高樂氏 (CLX) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Clorox Company fiscal year 2004 fourth 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 this conference call is being recorded. I would now like to introduce your host for today's program, Mr. Stephen Austenfeld, Vice President of Investor Relations for the Clorox Company. Mr. Austenfeld, you may begin your conference.

Thank you. Welcome, everyone, and thank you for joining Clorox's fourth quarter conference call. I am Steve Austenfeld, Clorox's Vice President of Investor Relations. On the call today are Gerry Johnston, Clorox's Chief Executive Officer, and Dan Heinrich, our Chief Financial Officer. We are broadcasting this call over the Internet and a replay of the call will be available for seven days at clorox.com. For additional information about the Company's results including definitions of financial terms used in this earnings release and on today's conference call with the investment community, please visit the financial results area within the investor section of clorox.com. On today's call Gerry will start by providing some observations about the quarter and the full year. Then Dan will discuss the key financial drivers and results and provide our financial outlook. Finally Jerry will wrap it up and then open it up for your questions.

Before we begin I need to remind you that the material we are providing during this 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 10(K) filings for the fiscal year ended June 30, 2003. With that I will turn it over to Gerry who will briefly recap our fourth quarter results.

Thanks, Steve. As you saw in the press release, we had a very strong quarter. Fourth quarter earnings grew 26% to 86 cents per diluted share. Sales for the quarter were up 8% and as expected outpaced volume growth of about 6%. Our 8% fourth quarter sales growth was in line with our expectations. And at the highest level of sales growth in more than two years. Our fourth quarter gross margin reached 46.5%, an increase of 120 basis points versus the year ago quarter.

Now for the full year earnings grew 15% per diluted share to $2.56. On the top line, sales increased 4%. Gross margin for the year was 44.8%, a decline of 150 basis points versus the prior year. That was driven by a challenging first half as we faced tough comparisons, particularly in commodities. Plus we invested heavily to support new products.

Now earnings for the quarter and the full year came in a penny higher than the upper end of our expectations. Those results reflect three key factors: One is the positive top line growth. Second, a healthy P&L which allowed our Glad business to absorb an $11 million charge that negatively impacted the Company's net earnings by $7 million, or 3 cents per diluted share on an after tax basis. I'm going to talk more about this in a few minutes but I'll mention here that this charge had already been factored into our earlier guidance. Finally we came in slightly higher than guidance due to additional tax benefits related to a discontinued operation in Brazil. I think it's fair to say that fiscal 2004 was a very good year for Clorox. And had it played out much like we said it would when we gave you our initial guidance for fiscal year '04. We established a business and financial plan for the year and we delivered against it while focusing on improving annual consistency along with quarterly predictability.

Now, let me revisit results for the past fiscal year versus the guidance that we provided about 15 months ago in May of 2003. We estimated sales would grow from 3 to 5%. We delivered 4%. We predicted gross margin change versus prior year would decline for the year but improve sequentially and turn positive by Q4. As projected we did improve sequentially and gross margin increased 120 basis points in the fourth quarter. Although commodities impacted us more than the original projection. Third, we projected advertising spending of about 10% of sales for the year. We came in at 9.9%, one of the highest levels of spending in our peer group. We estimated earnings would grow by double digits with a projected range of $2.47 to $2.57 per diluted share. We delivered $2.56 for a 15% growth despite the mid-year suspension of our share repurchase program. So our full-year results and general trends were much as we projected more than a year ago. We met top and bottom line growth goals and our P&L items came in about as we expected other than some commodity pressure on gross margin.

Now I feel very good about the year and the credit goes to Clorox people around the world who stayed focused and drove results across the P&L and balance sheet. At this time last year I told you that we'd be maintaining our second year of focus on four key priorities. I believe this focus was key at a strong fiscal 2004 results. Let's take a look at how we delivered against each of those priorities. First we said we'd be driving growth through innovation and investing in established brands while we pursue longer term growth opportunities. In fiscal 2004 our 4% sales increase was in line with our long-term target of 3 to 5%. We realized growth in six of our eight domestic business units as well as both Latin America and our Asia Pacific international businesses. Importantly, several innovative new products contributed to our top line results including Glad Press'n Seal Wrap, Clorox Bleach Pen and Clorox Toilet Wand disposable cleaning system. While we still have some work to do drive our home care business further and reverse some declines in the auto business we nonetheless are pleased to have delivered our targets for the year.

Second we said we'd fund our growth initiatives to our priority to cut costs everywhere. In fiscal 2004 we delivered 108 million against our cost savings target of about $100 million, which was important in light of the commodity pressure. We also had good momentum going into fiscal year '05. Importantly this focus on cost savings and margin enhancement is now imbedded in our culture. We are going to continue to drive both cost savings and margin enhancement as a part of our longer term strategy. Third we said we were going to accelerate our efforts to get more customer focused by being a premiere supplier of leading brands in our categories while providing value-added services to our retail partners. In FY '04 we continued to develop cross functional capabilities to grow our customers categories with our brands.

