高樂氏 (CLX) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Clorox Company fiscal year 2004 third 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 program, please press star then zero on your touch-tone telephone. As a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Steve Austenfeld, Director of Investor Relations for the Clorox Company. Mr. Austenfeld, you may begin.

Thank you. Welcome, everyone and thank you for joining Clorox's third quarter conference call. I'm Steve Austenfeld, Clorox's Director of Investor Relations. On the call today are Jerry Johnston, Clorox's CEO and Dan Heinrich, our Chief Financial Officer.

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, Jerry will start by providing some observations about the quarter. Then Dan will discuss the key financial drivers and results, and provide our financial outlook. Finally, Jerry will wrap up and then open it up for your questions.

Before we begin, I need to remind you that the material we're providing during this call 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 10-K filings for the fiscal year ended June 30th, 2003.

With that, I will turn it over to Jerry who will briefly recap our third quarter results.

Thanks, Steve. Good morning or afternoon to everybody. As we saw in the press release, we had a very strong quarter. Earnings grew 18% to 59 cents a diluted share, and earnings came in about 2 cents higher than the upper end of our expectations, driven by top-line growth. In fact, at 7%, sales growth for the quarter came in at a two-year high.

I simply feel very good about the Clorox people who delivered these positive results this past quarter. The results are clearly the outcome of focus and execution across the entire Company. The quarters' numbers provide good momentum going into the last quarter of the fiscal year.

Now I would like to briefly highlight our results within the context of the Company's four priorities. That is, drive growth, cut costs everywhere, get more customer focused, and out-execute the competition. First, driving growth. As I said, sales came in up 7%. Our strongest performance in eight quarters. Sales growth was driven by a 4% increase in volume, reflecting growth across most of the Company's business units. About half of the difference between volume and sales growth came from favorable foreign currency. The balance was from pricing, coupon spending reductions and trade spending efficiencies.

Clearly a key element of our growth is the impact of first half new product launches, including Glad Press 'n Seal wrap, Clorox Bleach Pen gel and Fresh Step dual action crystals cat litter to name a few. The quarter also benefited from some new Q3 product launches, including five new Hidden Valley and KC Masterpiece items and Tilex mildew root penetrator and remover.

But I'd also like to point out that top-line growth this quarter wasn't just the result of new products. We also saw solid growth in a number of base brands, such as Clorox 2 bleach for colors, Clorox Disinfecting Wipes, Brita, Armor All, Kingsford, and Glad trash bags. These are important trends. Gains in these areas far outpace some volume declines on certain home care brands and STP.

Our second priority is cut costs everywhere and again in the third quarter we made good progress. We remain on track to deliver $100 million in cost savings for this fiscal year. Dan will be discussing our preliminary FY '05 outlook later, but let me mention here that we continue to see real opportunities to reduce costs over time and we expected to generate a solid level of cost savings during the next fiscal year.

Our third priority, get more customer focused, is all about building our retail customer businesses with our brands. Now as we've discussed in the past, one of our key activities here is to be a premier supplier in our categories of both leading brands, but also value-added services to our retail partners. One way we do this is by leveraging our capability in consumer analytics. We're able to bring those insights to our retail customers, so that key category building activities, like merchandising, assortment and shelving are optimized to drive higher consumption by their shoppers and our consumers.

For example, our sales team recently worked with a large retailer to execute major feature and display support for Hidden Valley salad dressings. Now despite a considerable price premium over the main competitive offering, the retailer enjoyed substantially higher and more profitable consumption of Hidden Valley dressings during the event. This is a good example of the kind of value-added database analytics that we provided to the retail partner so that they could improve their sales and profitability. It produced a win for the customer and for Clorox. In fact, in Q3 our food business delivered its ninth consecutive quarter of year-over-year volume growth.

Now, over the past couple of years, the focus of our fourth priority, out-execute the competition has been our project Delta implementation. This past Monday marked a significant milestone for Clorox as we successfully completed the final phase of our SAP systems implementation. Those of you who follow us closely know this was a tremendous, multi-year undertaking. And I couldn't be more proud of the Clorox organization for successfully completing the implementation with excellence.

Project Delta is already helping us deliver improved productivity, cost savings and business results. One example can be seen in this quarter's receivables, which continued to decline significantly. Let me frame it for you. We track receivables performance in terms of day sales outstanding or DSO. Back in fiscal '01, our DSO was 54 days. Now we just closed Q3 with DSO at 33 days. It is the lowest level in memory, and the seventh quarter in a row with DSO in the 30s.

The project Delta system installation is only the beginning. In Q3, we announced the formation of a process management office. Much like our cut costs everywhere office, the process management team will be working with business process owners to identify and capture the financial benefits of project Delta, and our ongoing process improvement efforts. This really represents the next phase of project Delta. Transitioning from systems implementation, to continuous process improvement. We expect it to drive cost savings, enhance margins and deliver better and faster decisions for many years to come.

