高樂氏 (CLX) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Clorox Company fiscal year 2003 fourth quarter and fiscal year earnings release conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If you require assistance during the conference, please press star then zero on your touch-tone phone. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Gerry Johnston, President and CEO of Clorox Company. Mr. Johnston, you may begin, sir.

Welcome, everyone, and thanks for joining us for Clorox's fourth quarter conference call. Here with me are Karen Rose, our Chief Financial Officer, Dan Heinrich, who will take over as CFO in October, and Steve Austenfeld, our Director of Investor Relations.

I'd better take a moment here to note that this will be Karen's last conference call. As you know, after 25 great years with Clorox, Karen announced last week that she's retiring effective October 1. Karen has been with Clorox since 1978 and has, certainly, made her mark on the company. I've worked closely with her from the day I joined Clorox and I'm personally going to miss the leadership that she's brought to the company.

I'm sure you will also saw her announcement that Dan Heinrich will succeed Karen as CFO. Dan has served as the company's controller for the last two and a half years and brings a great back ground to the CFO role. Dan has provided tremendous leadership as the company's Chief Accounting Officer. Among his many contributions are the significant improvements in financial discipline that he's driven. He's also increased our finance and accounting support for the sales organization, initiated a number of process improvements in the handling of our receivables and deductions and he's been a major contributor to Project Delta. Now, Karen is staying on through September and she's going to actively work with Dan to ensure a smooth transition. You will have the opportunity to meet Dan in the next several months in person.

Now, we're broadcasting this call over the Internet and a replay of the call will be available for seven days at www.clorox.com. On today's call, I'll start with a brief recap of Clorox's fourth quarter results followed by a discussion of the fiscal year. I'm going ask Karen to provide some additional details about those results, then we'll turn our attention to the current fiscal year, which includes providing perspective on our priorities for fiscal 2004 and then Karen will provide details about our outlook for the first quarter and the balance of the year. Finally, I will wrap it up and open it up for your questions.

Now, before we begin, I need to remind you that the material we're providing today contains forward-looking information. Our 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 10K filing for the fiscal year ended June 30, 2002.

With that, I will briefly recap our fourth quarter results. I think as you saw in the press release, we feel we had a very good quarter. Fourth quarter earnings were $149 million, or 68 cents a share. That's an EPS increase of 5 cents or 8%, versus our Q4 of last year. These results were right in line with our expectations.

Volume and sales were up 2% for the quarter. Now, if you exclude the impact of divestitures, volume was up 4% and sales were up 3%, versus the prior year, again, right on target with expectations. For the full year, we recorded earnings of $493 million or $2.23 per share. That's up 86 cents per share or 63% from our fiscal 2002 results. On the top line, volume increased 2% and sales increased 3%, again, if you exclude the impact of divestitures, volume was up 4%, sales were up 5% versus the prior year.

We are particularly proud that our sales in the North America business, excluding divestitures, grew 6% this past year. Now, again, our full year numbers landed right where we expected them to be. I think it's fair to say that fiscal '03 was a very strong year for Clorox.

To be sure there were a lot of moving parts as we eliminated SKUs, recognized impairments and divested nonstrategic businesses but I also think it's fair to say that we've largely put that period behind us and in fiscal 2003, Clorox emerged from its turn around a stronger and healthier company.

Last fall, we introduced some financial targets for Clorox and I think the real story comes out when you consider Clorox's results in light of those targets. So, let's take a look at how we delivered against each of them in '03. We said we were targeting double digits earnings growth. In 2003, we grew EPS by 63%. Now, admittedly, our earnings results this year are benefiting from comparison to a base period where we had a number of impairment and other charges that didn't repeat. But, even when you factor those out, Clorox delivered very healthy double-digit earnings growth this past year.

We're also targeting sales growth of 3 to 5%. For the year, Clorox grew sales 3% on an as-reported basis and 5% when you exclude divestitures. We're targeting average annual gross margin growth of 100 to 150 basis points. In 2003, each of our business segments increased gross margin and total company gross margin increased by nearly 300 basis points.

We're investing in advertising and R&D. In 2003, our advertising and sales promotion investment was up 17% in the absolute and 130 basis points as a percent of sales. We also invested 15% more in R&D and importantly, we launched the Glad products joint venture with Proctor & Gamble.

Now, we're also targeting average annual operating margin growth of 100 to 150 basis points. Over the past year, we increased operating margin by 170 basis points. We're driving to maintain negative working capital. Working capital averaged negative 1.6% of sales for a 220 basis point improvement over 2002. We're aiming to achieve capital spending at 4% of sales by fiscal '05.

Capital expenditures totaled $205 million for the year or 4.9% of sales as expected. That includes $91 million for the Delta Project, including our SAP implementation, updated hardware and IT consulting on the project. Excluding those IT investments, our fixed asset expenditures were below 3% of sales. We're also targeting average annual ROIC growth of about 100 basis points. For the year, Clorox grew ROIC 120 basis points from 13.5% in '02 to 14.7% in '03.

Finally, we said our overwriting goal is to achieving total shareholder return in the top third of our peer group. Now, while one year really isn't the right time frame to evaluate total shareholder return, it'sreally a long term goal, nonetheless, in 2003, Clorox, one year total shareholder return, did outpace 2/3 of our peer group as well as the S&P 500.

So was it a good year? I think the numbers speak for themselves and the credit for these results go to Clorox people everywhere who stayed focus on our key priorities, driving results on each Iine of the P&L and the balance sheet.

Now I'm going to turn it over to Karen to provide additional details about our results.

Thanks, Gerry. I'm going to begin with a little bit more detail on our top line results. Sales were up 2% in the quarter or 3%, without divestitures.