Now you'll recall that over the course of the year we discussed a number of progress points on cross functional approach to working with customers such as Kroger and Wal-Mart. This quarter I'd like to just mention another important retail partner, Target. In May, Target invited us to join just nine other suppliers on their council of strategic partners. Participating on the council will give us greater understanding of Target's high level strategies in the areas of merchandising and supply chain as well as provide opportunities to meet one to one with senior leaders and develop joint business strategies and plans. Clearly we are developing strong relationships with many of the retail customers in the U.S.

Finally we said we remained determined to out execute the competition. While we've now completed the final SAP implementation phase of project Delta our multi-year systems and process initiative. This was a huge undertaking and a great effort by Clorox people throughout the Company. We now have a common domestic systems platform and access to real time data. But the true path to longer term success is our focus on process improvements. And capturing the full value of the implementation. As I said to you last quarter, we expect the Delta initiative to drive cost savings, to enhance margins and to deliver better and faster decisions for many years to come. So overall we are very pleased with the year.

Now what lies ahead for the Clorox Company? Now Dan is going to discuss our fiscal year '05 outlook in detail when he comes on. However, there's one topic I would like to address up front and that's our long-term strategy for the Glad business. For some time we've said we are focused on growing the brand's top line through innovation while also fundamentally increasing margins and profit over time. As you know, a year ago we launched Glad Press N' Seal with great success and one year later the market has yet to see a similar competitive product. This week we began shipping the second game change to come out of our joint venture, it's Glad Force Flex trash bags. They they have a unique diamond texture that stretches to prevent punctures and rips. Of course it's still extremely early; however, sale into the trade has been quiet strong, shipments started in the past week and top customers are building solid plans with quality merchandising support. Importantly we believe Glad Force Flex is an important gain changing consumer proposition.

So we are addressing Glad's top line through innovation and both Press'n Seal and Force Flex are accretive. But to really make a step change in Glad margin structure over time we needed to do make some larger change. First as I mentioned in the fourth quarter we took an $11 million pretax charge for the Glad business. Now that's separate from charges we had communicated to you earlier for fiscal year '05. This charge was related to shifting product of certain Glad products to contract manufacturers that can produce them in a more flexible, efficient and cost-effective manner than we can in house. Doing so also allows to us focus our internal resources on products where we add the most value in producing them ourselves, for example products with much more complex and manufacturing processes like Press'n Seal.

In addition, the board recently approved our previously announced plans for restructuring within Glad's U.S. manufacturing operations. As a result yesterday we informed employees that we've entered into negotiations with the union to close the Glad manufacturing plant in Cartersville, Georgia, near Atlanta. This plant was the least efficient in the Glad network and our other U. S. Glad manufacturing plants are expected to absorb the vast majority of the Cartersville plant's production. Fiscal 2005 restructuring charges related to this plan are expected to total 12 cents per diluted share with 9 cents following in the first quarter as we had previously announced. We expect this action to deliver savings beginning in fiscal year '06.

Now both of these moves are consistent with our strategy to streamline manufacturing, improve our margins and enable to us fund investments in growth through innovation. It is always difficult to make and communicate decisions that impact so many people so directly. At the same time we believe it's the right thing to do for the long-term health and growth are the business and for the Company. Now Dan is going to review the financial impacts of these decisions more detail for you when he comes on, but I wanted you to see understand how these actions fit into the overall Glad strategy. Importantly, none of these plans change our financial guidance for fiscal '05. Our business is healthy. We have good momentum and we continue to feel good about the our ability to deliver on our commitments for fiscal year '05 and beyond. Now I will turn it over to Dan.

Thank you, Gerry. I will start by providing a few more details about our top line growth. As Gerry noted with delivered 8% sales growth on the quarter and 4% on the year, right in line with our estimates. Importantly, sales outpaced line growth in the fourth quarter as we benefited from trade spending efficiencies and ongoing impact of price increases we took earlier in the year. Many of the details are in our press release but I'd like to mention a few of them here. First I want to make particular note of our results in household products North America. You'' recall that in the first quarter of the year we launched a record number of new products, 11 in the laundry and home care business alone as well as Glad Press'n Seal wrap. In the second half of the year we went on to launch Clorox Toilet Wand , a new Tilex product and several other items. Clearly, introductory expenses behind these product launches impacted the segment's full year profit margin. However, by the fourth quarter, top line and bottom line accelerated and the segment delivered 9% sales growth and double-digit pretax earnings growth. I think it's fair to say our strategy to drive growth through innovation is showing results in the household segment.

