高樂氏 (CLX) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Clorox Company fiscal year 2004 first quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press the star button followed by the 0 on your touch-tone phone. This call is being recorded.

I would now like introduce your host for today's conference call, Mr. Jerry Johnston, president and CEO of the Clorox Company. Mr. Johnson, you may begin your conference.

Thank you, welcome, everyone and thank you for join Clorox's first quarter conference call.

Here with me today are Dan Heinrich, our Chief Financial Officer, and Steve Austenfeld, Director of Investor Relations. We're broadcasting this call over Internet. A replay will be available for seven days at www.clorox.com.

On today's call, I'll start by providing some observations about the quarter and then Dan will discuss the key financial drivers and results and provide our financial outlook. Finally, I will wrap up and open it up for questions.

Before we begin, I need to remind you that the material we're providing during the call contains forward-looking information. Our actual results may differ materially from what we are 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, 2003.

With that, I will recap our first quarter results. As you saw in the press release, we delivered earnings of .60 a diluted share, which was consistent our guidance.

Volume also came in up 2% as expected and sales came in flat, a bit better-than-expected for the quarter. If you exclude the impact of divestitures, volume was up over 3% and sales were up 1% versus the prior year.

Now, as we discussed during our last conference call in August, the first quarter was expected to be the toughest quarter this fiscal year in comparison to prior year results. As expected, we spent heavily to launch new products and we absorbed a number of cost increases which we will talk more about later. We also had tough comps on the top line, given the negative impact of prior year divestitures, an unfavorable comparison due to coupons adjustments in the base period, the high level of trade promotion spending to launch products this quarter, and later quarter volume last year for trade merchandising. Nonetheless, volume X divestitures was up 3%.

Based on comments from analysts following the press release this morning, I want to address a topic on your minds. That's our gross margin. As noted in the release, gross margin was down 440 basis points year-over-year. It's important to point out that this was in line with our expectations. Dan is going to describe the details of the gross margin results but first let me say I feel confident that this expected decline is going to be the worst we face all year.

Second quarter is expected to be better than Q1 and Dan will go over the details of that and we expect it to have strong year-over-year gross margin improvement by the fourth quarter.

Now, as I've said before, we're managing the Clorox business for consistency on an annual basis, not on a quarterly basis. Because it gives us the flexibility to make decisions throughout the year that are right for the business, both short and long-term. This quarter, we had a number of cost items well outside normal ranges, such as raw material costs, manufacturing cost upcharges, including [inaudible], increased new product trade spending, which reduces gross margin and an upcharge, plus, an upcharge for Chuckle outsourcing to give us more capacity.

I think these kind of short-term items provides an example of why we take the approach on inconsistency on an annual versus quarterly basis. No, that being said, I've also told you that I am committed to improving predictability on a quarterly basis. Our P&L came in as expected, including gross margin, but the margin results were different than some of you were expecting.

Now, in the past we have not provided quarterly guidance for gross margin in some specific way. As we move forward, we are going to look at providing some additional direction in order to improve our predictability. Now, that being said, and now that the toughest quarter is behind us, I think you will find that we continue to feel very good about the full year and confident about our expectations and momentum going forward.

Let me give you the highlights. We launched a record number of product introductions, including Glad's Press 'n Seal wrap. That is the first game changer initiative. We continue to make significant investments in the business with increases in both trade spending and R&D while main taking a high level of advertising support and around 10% of sales.

Cost savings remain on track for the year, although masked this quarter by our increased spending in the higher costs we absorbed. Our plans to revitalize our Latin America business are working. As reflected in the press release, top line and profit results for the international segment were up meaningfully.

Finally, we continue to have a very strong working capital position at -2% which represents our fifth consecutive quarter of negative working capital.

Now, as we typically do, I will review the highlights of the quarter against the company's four key strategies. That is dry growth, cut costs everywhere, get more customers focused, and out execute the competition.

First driving growth. Innovation is key to this strategy and the first quarter was a big one with record number of Q1 product launches. As we planned, we launched 11 new products in the laundry and home care business alone. We launched a new auto care and cat litter product in our specialty products business and, of course, we launched Glad Press 'n Seal.

Now, these new products, which were launched mid-quarter, are doing well overall and contributed to the top line growth results this quarter. Overall, early response to the new products has been somewhat stronger than anticipated.

For example, response to Glad Press 'n Seal has been so strong that demand is exceeding our expectations and temporarily out pacing supply. We're adding capacity and we're confident the Press 'n Seal will meet both our retail customers' demands and will achieve our fiscal year expectations.

As noted in our press release, Glad delivered its highest volume since we owned the business, partly due to the success of the new product, but also behind record first quarter shipments of trash bags and Glad wear containers. Now, our earlier response to the laundry and home care new products is another highlight. Notably, the Clorox Bleach pen. Our cleaning products with teflon, and Clorox disinfecting wipes for the kitchen. Along with the good progress on our lavender fragrance products that we introduced.

Now, as we said all along, our top line results reflect the choices we deliberately make to drive growth. We did shift some of our spending from advertising to trade promotion to both launch new products and to build our bleach business.

Advertising spending was down some on a year-over-year basis but it was still quite high in terms of the absolute dollars invested and as a percentage of sales. In fact, for the seventh quarter in a row, our advertising investment was 10% of sales or higher, certainly at or near the top of our entire pier group. And if you looked at our Q1 investment behind what we call our three gross investment levers, advertising, R&D and trade promotion spending combined, we were actually up double-digit versus the prior year's quarter.

Now, turning to our second strategy, we're continuing to see positive momentum against our priority to cut costs everywhere. And we remain on track to deliver our fiscal year '04 target of $100 million.

For example, we continue to improve trade funds effectiveness as we realize benefits from the implementation of new systems and processes through Project Delta. These tools are enabling earlier and better planning with customers. In the first quarter, our cost per incremental case declined another 1% on top of the 8% decline we achieved in fiscal year '03. We expect this trend to improve throughout the year.

Third, we're continuing to make progress in our efforts to get more retail customer focused. As I've said, this strategy is all about helping our customers grow their businesses with our brands. Now, while our initiative to reduce unsaleables contributes to cost savings, it's also very much a customer-focused initiative. Cross functional Clorox teams partner with retailers to understand and eliminate the root causes of damaged goods within our company and at the customer distribution facilities and stores.