Overall, we're very pleased to have delivered strong Q3 and year-to-date results. Importantly, and as you also saw on the press release, with this positive momentum going into the fourth quarter and our April launch of Clorox ToiletWand, we've taken up our full-year expectations. And Dan will discuss more about that in a few minutes.

Before I turn it over to Dan, I would like to emphasize something I've been talking to you about since I became CEO, and that's this commitment to delivering annual consistency, and improving quarterly predictability. Given our Q3 results, the year has been playing out much like we said it would when we gave you our initial guidance on the year. That is a challenging first half as we face tough comps and invested heavily to support new products, followed by a strengthening second half.

Now while I know we still have some work to do here, I feel good about the progress we're making towards becoming more predictable on a quarterly basis. As you saw in the the press release, we're on track to deliver double-digit EPS growth and now expect to deliver earnings per share solidly within our initial projections.

So let's look at '05 guidance. I do feel good about our ability to continue to deliver 3 to 5% top-line growth over the next year. We also feel very good about the basic health and outlook for our businesses in delivering improved operating performance in fiscal '05. The uncertainty here, over the near term relates to our share repurchase plans in light of Henkels announcement that they intend to sell all or part of their Clorox and/or Ecolab stakes. Because of this, we have suspended our current repurchase program. We also have not projected any impact from share repurchases into our fiscal year '05 guidance.

Now, while we would hope to know something about Henkel's plans as soon as possible, we simply can't give guidance at this time or predict the outcome of that decision right now.

So with that, I will turn it over to Dan for more details.

Thanks, Jerry. As expected and as we have discussed on prior calls we had tough comparisons in the first half of the fiscal year, followed by strong growth in the second half. We're pleased to have delivered the third quarter and the organization is working hard to deliver Q4 and the full year.

With respect to the third quarter, sales came in up 7%, driven by the factors Jerry already discussed. As Jerry mentioned, this quarter's sales growth was the highest since March 2002, with increases coming in across all the segments. In household products North America, 6% sales growth was driven by 9% volume growth on the Glad business. Glad Press 'n Seal wrap was certainly a big factor as were record shipments of Glad trash bags. The Brita business, which posted 21% volume growth also contributed strongly to the segment's top-line results due to merchandising support for pour-through pitchers and distribution gains for faucet-mounted products.

A 9% increase in shipments of laundry care products was driven by Clorox Bleach Pen and strong merchandising support behind Clorox 2 color safe bleach. Partially outstanding these gains was a decline in the home care business, due to intense competitive activity in the convenience mopping category, which more than offset record shipments of Clorox Disinfecting Wipes and the incremental volume from the new Tilex Mildew Root product.

The specialty product segment delivered 5% sales growth, driven by a 14% increase in shipments of food products behind the launch of three new flavors of Hidden Valley dressings and two new KC Masterpiece items. As noted in our press release, this was the ninth consecutive quarter of volume growth in our food business, the 12th consecutive quarter of growth in charcoal shipment and the 8th consecutive quarter of volume growth in the litter business. These positive trends were slightly offset by the auto business, as increased Armor All auto appearance products were more than offset by reduced shipments in the auto performance category.

The 13% sales growth in the household products Latin America other segment, was primarily driven by favorable foreign exchange. The segment's volume growth of 2% was driven by growth in Argentina, as that local economy continues to recover, market share gains in Venezuela, and increased distribution of cleaning products in the Asia-Pacific region.

Turning to the rest of our financial results, this was a strong quarter with good P&L quality, a solid balance sheet and strong cash flow. On the P&L, gross margin came in at 45.1%, which was down 40 basis points from the prior year; however, gross margin actually came in a bit higher than we expected due to our strong third quarter sales. As I have done for the past two quarters, I will provide details about some of the key items behind our year-over-year gross margin performance.

On the plus side, we picked up about 190 basis points from CCE for cut costs everywhere initiative, including the increased benefit from direct plan shipment and increased truck load utilization which you may recall are two key initiatives under the program. The favorable margin impact from cost savings more than offset 120 basis point impact from increased commodity costs primarily due to resin and chloralkalide prices. Now as projected, the gross margin impact from raw materials was not as steep in Q3 as it was in the first two quarters, and we continue to project minimal year-over-year impact from commodities in the fourth quarter.

While CCE more than offset commodities cost increases, gross margins still declined, largely due to increased logistics costs. This was due in part to higher inventory levels as built inventory for the April launch of Clorox ToiletWand and seasonal builds of charcoal.

Looking at our gross margin this year, savings resulting from our cut costs everywhere initiative have remained strong at 150 basis points or better each quarter. However, year-to-date they have been masked by commodities increases. As I just noted in Q3 cost savings came in higher than the impact of commodities and we now believe we have turned the corner. In the future we expect to see a greater portion of the cost savings follow profit.

Moving down the P&L, SG&A increased slightly versus the prior year. Primarily due to a $6 million contribution made to the Clorox Company Foundation. As expected, advertising was lower in the current quarter compared with a 16% increase in the year-ago quarter. On a dollar basis, ad spending was right on target with our projections. On a percent of sales basis, given our strong sales results, that spending came in at about the 9.8% level which is at the upper end of our peer group.