I also want to mention our household products, Latin America and other segment which is effectively our businesses in Latin America and Asia Pacific. Sales were up 9% for the quarter and 12% for the year. While sales growth did benefit from favorable foreign exchange, particularly earlier in the year, it's important to note that volume, which may be a better indicator of the health of these businesses, was up 10% for the quarter and 5% for the year. For five consecutive quarters now, we've seen significant top line growth and two consecutive years of very significant improvement in the profitability of this segment. We are delighted with the health of these businesses.

Now, moving on to the rest of the P&L. I'll turn first to gross margin. As Gerry already mentioned the change in gross margin improved sequentially through the year and came in up 120 basis points in the fourth quarter. This trend was supported by about 200 basis points in cost savings coming out of our cut costs everywhere program, a 60 basis points improvement from trade promotion efficiencies and the carry over benefit of price increases, partially offset by an 80 basis point decline due to higher commodities costs and a 60 basis points decline due to higher logistics costs net of some other smaller items. Fourth quarter advertising was up 4% versus the year ago quarter to 10.3 percent of sales. Again as Gerry mentioned advertising spending as a percent of sales came in about as projected at 9.9% for the full year.

In the quarter operating profit margin increased 250 basis points to 23.4% of sales. For the fiscal year operating profit margin was 20.2% of sales. While this represents a slight decline of 40 basis points it is our second consecutive year with operating margin above 20%. Fourth quarter other income and expense was unfavorable due to the $11 million charge we took as we shifted production of some Glad food storage bags to contract manufacturers which Gerry already discussed. For the fiscal year other income and expense was favorable due the our comparison to the base period in which we had a goodwill impairment charge related to our Argentina business. As Gerry noted, we continue to wind down our operations in Brazil and reflected $7 million in after tax gains for the quarter and 3 million for the year in discontinued operations. The favorable impact resulted from lower wind down costs as well as a tax benefit associated with the losses incurred.

Moving on to cash-flow, for the year we generated cash provided by operations of $899 million, or 21% of sales, compared with 803 million and 19% of sales in fiscal 2003. The increase was driven by higher earnings and improved working capital. In addition, capital expenditures for the year came in a little lower than projected at about 4% of sales, as we tightly managed our capital budgets in light of our investments in our SAP implementation. Now before I move on to our guidance I want to recap our cut costs everywhere, or CCE performance. In fiscal year 2004 we delivered 108 million in savings, slightly better than the 100 million target we established for the year. More than 80% of the savings was realized in gross margin through a combination of trade spending efficiencies, reductions in unsaleables, cost savings generated in procurement through our manufacturing network and in logistics areas such as truckload utilization and direct plant shipments. Some of these savings were invested in advertising and R&D and also were used to cover commodities and other manufacturing cost increases. The remainder fell to profit particularly in the second half when our margins were up strongly.

Now before I move on to our guidance I want to reiterate an important point Gerry made in his earlier comments. We are pleased we delivered on our commitments and importantly we feel quite good about the fact that the general trends we experienced, a tough first half followed by strong second half, were much as we projected more than 15 months ago when we communicated our goal and financial plan for the fiscal year and we remain fully commit to improving annual consistency and predictability.

I'll now turn to our FY '05 guidance which we provided in this morning's press release. As you think about fiscal 2005 there are three items you should consider. First, as many of you recognize our quarterly results are impacted by the timing of new product launches, their size and the level of start up costs and marketing support required to launch them. Similar to fiscal year 2004, our first half results in FY '05 will be impacted by new products including the two gain change injuries we recently introduced, Clorox Toilet Wand and Glad Force Flex. Volume growth in these new items will be offset to a degree by significant first half introductory trade merchandising and consumer spending which as you know are booked as reductions in sales.

Second, we will be absorbing about $40 million pretax, or about 12 cents per share after tax in costs related two Glad's restructuring. We expect about 30 million of this total to fall in Q1 and about 5 million each in the second and third quarters. The third item is selling and administrative expense. We expect year over year increases in the first half followed by year over year declines in the second half. However, importantly we expect our full year selling and admin expense to be about flat in absolute dollars and lower on a percent of sales basis. I'll talk more about this in a minute. As a result of these three factors, we expect significantly higher profitability in the second half, similar to the trend we experienced in FY 2004.

As Gerry noted we remain focused on our of consistently meeting our annual guidance. I also want to emphasize that we are communicating the same FY '05 full year top line and bottom line targets we communicated to you in May. With that let me provide you more specific details regarding our FY '05 guidance. Starting with the full year on the top line we continue to expect FY '05 sales growth consistent with our long-term target of 3% to 5%. Volume and sales growth are expected to be about equal on the full year for a couple of reasons. First we expect to benefit from continued efficiencies and trade spending. You may remember that this is one of our biggest CCE savings projects, getting more unit volume for each dollar invested in trade merchandising. Trade spending efficiency will be incremental trade spending for new products and slightly unfavorable mix as we see continuing shifts to larger sizes. At this point we don't expect a significant full year impact from foreign currencies.