We recently completed an audit and confirm that this approach of shared responsibility is resulting in a significant reduction in unsaleables for Clorox and for our customers. The audit also confirmed that we're on track to deliver this fiscal year's forecasted cost savings building on a savings that we achieved last year. Another duel cost savings in get more customer focused effort is our efficient customer logistics initiative. Like the unsaleables project, this win-win proposition reduces shipping costs for both Clorox and our customers. We have now implemented shipments of cat litter and/or Glad products directly from our plants to our customers. And again, we're on track to deliver the forecasted fiscal year savings.

Our fourth and final strategy is about out executing the competition. You know, we continue to talk about our business as a game of inches, where execution really makes a difference.

And executing with excellence played a key role in this quarter's new product launches. The speed to retail distribution for the Clorox Bleach pen was outstanding, achieving 70% distribution among stores in track channels in about 10 weeks. As a matter of fact,recent memory, the only product we rolled out faster was Clorox ReadyMop, which set an all-time company record. As you know, the process and systems improvements we're driving with Project Delta are a significant factor in our ability to out execute the competition.

We did achieved a milestone on Monday when we turned on Phase II systems for the first wave of our plants. Our suppliers and our contract manufacturers. While it's been just three days, I'm pleased to report that Go Live is progressing as expected and that we're making shipping -- making and shipping product under our new processes and systems. As a reminder, Phase II focuses on supply chain and logistics processing. It includes manufacturing, procurement and accounts payable. It's being rolled out in three ways.

With the complete implementation of Project Delta Phase II by the end of fiscal year '04, we will have the full compliment of all of our domestic transactional business systems and processes in place.

Before a wrap-up, I'd like to reinforce, we're pleased with our progress so far this year, we're executing our strategies well and we feel very good about the outlook for the rest of the year, with that, I will turn it over to Dan Heinrich for more details.

Thank you.

As Gerry mentioned, we feel good about this quarter's results given the tough Q1 comparisons we've talked to you about for a couple of quarters now.

Starting at the top, volume came in up 2% or 3% when you exclude the impact of divestitures in the base. Sales were flat for the quarter or up 1% excluding divestitures, better than we had expected. Our more positive sales results were driven primarily by the strength of underlying shipments in this quarter, a number of items contributed. Here are the highlights.

First was the high level of new productivity that Gerry already noded. Second, the Glad bags and wraps business recorded setting 11% volume growth. Press 'n Seal had a lot to do with this. However, volume growth was driven by record first quarter shipments of trash bags and Glad wear containers. The specialty products segment delivered another strong quarter with 7% volume growth excluding divestitures, driven by record first quarter shipments of charcoal, food and cat litter products.

These positive trends were somewhat offset by a decline in auto care due to category softness. Despite the overall downward category trend, we're growing share in auto, which will put us in a better position when the category recovers. Finally, I want to call attention to our Household Products Latin America and other business. Excluding divestitures, volume was up 5% for the quarter, building on the 4% gain achieved last quarter.

As expected for the company overall, sales growth lagged volume growth primarily due to product mix resulting from a shift to larger sizes to support merchandising activities at key retailers and increased trade spending to support new product introductions. As discussed during the last conference call, trade promotion spending was up behind Clorox Liquid Bleach, which has proven to have a positive payback. We continue to be pleased with the results for Clorox Liquid Bleach.

As noted, gross margin declined 440 basis points to 43.6%. This is in comparison with a gross margin in the year-ago quarter that improved 490 basis points.

Let me provide some additional detail about the four biggest drivers. First, increased manufacturing costs contributed about 180 basis points. These costs were primarily related to the start-up and launch costs for Glad Press 'n Seal wrap and to a lesser extent, increased cost versus the year-ago quarter due to a shift in time of the charcoal maintenance.

Last year, we closed down one of our five charcoal plant for maintenance in the third quarter and the remainder in the second quarter. This year, we performed maintenance on three of the five plants in Q1 and only two will be shut down in Q2.

Second, the gross margin impact of increased trade promotion spending this quarter and the year-ago coupon expense adjustment contributed about 150 basis points. As a reminder, trade promotion spending and coupon expense are deducted from gross sales.

Third, costs related to the outsourcing of some production of match light charcoal contributed 120 basis points. As those of you who follow Clorox closely know, Kingsford Charcoal has been an incredible growth story for us. It's the 10th consecutive record of record quarterly shipments. And they've stretched our capacity. In the near-term, outsourcing production allows us to continue to support growth while we execute already planned capacity improvements and consider further capacity expansion options.

During Q1 we were able to utilize the contract manufacturing compass to cover volume during the plant maintenance shutdowns. Our press release was the first time you heard about the agreement. As a routine part of our business, we continually make choices about how we support growth and whether we need to utilize contract manufacturing arrangements.

In most occasions, the impact of such choices doesn't have a significant effect on our results. In this instance, the impact is more significant because of the continued strong growth in the charcoal business.

Back to margins, fourth, as you recall, we projected unusually high commodity pricing this quarter. Compared with last year, we realized price increases in nearly every key commodity. These higher commodity costs impacted gross margin by about 160 basis points, which completely offset the gross margin benefit of this quarter's cost savings results.

Moving down the P&L, we increased R&D this quarter by 32% behind incremental investments in the game changer innovations and the glad JV.

As Gerry mentioned, overall spending behind growth investments was up double digits versus last year due to increased trade spending and R&D investments. I'd like to spend just a moment elaborating on the shift of some dollars from advertising to trade promotion.

As our marketing analytics and modeling continue to improve, we're able to further refine the mix of spending behind our brands to get the greatest benefit based on our knowledge of which brands respond more to advertising and which to promotion at different times in various competitive situations. We believe the insight we've gained from these improve analytics will continue to help us identify the best mix of advertising and trade promotion to drive growth and build our brands over the long-term.

While still quite high on an absolute basis and as a percent of sales, advertising was down, as we adjusted the mix of our investments in brand building and marketing. You may recall that two years ago, advertising was 9% of sales. As Gerry noted, this is now the 7th quarter advertising has been at or above 10% of sales. Wrapping up my P&L comments. Selling and admin increased primarily due to higher Project Delta costs.