We continue to feel good about the level of our advertising investment and still expect to be at about 10% of sales for the year. R&D came in as expected with a 10% year-over-year increase as we continued our investments in game changer innovation and the Glad joint venture. Other income came in at $6 million, primarily due to $2.5 million in favorable litigation settlements and $3 million from a favorable mark-to-market settlement on a commodity derivative contract.

Turning to the balance sheet, we are pleased to maintain our negative working capital position this quarter at a negative 1.9% of sales. Inventories grew primarily due to the normalization of charcoal inventories this quarter compared with low levels a year ago. As Jerry mentioned, receivables, as measured in day sales outstanding declined to the lowest level in recent memory. Additional details are provided on our web site.

Turning to cash flow, we generated cash provided by operations of $203 million, or 19% of net sales. That's up significantly over the year-ago quarter driven by increased earnings and lower working capital in the current quarter and the impact of a $54 million pension plan contribution in the year-ago quarter. Capital expenditures were 3.3% of sales for the quarter. For the full year we expect capital expenditures to come in at about the 4% of sales level.

Now, move on to guidance. First I will discuss our Q4 outlook and then provide our initial guidance for fiscal year 2005. Our fourth quarter expectations are essentially unchanged from what we previously communicated. That is, on the top line, we still expect volume to be up in the mid-single digit range. We expect sales to grow faster than volume, due to price increases, trade promotion efficiencies and favorable foreign exchange. We continue to expect strong gross margin gain in the neighborhood of 100 to 200 basis points in Q4, again, primarily benefiting from cost-savings initiatives, and also due to a more balanced year-over-year commodities comparison.

As with our full year expectations, we still project fourth quarter advertising to come in at about 10% of sales. Our bottom line estimates for the fourth quarter also remain unchanged. Specifically, we continue to expect earnings per diluted share in the range of 82 to 85 cents. For the full year, our guidance is essentially unchanged with the exception of EPS which we have taken out. We now expect full-year earnings per diluted share in the range of $2.52 to $2.55 with the goodness we experienced in Q3 falling to the full year.

Let's turn now to fiscal year 2005. I'm sure you saw our press release with our initial outlook. Although we're still in the midst of putting all our plans in place, I would like to provide some perspective. Once our plans are complete, we anticipate that we'll project full-year sales growth within our stated targets of 3 to 5% and earnings per diluted share in the range of $2.58 to $2.66. Keep in mind this EPS range estimate does not factor in the possibility of any share repurchases.

As we have discussed with you before, Henkel has said it might sell some or all of its stake in Clorox or Ecolab to fund its recent acquisition of Dial. While we remain authorized by the Board to make share repurchases, we're temporarily holding off until we know more about Henkel's plans. As most of you know, Henkel hosted an analyst meeting yesterday and there's nothing new to report with respect to what they might ultimately decide about their stake in Clorox.

As to fiscal year 2005, there are a number of factors that will contribute to the year's earning's pattern. First, we'll lap the launch of Glad Press 'n Seal in Q1. At the same time, we'll still be spending heavily behind our recent launch of the Clorox ToiletWand. Clorox ToiletWand is on track at this point, but with only a month behind us, it's really still too early for us to us to perfectly predict results.

We also have another game changer item we'll be launching in the first quarter requiring significant introductory spending. Now for competitive reasons, I'm not going to provide details about this product, however, we're excited about it and think it's a very strong consumer proposition.

Given our expectations for more level commodities comparisons, and strong cost savings, we anticipate gross margin to increase for the full year. Specifically, we project fiscal year 2005 cost savings to come in at about $85 to $95 million driven by further efficiencies in trade spending and manufacturing, further reductions in unsaleables and benefits from our strategic sourcing, direct plan shipment and full truckload utilization initiatives. That said, we do anticipate Q1 gross margin to come in slightly down followed by solid growth in the remaining quarters. It's too early, however, for to us provide more specific gross margin guidance.

On a full-year basis, we expect advertising to come in at about the 10% of sales level. On a quarter-on-quarter basis, advertising spending may come in higher or lower based on our marketing strategies and new product activity. Net-net for Q1, our initial projections are for sales and volume growth of 3 to 5%, and earnings per diluted share in the range of 53 cents to 55 cents.

As noted in our press release, our guidance includes an estimate of about 9 cents per diluted share for potential restructuring charges related to manufacturing operations. Specifically, we're looking at some actions we may take in Glad's manufacturing operations as we continue seeking opportunities to drive efficiencies and grow margins in this business.

Now to be clear, we haven't made any decision yet. We still have to work through the numbers and the impacts and it will ultimately require Board review and approval. But we wanted to identify this potential impact so you will have a better sense of the operating profit growth embedded within our guidance.