In the first quarter as we communicated in May we expect sales growth to be within our annual target of 3% to 5%. We expect similar results in the second quarter. Again as I mentioned a moment ago we anticipate that introductory trade merchandising and consumer spending will partially offset strong unit growth from Toilet Wand and Force Flex. While we expect sales in the second half to grow year over year growth rates will likely trend slightly lower than the first half as we anniversary the FY '04 launches of Press'n Seal and Toilet Wand. Nonetheless, we expect to grow top line in the 3 to 5% range for the full year.

Moving on to gross margin. We are targeting 25 to 75 basis points of improvement for the full year. As communicated in May, our CCE initiative is expected to deliver about 85 to $95 million in FY '05 cost savings, or approximately 200 basis points in margin improvement, the majority of which will benefit gross margin. We do expect higher commodities costs to partially offset these savings, although to a much lesser extent than we experienced last FY. In addition about 10 million of the $40 million in Glad restructuring costs will impact cost of goods sold and gross margin primarily in the second and third quarters. The Glad restructuring impact on gross margin is included in our 25 to 75 basis point improvement target for the full year. Commodities are expected to be unfavorable but less of less so in FY '04 as we will be comparing against increasing prices of a year ago. All other manufacturing costs are not expected to have a major impact. Following a slight decline in gross margin in Q1, we expect the remaining quarters to be up verses the prior year with Q4 being the strongest due to lower levels of introductory marketing support behind new products launched in the first half and the benefit of ongoing cost savings.

Full year research and development costs are expected to increase a bit faster than full year sales growth as we continue to support near term and long-term new product development. Although the growth rate will be a bit faster than sales growth, we still expect R&D costs to be about 2% of sales for the full FY. As I noted a moment ago, we expect our full year selling and administrative expenses to be about flat versus prior year and to grow at a rate slower than sales. We project that our first half expenses will be higher than a year ago due in part to higher IT spending primarily due to SAP stabilization costs and the timing of market research spending to support new production innovation. Although we've completed the SAP installation, we continue as-planned to support completion of the stabilization process in the first half of fiscal '05. Now that the system has been implemented the expenses are no longer eligible for capitalization so they will hit the P&L. In the second half of the year selling and admin costs are expected to be lower as we compare against higher base period costs. Consistent with our long-term target, we expect full year advertising to be about 10% of sales. As with the last several years results, this will vary modestly by quarter with some coming in somewhat below 10% and others above.

With all that said, we expect our full year operating margin to improve modestly, supported by full year gross margin improvement and selling and admin efficiencies. Consistent with the projections I just disclosed we expect the first half operating margin to decline to be followed by strong growth in the second half, much as we experienced in FY '04. Interest expense and other nonoperating items are expected to increase in FY '05 for two primary reasons. First, we expect some rising interest rates will lead to higher interest expense during the year and second approximately $30 million of the $40 million in pretax lab restructuring costs will hit other expense largely in the first quarter. At this early juncture we are assuming our full year tax rate remains at about 35%. As previously communicated our current financial plan does not assume any share repurchases. As a result based on the option exercise patterns of prior years, shares outstanding are expected to increase by about 2 to 3 million shares during the year.

Now for the full FY consistent with the guidance we provided in May we continue to project FY earnings per diluted share of $2.58 to $2.66, first quarter per earnings diluted share of 53 cents to 55 cents. For the second quarter we are introducing guidance for earnings per diluted share of 48 cents to 52 cents. Again this guidance assumes no share repurchases. Q1 and Q2 estimates reflect spending behind new products, final expenses to complete the stabilization of our SAP implementation, Glad restructuring charges and the impact of some option dilution. We expect these factors to lessen over the course of the FY and we anticipate a much stronger second half as we experienced in FY '04. We are currently expecting to deliver free cash-flow which we defined as cash provided by operations less capital expenditures, of 13 to 15% of sales which is consistent with our healthy rates of free cash-flow generation in recent years. FY '05 free cash-flow will be driven by net income growth, stable working capital and capital expenditures consistent with our long-term target of 4% of sales. Until this situation with Henkel is reserved we plan to use our cash-flow to pay down debt. Now I will turn it back over to Gerry.

Thanks. Before I open it up to Q&A I would like to make some comments on our view of the retail environment that a number of people have been talking about lately. As we look at our business, June was very solid. But as we moved through the 4th of July holiday and the first half of July we began to see some softness in those businesses of ours that are affected by holiday and seasonal summer merchandising activity. That would include our charcoal, our auto business and our food categories. Now weaker than anticipated shipments on those businesses continued through July. On the other hand our other business units did not see much affect from those conditions in July. In the past couple of weeks retail consumption appears to be picking up and shipment trends on the affected businesses are now improving. Several retailers are also publicly reporting that their same store sales are recently improving. We are going to be monitoring this carefully but at this point we see no reason to adjust our first quarter guidance. And, again, I feel very good about our ability to also deliver the full year. With that I am going to ask the operator to open up the lines for your questions. Operator?