Turning to the balance sheet and cash flow, at the end of the quarter, working capital was negative at minus 2% of sales. We've maintained negative working capital for five quarters in a row now.

In terms of cash flow, the numbers I'm providing here are preliminary, however, we don't expect them to change significantly other than potential reclassifications that sometimes occur.

We generated cash from operations of $140 million or 13% of sales. That's down compared with $204 million in the year-ago quarter due to a $37 million contribution to the company's pension plan and higher earnings in the year-ago quarter. With the additional $37 million contribution to our pension plans this quarter, combined with a $50 -- $54 million contribution last fiscal year, we now believe that we will not have to make another contribution until 2008.

Free cash flow, which we define as cash provided by operations less capital expenditures and investments was $101 million. As you know, we currently use our free cash flow to fund share repurchases and dividends. In the first quarter, we repurchased 3.3 million shares of stock and made payments to shareholders of the quarterly cash dividend that our board recently increased by 23%.

Finally, capital expenditures for the quarter were 3.7% of sales. For the full year, we're expecting our capital expenditures to fall between 4% and 5% of sales. A little higher than our goal due to continuing investment in our Delta systems project.

Let me turn to guidance now. I will start with the second quarter, which we're now about five weeks into. As we said here in our last conference call, we expected several second quarter measures to be stronger than in the first quarter. On the top line, we expect low single digit growth for the second quarter driven by a full quarter shipments of the new products we launched mid-first quarter. Keep in mind, top line growth continues to be impacted about 1 point from divestitures.

Sales growth will lag volume growth due to increased trade promotion spending behind the new products we launched in the first quarter. Sales growth will also be negatively impacted by comparison to the year-ago quarter which benefited from lower trade promotion spending as we closed out certain customer trade programs under legacy systems prior to the delta systems conversion.

Consistent with guidance on the last call, we expect gross margin to improve sequentially from quarter-to-quarter throughout the year. I will be more specific about the second quarter now. We expect second quarter gross margin to decline by 150 to 200 basis points versus the year-ago period. Substantially less than the decline we experienced in Q1.

The same things that impacted first quarter results will be the primary drivers in second quarter, although many to a lesser degree. For example, first, commodity costs, although still much higher than a year ago, we'll have a lesser impact in second quarter as we begin to lap the rising costs we experienced last year.

Second, we expect the match light contract manufacturing arrangement to have a lesser impact on the second quarter and Q2 manufacturing costs will reflect the impact of two charcoal plants shut down for maintenance, versus four in the year-ago quarter. Finally, we will continue to drive cost savings, which will partially offsetting some of these factors.

Walking through the other P&L items, advertising is expected to be about 10% of sales which will make it the eighth consecutive quarter at or above 10% of sales. R&D spending is expected to be up about 10% versus prior year. Selling and admin expenses are projected to increase prior year year due to Glad JV and Project Delta costs. Other income and expense will benefit from comparison to the base period, which included a $30 million asset impairment charge for a business in Argentina. With that, we expect to deliver double-digit earnings per share growth in the range of 48 to 51 cents per diluted share.

I'll now turn to the full year. Consistent with the guidance we've given you since our conference call in May, we continue to expect to achieve our top line and bottom line growth goals. That is sales growth of 3 to 5% and double-digit diluted earnings per share growth of $2.47 to $2.57.

We continue to expect gross margin trends to improve sequentially throughout the year and turn substantially positive by the fourth quarter. But will likely be slightly down for the full year. We previously projected the gross margins would be about flat for the full year. We now estimate full-year gross margin to decline about 50 to 100 basis points.

The reasons for the change include the impact of the shift in advertising to trade promotion spending and the full-year impact of the additional match light contract manufacturing volume, particularly as we ramp up production prior to the summer selling season.

Let me provide more guidance on advertising. In our earlier guide for this fiscal year, we estimated advertising spending would be flat versus a year ago on an absolute or dollar basis. We now expect advertising costs down on an absolute basis or about the 10% of sales level. This level of advertising investment compares very favorably with where we were two years ago. Building on Gerry's earlier comments, this is still a high level of advertising and we think it will give us the best mix to drive growth and build our brands.

For the year, our combined investment behind the growth leverage of advertising, trade promotion and R&D is projected to increase versus the high levels of a year ago. All other items on the P&L are projected to be the same as previous guidance and we have no changes to the previous balance sheet guidance.

With that, I will turn it back over to Gerry.

Thanks, Dan.

Before I open it up to questions, I'd like to summarize why I feel confident about our expectations for the balance of the year. First quarter is expected to be the toughest comp we have this year. We're pleased with the quarter's top line results and meeting our bottom line expectations. Importantly, we have positive momentum going into the second quarter. Consistent with previous guidance, we expect to have double-digit EPS growth, each remaining quarter of the year. We also continued to invest heavily in brand building and innovation.

We feel very good about the new products that we just launched and expect the top line to strengthen sequentially over the next three quarters. As I said earlier, we remain committed to delivering annual consistency and improving our quarterly predictability.

In addition to outlook for the remainder of the fiscal year, I'd also remind you: We have a great portfolio of strong consumer-preferred brands. In fact, 85% of our brands are No. 1 or No. 2 in the category. We have healthy operating margins, more than 20% for fiscal 2003. More than 20% this quarter and our operating margins are expected to be greater than 20% for fiscal year 2004.

Were successfully executing a major implementation of SAP, which should bring benefits to the long term. We have a strong balance sheet with negative working capital, we have very strong cash flow, and we returning cash to our investors through share repurchases and strong dividends.

Now with that, I am going to open it up for questions.

Thank you.

Ladies and gentlemen, if you have a question, please press 1 on your touch-tone phone.

Our first question comes from Andy Smith of AG Edwards. Your question, please?

I actually didn't queue in for a question, sorry.

Our next question comes from Wendy Nicholson of Smith Barney. Your question, please?

Hi.

My question has to do with the guidance for sales growth for the full year and the question I have centers on the new activity because it seems like there's been an enormous amount of new activity in the first quarter and flowing into the second quarter.