As I noted, we're still formulating our final plans for fiscal '05 and they are not yet complete, but we feel very positive about the coming fiscal year and confident about our outlook for the business. We see further cost savings opportunities, a more balanced commodities environment and strong top-line growth coming from core businesses and new products. We'll be able to provide more details when we get back to you in August.

Now let me turn it back over to Jerry for a wrap-up and Q&A.

Now before I open it up for your questions, let me take a moment to recap what I think are the key points from today's conference call. First of all, our business and brands are very healthy and we have very good momentum. Our overall third quarter performance on the top line, bottom line and balance sheet is quite strong. In particular, sales being up 7%, reflecting new products and importantly, to me, strength in our core businesses.

Year-to-date, we've seen positive trends across the business. And we're very pleased with that. Clorox people are simply focused and they are delivering. We are confident we can meet our fourth quarter targets.

Looking ahead to fiscal '05, we anticipate another very good operating year. On the top line, we expect sales to fall within our stated target of 3 to 5%, gross margin is expected to grow for the full year as we anticipate our fourth consecutive year of significant cost savings building on the success of our cut costs everywhere initiative.

We expect increased advertising spending as we continue to support our core brands and new products. With advertising for the year, as a percent of sales, we expect to be at about the 10% level, the same as fiscal '04. Now we have not completed all the details of our fiscal year '05 plan, but net-net we expect to deliver earnings of $2.58 to $2.66 per diluted share but with upside potential if we should resume our share repurchases.

Now, as a final comment, let me remind you, we will be hosting a meeting for investors in New York this September where we'll be discussing our strategies and financial goals going out beyond 2005 to 2008. With that, I'm going to open it up for questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered, and you wish to remove yourself from the queue, please press the pound key. One moment for our first question. Our first question comes from Amy Chasen from Goldman Sachs.

Hi.

Hi there.

The first question is '05 and I understand you haven't completed all of your plans, but you are probably making some assumption for what you think resin prices are going to do and our estimates are looking for continued increases albeit not at the same rate that we saw last year. Can you just comment on what your assumption is that's embedded in your guidance?

Yes, Amy, this is Dan. On our commodities outlook, specifically for resin, there is upper pressure on resin prices in the market, but we haven't placed stabilized purchasing contracts through fiscal '05, so we would expect any impact to be relatively modest on it.

You have contracts through FY '05?

Through fiscal '05, yes.

Okay, great. And then just on, just backing into it, to try to figure out what the operating profit growth is going to be next year, I'm coming up with about 5% and I just want to know whether that sounds about right to you? I mean, just backing in, taking the $9 million charge, assuming -- I'm assuming your guidance includes that, making no assumption on share repurchase and trying to kind of back into your number, that's kind of what I'm coming up with. Does that jive with what you guys are thinking?

I think depending on where you go in the EPS guidance range, that could be a number that you could back into in terms of our operating profit growth. Obviously, the last couple of years share repurchases have helped contribute to get to our 10% EPS growth level, but that's probably within the range in terms of operations.

Okay. And on the share repurchase, I mean, I know that you guys halted the program, and that you're waiting to see what's happening with Henkel, given that Henkel's taking so long to figure this out, why wouldn't you just resume share repurchase until they make a decision and then once they make a decision, then you can stop doing the open market share repurchases and use your cash to buy back directly from them potentially?

Amy, it's just a choice that we've made that we think the better use of our cash and the potential of them selling some or all of their shares to us, I think says it's better to use our cash that way, than be out in the open market buying shares and then not have that cash available to be putting against what could conceivably be a larger purchase.

And yet your cash flow trends are so strong and your balance sheet is so healthy that you have plenty of room to lever up and buy shares back from them. It just seems to me like you might be being overly conservative in the short term.

That may be what we are is overly conservative in the short term.

Okay. Would you say that you are being overly conservative in your EPS guidance for next year as well?

I think we're giving you the guidance that we think is realistic guidance for now. We still have some final work and final points to do on it. I remain committed. In FY '03, we delivered within our top-line growth and our EPS range of double digits. Our top-line growth of 3 to 5 and EPS of double digits. In fiscal year '04 we expect to do that same thing. In fiscal year '05 that remains a high priority for me with the exception that we have this one outstanding issue of what would be the impact of share repurchases depending on the timing of resuming them, or some other alternative.

But okay, let's just stick on that point and then I will be finished and let somebody else ask a question, but high priority gives you 10% with the only variable being share repurchase, as I read in the press release that 9 cent charge for manufacturing realignment could also be a variable and increased spending on these game changers could be another variable. Is that not the case?

I don't think that's the case. I think the way you should think about it is the way we are trying to manage this business that included in the investments that we make on brands or any charges that we make, our objective would still be to deliver 10% earnings with those other items embedded in there.

Okay, because when I backed into it, I think I came up with it and maybe I made a mistake, I can go back and do it again. I think I came up with 5 to 10% EPS growth, without the share -- or sorry -- if I gave you credit for some degree of share repurchase.