[OPERATOR INSTRUCTIONS. Our first question comes from Amy Chasen from Goldman Sachs.

My first question is about these charges can you explain a little bit better in the fourth quarter when you found out about this Glad charge? And I'm a little bit unclear about the stuff related to Brazil is an exact offset or not, because you mentioned lower losses but you also mentioned a tax benefit. So can you quantify all of that?

Amy, on the $11 million charge in the fourth quarter, that was known to us previously and included in the fourth quarter guidance that we provided to the street. So that action was known. The Brazil tax benefits relate to some of the losses that we had taken over fiscal '04 that we determined at the end of the year that we could in fact takes some tax benefits for so we reflected that in the fourth quarter. The two are not linked at all.

But they are the same exact amount, right? The 11 million for Glad is 7 million after tax and the Brazil benefit is 7 million.

That just is happenstance. There's no linkage at all between the two.

Okay. Can you quantify for us, what you expect the cost savings to be for the Glad restructuring over time?

We expect both the restructuring actions are, the one in fiscal '04 and the one in fiscal '05 to be very positive on an MPV basis. In fiscal '06 will you start to see that showing up in the Glad margin improvement and I think you'll see that it's fairly good improvement in our margins in that business as a result of these actions.

So you are not going to quantify that.

Not at this time.

Amy, I think and when we talk about our long-term strategy in September in our analyst meeting regarding our abilities to improve margin enhancement I think we will be talking about a number of different platforms -- taking on Glad will be at least part of that we will be able to quantify that to a degree in our September meeting.

I'm wondering why you've taking any kind of stab at thinking about thing -- the cash that's on your BS and what the benefit would be from the uses of that cash in FY '05 on an EPS basis?

That's really going to be dependent on the outcome of the Henkel situation. I know there's been a lot of discussion about our suspension of the share repurchase in the first place and that one is a tough one because in our view that is something that we needed to do until the uncertainty surrounding that situation gets resolved. If you were looking at what the plan would be, they still plan, and we hope they do, come to a conclusion on this by the end of September. So that that can get resolved. But depending on the outcome of that particular situation, if we were to continue going back into our normal share repurchase plan that would be a high-value use of our cash that would be available along with looking at dividends. And if it does -- if another scenario should come about, then that will have to sort of take care of itself as it relates and we would be disclosing further what we would do with regard to debt at that time.

Can you update us on where those conversations stand between you and Henkel? Are you in active conversation with them right now?

I hope that this thing gets resolved. We are in active conversation and I hope this gets resolved on the timing that they had announced. That really isn't all in our hands, that that gets announced and they still focused on having something resolved by the ends of September.

Thanks a lot.

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

One quick question on the expense numbers. I think it was pretty high considering you guys have done a good job of paying down debt, I was curious why that had ticked up despite the fact that your net debt number is almost half what it was in the first quarter.

Yes, the increase in projected interest expenses is due to higher than anticipated rates which will offset the lower debt balances that we have so we are expecting interest rates to rice although the average debt balances will be down for the year.

And also on the Henkel issue, you guys potentially could be debt free it looks like in about 18 months. If that occurs, could there be potentially beyond dividend increases an accelerated share buy-back program to catch up on what you missed over the past two quarters?

I think we would have to sort that out as we go through this thing depending on what we come out. We have generated a lot of cash and we have capability to do things but right now we are focus on getting a resolution to the Henkel situation and depending on the outcome of that we would have some other work to with regard to longer term plan for the use of cash.

Would acquisitions play a part of it?

Acquisition could play a role in that. They are not high on our list right now in light of the situation that we have with getting a resolution to the Henkel situation.

Great. Thanks.

Thank you. Our next question comes from John Bruchez from JP Morgan.

Good afternoon. Thank you. You talked about how the back half again will be better than the first half in terms of earnings performance. Is there some sort of adjustment you are making to the business that's leading to this or is this sort of opportunities cropping up whenever they are, whenever they happen, or is there is something longer term where you are saying, okay, the seasonality of the earnings stream needs to change.

I don't think so. I think we are going to continue to look at this on an annual basis the earnings stream for the company and make sure that we are delivering some consistency on that annual basis. It just so happens that the level of innovation that's involved in these two years that we are talking about here happens to be high in the particular quarters, first half quarters of the years. As we look forward it will depend on the timing of those kinds of things. But still being able to produce an annual consistency that would be satisfactory to us and we hope to the external environment.

If I could ask one quick follow up which is your top line comparisons are much easier in the first half of the year as we look at fiscal year '05 versus the back half yet the earnings growth is going the other way. Is it fair to say that you are just putting a lot of extra advertising investment in the front half of the year in order to maybe help top line performance in the back half against the tougher comparisons?