So, I would have thought that we would have seen pipeline filling and, you know, initial trial and that kind of stuff really boost the first half, but it sounds like the guidance is for a back-half sales loaded year. Is that because there are oodles of new products still to come that we haven't heard about? Or the rolling off of promotional spending that's depressing the top line?

I think the promotional spending depresses the top line from a sales standpoint, not from a volume standpoint so much. The benefits we go through the year, we have a lot of new products in the first half of the year. We will start seeing the benefits of those as we go through the years, in particular on the sales line in the second half of the year, you will start seeing bigger benefits from those because of the promotion front loading that.

Wendy, this is Steve.

The one thing to keep in mind, as well, is we're still experiencing about a 1-point drive due to divestitures made in the last year. That should go away after the second quarter. The second quarter will be depressed about a point due to that. That will be a benefit in quarters three and four.

So, three and four you feel confident of looking at top line growth of 4, 5, 6% or so? And that would help you get to the full-year target it sounds like of 3 to 5?

It will likely be in the low to mid single digit rates, that's correct.

Okay, and then returning back to the issue of more promotion and less advertising, that sounds like a little bit of a departure from what you've been talking about in the last couple of years, in terms of the corporate shift in priorities, less trade promotion, more advertising and I think we've heard loud and clear that's where you think your investment dollars are better spent. Is the timing -- you know, have you shifted your focus because of the particular new product launches? Or has there been a reassessment of what drives growth in the categories?

Generally I think advertising is probably the most important lever that we have to build equity over time. If you looked -- one of the things we've done a lot of work on is the whole market mix analysis in terms of looking at all the different drivers for each of our businesses and so for some businesses it may be that advertising is predominantly the driver for both short and long-term business building.

We do have a couple where we -- we -- we experimented with heavy increases in advertising and some decreases in trade spending. Let me give an example. Bleach would be a good one.

Where the impact wasn't just the impact of what I'd call the reduction in price differential but we lost a lot of display activity during that period. And what we did was we reshifted that because even though I would describe it as not price oriented, the amount of display activity that's increased by spending that trade merchandising money is pretty substantial. And so it's -- it's really a matter of fine-tuning the -- the mix of these things.

I think we still want to be heavy into the advertising business and I think if you went down and looked at every single competitor, you know, whether it's Gillette or Colgate or anybody and we're going to be near the top of the pack, in terms of even at this level that we're spending right now. The top of the pack in terms of the amount of advertising spending that we actually spend on our businesses and brands. Both in the international arena and in the U.S.

Okay. Fair enough. Thank you.

Thanks.

Our next question comes from Carol Wilke of Merrill Lynch.

Thank you. I have a couple of questions.

I was curious if you could discuss sort of what's going on in both the wipes and the -- and the mops category? It seems like the shares have been declining there. I know that in the prior year, you know, the ReadyMop was such a huge driver. I guess where this is going is from a bigger picture perspective, are you finding that -- or do you sort of plan that a big new launch into a new category has a contribution lifespan of maybe a year, year and a half at best? And then it sort of declines? It just seems like in some of the newer categories/businesses, that has been the trend so you get stuck with a really big comp but then it doesn't contribute so much going forward.

Well, I think I'd say first of all, I think there's some accuracy to that portrayal. I think what we really need to say is when we're on the front end of something like wipes and -- or ReadyMop where we've got big shares early on, and we're clearly the leader that as other people enter or get more competitive and the same is true with Wipes, we were the early, big leader. We have big shares of these categories, but they're declining shares. So, I think for us we -- we usually worry less about that than we do what's the basic health of the volume on those brands?

And there you're relying on, you know, what's the sustainability of a new product? And I think the results on those things vary between products. Some, you know, some don't have a long life. Some have a long life. We actually are very happy with our Wipes position, but it's a very competitive business and we have some comparability because we did so outstanding early as we also did on ReadyMop that it hurts us from a comparability standpoint, but we normally will have other things offsetting that.

So, just as a couple of follow-ups to those, the new teflon wipes, is that expected to help maybe stop the share loss in wipes? Is that sort a follow-up to maybe something new that was helping it before?

I think that's one of the things. I don't know if I put it as -- as the end-all. I think we'll continue to look at are there ways in this wipes category to extend the usage of our products in ways that we didn't get it before and teflon just provides a new way to do that and so I think that it's a good addition to the line. I don't know that it will offset completely, you know, all the competitive activity going on in wipes.

And just as a follow-up on the ReadyMop, it looks like from a pricing standpoint there's been between you and the switcher wet jet, a lot much, you know, price cuts over the past -- they were first in the category at $30 and now down to about $11. You started at $20 and now to just under $8. How far down does it go? Is there a $3 to $4 window you want to be less than them and it could keep getting cuts?

Anything could happen in the real world. I think we're focused -- we did, in fact, have rollbacks on that in order to be competitive because remember the real profitability in this business is the resales. And so maintaining our lead in the household penetration front on these tools is the key to our success. But the profitability, as we move forward, is certainly going to be with the refills. So, we still think even if you are going to have to take hits on the pricing, on the tool itself, the benefits that are going to come out as you move forward are still going to be worth that.

And can I just ask on a completely different topic? There was a comment in the text of the release about a negative mix in the Household Products in North America. I just want to make sure I'm clear on this. Is that because -- can you just explain the negative mix? I would think when you're launching new products -- was it really referring to difference between sales and volume or both?

Hi, Carol, it's Steve.

Hi.

Probably the biggest driver is at the top line and I think one of the items you just talked about was one of the primary drivers. If you look at ReadyMop a year ago, we primarily selling starter kits that were $20 in value -- or at shelf price. There's been a series of rollbacks. The prices are now in the low to mid-teens and because of that you see a decline in your mix from one year to the next.

It isn't necessarily a matter of the health of the business or ongoing trends, it's just year-over-year, the fact that you're not selling as many $25 starter kits.

The other area impacting that, the Household Products business, we continue to see great success from a merchandising standpoint with customers that traditionally take larger sizes. Usually club and mass. So, Disinfecting Wipes, toilet bowl cleaner, I think Glad trash bags was another one with outstanding shipments driven by merchandising in the channels, but they tend to be larger sizes, which carry a little bit lower sales value per unit.

Thanks very much.

Okay, Carol.