Yeah, I'm not sure. Let me -- I don't want to get into a pro forma discussion. So let me give it to you this way... If you looked at fiscal year '03, share repurchase under the Board-authorized plan amounted to about 13 cents. If you looked at fiscal year '04, we had a half a year of share repurchase, and that amounted to 8 cents. Hypothetically, if you were to say under the Board-authorized plan, if you were to continue a plan with those kinds of directions, we believe that it would fall within the range that we've been talking about in our target.

And when you come up with those numbers, the 13 and the 8, you're taking into account loss of interest income or interest expense? That's not just the reduced share count, right?

Yes, that's correct, Amy.

Okay. All right. Great. Thank you.

Thanks, Amy.

Thank you. Our next question comes from Connie Maneaty from Prudential Equity Group.

Hi.

Hi.

Okay, the buyback. Excuse me.

Which one is that?

Well, you got me while I was taking a bite out of my sandwich. Sorry. Okay, under what circumstances would you not do a buyback?

Well, I think that you have to look at any buyback with economics in mind and it involves all the things you would do in evaluating price and the total value, and a number of other factors as you look at those things. I think we, obviously, have a lot of capacity to do it and we just want the right economics, if we were to do that.

So it just sounds like it's a matter of time? I mean, it's hard to imagine that having done a buyback in the past, and looking at a potential one from a major shareholder here, it's just like inconceivable that you would not be back buying shares within the next six to 12 months.

I think we have to wait and see how the discussions that go on with Henkel play out and that there's no conclusions that have been made by Henkel in terms of where they will end up.

Okay. Why was the contribution to the Clorox Foundation booked in SG&A instead of that big black box you have as other income, other expense?

We typically view that, Connie, as an operating cost. The company has long supported the Clorox Company's Foundation. We typically contribute to the foundation every 18 to 24 months and we were coming up on that time frame, so we've always recorded that as part of the SG&A.

Okay. And one follow-up question on the process management's office, what exactly does that mean in English? What's it going to do? [ LAUGHTER ]

Essentially, Connie, view it as our transition. A lot of the work has been part of the project Delta process of overhauling our major processes and getting our integrated systems installed. What this is going to do is take us to the next level, to continue to develop and to drive continuous improvement in all of our major business processes throughout the Company. It's also a group of folks that are going to drive to ensure that we make sure we capture all of the value that we perceive we can get out of the Delta investment.

And in addition to that in terms of the people that actually work on things, on these processes, they will be creating an important set of metrics and accountabilities for the delivery of goals against those major processes that we have in the Company.

Well, could you give us one or two examples of projects that fall under this new office?

Yes, the support -- the process office would be working with our folks in our order-to-cash process, our procure-to-pay process. Those are probably two of the largest we have, and so they will be working with those folks to continuously improve and refine that process, take costs out of the systems, generate efficiencies and, as Jerry mentioned, create additional metrics out of the new information that we have to help drive that efficiency going forward.

Okay. Thank you.

Thanks.

Thank you. Our next question comes from Ann Gillen-Lefever from Lehman Brothers.

Thank you. Jerry, I'm still struggling with the A&P variability and I know that's something you were hoping to drive consistency for.

Yeah.

So I wondered, maybe just a basic accounting question. Can you go on an accrual basis so it's smoother throughout the year? And then, secondly, how do you smooth this given the game changer environment? Because it seems to be adding a lot of volatility to the EPS.

Just on the accounting piece of it, Ann, we're on an as-incurred method. So we did not use case rating or smoothing techniques. We recognize our advertising expense as incurred.

Would you consider going to as accrued?

I think at this point we've decided it's better to do it as incurred for us, even if there's a little volatility and I think over the course of a year, as I've been telling you, we're trying to get consistency in the year, that would be fine. I think the volatility -- there could be volatility sitting inside quarters and we'll just try to give you good predictability in terms of what's going to happen in the next quarter or the next couple of quarters as we move forward.

And I'm sorry, I joined the call late, Jerry, but I'm not understanding the volatility this quarter on year-over-year comparison on the pricing line. It seems like you got a much better contribution from pricing this quarter than most of us expected.

Well, in the past we've taken some pricing actions. We've taken a price increase on Glad trash, on our charcoal business and we've just taken one on the litter business, and we also have the premium pricing on our Press 'n Seal products, so what you are seeing is the contribution from those increases in the current quarter.

Ann, Steve here, I'm just going to mention that, if you think back to our guidance really from the beginning of the year, the first half of the year we probably have the pricing impact being negative, meaning sales trailing volume growth, and I think you saw that. And conversely, we indicated that sales would outpace volume growth in the second half of the year through pricing, through the elimination of some tough comps, trade spending efficiencies, et cetera. And that played out in the third quarter and that same general dynamic we're suggesting is going to play out in Q4 as well with sales outpacing volume. In total, I really don't think this is much different than what we have been suggesting.

No, I didn't mean to suggest that, Steve. I was just trying to think about the first half, second half differences and wondered, of course, as we go forward whether it's a tough and easy comparison, then reverse as we get into '05, for example.