Now, most of the details are in our press release and also on our web site but I'll just fill in a little bit more here. First, you might remember that earlier this year we noted that poor weather, particularly in the eastern part of the U.S. during April and May, had negatively impacted shipments on charcoal and automotive products, versus our internal forecast. So, we're particularly pleased that the specialty segments that includes these businesses still reflected higher sales for the quarter versus prior year.

I particularly want to make a note of charcoal, which had increased shipments for the ninth consecutive quarter as our marketing and sales teams continued to find successful ways of merchandising these products to drive incremental sales for both Clorox and also our retail partners and that was despite unfavorable weather.

I also want to note our Household Products Latin America business, which effectively is our business in Latin America and also in Asia. Without divestitures, sales were up 7%, which is much stronger than we've seen and it's despite political and economic instability and while sales growth did benefit slightly from favorable currency versus prior year, it's important to note that volume, which might represent a better measurement of the health of these businesses, was up 4%, excluding divestitures. As you know, we've been seeing a very significant improvement in the profitability and the balance sheet of this segment and so we're delighted to see some top line evidence of their strengthening health.

There were a number of other positive results in the quarter, as well. Gross margin was up 73 basis points and that's supported by cost savings coming from our Cut Costs Everywhere program. Offsetting this was significantly higher commodity costs and that was driven primarily by natural gas and the energy component within our raw and packaging material but this is still the seventh quarter in a row of strong year-over-year gross margin improvement.

Advertising was up for the sixth consecutive quarter, increasing 9%. R&D was also up again, increasing 15%. Now, these investments were partially funded by a significant reduction in our selling and ad minute costs during the year. Now, although it's up 11% in the quarter, due to last year's fourth quarter activity on management incentive compensation, selling and admin costs were up only 1% for the entire year.

In the quarter, operating profit margin declined by 100 basis points off the very high base period a year ago, when it increased 380 basis points. Notably, operating profit margin reached 20.6% for the year and now that's the highest level since the first brand's acquisition in 1999.

Interest expense and other nonoperating items were lower versus prior year, thanks to lower interest rates and also the gain on the sale of the Black Flag business, which we've already talked about.

As we continue to wrap up the final accounting for exiting our business, we reflected $8 million after tax expense in discontinued operations. This reflects the loss in operations as well as severance expense and potential additional expense associated with Kopak contracts. The negative 4 cents impact to earnings per share, due to Brazil, was partially offset by a tax rate on our continuing operations that was slightly more favorable than our forecast. The tax rate was just over 35%.

Moving on to the balance sheet, this quarter wrapped up an outstanding year of working Capital Management. We had negative working capital for the fourth quarter in a row and that means Clorox is now able to grow its business without having to invest additional cash. Receivables, in particular, continue to show improvement in year-over-year day sales outstanding through improved collections and deduction management.

From a cash flow standpoint, '03 was another great year. We generated cash provided by operations of $804 million and that's 19% of sales and that's despite a $54 million contribution to our pension plan made during the third quarter. Free cash flow, and that's using our definition of cash provided by operations less capital expenditures and investments, was $599 million, also another strong year for us.

Let me now turn it back to Gerry for some thoughts on '04.

Thank you, Karen. For several years now, it's been our practice to set a few key priorities to keep the organization focused. That approach has worked for us and as you've just heard, I believe it worked for us in 2003. Not surprisingly, then, we will continue that direction in 2004. We're going to maintain essentially the same areas of focus: That is driving growth, cutting costs everywhere, getting more customer focused and having great execution versus competition.

In fiscal 2004, our effort to drive growth is going to be through innovation and investing in brand building. We're also going to be pursuing some other longer term growth opportunities. We expect good top line growth for the full fiscal year 2004.

As you already know, we've just started shipping Glad Press 'n Seal wrap. We're introducing a number of other new products. We will achieve a record level of first quarter product launches. For example, in the laundry home care business alone, we're introducing 11 new products in Q1. Things like a Clorox Bleach Pen that treats spot stains in the laundry and provides a convenient way to clean grout in the kitchen and bath. Clorox Cleaning Wipes with teflon, it is a surface protector as well as new aerosol form of our general bathroom cleaner and building on the success of lavender-fragrance cleaners in Latin America, we're introducing three Lavanda fragrance products, geared toward the U.S. hispanic market, under the brand Clorox Disinfecting Wipes, Formula 409 and our Pine - Sol cleaners. In auto care, we're extending our Armor All wipes line with new orange scented multi-purpose wipes and protectant wipes and we're introducing it in AromrAll Oxy Magic Interior Car Cleaner.

Finally, in cat litter we're going to build on the success of blended products, that is, silica gel crystals combined with scoopable or regular litter. So, in Q1 we're introducing Fresh Step Scoop and Ever Clean blended cat litters.

Moving on, we're going to fund our growth initiatives to a priority we call; Cut Costs Everywhere or CCE. It has clearly delivered for us and will continue to due so with projects already in the pipeline. In fiscal '04 and going forward, we are going emphasize improving the productivity of our spending to optimize growth and margins. That's going to be facilitated by some new capabilities that Project Delta will deliver. For example, things like our improved ability to look at mix by customer on real time basis.

Next, in 2004, we're going to accelerate our efforts to get more customer focussed. This is our initiative to improve our category to customer linkages in our planning processes, through multi-functional efforts that helps us better partner with key customers. We are and we intend to be a preferred partner with many of our customers. Our final corporate priority is to out execute the competition. As more systems and processes come on line this year, Project Delta will be a big enabler for Clorox. I simply believe that in today's environment you must have real time access to the right data and information for decision making.

So, with those priorities as a back drop, let me turn back over to Karen who will walk you through our specific expectations for Fiscal 2004.