Our next question comes from Bill Steele of Banc of America.

Thanks, good morning. Just a clarification, Gerry, did you mention that there were 13 mew products launched in Q1?

Well, there were 11 laundry and home care new items.

Uh-huh.

And then a new product in cat litter. There was a new product in auto and then you had Press 'n Seal.

So, the total is 14.

Yes.

I guess in my notes and I could be wrong, obviously, I thought there was going to be closer to 12 new products. Were there a couple of products launched that we weren't aware of.

I don't know to what degree we actually announced the cat litter and auto. We launched all of these laundry and home care products and put it out there and then we obviously launched the Press 'n Seal. But it could be that the auto products and litter, we just didn't talk about broadly.

Okay. In terms of the full year new product launch, I new typically the new products are launched in Q1 and Q3, is that still kind of the way to look at it for this year? And if so, how many new products, generally speaking, are we shooting for for Q3?

We don't give out the details until we get closer to it, there will be fewer new products in Q3 and those are the typically the windows. I want to leave myself a little bit of an out-there, though that that there could also be new product activity outside of those windows for a variety of reasons, including Q4.

Okay. And then the last question, with regard to your -- your outlook in terms of margins, you know, as you mentioned, you're kind of narrowing the window a little bit in terms of your gross margin outlook or giving us increased guidance. Is that a function of the SAP installation? Do you have more confidence now in your ability to kind of peg what the margins are going to be on a long-term basis?

I'm not sure I would describe it as increased -- I think SAP helps, but remember, a lot of the -- the information that SAP is being implemented on that affects that kind of visibility is actually being done right now.

We just this past week launched in it in about a third of our plants and then we will finish up the other 2/3 of the plant at the back half of the fiscal year. So, I think it's unlikely at the SAP. I think we're putting a lot of diligence in our forecasting process in general that makes us sure we know all the almost that may come, in particular the ability to make choices as we look at the annual timing so that we can have consistency on the annual basis.

Okay, thank you. Very helpful.

Thanks, Bill.

Our next question comes from Amy Chasen of Goldman Sachs.

I was hoping you could talk more about Press 'n Seal. It seems that, you know, in the marketplace, at least it seems to me antidotally that there's not as much momentum or as much advertising or as much promotional activity as I would have expected to see at this point. Is that because you're supply-constrained? And also you said, you know, it's been a lot more successful than you had anticipated. Can you give us some metrics around that?

Let me give you a little bit of information on that. It has a complete promotional plan that includes a variety of vehicles, including the coupons in the second quarter and on -- onwards. We've done a substantial number of in-store demonstrations on the product. I'm getting a little bit of echo in my speaker here, not sure if you do.

I can actually hear you okay.

Okay. The -- we're doing it in a lot of in-store demonstrations, which is one of our promotion line items, with advertising. And we've just found that with a product like this showing consumers on the spot, actually how it work and its versatility is a valuable way to do that. So, there's been a number of those where we've shifted money to do that which we think is more effective than some other vehicles.

In addition to that, we have started our advertising, it's been running and -- but -- but I don't know how much we talked about our initial plan was, in fact, we were not going to launch this in every class of trade, we were going to go to the mass channels that is mass and grocery, first, and then in the third quarter we were going to go to the clubs and the dollar stores and the drug, et cetera. And so there still is a lot of room for doing things as we move forward, in particular as it relates to some of the marketing-kinds of activity.

We're right now, from the -- now from the supply standpoint, we're building capacity as we speak and we feel good about where we are in terms of our ability to both meet our customers demand and also meet the fiscal year expectations that we have for the product, from a planning standpoint and then the antidotal information around how's it doing at customers, I got to tell you, this thing is doing terrific. We've got -- it's one of the top 5 items of all Clorox items and one of our major accounts. And the top item in the entire Bags and Wraps category and another major grocery customer. At least so far we feel very, very good about in particular both customer response and consumer response to this product.

The thing about the distribution, you're saying the initial plan was mass and grocery and then club, drug and dollar stores in the third quarter, is that still the plan?

That is still the plan.

Okay. I was not aware of that. Okay. And you said that you're building capacity, were you planning on building capacity? Is that one of the reasons your Cap Ex number for the year is coming in higher?

No, I think the Cap Ex number is coming in right on target with where we expected. The incremental is because of the delta investment. The Project Delta SAP investment. I don't think that anything is -- is offline with regard to the rate -- the regular capital investments we're making. This was always planned in terms of building the capacity. The initial consumer response to this and customer response to this has been a little better than we expected so we're a little constrained there, but other than that, we feel good about moving forward.

Okay, and last thing on this topic, when do you expect that you will be able to meet all the demand that's out there?

Well, we're working at it as we do. I don't think there's a good answer to that, Amy. You know, this -- these things build up in demand and you can't be effect in your projections as to how much demand there's going to be.

I'm Glad we have the problem but we're working hard at it and I think we're very close to meeting the demand that we have for right now.

In well, when will the capacity be ready? Let me ask it that way.

Certainly as we get into the second quarter, we feel good about the capacity we're generating for the channels we're selling right now. As we -- and we're building that capability as we get into the third quarter, where threw be more customers buying it.

Okay. So it's fairly rapid?

Amy, to be clear, a lot of the capacity discussion not to be thought of production start-up curves. You know, with any new product you get better with every week that goes by in terms of your efficiency and utilization on the product lines. That's true with Press 'n Seal, as well. Every week we get better at that. Our capacity increases just naturally on the equipment we've already got in place.

Okay. Great. And one last question on this whole issue of the shifting the advertising into promotion: You know, I guess can you just tell us whether, and again, maybe give us some metrics as to either which businesses this shift has occurred in or what you've learned in your studies that has brought you this conclusion? Just a little bit more specific because it does seem like a pretty significant change in mindset.

Yeah, I don't know if it's a change in mindset. But we simply are going to use the tool we have that guides us to say where do we get the most incremental volume for the spending we have. And we're constantly updating the never, driven by the information that exists, the current results that are out there. But I will tell you a couple of categories that we had beefed up our advertising, charcoal and bleach.

