高樂氏 (CLX) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Clorox Company fiscal-year 2005 first quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press the star button followed by the 0 on your touch-tone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Steve 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 first quarter conference call. I'm Steve Austenfeld, Clorox's Vice President of Investor Relations. On the call today are Jerry Johnston, Clorox's Chief Executive Officer, 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 7 days on our website, thecloroxcompany.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 information and results area within the investor section of thecloroxcompany.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 we will open it up for your questions.

Before we begin, I need to remind you that the material that we are 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 filing for the fiscal year ended June 30, 2004. With that, I will turn it over to Jerry who will briefly recap our first quarter results.

Thanks, Steve. And welcome, everyone. As you saw in the press release, we had a very good first quarter. We delivered 57 cents per diluted share, 2 cents higher than the upper end of our expectations. As expected, earnings per share were down versus year ago, driven by the previously-announced 9 cent charge we took in the first quarter for restructuring our Glad manufacturing operations. Excluding the Glad charge, we feel very good about our earnings results for Q1 on an operating basis. The stronger-than-anticipated earnings this quarter was primarily driven by gross margin growth, up 90 basis points versus the prior-year quarter. The strength was due in part to a favorable mix behind strong shipments of our Clorox franchise, notably the Clorox Bleach Pen, Clorox 2 color safe bleach and Clorox Disinfecting wipes.

We also saw a slightly greater benefit from cost savings coming from our cut costs and enhanced margin strategy. These upsides, move that than offset ongoing, upward moving, energy-related costs. On the top line, first quarter sales and volume both grew 4% versus the prior year, that's in line with our long-term expectations. Both new products and increased merchandising behind Clorox Disinfecting wipes drove the top-line results. On the new product front, we launched a game changer, Glad ForceFlex trash bags in the first quarter.

I'm pleased to report that in addition to Glad continuing to be the number 1 branded product in trash bags, our leadership position has now also surpassed all of the private label brands combined. This beats directly to the value of innovation and competing with private label. The first quarter's growth also came despite some weakness early in the quarter in our seasonally merchandised businesses that I identified in last quarter's call, that includes the charcoal, auto and dressings and sauces businesses. As we progressed through the first quarter, charcoal and food returned to their normal growth trends. So fundamentally, the business is healthy overall and we're pleased with the quarter's results.

Now, as most of you know, we recently communicated a new long-term corporate strategy in 2008 goals for Clorox. Central to the strategy are 6 strategic capabilities that we call the 3 C's and the 3 P's. The 3 C's, consumers, customers, and cost are all about our core business capabilities. While the 3 P's, people, process and partnerships, support our enable the business strategies. Going forward, I'm going to discuss our progress towards strengthening some of these capabilities each quarter. This time, I'm going to highlight our results within the context of our consumer and partnership strategies.

First, consumers. This strategy focuses on increasing the level of consumer insights that we apply to all of our brand building and innovation activities. I think our home care and laundry business provide a pretty good example of the power of this strategy. The key consumer insights built around the importance of a heath and wellness benefit for our Clorox brand franchise, in both laundry and home cleaning. We know that consumers are increasingly motivated to maintain healthy homes, and to protect their families against germ-related illnesses.

In home care, the strength of the platform was clearly evident in our Q1 volume. We had an increase of 7%. A key driver of the result was all-time record shipments of Clorox Disinfecting Wipes, driven by strong advertising, increased distribution, strong merchandising support with key retailers, and consumer insights that identify this need that disinfecting wipes works against. Now, consumer insight driven product innovation in bathroom care brands also contributed to our progress in Q1. That includes the April launch of Clorox Toilet Wand and the July launch of Clorox dual action toilet bowl cleaner. In fact, our share of the total toilet cleaning category is up strongly, and in Q1, for the very first time, we became the category leader overall.

In addition, we had a 6% first quarter volume increase in laundry care. It supports our belief that the health and wellness platform can clearly extend to laundry additives. Clorox has long been known as the ultimate bleach, but over the past year, we've been integrating our laundry care messaging around a pure clean, and the disinfecting benefits of bleach. We expect to generate additional momentum as we focus the entire Clorox franchise on our "pure clean for a healthier home" strategy.