O.k., I'm going to provide you with a summary of some of the key metrix for the year and I'll move through the P&L as well as the balance sheet and while doing that I'll also share some thoughts regarding what you might see in broad quarterly changes. First , consistent with guidance we gave you on our third quarter conference call, top line and bottom line results are expected to meet our goals, this means sale growth of 3 to %5 and also double digit earnings per share growth. This is in spite of being short of our emergent goal for the full year driven by first half comp, introductory new product spending and cost pressures, I'll talk about these in a moment.

As we said, earnings per share for the year are estimated to be in the range of $2.47-2.57. We expect the total company's, last three quarter revenue growth to be stronger than the first quarter. The first quarter and to a lesser extent, the second quarter, will be still be impacted by prior year divestitures.

As Gerry mentioned, we are expecting a significant number of new products introductions, in particular, here in our first quarter, including new Glad Press 'n Seal.These new products are expected to contribute to the growing strength in our shipments as we go through the year.

Our net customer sales growth, as always, will be driven primarily by underlying shipments. However, the first half of the year will be negatively impacted by two items. First, a comparison to a base period that included some trade spending and coupon favorableness that we've already discussed with you and second, a very high level of trade spending in the current year to support the significant new productivity in the first part of the fiscal year. As a reminder, trade spending is a marketing expense that is deducted from gross sales. Although we expect to launch new products later in the fiscal year, our current plans don't require the same investment in trade monies that the early wave of products involved.

Moving down the P&L to cost of goods sold, we are expecting higher commodity costs in FY '04, versus '03 and that's primarily driven by natural gas pricing. Our forecast assumes that natural gas pricing remains above historic norms for the entire year and the 4 to $6 per million BTU range. This is driving most of the high commodity pricing that we see. As we communicated to you earlier, our first quarter is impacted most significantly by these higher costs due to the comparison against a low year-ago base. Now, that comparison against base, becomes more favorable as we move through the year.

We're currently projecting to see continued savings from our Cut Costs Everywhere efforts and that will be primarily in cost of goods sold. FY '04 estimates are about $100 million. I'll explain more about this in a few minutes. However, for the reasons we've noted earlier, that is unfavorable base period comparisons and commodities, unfavorable base period comparisons on coupon and trade spending and also current year heavy investment in new products such as Press 'n Seal, gross margin will be down in the first quarter.

Gross margin will also be down in second quarter due to the continuing trade spending investment behind the Q1 new products. Quarter 2 gross margins would be up year-over-year, except for this new product introductory spending. Our first and second quarter gross margins will have an impact on our ability to meet our average annual gross margin targets for the full year. However, we do expect to see very strong progressive gross margin improvement quarters 3 and 4, but will likely be flattish for the full year.

Once again, we expect overall to increase our marketing spending against our brands. As I've already mentioned, a good portion of this will be new product introductory trade promotion spending. This, again, due to the deduction from sales. Advertising and sales promotion, which is combined to what you see on the advertising line, is expected to continue approximately at last year's very high level overall for the year. We are among the highest in our peer group in term of advertising spending and we want to continue to appropriately support our base business and we believe that this is paying dividends for us.

Now, R&D is expected to increase as we complete the ramp-up in resources to support invasion in the Glad JV as well as our other businesses. This increase will be seen, primarily, in the first two quarters. Selling and admin costs are expected to grow more slowly than sales for the year. Now, factoring in the above assumptions, operating profit is expected to show solid growth for the year and although operating margin is expected improve, it will show less of an increase than our target. Again, we expect to see declines in the first half, primarily in quarter one, offset by strong growth in the second half as our top line continues to grow, driven by our new products and the fact, also, that divestitures will be behind us, as commodity cost comparisons improve, as comparisons to base period items improve, and also as our new product introductory trade spending decreases.

We expect interest and other income expense combined to be about the same in FY '04 as FY '03. Specifically, we expect interest rates to pick up modestly, versus the record low rates seen this year and that should lead to higher interest expense for us in '04. Offsetting this will be slightly lower other income expense. Our current forecast does not include any specific one-time extraordinary gains as a sign of FY '03, nor significant other nonoperating expenses.

Taxes are expected to be slightly lower in '04 and that's thanks to continuing benefits from patent donations and also optimization of our foreign source income.

Shares outstanding are expected to decline as we continue to use our free cash flow to repurchase shares. Consistent with the recent Hinkle agreement, we expect to repurchase about $350 million in shares, with a portion of that going to cover option dilution. The agreement allows for a greater amount going into FY '05.

So, consistent with the guidance we've already given you, we continue to project 57 to 62 cents as the EPS range for quarter one. At this point, we expect second quarter earnings per share to be in a range of 46 to 51 cents. This double digit improvement reflects strengthening top line growth, cost savings from our Cut Costs Everywhere efforts and the favorable comparison against the Argentine impairment taken a year ago, but it is also offset by commodity cost increases and the unfavorable comparison against year ago, when we recognized savings in our old legacy-based trade spending programs. Let me also add, as we've mentioned to you before, we include in our projections appropriate conservatism to cover those events that are found as we go through the year, but that aren't specifically a part of our current plans.

Let me also add, as we've mentioned to you before, we include in our projections appropriate conservatism to cover those events that, typically, arise as we go through the year but that aren't specifically a part of our current plans and this is particularly clear for the back half of the year, which is farther out. These items might include new products that may be ready for introduction, unanticipated competitive activity, asset write downs that made may be required as we assess our operation and GAAP reporting, as we've been doing for the whole past year, we have to be ready for all of these things so that we can continue to meet our overall estimates.

Now turning, briefly, to the balance sheet, we're projecting results that should continue to be best in class, including another four quarters of negative working capital. This is despite the necessity of some buildup of inventory as we prepare for the cut-over to product supply modules and SAP in our Delta Phase II work. We're expecting our capital expenditures to fall between 4 and 5% of sales, again, a little higher than our goals, due to continuing investment in our Delta process and systems project.