I'm not sure that it's all in the advertising line but I think if you look to the total marketing spending activity which includes trade spending in coupons, it includes advertising and other sales promotion, I would think that the first half will be higher levels of marketing spending overall than the second half.

Okay. Thank you.

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

Hi. On this restructuring of Glad. What products are being contract sourced and what percentage of Glad sales do they represent?

Let me get that data today. We are looking something up right now.

Here's an easy question while you're doing that. How many Glad plants will you have left?

We've got a plant in Canada. We have two other large plants in the U.S. As you probably know we have a Glad plant in Australia and one in China. It tends to be the smaller sizes -- I just got the information on this in terms of the outsourcing of some of this to third parties. Our interlock and closure sandwich bags, some of our small garbage bags and it's a pretty small percent that we are outsourcing overall. It's what I'd call the stuff that takes a lot of time for change overs that costs money in a big operating plant.

Can you give us an early read on how the Toilet Wand is doing.

We feel very good about the results on the Toilet Wand. There's been a number of competitors -- we think we absolutely have the best consumer proposition from a performance standpoint. We think our brand equity called Clorox helps that business an awful lot. We are the leader from a dollar share standpoint in the category already. And our overall share of toilet has improved substantially. These kinds of things, though, do have other tough competitors in the middle of this. We think it will shake out and there will probably be two competitors left in the end. But that competition is -- we are in the middle of all that. We feel pretty good about our ability to compete in this area over the longer term.

Okay. Thanks.

Thank you. Our next question comes from Chris Ferrera from Merrill Lynch.

Can you talk a little bit about Force Flex I guess relative to Press'n Seal, maybe I'm wrong the category is about four, five times larger than plastic wrap category and the it looks like there's a higher level label presence in there so what does that mean with regards to what you saw from Press'n Seal.

Press'n Seal is a pretty unique product, it's a completely new kind of a proposition from a consumer standpoint and it has driven growth in the entire category. In fact I said something earlier in my script that I'd like to reinforce here. Much of the activity that we have as relates to innovation is focused on helping -- growing our customers categories with our brands. So it's about category growth not just getting market share by itself. But as you look at Press'n Seal it was pretty unique. Now as we get this new technology which we think is every bit as creative and impactful from a consumer standpoint based on all the testing that we've done because it's a product that actually flexes, stretches the plastic, and allow to you to actually stuff more trash in there without puctures and rips. This, though, is an existing category. We actually think it's going to be growing the category because it's going to be at a higher price point on a per bag basis but the consumers are going to like it. And so in a category that has a fair presence of private label this is the first launch of a product in which we are really doing a serious consumer value-added as we move forward.

Chris, if I can just add to that as well. You asked some specifics there which we can probably help you out with. You first noted the size of the category and you're correct. The wrap category all out is probably a 300 plus million dollars type category whereas if you look at the trash bag category where Force Flex will makes just on an IRI tracked basis it's over an $800 million category and you throw in the other untracked channels you are probably over $1 billion in size. So it's a much bigger pie to go after. This is as a category that hasn't seen a lot of innovation over the years. I think the last innovation was draw string and that was quite awhile ago. You asked about private label share and your assumptions will are correct as well. We are about equal to private label in leadership of this category which I think we would use an opportunity, you know, Gerry mentioned earlier the strategy over time on Glad is to differentiate so we can improve margins in this category and I think this will be something that will allow to us differentiate not only from private label but other competitors as well.

Where do you see more of the opportunity? You think it's easier to trade up people in private label or do you think you will be able to get the branded competition, provide a little bit more of a competitive product to the branded competition? Where is the bigger opportunity?

I think, it's probably I mean the performance of this particular product wins clear until blinds tests versus our own trash bags and versus competitor but other branded competitors so I think the opportunity is to upgrade consumers probably from both segments, both private label but also the branded business.

Actual just one other quick one, on the cost savings for Glad, I think you said it starts in '06, does that mean that the savings outstrip the costs in '06 or should we expect that there are no savings realized at all even on a gross basis in '05?

We may have a little bit of savings in the back half of '05 but most of the savings stream come on line in fiscal '06.

Thank you. Our next question comes from Lauren Lieberman from CSFB.

Good morning. Two quick questions on cost savings, wanted to get an update on direct plant ship, where you stand on that, benefits realized, if benefits are now outweighing costs?

Yes, in our CCE initiative and direct planned shipment, efficient customer logistics, that is paying off pretty much as-planned. We are seeing fairly substantial savings on that through the back half of '04. We did have some start up costs associated with that program in the first half. We've got past that point and is now generating a level of savings that we expected to see out of the program.

Okay. Great. Then I guess similarly on the trade promotion efficiency I think I remember $65 million as being the long-term opportunity there. Where do you stand on that, how far in, because this is the first quarter that I can recall such specific mention of that program being a source of cost savings?