All of those things will be dependent on the specific initiatives that are going on as we go through those periods. And so I don't think we could look and say, now the second half will be harder or the first half will be easier. It will be dependent on what's going on in terms of the choices that we make and investments in either innovation or the new products, or other areas. It may be charges that we take because of future opportunities.

Okay. And, I'm sorry, just one question, somewhat related. Is it fair to think about kind of your manufacturing efficiency or optimization similarly? Or is that more flat around the course of the year? When you see kind of a response on the A&P line to new product initiatives varying so much from quarter to quarter, how should we be thinking about the manufacturing profitability, or use of capacity?

I think the core business is pretty stable in that we have seasonal businesses and so you will have some variation on that, but the comparability things won't be big as it relates to those things. Manufacturing costs, though, are effective during start-up times, on new products and so that could effective than in any one quarter or two quarters as you're launching new products.

And embedded in our CCE targets for fiscal '05 are a number of manufacturing efficiency and optimization savings goals and, obviously, the actions we're contemplating in the Glad manufacturing environment are designed to drive additional future benefits and improve those margins.

Thanks. Very helpful.

Now, Ann on the other question you had about these game changers that we're having and have an impact in any one quarter and, in particular I think we have a situation where we've got one in the fourth quarter and one in the first quarter coming up in the year, we're going to look at all of our investments and try to continue to look at it on an annual basis, because we remain committed to have consistency on an annual basis. On the other hand, when we have an opportunity, even if it throws off comparability in quarter-to-quarter, or investments higher at one point in time, we're going to be willing to do those things, either for competitive reasons or opportunistic reasons. But we remain committed to attempt to deliver consistency on an annual basis.

Thank you, Jerry.

Sure. Thank you.

Thank you. Our next question comes from Lauren Leiberman from Credit Suisse First Boston.

Thanks. It's actually a good lead-in from Ann's last question. Thinking about the new game changer in the first quarter and the related spending and then also, I guess, the ToiletWand in the fourth quarter, how should we be thinking about the mix of spending? Is it more in-store work?Is it also more on air? And I guess, in the fourth quarter with ToiletWand, would that be different than your initial plans because so many manufacturers are now in the market with similar products?

I don't think so. In the fourth quarter I think you will see some basic stability in terms of the kind of spending we will do overall, because even within our company, remember we have the capability to move things around a little bit. As we get into the first quarter on the launch of that particular new product, most of the spending will probably be in the introductory -- in the pricing line and sales line. As you get to the second quarter, you would see more spending probably in what I would call the longer-term marketing kinds of activities.

Okay. And then looking out, I guess, the next four quarters if you can, thinking back to the gap between sales and volume, do we continue to see price and mix be a positive to the top line or more neutral?

Lauren, I think over the course of the full year, meaning fiscal '05, consistent with our longer-term expectations they should be roughly in line. In any given quarter one might be slightly higher than the other, particularly in a period where you have got significant new product introductions, you do have the introductory marketing spending that Jerry just noted, but we wouldn't expect it to be significantly different one quarter to the next. You're probably talking within 100 basis points on each line in any given quarter.

Okay. And I guess just the last thing would be, I'm not sure when Amy was asking about 5% operating profit growth, that she was able to back into that. It surprises me that the numbers would work out that way because my sense is that have you got great momentum right now going into the fourth quarter and visibility into the pipeline. I'm not really sure how 5% operating profit growth would make sense for '05, if that is, in fact, what the numbers add up to. So maybe you could elaborate on how that is possible when you have got good momentum.

I think it depends a lot on where you anticipate we'll be in terms of the EPS range. Actually, if you focus on the operational piece, I think it is a little bit stronger than what Amy may have indicated, but a lot of it depends on where you expect we'll fall in the EPS range.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Art Bascom from CIBC World Markets.

My questions have been answered. Thank you.

Thank you. Our next question comes from Robbie Pamanoti from GE.

Hi, guys.

Hi.

Two quick questions for you. One on the gross margin line, you guys said 190 basis points you were helped by productivity and then we back out 120 for commodity costs, then I would assume we back out another 110 for the increased logistics cost. Is that right, Dan?

That's a little high on the logistics side.

Okay.

It's 110 for all other items of which logistics was the largest portion, but there's some other items in there as well, Robbie.

Okay. And on the logistics front, is that mainly just higher freight costs or is that still some special programs that you are rolling out for some of your businesses?

It's a combination of two items. It's both freight and warehousing and it's primarily this quarter being driven by the higher inventory levels that we're carrying. The year-ago quarter we came in with the charcoal selling season with pretty low inventories and this year we're entering the selling season with more normalized inventory levels, so it's essentially the freight and warehousing around that.

Okay. And one other question for you folks, in terms the dividend policy, does the Henkel situation here that is sort of precluding you from buying in stock also preclude you from maybe raising the dividend, I guess, at your upcoming board meeting which is your annual meeting in July or whatever?