We are currently projecting FY '04 to reflect continued strong free cash flow of about $550 million or better. We expect to return a record level of cash to shareholders through an aggressive share repurchase program over the next two years as well as a strong dividend payment that represents one of the highest yields in our sector.

I also want to mention one quick item regarding cash flow. We made a $29 million contribution to our pension plan in July, following the $54 million contribution made in March. This anticipated contribution was noted earlier and it is now believed that we will not have to make another contribution until 2008. This recent contribution will be reflected as a reduction to cash provided by operations. Finally, the solid growth in earnings and the continued discipline around our balance sheet is expected to continue to provide another solid increase in return on invested capital.

Now, before I close, I want to summarize our work on cut costs everywhere, or CCE, as we call it. As Gerry noted, CCE is one of our four company priorities and it is an integral part of our overall business model. In '03, CCE delivered $169 million in savings across a wide range of projects. From a P&L standpoint, roughly 70% of the '03 savings benefited cost of sales directly, such as in the areas of procurement and manufacturing. Most of the remainder of the savings came from reduced selling and admin expense, trade spending efficiency and lower unsalable.

The trade spending efficiency and lower unsalables contributed to a favorable GAAP between volume and sales sellers. The collective benefits to sales and cost of sales were key drivers for our 300 basis point improvement in gross margin during the year. These savings were invested primarily in advertising and R&D and also were used to cover commodity cost increases, especially in the second half of the year.

The remainder felt of profit and that was particularly in the first half of the year, when our operating margin was up an average of 425 basis points. As I said, we're expecting another $100 million in FY '04, with some of these savings from projects already implemented this year and some from new upcoming projects. For example, we're about to implement an efficient customer logistics program on both Glad and litter, and that's a project that provides material savings to both Clorox and our customers. You probably have two questions now.

Where is the $100 million going and also, how much might CCE produce in savings beyond '04? Regarding where we're putting the $100 million, there are three primary areas. Again, we're expecting to invest savings in the business. This time it's primarily in new product introductory trade spending, as I mentioned, in the first half of the year, as well as the continued investment against our base business. We're also planning to cover commodity costs, which we've noted to you will likely be at their most negative note of comparison here in our first quarter. Finally, we're projecting that some of these savings will fall to profit, in particular in the second half of the year.

In answer to the second question, how much are we getting out of CCE in the future? We're extremely pleased, first of all, that our current plans would have us delivering more than our current $250 million target in only two years, but we know that isn't going to be the end of it.

Regarding beyond '04, we don't expect our ability to approve margins just to disappear and I say this for two reasons. First, none of our current savings have yet come from a completed company-wide SAP systems platform. Although the Delta process work we've done has certainly helped drive our working capital improvements in particular, we know from the examples of our peer companies who have already implemented similar ERP systems, that there are many savings that will be available to Clorox in FY '05 and beyond, once Delta is complete. For example, we expect to make better decisions through approved ability to measure our customer profitability on a real-time basis and also having real-time understanding of our production costs across a multiple facility, should enable to us make better sourcing decisions.

The second reason for our confidence in future savings is our rich pipeline of opportunities. Our cut costs everywhere program office is providing us with a continuous process and discipline identifying savings opportunities that span the company going beyond the work we've always done at the business unit level. At this point, we're continuing to plan additional projects that have concrete saving sellers attached to them that will benefit us beyond '04.

Now, before I turn this back to Gerry, I wanted to say a couple of words, because this is my last conference call. I've had a long and wonderful career here at Clorox and I'm going to miss all of the good people here in the company, as well as many of the contacts that my position has provided me. You know, there are many things that I've enjoyed during my 25-year tenure, but I have to say that my work with the investment community is actually a highlight if I look back and although not always smooth, it's been intellectually challenging and many of you have helped me interpret what was most important to shareholders and in so doing, you provided insight that was very valuable to us in the company and for that, I thank you for it. With that, now I turn it back to Gerry.

Thanks, Karen. In closing, this is why I feel so good about Clorox and think you should, too. In fiscal '03, we emerged from a turn around a much stronger and healthier company. The noise we've experienced, such as divestitures, substantially should be behind us. We're a focused and disciplined company. Second, our efforts to drive growth are working. Innovation remains high with a record number of new products launches expected in our first quarter and our pipeline for new products beyond '04 will remain strong.

Each segment is projected to increase both volume and sales in fiscal '04, including the international divisions, which you know, have faced challenges in recent years. Third, once we get past the tough comps, high introductory spending and negative commodity impacts in the first two quarters, earnings growth will be quite strong in the second half.

Finally, putting aside year-over-year comparisons for the moment, Clorox's absolute performance is very good. Let me frame it relative to our peer groups performance. At 20.6%, our operating margin is top tier. Our operating cash flow as a percent of sales is top tier. We rank among the top three companies in working capital performance. Free cash flow as a percent of sales is near the top of our peer group. With our recent dividend increase, our dividend yield is now among the best and we've delivered top tier ROIC improvement. I'm feeling very good about the direction of the company and/or about our ability to deliver top tier performance and to deliver the next year. With that, I'm going to open it up for questions.

Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch-tone telephone. One moment for our first question.

Our first question comes from Carol Wilke of Merrill Lynch. You may begin.

Thanks, I have one big picture question and more of a specific question. How do you see it progressing, I think of all the things you just went through, ROIC, et cetera, how do you address what I think people view as the consistency challenge in terms of, you know, volume each quarter and pretax income each quarter? Because it is surprising, the first half of the year you had strong pretax profit growth. This quarter and last quarter, it's down. Is that sort of the last big challenges to become consistent quarter-to-quarter, sort of across all businesses? Are we going to see fluctuations within all the business segments depending on trade spending levels, et cetera?