Actually we have mentioned in prior quarters the contribution of our trade spending initiative efficiencies but they've been offset by introductory trade spending and some other factors. Actually we've been at this now for the better part of two years. We have seen benefit in that. You are correct, one of the original estimates we had is that if we could improve the median return on our trade spending events or, excuse me, our lower performing trade spending events to the median of all events, we could improve our trade spending efficiency buy about $65 million for the year, per year. We are improving and we are working to get to that level of efficiency.

Okay. Then just finally, still on cost savings, whether or not it's fair to do this, if I add back restructuring spending this quarter on Glad, you said it was in your original estimates, I'm going to make the assumption it may have been in your estimates as of four months ago but it might not have been in your estimates, six, nine or fifteen months ago which tells me fundamentals are stronger than you originally expected. Is that a fair way of thinking about it? If you add back that restructuring, your margin expansion in North America was over 300 basis points?

As we look at the guidance we provide even at the beginning of the year we try to anticipate and provide for different action that is we may take throughout the year. And while maybe early in the year they reason specifically identified to specific actions we do provide for that in the guidance that we give the street. As relates to this particular action we had been talking about it to ara couple of quarters and then we formalized the analysis and moved forward with that in the fourth quarter. So that is already imbedded in our guidance. I think we did have a strong second half of the year much as we had forecasted that we would have a somewhat difficult first half with comps that we were up against and then improvement in the underlying business in the second half of the year and we feel pretty pleased about the performance we've seen in the second half.

In addition I think that both for FY '05 we -- anything that might come up we believe we've appropriately set aside contingencies that would allow to us cover things that could happen in '05 and we are already looking at '06 to see the types of things that could conceivably happen in terms of projecting that out as we move forward.

Okay. Thank you.

Next question comes from Wendy Nicholson from Smith Barney.

In terms of your annual operating margin goal, I know that you talked about several times of being 100 to 150 basis points per year. The fact that operating margins were down in '04 and then are expected now to be up just modestly in '05, it's a little confusing to me because it sounds like all the cost cutting programs like Delta and CCE are all coming on line really well. Is it just that the raw materials pricing environment is eating into that? The question is 100 to 150 basis points of operating margin expansion still valid for the long are run? Do we see that in '06 or '07 or do we need to reset that goal?

For purposes of looking beyond 2005 I think we need clearly to relook at that goal and we will be talking about that more in September when we get back to you. The fact is, though, that we haven't delivered it consistently on a year over year basis. When I look at the, and this is I think helpful as we talk in September, too, but if we look at the three-year averages from '02 to '04 and you looked at some of the goals that we had, for instance, our net customer sales goal was 3 to 5%, the three-year average on net customer sales even with divestitures was 4%. Our gross margin improvement over the three-year average from '02 to '04 was 140 basis points. Now the one line that grew faster than what we targeted was the SG&A line because of the Delta initiative. And because we wanted it to grow at half the rate of sales but it grew larger than the rate of sales. So that had an impact on the operating margin, too. In addition, advertising and R&D, we've actually increased our spending in those and doubled the rate of sales averagely over the three-year period from '02 to '04. In other words, 8% per year averagely with '01 as the base. Finally, operating margin if you looked at the three-year average, was up 90 basis points per year, actually, but averagely but very uneven on a per year for each of those basis. ROIC during that same period of time averaged 110 basis points of improvement. So I think as we look out to '08 which is what we are going to be talking about in September I think we are going to be looking at the longer term targets that we set and try to give as much guidance as we can and what kind of a variability that you might have during the periods of time as we move toward those.

Fair enough. Then my second question is on pricing. I think you said the positive pricing helped you close the gap between volume and sales growth in the quarter. Am I correct, I think that was positive pricing in bleach and cleaning? Have you done anything on the pricing side in the Glad business aside from just watching premium price products?

Actually we had three pricing increases in the fiscal year '04. We took a charcoal price increase. We also took a price increase in the Glad trash line and in the fourth quarter we also sold in a price increase in our litter business. So we actually had the impacts of three price increases there. We also have been taking pricing internationally, particularly in our Latin America businesses. We have the continuing benefit of those price increase actions in our results.

Terrific, thank you very much.

Wendy, I might just comment as well for the other folks out there. You think about our fiscal '05 expectations, those price increases that we mentioned in fiscal '04 will still have continuing benefit into Q1 but after that that will mitigate a little bit because we will be anniversaring the Glad price increase taken in that quarter a year ago.

Fair enough. Thank you.

Next question comes from Kathleen Reed from Sanford Financial.

Good afternoon. Just a quick question. Just on your fiscal '05 when you were talking about your expectations throughout the year. I understand your first half will have more heavily weighted trade spending for products, your second quarter, your December quarter I was just wondering if you could comment if you have another big new product launching in December or is that just continued spending on what you just launched, the new Toilet Wand and your new product in Glad.