Now, I would like to move on to our partnership strategy. That's all about creating more external focus in order for us to drive growth and to create virtual scale. This activity contributed to Q1 in a number of areas, including our cat litter business. For example, we partnered with Costco's Kirkland label to successfully execute a promotion that co-marketed their cat food with our Scoop Away cat litter. That was a winning proposition for both Clorox and Costco. We were both able to generate higher returns on our merchandising investments through that event. The promotion in part contributed to the momentum we've experienced on our entire cat litter business. In Q1, Scoop Away delivered its 10th consecutive quarter of year-over-year volume growth. Now, I'm also going to mention here as well that the first quarter was the 8th consecutive quarter of year-over-year growth for Fresh Steps Scoop and a record-setting quarter for Fresh Steps dual action crystals blended cat litter.

As I said, we're pleased with our Q1 results. We feel good about the business overall. The organization is actively engaged and they're focused on executing the strategies and delivering results. Before I turn it over to Dan, I would like to spend just a minute looking ahead. As you know a few weeks ago, we announced the Henkel transaction. We feel very good about the agreement and the investment we are making in The Clorox Company for our shareholders. The transaction is on track to close by December 1. We're going to -- we're planning to communicate additional details after the transaction closes and when we completed the related financing.

As noted in our press release, we're going to hold to our full-year guidance, despite the strength of our first quarter. Dan is going to be providing more detail when he comes on, but I just want to take a minute to address this right now. 2 main factors are causing us to be somewhat more cautious about the back half of the year. First, we're continuing to see rising energy prices. Which means consumers may have to put more dollars toward energy-driven costs, like gasoline or heating. They potentially have less to spend in other areas. That contributes to some general uncertainty on the consumer front. Second, energy-related commodity pressures continue to rise. Our second half assumptions now assume an even higher rate of commodity cost increase than we'd previously assumed. In the face of these cost headwinds, we're pleased to be maintaining our full-year earnings share targets, but not increasing them by the amount of the increase over -- because of our first quarter results. And again, that excludes the impact of Henkel. Now I'm going to turn it over to Dan.

Thank you, Jerry. As Jerry noted, we're quite pleased with the quarter's results. I will start by providing a few more details on our top-line performance. We delivered 4% sales growth for the quarter, which is in line with our guidance and long-term targets. As always, the underlying strength of shipments drove sales notably in our household products segment. A 14% increase in shipments in our bags and wraps business resulted from all-time record shipments of trash bags following the introduction of Glad ForceFlex trash bags, which we started shipping in July, and all-time record shipments of GladWare containers.

As Jerry noted, another key top-line driver in the household segment this quarter was the strength of the Clorox brand equity as we continue to leverage a unified strategy across the Clorox laundry and home care franchise, focused on the brand's promise of a pure clean for a cleaner home. Specifically, laundry care shipments were up 6% driven by increased shipments of Clorox Bleach Pen gel and Clorox 2 color safe bleach behind distribution gains and merchandising support. And home care shipments were up 7%, driven by Clorox Disinfecting Wipes, Clorox Toilet Wand and Clorox bathroom cleaners.

New products and market share gains in Latin America and the recent introduction of Clorox-branded laundry and home care products in Australia and New Zealand, drove sales growth of 6% in our international segment. Partially offsetting sales growth and household products in international was a slight decline in the specialty products segment, primarily due to strong competitive activity in the auto care business and category softness in the charcoal and dressings and sauces categories. Which were partially offset by the record cat litter shipments Jerry mentioned.

Stepping back to look at overall results, it is important to note that the diversity of our portfolio and our portfolio investment strategy clearly demonstrated its value this quarter. Charcoal and food products, which for some time now consistently have been our 2 fastest growing businesses, experienced a quarter of category softness. At the same time, innovation in our laundry, home care, and Glad businesses drove increases that more than offset weakness from charcoal and food performance.

Moving down the P&L, gross margin came in up 90 basis points versus the year-ago quarter. Gross margin benefited from the 200 basis point improvement coming from our cut costs and enhanced margin strategy, or CCEM, as we call it. Positive CCEM results, included benefits from a number of ongoing activities, such as direct plan shipments and strategic sourcing. We're also starting to see some benefits from lean manufacturing. In addition, we also saw positive impacts from mix and assortment, which were essentially offset by trade spending to support new products, and logistics increases driven primarily by diesel prices.

The 200 basis point favorable gross margin impact from CCEM more than offset a 110 basis point impact, primarily from increased year-over-year costs in many of our key commodities. The Q1 impact of energy-related costs, while slightly unfavorable versus our expectations, was less than the 160 basis point decline we experienced a year ago. However, we continue to see upward price trends, especially in the energy-related commodities market.