The shift -- we've shifted some of the bleach and the mix of the charcoal spending is now more on the trade spending than it is in advertising. And I think those are two pretty good examples of where the data that we had and the metrics we were looking at said we will get more by generating a particular display and inventory support on these businesses in terms of moving it that direction. And the other brands, it's just the normal movement that we would have and then you have, you know, when we -- when we start chewing up new products, we sometimes move in some out and some in.

But there's other brands we have -- here's an example, liquid plumber, we might have advertising that goes on for a while with liquid plumber because you have to make sure consumers still remember this brand, but it doesn't actually stimulate the sale right then. They use liquid plumber when they have a problem. We want to be sure there is some advertising that goes on in a particular point of time, but may pull back for a period of time, too, if we feel want to shift no another place. Those are examples.

Is it fair to say that charcoal and bleach are the two biggies in terms of where there's been a significant shift? The other stuff has been tweaking?

Yes.

Great. Thank you.

Our next question comes from Lauren Lieberman of Credit Suisse First Boston.

Thanks. I had two questions on the cost side.

First is on raw material prices. I wondered if there's any change in the outlook for resident costs versus where you thought it would be three or six months ago?

This is Dan. On the commodities cost, the resin prices and other commodity costs are coming in reasonably as expected. We use a series of contracting techniques, forward buys, caps, collars, things like that, that pretty well stabilize our buy for this year, although we're still at a high level compared to last year, we feel pretty good about where we are for this year in terms of those cost increases that were fairly well stabilized. So, most of the issue we have on commodities is a comparison to the base period.

Okay. Great. And then the -- the second question was on pension cost. I don't know if I just didn't have it in my notes from the last quarter, but was the $37 million expected or something you decided in the middle of the quarter?

That was something that was expected and I believe during the fourth quarter we talked about another possible contribution to the pension plan. The reason it was done in two pieces is really the tax efficiency of the payment. We wanted to make sure it was fully deductible so that drove part of the payment into the first part of this year.

So, there's -- just to confirm, you said no other contributions this year?

None are expected. None are expected this year and under present press conferences, we don't believe we'd need another contribution until 2008.

Okay. And quickly on the armor all. That's one I was real surprised on. I thought there was a pretty easy comp last year. In the press release it sounded product-specific. In the comment just now, it sounded category-specific. Can you give more color on what was going on there?

I can. If you looked the at the comps -- I think you're accurate in the assessment of it had an easier comp. Home care had a difficult comp last year and Brita had a difficult comp versus those because of things in the late part of the quarter in '02. Auto, on the other hand, should have had an easy comp.

Here's it's a situation with a real weak category right now. We're gaining share on our armor all business and feel good about that, but there is a very weak category. We think largely driven by we haven't had very good weather. Somehow we were able to make it through on the charcoal business, I guess people are still barbecuing in the rain. But the auto business was affected by weather and it continued to be wet in July and August. But our wipes business also, while still growing, was much slower but I want to reinforce that our shares are up. So, when the category rebounds, we should get benefit out of that.

Okay. Great. And one other thing was on dressings and sauces. It was a really big volume number for food product.

Yes.

Was there sell-in for Q4 events? Should I expect that to moderate in the fourth quarter?

You know, I'm not sure that I have that data right in front of me, nor I'm not sure we're giving specific guidance on the quarter by that business unit at this point in time.

Okay. Great. Thanks.

Our next question comes from Ann Gillen of Lehman Brothers.

Thanks, I wanted to go back to Press 'n Seal for a second is it possible to understand what your penetration right now is in both the mass and the grocery, kind of on a similar basis that you gave us with Clorox pens, percentage penetration?

Yeah, first of all, congratulations, Ann!

Thank you, Gerry.

I didn't expect you to be on the phone.

My days or nights and nights are days! [ Laughter ]

I'm getting the data for you on that.

Ann, latest numbers, and again, this is changing by the week, you know, new accounts finally put the product on shelf, et cetera. But in tracked channels, again, that's less than half the universe these days, slightly less than half, it's in the high 60s, maybe 70% range. So, if you cut that in half, recognizing that's only half the universe that gives you in the 30 to 35% range. Then you have the on-track channels where we've got good distribution, some of the, you know, one of the largest mass customers, for example, that's not in the track channels, has been stocking the products since the first week.

Right.

And so when you couple all of that together, we're probably close to 60% or higher of the total retail universe out there as we speak today.

Okay. That's kind of where you were in the beginning of September or so? Am I right?

It's inched up slightly, as you know, even though we get headquarter acceptance on the products, very, very early, it varies by customers as to when they change their shelf sets and when they get the product on shelves. So, from a scanner data standpoint, it does inch up a little bit every week, but you're right, by and large for the last month or so it's been stable at the 60, 65% rate in the track channels.

Okay, that's helpful. Thanks, Steve. And just on Project Delta, Dan's comment about it being completed by the end of fiscal year '04 caught me. Is that in line with expectations or is there more of a stretch out into the fourth quarter?

No, the completion by the end of fiscal '04 is consistent with our plans, we're going through three waves of conversions this year and we've just completed our first one, we went live this week. We will have another one in March and another one in May. But the plan is consistent with where we've been, the plan is to be completed with Phase II by the end of this fiscal and at that point we will have, at least U.S. domestically, have a fully integrated system. There will be some stabilization efforts that will go into '05 related to the system, but the lion share of the work will be completed this year.

Okay. And last question, Cut Costs Everywhere, you gave us a sense of the benefit on the gross margin line. Can we get it for the SG&A line, also?

I don't think we've -- we calculated that on the SG&A line. What we've provided is on the -- on the margin line. As it relates to CCE, we're still on track for the $100 million we're projecting to save this year. Some of that will accelerate in the back half. Our sales initiative will be lowering the costs in the second half. We're launching our efficient customer logistics here in the first half of the year, it will gain momentum in the second half and you will see the savings in the back half.

I'm sorry, you said for the margin, I didn't catch that, only for gross.

Yeah, for the gross margin, that's it.

Okay, you don't have an operating margin contribution?

No, we typically don't calculate that on a quarterly basis.

Okay. And were there any costs relate aid to Cut Costs Everywhere that we should be keeping in mind in this quarter?

There was a small and -- relatively small capital investment for the efficient customer logistics project. Some wire housing, but it was within our total budget. So, we will bear depreciation going o that going forward.