I think you'll see in the second quarter is some continued spending against the two gain changes that we are supporting in the marketplace. We also will have some continuing a little bit higher cost in the SG&A line in the second quarter and that moderates in the second half of the year. Essentially in the second quarter you will see continuing spending behind the introduction of the two products.

Not necessarily a new product?

We will not be having a gain changer new product in the second quarter.

For the four quarters then for '05, if I understood all of your comments, your first half will be weaker, stronger on the top line but more cost, so net/net a little bit weaker on the EPS growth line. Your second half, though, seems I think if I understood you right, your sales will be weaker than your first half, and I wondered if that was below your full year three to five, if we could see sales come in a little bit lower than your three to five in the second half?

Kathy, it's probably too early to the project with any real precision what the second half is going to look like. I wouldn't expect it to be materially different than our annual target of 3 to 5%. But I think if you average out the year a range of 3 to 5% recognizing the first half will be a little bit stronger, the second half of the year would be close to the bottom ends of the range.

Great. Secondly just more of the housekeeping, can you give us some of the volume growth numbers for some of your key categories, like laundry additives, cleaners, that type of thing?

Kathy, there's a document we public on our website every quarter that's out at the same time as our earnings release this morning and given it shows a lot of detail in volume growth by business over the last several years, actually, I refer you to that and certainly you and I can cover that in any detail and answer any questions you have on that.

Great. Finally, Brazil, when does that business go away? When do we no longer see a discontinued number on the P&L?

Brazil is essentially gone. We've ceased all operations there. We've closed our offices and the final plant properties are in contract for sale and we would expect those sales to close early in fiscal '05. Essentially Brazil is done for us.

Thank you very much.

Thank you. Our next question comes Robbie Pamanoti from G.E. Asset Management.

First question on inventories, I want to understand what the rise there was for, up 14% year over year?

A couple factors impacted our inventories. The biggest two factors were the inventory build to support the two launchings, Toilet Wand and Force Flex. And we also had higher inventories in our charcoal business. If you look back about a year ago, our charcoal inventory levels were actually pretty low going into the selling season. So this year we came into the selling season with higher inventory levels. Those are the three primary drivers of the build that you see in inventory.

It has nothing to do with maybe retailers asking you to take a little more on your books because of some of the summer slow down in we've heard of?

No.

Second question on the dividend. I know you guys talk about maybe raising it at a later point in time. Just out of curiosity I think around last time this year you did raise it in line with your earnings growth. I'm wondering, the incremental cost of doing that again is about $25 million. And considering the sort of shape your balance sheet is on and the amount of free cash-flow you are throwing off why wouldn't you do it like you did last year?

This is a little bit like the share repurchase question is, I'm not sure -- depending on which way would you like, which investors would like to look at this, you can look at it both ways. At this point we've simply said, until we get this thing with Henkel resolved that we feel we are better off postponing any further decisions related to dividends.

Okay.

Now we did, as you know we approved, the board approved our dividend that's being released in August at the same levels as we had previously.

Correct. Okay. And the last question, what was your cap ex in fiscal '04, what did it end up at?

Cap ex in fiscal '04 ended up about four percent of sales.

For next year since you are projecting I guess free cash of 13 to 15% of sales, I guess just backing into that number I come out to around 630, $640 million. And then I would assume is a slight reduction from what we saw this year. Is that because you are assuming working capital to be a bit more negative next year relative to this year or something?

We've had improvement, in terms of free cash-flow, cash-flow generation we have had pretty substantial improvement over last couple of years because of further improvement in working capital levels. As you look at fiscal '05 I think you should view that as we expect to be at stable working capital levels. So you won't see the cash generation as much from further improvement in working capital levels in fiscal '05.

Okay. Thanks a lot, guys.

Thank you.

Thank you. Our next question comes from Linda Bolton from Oppenheimer.

Just a little question on the Latin America segment. Can you just tell us exactly how much the currency effect was on the sales growth? Because it looks like the price mix was negative which kind of goes against what you had said about the pricing in that region. So could you explain that a little bit?

Linda, you are asking specifically about the international segment?

Yes.

I think what's reflected in our earnings release is the unit growth was up 10% and sales growth was up 9. So, you're right, there's a little bit of a drag there. The currency piece of that was favorable, I think it was two-point, then there was offset from mix across the countries. But the key point is the currencies were still favorable not just week as favorable as they've been in past years bought we are about to anniversary some of the favorable currency of prior years.

So 2% of the growth was from currency.

Yes, correct.

Okay. Thanks a lot. That's it.

Thank you. There are no further questions in the queue at this time. I would like to turn the program back to Mr. Gerry Johnston.

Thanks a lot everybody for calling in. We look forward to meeting you in September in New York where we are going to be discussing our strategies and financial goals going out to 2008. Again, thanks for your time today.

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