First quarter selling and administrative expenses were higher than year ago, due to the amortization of our systems investment and continued 1-time costs as we go through stabilization. As we noted on the August call, we expect these costs to flatten on a dollar basis as we move through the year, and complete the stabilization process. Advertising was 9.9% of sales in the first quarter. That's in line with our average annual target of 10% of sales. Which could vary between 9% of sales to 11% in any particular quarter. Again, this remains a relatively high level of investment compared to our competitive set, and reflects our continued strong commitment to support our brands.

First quarter operating margin grew 50 basis points to 20.6% of sales, driven by our gross margin improvement. Nonoperating expenses, which include interest expense, restructuring and asset impairment costs, and other income and expense, were up $26 million versus the year-ago quarter, primarily due to the previously-announced first quarter $30 million Glad manufacturing restructuring and asset impairment charge. We continue to expect these costs to total about $40 million for the full year, with the remainder largely reflected in cost of sales.

Turning now to cash flow, we generated cash provided by operations of $216 million, or 20% of net sales. That's up significantly over the year-ago quarter, driven by increased earnings in the current quarter, adjusted for the Glad restructuring charge, which is substantially a non-cash charge. It also reflects the impact of a $37 million pension plan contribution in the year-ago quarter.

Now, move on to guidance. To provide you with a better understanding of our forward-looking expectations, I will start with guidance excluding the anticipated impact of the Henkel transaction. Then using that as the base, I will follow with our preliminary guidance regarding the anticipated impact of the Henkel transaction. Let me start with our guidance without Henkel. On the top line, we continue to expect 3 to 5% sales growth for the second quarter and for the full year, driven by our Q1 momentum in incremental volume from new products including Glad ForceFlex and Clorox Toilet Wand.

Looking at gross margin, given the trends we've already discussed, we now expect commodity costs to increase at a higher rate than previously forecast. As a result, we now expect the second quarter to be down slightly versus year ago, and the full year to come in flat to down about 50 basis points. We anticipate operating margin would be down in the first half, and up slightly in the second half on a year-over-year basis. For the balance of the P&L, we don't anticipate any material changes versus what we provided on the August call, in the advertising, selling and admin and R&D expectations. Finally, our EPS assumptions, again, excluding any impact of the Henkel transaction, remain in the range of 48 to 52 cents per diluted share for the second quarter. Although we're not assuming any of our Q1 favorites will fall to the full-year bottom line due to increased second half commodity cost pressures, we do continue to estimate full-year earnings per diluted share in the range of $2.58 to $2.66.

Now, let me summarize the anticipated impact from the Henkel transaction. Again, we expect the transaction to close no later than December 1. For the second quarter, we don't expect the transaction to materially change the guidance I just communicated. However, the transfer of the Soft Scrub and insecticides businesses to Henkel will impact our full-year guidance. So building on the base I just gave you, let me provide estimated full-year guidance including the anticipated impact of the Henkel transaction. On the top line, excluding the businesses to be transferred, we expect low-single-digit sales growth on an as-reported basis. The transferred businesses and assets will not be treated in our financial statements as discontinued operations. As a result, for fiscal '05 and the first half of fiscal '06, we will be comparing our results against numbers that include the effects of the transferred businesses and assets.

Turning to gross margin, keep in mind the businesses to be transferred have margins that are higher than the Company average. Therefore, because we're not restating prior-year numbers, the anticipated impact of transferring these businesses is expected to result in the absolute level of our gross margins in fiscal-year 2005 to be lower by about an additional 50 basis points on an as-reported basis. Similarly, operating margin in FY '05 also is expected to be lower by about an additional 100 basis points, due to the transfer of these businesses. So to be clear, when you add the effects of the Henkel transaction to the base ranges I gave you, we now anticipate gross margins to be down 50 to 100 basis points in fiscal-year 2005, on an as-reported basis.

Another anticipated impact from the Henkel transaction is a substantial increase in our interest costs. We will be issuing about $2.1 billion in debt to fund the cash portion of the transaction. As a result, our interest expense will increase materially. We will be able to provide additional clarity on financing costs after the transaction closes, and we've completed permanent financing.