Carol, I think that is an important question. Let me see if I can frame it in terms of how I'm thinking about it. I think in terms of consistency, one of the big things that we simply are committed to and I believe we can deliver, is consistency on an annual basis. I think the variability that you see on a quarter-to-quarter basis, there's going to be some there, but our commitment is going to be about being able to be more predictive in looking at that variability. Because there will be times in which we will want to introduce new products and they may have a reasonable size impact on the company and we want to be able to still make those decisions, because those are right for the company for the long-term. There may be particular cost increases during a particular period of time or cost pressures, that impact things and we can endure those things. What we're really looking for is consistency in terms of delivering against our goals over an annual period and consistently over time. In that way.

You know, I might add something here, too, as well. We were a very early convert to reporting only in GAAP. When you are reporting in GAAP, you do have less consistency versus when you are just looking at pro forma and I think that although it is clear that we have been inconsistent quarter-to-quarter, we may have been disadvantaged in being an early convert there, as well.

If I ask a follow-up to sort of get rid of the GAAP issue. Just from a top line perspective, is it fair to say that some of the categories in which you compete are just more, all around, volatile quarter-to-quarter? As an example, Brita was up 14% in the third quarter and this quarter it was flat. There seemed to be, from a volume standpoint, are they more subject to competitive trade spending and if you shift your spending, then you don't get the volume?

I think there is. If you just looked at narrow categories, let's say they operate in a number of categories that might range between 300 or $500 million in sales or even 7 or $800 million in sales, the entire category, in any one quarter you could have variability for a particular category, based on what's going on in the category. In charcoal, it could be weather, could be defense activity, from a competitive standpoint in another quarter from another business. It could be opportunistic because in new products.

One of the things we like about our portfolio is the diversity we have in our businesses, because when you look at the entire portfolio and I will take just North America, for instance, if you exclude divestitures, because we've not eliminated most of the noise, we now have eight quarters in a row in which North America sales had a minimum of 3% sales growth or a maximum of 8% sales growth. There is some variability in that, but that makes us feel pretty confident that at least over periods of time and even within a quarter, but with the portfolio, that we have, the diversity that, actually, we think is a positive thing in light of one particular smaller category having volatility

One follow-up, that's very helpful. Just from a retailer perspective, are you finding that higher trade spending is required for new products than say a couple of years ago? I know several years ago, you know, there's a period of time where you guys cranked out a number of new products each quarter, but there weren't downed earnings quarters because of trade spending. Is it just a different environment on the retailer side that requires that much more spending and therefore the impact on the profit?

I don't think so. I think that the levels of introductory spending are relatively the same as they've been historically. I think that there are times in which certain kinds of introductions you actually spend less, depending on how unique they may be. I think it's just the volume of new productivity that in this first quarter that also spills over into second quarter that is driving the spending this period of time. I don't see big differences, I mean it's always pressure, but I don't see big differences than I saw let's say two years ago.

Thanks very much.

You bet.

Thank you. Our next question comes from Amy Chasen of Goldman Sachs. You may begin.

Hi, a couple of things. First of all, can you, I just want to understand the CCE savings. You've talked about, you know, $250 million in savings, FY '03 to FY '05. Sounds like we're getting 270 in '04 and '03 combined. Does that mean, that, you know, this sort of 250, this chunk is pretty much complete after this fiscal year, number one? And as a follow-on to that, Karen, you mentioned another leg of savings, you've mentioned that before. Can you at least start to put some perimeters around that for us?

Yeah, the $250 million, when we set that out there as a target, it probably had some conservatism built into it and, you know, it has come a little bit earlier and maybe higher in certain projects that we've completed or are under way for us, higher than our original estimates were.

Beyond '04, you know, we clearly expect to see some savings once we get Delta fully implemented. We've talked about this before, hard to quantify some of these things. You know, when we know that the peer group of ours that have already installed SAP company-wide, when we know that they've been able to improve their profitability, due to having better real-time information, we know that we'll probably be able to take advantage of those same opportunities and they'll probably translate into better mix of products, as I mentioned, I think, in my comments, better source or optimized sourcing of our products from our various plant locations. Those things right now, we don't have a specific number to provide to you. We just know that once Delta is implemented, they will be there, the savings will be there.

Right, but Delta won't be implemented until FY '05, correct?

Well, Delta, we expect through fiscal '04 to be doing what we call Delta Phase II, which is all of the procurement and production modules. So, for the most part, regarding our operations, we'll have a full suite of SAP implemented. What will remain will be the HR modules and that will come later, but we don't necessarily have to rely on that for the kinds of cost savings opportunities that we expect to see once we have Delta installed.

Amy, I would describe it as let's look at these improvements that SAP is going to give us as sort of continuous improvement that they don't all come at once as soon as the machine pops on. We will be building our capability over the next several years and we expect to see benefits coming out of that in terms of better decision making from real-time data, as we move forward. Independently of that, we had established our CCE program really as a program through 2005 but we think it's such a critical element of what we're doing over the long-term that we are now looking at what's the next step change that we can make in looking at further out cost savings that become part of the company's ongoing program to fund growth through cost savings.

Gerry, and I realize that, you know, we're barely into FY '04 and I'm asking about FY '05, but, you know, as the new CEO of the company, you will be, you know, entering next year without a quantifiable amount of cost savings and more of just sort of, you know, understanding the continual improvement and understanding the major changes internally at the company that should allow you to drive cost savings, but in terms of the sheer magnitude that we've seen over the past two years, are you concerned about that?

Well, I'm glad we got the magnitude of the past couple of years, first of all. I think that the next dimension, you know, we're doing the work right now in terms of looking at what are the things that can happen in '05, you can't wait until the beginning of '05. I think, as you've seen, we got the big numbers in '02/'03 and then in '04, we still got pretty good numbers and I think they will be a little tougher in '05, but we also have some good things going on in probably, at least early on, it looked like a more favorable cost environment as we look at the structure. So, as I'm looking at further out, I'm not feeling alarmed about anything. I'm feeling pretty good about our ability to deliver against the goals we set with the Street.