It was very minimal.

Great. That's very helpful. Thanks so much.

Thanks.

Our next question comes from Linda Bolton-Weiser with Fahnestock.

Thank you. Can you -- can you just remind me, in terms of your share repurchase program, the $1 billion over two years, why is it so heavily weighted toward the second year of the program?

On our share repurchase program the -- the timing of our repurchases are tied to the agreement we've entered into with Hinkle and in that agreement there is more repurchases scheduled for the '05 year versus the '04 years. So, that's really driving the timing of when we're going to do our repurchases.

Okay. And then so here in the -- in the first quarter, the share repurchases you did were all open market, there was no related to the Hinkle agreement?

Yes, that's correct. Our -- our Hinkle agreement we will be settling with them and purchasing shares from them that will settle in December. We are essentially done with the repurchases for the first half and will be repurchasing shares from them, selling in December. We did elect to exercise the $15 million additional option from Hinkle so we will be repurchasing $65 million worth of shares December from them.

Okay. And just a couple of questions on your businesses here. Can you just comment on the -- on the strength in the dressings and sauces business? You're posting, you know, strong growth on strong growth and it's been going on for a while now. I mean what is really the root of the strength there?

I think it's fundamentals in this business, probably more than anything else. This is one where we've been very focused on what are we? We're really not a good company and really not even a salad dressing company.

I think we've done a terrific job on focusing on what we are to customers, which is a ranch salad dressing business and it has to do everything with packaging, our advertising, getting our price gap right versus the competition in that area and getting the right kind of retail execution and in-store merchandising for our products. It's all the nuts and bolts of building a brand. I think it comes from just solid focus over an extended period of time that's pays those kinds of dividends while other people may be distracted doing other things.

Uh-huh. Okay. And just in the Brita business... You know, you had a decline in sales there. There was a hard comparison. You have another hard comparison coming up in the third quarter. Should we expect to see another dip in sales then?

You know, as you know, Linda, we don't get too specific by business unit, we talk to the segment. When you think about Brita, Q1 was a challenge because of a major product launch a year ago. That impact anticipates as you move through the year. I think you will see pretty decent growth on Brita from quarter 2 onward for the remainder of the fiscal year.

Okay.

Despite the tougher challenge in Q3. Woe expect it still to show a nice improvement.

Okay. Thank you very much.

Thanks.

Next is Connie Maneaty of Prudential equity.

Good afternoon. If I look out to the gross margin, which is now expected, I think, for the full year to be down 50 to 100 basis points, it kind of -- in the back of envelope calculation, suggests that in the fourth quarter you have to have, you know, maybe 250 to 300 basis points of expansion. Beyond the easy comparisons, what would be the factors that would go into that kind of swing?

First of all, that's an accurate picture of things. Let me have Dan go through sort of the mechanics of how it will work.

Yes if the strength in the back half, obviously we're going to have momentum from our new product launches in the first half of the year, which will tend to accelerate the charcoal sourcing will not affect us as much in the fourth quarter and a lot of our trade spending is hurting us in the first half, we're also not up against the comps that we had in the first half in the back half of this year. Some of the trade spending impacts, the coupon adjustment, and you will continue to see the CCE initiatives contributing to margin in the second half of the year.

And then the raw material costs from a comp basis year-over-year, they've been very difficult this entire calendar year and going into '04, those ease.

Okay. That's helpful. Over the longer term, just on an annual basis, do you -- is your growth margin, do you think it's going up, down or flat for say the next three years?

You know, Connie, we've only given guidance out through '05 on the gross margin. I think that -- I'm going to give you a conceptual answer on this. I think there's no doubt that there's a lot of improvement that we can make on the gross margin line and that we intend to make. Even with things like the Glad business, where the innovation over time is going help us improve that entire business.

We're going to be giving -- we're doing a lot of strategy work on our portfolio right now looking into each of our businesses and looking at the kinds of targets that we should be setting beyond '05. And probably by late summer early fall we're going to give you some directions for our longer term goals and -- and targets in these areas. But I feel quite confident that there's a lot of room for improvement in gross margin over time.

Okay. If I could ask a question on Press 'n Seal.

Yes.

When you talk about a game changer these days, you have order of magnitude sales that we should be anticipating because clearly for this to be a game-changer, it has to affect more than just the declining plastic wraps category.

Yeah, I think that -- I'm not sure that we've typically given out sort of what is a game-changer mean, but in our typical new products kind of areas, if it's not a game-changer, we could be talking about a 10, 15, 20, $25 million line extension or item. With we talk about game-changers, we're talking about $40 million. In other words, a change of top line at a minimum. That could be a wide range depends on the product or choice we make there. They're typically just delivered by size.

That's very helpful. Do you see that Press 'n Seal as affecting other areas of plastics beyond plastic wraps? I can't tell from looking at the data yet.

Yeah. I think there's going to be about -- I think it's a third of the volume is going to impact other segments of the category and about 2/3 in the plastic wrap's segment.

it's probably a little too early, though, Connie, to confirm that. What you're seeing now is primarily trial eye expect as people get comfortable with the product, recognize the different ways to use it versus current plastic wraps, that's when you will start to have it more so impact the other aspects or segments of Bags and Wraps.

But this is clearly a product that could replace certain kinds of uses or food bags or foils.

Okay. And just my final question is on cat litter. What was the new product that you launched in the quarter and how do you see the flushable litter being put out by Arm and Hammer affecting the category?

I think you have asked this question the last time.

Well, I still want an answer! [ Laughter ]

The product that we launched and successfully launched, because it's doing very well, is Fresh Step Crystal blend. It's a blended product with clay and crystal and it was launched in the in the first quarter. On the -- on the Arm and Hammer, we continue to understand this category pretty well. We've experimented with a variety of sub straits and ways of looking at liter.

I think that this is a pretty -- in terms of flushable, consumers don't necessarily believe that you can flush a product, even if it's flushable. And so there's probably a pretty big switch between certain consumers who might like it and certain that don't. It is completely capable for every manufacturer to do it. If there's a proposition. I think that's an important point. And if -- and if there's an opportunity, you know works take advantage of that but this isn't some kind of unique technology. This has been around actually for quite a while.

Great, that's very helpful. Thank you.