As a result of of re-acquiring our stock from Henkel, our actual shares outstanding will drop by about 61 million shares. However, in FY '05, we will only receive partial EPS benefit from the re-acquired shares, since the transaction will close about in the middle of the fiscal year and therefore only impact weighted average shares outstanding for about half of the year. For FY '05 then, we anticipate a full year of weighted average number of diluted shares outstanding of approximately 180 million shares. We should see the full 61 million weighted average share impact in FY '06.

For all of the reasons discussed above, fiscal-year 2005 net earnings are expected to decrease after the Henkel transaction closes. We anticipate the EPS impact of the reduced net earnings expected from the transaction will be more than offset by the lower number of weighted average shares outstanding. The full-year incremental impact of this transaction in FY '05 is expected to add about 7 cents to 10 cents in earnings per diluted share on a full-year weighted average basis, excluding the anticipated 1-time gain on the exchange of the businesses and the assets. Upon closing, the estimated gain on the transaction is expected to be about $3.00 to $3.15 per diluted share.

Finally, as we discussed on our October 6 conference call, we continue to expect that the Henkel transaction will have a high-single-digit percentage accretive impact on earnings per diluted share in FY '06. I will now turn it back to Jerry for wrap-up.

Thanks, Dan. Before we go to Q&A, let me recap what I hope you will take way from today's call. One, the business is fundamentally healthy, across the domestic portfolio, and our geographies. Second, we're off to a good start this fiscal year and we've got some top-line momentum going into Q2. Our cash flow remains strong. Our innovation strategy continues to pay off. The strength and diversity of the portfolio and our portfolio investment strategies are delivering for us. And importantly, despite the expectation of ongoing cost pressures, our second quarter guidance remains unchanged and we remain committed to delivering our full-year EPS targets. Now the operator can open it up for questions.

Thank you, sir. (Operator Instructions). Our first question comes from Amy Chasen of Goldman Sachs. Your question, please.

Hi.

Hi.

First question is on cost reduction. Just looking at the numbers in the gross margin expansion in the first quarter, it looks to me like you're getting more cost savings, at least than I had anticipated this quarter. Can you update us on that? And tell me whether I'm reading that in the right way and whether there was something aberrational this quarter or whether it is possible that for the full year you could beat your expectations on the cost side?

Amy, our full-year expectations remain that we're looking for cost efficiency, margin improvement in the $85 to $95 million range. We did see a little bit more favorability in the first quarter on cost savings, and I attribute a lot of that to we're starting to see some favorability out of our lean manufacturing strategy, so we saw a little bit more of that strength in the first quarter than we had anticipated. But for the full year, we're still at the $85 to $95 million improvement range.

Is it possible though that the improvement in manufacturing that you saw this quarter could continue and help you maybe offset some of those higher raw materials?

Well, I actually expect them to continue to improve, but probably at this point I would think it would be preliminary to say that we're going to exceed what our expectations would be for the rest of the fiscal year, even though we might have generated a little bit more in the first quarter there. I still think that mix was a pretty important factor in this whole thing in the first quarter in looking at the numbers.

What specifically on the mix side?

Yeah, it was all the Clorox branded products that were higher than our expectations.

Okay. Second question is just on international. That business continues to be very heathy. And in the press release, you mentioned something about launching home care products into Australia and New Zealand. When did you start to do that? And is that -- I know you had talked about that back when did you the first brand acquisitions, but maybe you could update us on that since that was a long time ago.

Yeah, you know, usually from a materiality standpoint, we usually don't get into the details, I will give you a little bit of a picture of what is going on in Australia and new Zealand. The Clorox Equity has not existed there. And yet, we have a number of brands and technologies here that are pretty unique in the U.S. And to the degree that we could launch products in Australia and New Zealand using our infrastructure there, to establish the Clorox brand, using some of the unique technologies that we have, whether it is the Teflon kind of a product or a variety of other thing, we've launched a line of Clorox products, ranging from a Teflon product to a magic eraser under the variety of names there, and we think there is an opportunity to grow that business if we're selective about the products and the technologies and the consumer benefits that people would have out of those range of products.

I guess my question is really when did you start to do that? And, you know, is there a 1-time kind of -- I guess I don't know, the channel fill is the right number -- the right term, but year-over-year benefit that you're getting from that, when did it start, and so how long will that last, in terms of the contribution?

Yeah, it has been in place about a year. We launched these products about a year ago. And I think they've been shipping for probably 7 or 8 months. 8, maybe 9 months at this point.

Great. So maybe one more kind of incremental quarter of that?