I don't think it precludes us from doing anything. Obviously, it would be a factor that we'll think about as we look at our dividend practice, and, again, just to restate, typically what we have targeted is we'd like to have our dividend payout ratio in the top tier of our peer group and it's something that we look at on an annual basis and we would look at it again this year on an annual basis and make appropriate decisions. We will, obviously, depending on what happens with Henkel that could be a factor in it, but in terms of whether we would increase it but that's premature to speculate right now. We really don't know what Henkel's going to do.

Okay. Thanks a lot, guys.

Thank you.

Thank you. Our next question comes from Art Cecil from T. Rowe Price. Mr. Cecil, your line is open. [ MUSIC ] Our next question is a follow-up from Amy Chasen from Goldman Sachs.

Just a question on pricing. You mentioned an awful lot of categories where you had taken price increases. Can you just refresh our memory when you took that pricing and whether you are finding it easier to go to the retailers and take price increases? I was surprised in the number of price increases you cited.

Well, I think you first have be to be cost justified if you are going to take them to retailers. And I think in every case that we've done it we've had rationales that are very strong, and, so I think that the charcoal increase went into effect last fall, October 1st, probably.

Second quarter, the trash was second and we just sold in the litter increase.

Yes. So I wouldn't call them easier or harder. It's just that when there are real structural changes, we feel strongly that we should be able to sell in appropriate pricing. It's not something that we're casual about, though, in terms of doing.

Yeah, okay. Are there any other opportunities over the next couple of quarters?

I don't see anything major. Okay. All right, good. Thanks. Thank you.

Thank you. Our next question is from Art Cecil from T. Rowe Price.

Hi.

Hi, Art.

Would it be worth more to you to buy stock from Henkel than to buy stock from the public?

That's a hard question.

It might be hard, but it's straightforward.

Yes. I don't think we know the answer to that right now. It's straightforward, but we don't know the answer to that right now.

Okay. Because it seems to me that if Henkel chooses not to sell stock back to you all, as part of its plan, then arguably the Company would be in a position to look at buying a similar amount of stock rather quickly from the public. But we don't know the answer to that.

Right.

Is that on the table?

I think what we'd do is we'd go back to thinking about our board-authorized plan.

Mm-hmm.

And we obviously have a lot of capability, I mean, I think everybody knows that. And we would do what we thought was right and if we thought we wanted to do more, we'd talk with the Board about it, whether that's an appropriate strategy or not.

Okay. Jerry did you allude to the fact that you are having discussions with Henkel about this whole matter?

I think the way to think about that is that I believe both Ecolab and us are participants in discussions that are going on with Henkel as they try to come to their conclusion, and I believe they stated that yesterday in their conference call.

And in these discussions your position with them would be that you would like to buy it back or what is your position?

I would rather not negotiate with them on the phone. [ LAUGHTER ]

That's a good answer! Now, on '05, on fiscal '05, did you say that the restructuring assumption in your guidance is 9 cents a share?

That has been the guidance for the first quarter, yes.

And that's 9 cents a share?

Yes.

What's the amount of similar charges that you have shown so far in '04? Or not that you have shown but that you have taken.

Nothing specific from an impairment or restructuring nature that we've done this year.

Okay. So in other words you're identifying the 9 cents for '05, and there's nothing for '04, hence no identification for '04?

Through the third quarter, that's correct.

Okay. Good. Thank you very much.

Mm-hmm.

Thank you. Our next question is a follow-up from Connie Maneaty from Prudential Equity Group.

Actually, a couple of follow-ups. In the prior quarters you've had to outsource Match Light and that has had an impact on your gross margin. Can you bring us up to date on what your capacity for manufacturing your own Match Light has become and whether or not there will be any variability from outsourcing in the gross margin going forward?

Yes. We have had an impact, as you know on our gross margin over the last couple of quarters from our charcoal outsourcing agreement. In the fourth quarter we'll start to comp that in from prior year and we expect that impact from the charcoal outsourcing to have much less of an impact on us as we look at gross margins in fiscal '05.

In terms of capacity, we are in process of expanding our additional capacity in the existing charcoal network, and we'll be bringing that on line over the next 12 to 18 months. So it should be less of an impact from the outsourcing agreement in '05, and we'll be shifting to our capacity as we expand it.

Okay. So that sometime then in fiscal '06, there won't be any impact from outsourcing from Match Light.

I'm not sure I would go that far yet. I think that we still have to look at the consumption and sales in the category, and whether it's in line with history or whether it changes and we're still playing that through right now. But there's no doubt that we have plans to continuously increase capacity. I think the question will be, what's the consumption that goes on in the category over the next year to two years.

Okay, great. On the game changer, the new one, when do you show it to the trades?

The trade is already informed of this. We are actually doing planning with them in terms of shelf sets, et cetera. We'll probably be able to communicate it to you more specifically sometime in the first quarter.

And which month does it ship in?

For confidentiality purposes, and competitive reasons, Connie, I think we prefer to wait until we've actually begun shipping the product. So again, we'll tell that you in Q1, but at this point I think we would stay away from that.