Amy, this is Steve. Just to give you a little bit of comfort in terms of specifics, there are some things that will add a minimum carryover from '04 to '05. For example, the additional customers logistics project that Karen mentioned that will start this fiscal year and carry over into next fiscal year. We would expect to have more procurement or strategic sourcing related savings in '05 and, you know, we've talked about the efficiency we're expecting from our trade spending programs. That, as well, will have another leg of savings in '05. We just haven't quantified it yet.

I also want to mention, again, that '04 has commodity costs at a level that are probably historical highs and that's what we're assuming for most of the year. So, the cost comparison, our underlying cost pressures, if you will, between '04 and '05, will not be the negative impact that we're seeing '04 versus '03 and won't force to us use the cost savings to cover them.

Okay, let me shift gears for a second to cash flow. You basically said you're going to repurchase about $350 million in stock this year. That's actually a little bit less than I would have thought, given that you know have $1 billion to do over the next two years. So, I mean, any reason why it's not, you know, 50/50, half each year?

Well, the number was arrived at with -- through negotiations with Hinkle and we do have the ability within the agreement to increase the amount we purchase from Hinkle by about $15 million per six-month period. If we were to do that this year, for example, that would mean an additional say $30 million to Hinkle and $100 million over all, which would bring us up to a level that's consistent with our past practice. Right now we're going in with a $350 million, you know, we have, in fact, repurchased about $1 billion worth over the last couple of years, which is about 10% of our total outstanding shares. We think that that slightly lower amount makes sense for us right now. You know, we have no noted that we might want to be in the market for some bite size acquisitions that would allow to us do that without taking on additional debt right now. So, we think it would be the right amount right now for planning purposes.

And maybe I just don't understand the Hinkle thing, understanding that you have a specific agreement with Hinkle, but if you don't change that can't you just increase the amount that you do in the open market?

Well, we would prefer and our board would prefer that we keep Hinkle below 30% of our total outstanding shares.

Okay. And can you --

Right now they're at 29.4%.

I'm sorry, you said you can increase the amount that you've repurchased by Hinkle by $15 million each six months, is that right?

Yes, for any given six-month period.

Okay and I'm sorry, one last question, which is can you just address, if you have any early read on how Press 'n Seal is doing in retail reception?

Excellent retail reception, about 90% of customers have already placed their orders. Ire don't have the exact numbers in terms of how much of that vs. already shipped. Our advertising begins mid-month, this month. We're on the shelf in a number of places already. So, this is a very, very strong acceptance and introduction for the company at this point.

Was there any sell-in in the fourth quarter because your Glad volume was much stronger than I had expected?

None whatsoever.

Okay. Thank you.

Thank you.

Our next question comes from Wendy Nicholson of Smith Barney. You may begin.

Hi, two questions. First of all, just going back to sales growth and the forecast for the first quarter, it sounds like sales will be down year-over-year? Is that right? Volume up, but sales will be down?

Modestly down, yes.

Modestly down. So... Okay. I guess my question is, it sounds like you have an enormous amount of new products launching. Going back over the last few years, every time Clorox has been in an aggressive new product pipeline filling stage, your sales have actually been very strong. I wonder if there's any way to breakdown how much of the negative sales growth is a function of oh, increased trade promotion, versus the tough comp? Is there any more color you can give to us that? I wonder if there are other things, inventory restocking at retail, tough weather carrying over into the first quarter, what's offsetting all that good news on the Press 'n Seal front?

Well, I think the timing of when this product actually ships, in particularly, the other products. Press 'n Seal we're shipping what we're capable of making, we're shipping that in this period of time. A number of our other products ship all the way into the second quarter so we don't get all of that volume, pipeline volume there. There is no inventory de-stocking issues whatsoever that we have or inventory carryover issues whatsoever, anywhere in the system.

You know, Wendy, the color that we can give you is what we have already provided in last year's results and that is, for example, in the favorable coupon spending on Clorox ReadyMop that was 3 or 4 cents, I think and then our legacy system, trade spending favorableness, that was another 3 cents, so, you can take a look at those as part of the base period.

So, in terms of the flow, if we see sales down, you know, 1 to 2% in the first quarter, starting in the second quarter, you think they will be up in the 4 to 5% range that gets you to the full year number?

That's too high in those next quarter or two.

For the second quarter, so, second quarter will be depressed, but it's the back half when the comps get easier that we see stronger sales growth.

Second quarter sales growth will kick up and show strong growth, but it's too early to give you specific on that.

Okay. The second question I had was really for Gerry, on the conference call when your promotion, I guess, was announced, you talked about maybe pending changes in management, stressing the importance of having the right team and all that sort of stuff. Can you give us an update on how that's progressing and whether you now see more changes happening in the senior management team at the company? First of all, I didn't know about Karen's retirement at the time I made the comment, and so fortunate for us that we have a terrific replacement for Karen, because that became a surprise announcement for me. You may not be aware of it, I have changed the nature of our executive committee and it's to be more consistent with what I'd call the priorities of the company. Previously we had our CFO, General Counsel and then the two senior guys on the executive committee. I have added our VP, our senior VP of sales, really our customer development area, Frank Tataseo, because of our priority against customers, he's now on the executive committee. I've also added the two people that I think really are the key enablers of the functionality of the company, to our executive committee, Pam Hewitt, who is in charge of our human resources activity, and Keith Tandowsky, who is our Chief Information Officer. I fundamentally believe those are all about how you can execute better in the future and enable the company to get to where we need to be.

I think the big changes, although we didn't announce that formally, those changes have been made and I think on an an going basis, you will continue to say do you need to tweak any of that? But I think I've got the team I want in place right now and as you know, we have two very experienced operating guys in Larry Peiros and Rich Conti.

