you one, Andrew.

Sorry, I've been -- how about the R&D run rate for fiscal '04? You're at a $20 million run rate right now. Does it step up significantly?

We have extend it up pretty significantly this year as we talked.

Yeah.

You know, I think it's going to be up next year. But we're not giving those numbers out, but I think you'll see an increase. Certainly you will see an increase on the year.

Terrific, thank you.

Okay. I guess we've run out of questions so I'm going to close the meeting. Thanks very much for dialing in today. We really appreciate it. I hope we've answered your questions. Any issues you have, if we haven't, you can call us here in Oakland, which I'm sure you will and we'll look forward to hooking up with you again when we talk to you in talking when we have our year-end release. In the meantime, we're going to keep focusing on the business, doing the right things, we think it's working pretty well for us. Thanks again.

Ladies and gentlemen, thank you for participating in today's conference, this concludes the program, you may all disconnect. Everyone have a great day.