So that means we're have to do our own snooping, you know. Okay. I think we're all surprised that the second game changer came along so quickly. As you look out at the other things in development, do you see them coming on sooner or do you suspect there will be a year gap or some type of gap between game changer, this next one and the following one?

Yeah, I'm not sure we're ready to commit to the specific timings on all of these things. Some of them have competitive reasons and some of them have economic reasons that we -- can we afford to or not afford to if it doesn't have a competitive angle to it. And so we're -- what I feel good about, I think the way to speak it is, what I feel really good about it is, this increasing investment that we have against innovation is -- and our increasing improvements in our new product development activities, in the way we do it and how we do it with regard to technology brokering, partnering and our process itself in terms of getting to market faster, I feel very good about and it should continue to be a solid source of our longer-term program.

Okay. And just a final question, can you give us an update on the search for somebody to fill Rich Conti's position?

Yeah, we're in the search. I would like to get it done as quickly as possible. I feel very positive about the likelihood of getting somebody that will be very additive and value added to the Company.

And why will this person likely come from outside the Company, as opposed to being promoted from within?

Yeah, I'm mostly just trying to -- I feel very good about the quality and the depth of the management at Clorox. And particularly I feel good about the depth of management we have in running the businesses and functions and so we have lots of continuity. We have quality and we have depth. What I'm trying to do is ensure that at the senior management levels that we have a good long-term succession plan, and we have this one person we think we should bring in from the outside, but it has nothing to do with how I feel about the quality of the balance of the folks coming through our system and an increasing level of activity I have against building organization capability at the middle and upper levels.

So it kind of sounds like you might have two people at Larry's level, Larry and somebody new and they would be sort of the next -- they would be in line for succession and then you're building the bench from below?

Yes. But I think it's unlikely that we're going to be looking outside a lot at that. I think what we want to do is spend more time really building our own bench strength inside the Company.

I'm just wondering why there isn't somebody internally who might fill this position?

We've got lots of good folks and they would be considered as a part of everything we're doing, Connie.

Okay. Thank you.

You bet you.

Thank you. Our next question comes from Rob Schwartz from JL Advisors.

Congratulations on a great quarter, guys. That last question on the buy backs, I know you have spoken a lot about it. I mean if we listen to what Henkel said yesterday, that they would make a decision by the end of the third quarter, it seems like regardless of whether or not they choose to sell your stake or not, you will either have an opportunity to buy back some or all of their stake or you will have three quarters to resume your normal share repurchase activity. Are there any scenarios with that wouldn't be the normal course of action resuming your normal share repurchase activity?

Well, we have a board-authorized share repurchase program, and pending a decision by Henkel on what they would intend to do, which we do not have a time frame on, I would assume we would go back into a share repurchase program, that's authorized by the Board.

Okay. And then I guess to go one step further, I guess the authorization is $220 million per six months, I think. Either you will have about 6 to 9 months from which to make up. Is there -- would there be the -- I think you have set plans with Henkel to buy back a certain amount of their stake to keep them under 30%. Could you accelerate the $220 million to make up for the past 6 or 9 months that you have missed out in share repurchase opportunity?

I think it would be premature to discuss how we might reenter the share repurchase market if we choose to do so. The limit you referred to are the limits under the existing agreement that we have with Henkel. Our board authorization is actually larger than that, but it would be very premature for us to speculate at this time at what pay -- whether we would reenter repurchases or what pace we would make them.

And then last question just looking at the growth of the core operations, when you're saying that top-line sales and volumes are going to go up 3 to 5% and margins will improve as well, I mean it seems like the only difference on next year's guidance is this 9 cent charge and the lack of share repurchase, but, in fact, operating income is at least in line with this year, if not improving, unless I'm making a mistake here.

Rob, I think when you look at fiscal '05 and, again, this is preliminary and we can't give you the details yet, we'll be able to better provide that for you on our August conference call, I think it will look more normalized quarter to quarter versus this year. This fiscal year we had some challenging first half comparisons versus the prior year. We'll do some introductory spending behind the second game changer we have now in the first quarter of fiscal '05, following the game changer we just launched in Clorox ToiletWand in '04. But I think overall, when you talk about the top-line growth, it should be pretty consistent quarter to quarter through fiscal '05, I think that's more positive than we saw in fiscal '04, and our margin expectations are pretty positive in every quarter as well.

Okay. Thanks a lot.

Thank you. Maybe one more question and then we'll wrap up.

One moment. Our next question comes from Sam Tobias from Circle T Partners. Mr. Tobias, your line is open. Mr. Sam Tobias, your line is open.

Why don't we go ahead and wrap up.

I would like to turn the program over to Jerry Johnston.

Okay. Hey, thanks everyone for joining us on today's call. We feel very good about the quarter we just ended and are optimistic about our future and we look forward to talking with you again in August when we announce our full fiscal year results. Thanks a lot and I will talk to you later.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.