Fair enough and then just, I guess not to ask it to much away, but Karen's announcement of retirement, I know, you know, when Craig announced that he wanted to move on, obviously was a different job that was a long out search and what not, but given the ger of things going on at the company from a, you know, really restructuring and financial standpoint, Karen, are you giving the company enough of a transition time with your departure after everything you've done there for so long?

Well, you know, frankly, because Gerry was the person who became the CEO and because he was an internal person that makes moving on that much easier and quite frankly, you know, the fair is kind of lined up. I turned 55. I had 25 years with the company that allowed me to take early retirement and the final star there was the fact that there's a very strong bench here in finance and accounting. All of those things always don't come together and it just made a lot of sense for me from a personal point of view.

Okay, sounds good. Thanks a lot, Karen.

Thanks, Wendy.

Next is Joseph Altobello with CIBC World Markets. You may begin.

Thanks, a couple of quick questions. On Press 'n Seal, when do you expect that to reach full distribution, if you can call it that and on the tax rate, obviously it was lower than we expected, what should the tax rate look like going forward? Finally, on future divestitures, you said -- it sounds like those are pretty much now behind you. Is that the case or do you see additional future divestitures or basis exits?

I will answer a couple and turn it over to Karen on the cash flow. The Press 'n Seal should take four so six weeks to have spleet distribution out in stores.

In terms of divestitures, I think we've completed the real bulk of the activity. I think you're always looking at your portfolio to make tweaks to it but we have spent some hard time looking at things adding value and things where we feel we can add the most value and I think we're pretty comfortable with the portfolio the way that it looks right now.

You know, regarding the tax rate, this year it was a little bit higher, because the Argentine impairment wasn't tax deductible and we don't have that included in our projections, obviously, for next year. We're projecting a little bit higher than 35% for next year and the reason for that lower rate is, again, the comparison against this year, with the Argentine impairments, but also, we continue to make patent donations, which results in some favorable tax benefits as well as optimizing foreign source income.

Okay and if I could ask just one more quick one, on the ad spending side it sounded like you said ad spending would be pretty much the same as last year or the rate of increase would be the same as last year?

No, the level will be about the same as last year.

Great, thanks.

Our next question comes from Connie Maneaty of Prudential Equity Group. You may begin.

Hi, I have two questions. One is a product question. How do you view what's going on in the litter market now that Arm and Hammer is going to be introducing a flushable litter? If it worked, why would anybody buy anything else.

You know, Connie I think the best way to answer that is we know as much about litter as anybody on the face of the Earth and we've, probably, looked at every idea on the face of the Earth as it relates to litter and it's a category in which we're very comfortable competing with the brands we have and the propositions that we have and the idea of flushable is actually a pretty old idea. There's been a bunch of flushable litters out in the market in the past and so we feel very comfortable with sort of our new product plan, which we're not going to disclose specifically and how we're going to move in terms of our own pipeline of ideas for consumers and them being happy with the products.

Okay. That was kind of opaque, but --

Right! [ Laughter ]

I think I can live with it. Okay. I hate to see what we write all the time. Can you talk a little bit, I think this goes back to an earlier question, can you talk a little bit about how you schedule new product rollouts? Why -- what is it about the business that makes them hit in clumps during the year as opposed to being spread out more evenly?

Yeah, it's predominantly what's happened with retail consolidation and the timing that a large number of retailers in the industry now are picking usually a couple of times a year when they have a window and as reality of that, we've targeted that we will have a couple of times a year with windows. Periodically we will have exceptions to that, because simply we feel we either have to defend something or do something on another timing, but the two window he's are going to occur about the same time every year and we'll be launching our products in those timings.

So, what are the retail windows? What seasons do they come in?

One of them is in the early winter timing, say January, February, March kind of timing, the other is August and September.

Okay. Great. Thanks a lot.

Uh-huh.

Our next question comes from Ann Gillin of Lehman Brothers. You may begin.

Hi, actually this is Elia on behalf of Anne. I have a question on the cut cost everywhere initiative. Is sounds like the net amount from CCE would decline year-over-year? Is this fair and can you put numbers around this for us?

In fiscal '03, the amount that dropped to profit was roughly about $90 million or so and I think it's a little bit too early for us to say what exactly will happen in fiscal '04, but, you know, we've given you lots of detail to, you know, factor into your models in '04.

So, the difference was what are you reinvesting in the business, right?

I'm sorry, right.

The difference, $169 million minus $90 million was what you reinvested in the business?

Yes, that's right, our advertising and R&G combined were up about $75 million or so.

Great, thanks a lot.

Our next question comes from Andrew McQuilling of UBS. You may begin.

Thanks very much. Most have been asked and answered. Just a question on raw materials. Can you talk about the year-over-year increase in raw material cost on the quarter and what that movement is in fiscal '04? I know it's very difficult. I guess as a percentage of sales.

Oh, okay. In Q1, you know, as we've been talking to you, it really is the biggest impact over the whole course of '04 and it's probably, Q4, rather, it was greater than 150 basis points and we may see something similar to that in Q1.

Terrific and I guess in terms of the international profit rebound and the international outlook, understanding that Argentina probably needed some shipments, what's your sense for top line growth in the Latin of the region, you know, entering fiscal '04 and through fiscal '04, what are you thinking about planning?

I think it will look similar to the total company. It's possible it could be better than that. I think we're planning to it looking similar to the rest of the company, though. You know, there's still some volatility in certain places, Venezuela happens to be one but Argentina is working on a pretty low base at this point in time and,on, the rest of our international operations, which would be Asia Pacific, look pretty solid and the rest of Latin America looks pretty good.

Terrific. Thanks very much.

You bet.

Thank you. Our next question comes from Linda Bolton Weiser of Fahnestock. You may begin.