Uh-huh.

Our next question comes from Andrew Shore of Deutsche Banc.

Good morning.

Good morning.

Gerry, when you talk about out executing the competition and this is a game of inches, can you help us understand what are some of the metrics? I mean one of them you used was ACV distribution build, but frankly in a study I did, 10 weeks or 70% would be pretty poor when the average was 80%, 80% distribution is 5.8 weeks. I mean if that's executing the competition, you're going to be a long ways away.

Yeah, I -- first of all, I think we'd have to be sure we're looking at the same numbers that everybody's looking at. Because one of the problems we have with all of the data, one, it always excludes Wal-Mart and Wal-Mart is probably the fastest to shelf. Amongst major retailers. But our our presence, you know, the way we're looking at it, I won't describe it best in ace class, but for us it was one of the best performances in terms of moving it to retail. Some of the other products, I think we have a lot of work to do in terms of building up our capability to be best of class and getting products to retail, but, Andrew, I think we'd have to look at the data and say are you looking the at the same things you're looking at?

My study was with all the Wal-Mart data.

Yeah. We probably need to go down and go through how you're looking at the data and how it compares to other things. I'm not sure we track with what you're seeing. I saw your write-up on. That we weren't tracking it w that analysis.

Okay.

Maybe we can do it at some point.

That would be great. Also... Advertising down, I knew you gave the reasons but is there any chance to believe or reason to believe that advertising is down because gross margin was down four points and you didn't have a lot of extra money?

Remember, there is a double whammy. If you move money from the advertising line to the trade spending line it has a negative impact on gross margin. So, there is a relationship between those things in the absolute.

Okay.

But I -- I'd like to reinforce, I feel very good about a 10% of sales level of advertising and -- and look at anybody's numbers. There are times when companies get at a 10% or slightly above, but over time if you look through all of our peers, I think this would be pretty healthy.

That's great. And then the last question is you made a comment about third quarter not being as active on the new product front unless some things happened. Is there any chance that this year we see another product out of the joint venture?

I think I'm not going make a comment on that.

I think you just made a comment. Thanks.

Not necessarily. In all right, thanks.

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

Thanks, good afternoon.

Hi.

Dan, I think I missed something about what you said on the operating margin side. I heard it was going to be north of 20%, but didn't hear as far as what it will be versus 2003, up or down?

Yeah, I don't think that we gave -- I think we said it will be 20 % -- it will be something over 20%. I'm not sure we gave guidance on whether it's going to be up or down right now and I think that my -- my -- my guidance would probably be that it's going to be flattish to slightly down.

Okay. I think in August you said it would be up, but less than 100 basis points.

Yeah. And I think all the numbers, we've clarified and given you direction on more of these things to provide more predictability.

I see why they impact the gross margin --

Yes, we're at a fairly high level and our R&D accepted ag has gone up pretty dramatically because of the Glad JV. Both of those are between the gross and operating margin lines.

Even with the $100 million of CCE savings, we're looking at flat operating income this year?

Flattish to slightly down.

Realistically Joe, it's a little early. You know, I think Gerry's comments of it being greater than 20% ought to be taken literally, maybe slightly above last year's number, maybe slightly below, it's still very preliminary.

We still have decisions we have to make on other potential investments that we could make in that as we go through the year here.

Are the raw materials price increases pulling a factor in there or no?

We're not having to comp the high levels versus the previous year when we get into the second half. But we don't see any near-term or from a raw material and packaging standpoint.

So, it's really Project Delta driving that?

Yes.

Okay, thanks.

Thanks.

Our final question comes from Amy Chasen of Goldman Sachs.

Hi, I just wanted to know whether you've started to get -- or continued to look anymore closely at cost savings projects that you may undertake in 2005? And what, you know, potential cost savings could be in that year, above and beyond what you told us all in August?

Yeah, I think, first of all, this is a very high priority. If you think about the time that senior management spends, we're really focused on just a few areas.

One is making sure that the delta project gets initiated in the right way.

One is making sure we have the people and the organization we want to have over time building capability.

One of them is around growth and making sure that we have all the things we need in place. And making sure our customers that we have a program that makes us a preferred vendor, but the final in the cost area. This is done at the senior manager level.

What we try to do is look at all cost projects, other than what might happen at the local level, call it a division or a function kind of thing, that crosses the boundaries and we're in the middle of a number of these things that we see as being having potential step change kinds of impacts on us and this is a pretty high priority for all of us.

Okay. But --

We're not giving any dimension to that right now beyond the '04 numbers you've seen.

When will you give dimension to that?

I think for '05 we'll probably give guidance a little later, but probably later in the fiscal year. But the bigger thing for me is actually how are we looking over the longer term and we will be probably looking at setting some targets on cost savings for the longer term.

Okay. Great. Thank you.

Thank you.

Our next question comes from Lauren Lieberman of Credit Suisse First Boston.

Great, thanks. Just a quick, quick follow-up.

New product pipeline, I know you didn't make a comment on anything additional out of the JV, but any idea if you will have anything additional in terms of game changers this year?

I will not make a comment on that, either! Just because we have choices we can make and they will depend on a set of circumstances that are not clear yet and so I think I'd rather just not give any further direction on that.

Okay, thanks, thought I'd try.

Okay. Thank you.

Our next question comes from Andrew Shore of Deutsche Banc.

Gerry, I apologize, but I never got the answer to my question. What metrics are you looking at in terms of out executing competition?

The key thing we're looking at, Andrew, is not so much some of the little details that you're talking about right now, which we have to do at the lower levels, what we're really spending our time, if you have thought about the delta initiative and thought about all of the big processes that we have in the company, particularly our transactional processes and how we can do things more efficiently, for instance, order the cash or even new product innovation or one of the seven big processes that we have in the company, that's the place we're looking to put the biggest emphasis on metrics as we move through time. And -- and I think it's an important body of work and part of that is also financial metrics in which we're looking at score cards for each of our business units, each of our functions, but those are the big pieces of work that we're doing right now.

Okay. Thank you. That's helpful.

Thanks. I think we're wrapping up here, I appreciate everybody calling in today. We feel very good about our business and I will look forward to talking to some of you between now and the next conference call. But thanks again for calling in.

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