Thanks, it's Linda Bolton Weiser. I remember when you gave guidance for FY '03 and there was quite a bit of specifity about the operating margin, you know, you gave like an operating margin range. I guess I'm still a little confused about the outlook for operating profit for FY '04, you mentioned there would be solid growth. Can you explain what you mean by solid and maybe give us a base number on upon which the growth will,you know, upon what will be the base?

Linda, we didn't get precise or more specific with operating margin until later on in the fiscal year during '03, because when you're first starting out a year, you're working with a range, depending on how commodity costs behave as we go through the year, depending on how our new products perform out there. You know, we're still working with a range And so I think as we go through the year, and usually it's with our mid-year update, that, you know, we feel we can start to provide more specifity around certain numbers. And so I think that's what you're thinking about when you reflect on '03.

Okay and just in terms of asset write downs or charges, it sounds like you're thinking that there may be some in fiscal year '04, are you able to quantify those at this point? How should we figure them into our estimates kind of?

I've given you line byline information regarding the P&L and I think that, you know, as I stated, we don't have any specific plans for asset write downs, but..., You know, as you go through the year, we may, in fact, as we examine our operations, have some things that may, in fact, have to be written down. During the '90s, throughout that whole period of time, every year we absorbed asset write downs, we intend to continue to do that as we improve our operations as we go through and optimize moving forward. I can't give you a specific amount right now.

Okay, just one more thing, on the working capital, it sounds like you would expect improvement in working capital but it sounded like maybe not in the inventory area for FY '04. Is that fair to say?

We aren't really forecasting significant improvement in working capital. What we're expecting is that we will remain negative. We're negative right now. We will probably be at about the same level as we go through this next year.

Okay. Thank you very much.

Thank you. Again, ladies and gentlemen, if you have a question, please press the 1 on your touch-tone phone, again, if you have a question or a comment, please press the 1 key.

Our next question comes from Andrew Shore of Deutsche Banc. You may begin.

First, congratulations, Gerry and Karen. I wish you much luck. It's been a pleasure working with you all of these years.

Thank you.

Karen, are you sort of suggesting that 100% of the absolute EPS growth is going to come from CCE this year?

No.

65% net, you take 80% of that --

No.

No.

Huh-uh.

Can you help me understand that a little better?

You're talking about '03? Or '04?

'04.

'04. You know, as I mentioned, you know, we're going to be seeing $100 million in savings from cut costs everywhere, you know, portion of that is, obviously, going to be covering commodity cost increases. A portion of that is going to be invested back into the business, in particular, on the new product introductory trade spending and then, you know, in particular in the second half of the year, we'll see a portion falling to bottom line. I can't give you more specifics than that right now.

Okay and what was the impact, specifically from raw materials in the fourth quarter and what's the impact expected in the first quarter? And I assume, if you have 80% of your hedges, of your raw materials hedged, are you just allowing everything to roll over and not going to hedge anything, because you expect prices to be lower?

Actually, our hedges are a combination of long-term contracts with our suppliers and then to a lesser extent, we do have some financial hedges out there and you know, quite frankly it's always a combination. There are never, we'd never have all of our contracts rolling over at the same time. It is, you know, there is a wave effect, if you will, they phase in, so, it will depend on what's happening contract by contract and, you know, whatever the timing is.

Regarding the commodity impact in Q4, it was, the commodity cost increases actually impacted us by a negative 150 basis points, or so, and we're expecting about the same amount in Q1.

Okay, and then finally, you also mentioned that part of the IT process that everything is going to help you with account level profitability and understand account level profitability. Should I infer that you don't understand your account level profitability now?

No, quite the opposite. The problem is that it just the amount of time that it takes to get the data, it's a manual transaction, we can get the data easily, but it's manual and what we have is the new tools are going to give us real-time data, giving it in exactly the format we want to look at to make much, much faster decisions on these thing.

Finally, after looking at your cash flow, dividends, cap ex repurchased, Karen are you going to have to raise some debt?

No, we should be, roughly, the same level of debt here for the coming year. We've got, I think it's about 1.70 billion on the books right now and it should remain roughly flat.

Okay, great, thank you and again, congratulations and good luck.

Thank you.

Thank you, again, ladies and gentlemen, if you have a question or a comment, please press the 1 on your touch-tone phone. If you have a question or a comment, please press the 1.

Our next question comes from Troy Huff of U.S. Bank corps.

Could you provide, maybe, just a little more color, you did in the earlier part of the call, on the new product launches and talk about record level, can you give us some kind of perspective on the size or the base that you're up against for that?

Maybe you could repeat that for me, Troy, I'm not sure I understood.

Just some more color on the notion of record product introductions in the first quarter, kind of maybe an overall number or just more color on the types of products coming out and how that relates to what you've done in the past and what you will be doing throughout the year?

Yeah, I think a typical, in the U.S., a typical number of new products for us would be in the sort of 20-plus kind of range and in this quarter alone, this first quarter, it's going to be 11 new products. There will be others as we go through the year later and that's, substantially, higher than we would have, for instance, than we had in the last first quarter. All of these new products, they vary in size pretty dramatically. The Press 'n Seal is by far the largest of those. So, I think for a quarter this is a very high number.

And for the year, do you expect it to be higher than that 20-plus range?

It should be about comparable to what we've done in the past.

Okay.

Again, varying size of the initiatives.

Okay, thanks.

Yeah, if there's one more question and then we will wrap up, thank you.

Ladies and gentlemen, this concludes the question and answer session. Mr. Johnston, I would like turn the program back to you.

First of all, I'd like to thank everybody for dialing in today. I appreciate it. We think we've had a very good fiscal year, a good fourth quarter and I think, importantly, we feel good about the progress of the company and the direction of the company and our ability to deliver this next year. So, thanks again and we'll see all of you soon.

Ladies and gentlemen, thank you again for your participation in today's conference. This concludes the program. You may now disconnect. Good day.