Yeah, it is still going to be pretty modest in terms of its overall contribution to everything. I mean it is a nice little thing to add on here, but it is just not very material. It keeps our business there continuing to grow and healthy.

Okay. And if we exclude that with the international business still up?

Yes.

Great. Thank you.

In fact, I believe every single country in international was up with the exception of 1.

Great. Thank you.

Thanks.

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

Hi. My first question has to do with guidance. It sounds like you've brought down your gross margin guidance. I think old guidance was for up for 25 to 75, now it is for down as much as 50 basis points, but it doesn't sound like you're changing your operating margin guidance all that much. But maybe I've missed something, but what is getting squeezed in the middle there? Are you just doing better on the SG&A front or is there going to be lower advertising? What fills that gap?

Wendy, this is Steve. On the gross margin front, you're right. We are taking down our full-year expectation based on a more realistic view of commodities based on where they've been the first half of the year. As Dan had noted in his commentary, we expected costs to increase as it related to commodities in the second half of the year, but not at the same rate that we expected in the first half of the year and that we've seen to date. So to be cautious there, we are taking our back-half expectations up from a commodity cost standpoint, which is going to reduce our gross margin expectations.

From an operating margin standpoint, I don't know that we've given specific guidance to date, as you heard from Dan, from the Henkel transaction standpoint, we're moving from the portfolio what are very profitable businesses that we will be exchanging with Henkel. That will cause about a 100 basis point impact to operating margin. But I think on the overall base business, it is a little too early to say what the operating margin impact would be. I don't think, though, you're going to see a material difference on the base business between gross margin and operating margin change.

Okay. And so advertising for the full year is still expected to be around 10% of sales?

Yes.

Yes, our advertising is still projected to be 10% of sales. And I think it is important to note also that, you know, we're still fully committed to the 2.58 to 2.66 for the full year.

Okay.

And if I can just add one more comment, there is an important distinction though between gross and operating margin, just so that we're clear. Selling and administrative costs, which is much of our SG&A line, will be higher in the first half of the year, versus the second half of the year, and that's consistent with our earlier expectations. So you would expect more operating margin improvement in the second half of the year, because of that decline, and that just has to do with the timing of remaining costs from our SAP implementation from last year. There is a little bit of carry-over into the first half of this year and that effectively goes away in the second half of the year, so you'll see more favorability on SG&A in the back half of the year.

Okay. Fine. And then the second question I had was on the top-line growth. You did 4% in the first quarter and you obviously had, I think, quite a big pipeline fill for ForceFlex and yet when I look over the next 3 quarters, excluding the Henkel thing, you know, on a core basis, it sounds like you want to be still in that 3 to 5% range, but your comps get tougher and from what I've heard, I don't think there is another new product launch to, you know, order of magnitude the same size at ForceFlex to come, so I guess the question is, are you being amply conservative enough on the top line in terms of the expectations or is there something in the new product pipeline that we're just not aware of yet?

As you know, we don't disclose everything that we have until we get very close, either at the time we start shipping or close to it. And so we're not disclosing any of the details, but from our new product program, as it looks at the balance of the year. What I can tell you, that I feel very confident about, again excluding the impact of Henkel, very confident about the current plans as it relates to both volume and sales growth.

We also have a fair amount of trade spending in the first half of the year, as we continue to support the launch of Toilet Wand and ForceFlex, and that will start to moderate in the second half.

I think that's an important point as well in that we're currently in the midst of benefiting from 2 game changers, Toilet Wand launch in Q4 of the last fiscal year and now ForceFlex, so for the next several quarters we will get the benefit of both of those, where as a year ago, and the volume we saw over the course of the year, it was primarily just from Press 'n Seal which actually is not as large a launch as ForceFlex is expected to be.

Got it. Thank you very much.

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

Thanks. Good morning, good afternoon. Wanted to check in on inventory, they were up pretty significantly during the quarter. I wanted to see if you could give us some more color on that.

Yes, on the inventory side, part of what you're seeing was the build in inventories to support the ForceFlex launch. And also we have a more normal level of charcoal entering this season than we did a year ago. If you go back a year ago, we came in to the first quarter with pretty low levels of charcoal inventory and so this year, we've covered off and we have more normal levels of charcoal inventory. So the combination of the buildup for ForceFlex and charcoal explains the increase in inventory.

And as we go now into the second quarter for our inventory, kind of back down so that it sounded like charcoal got a little bit better in the end of the quarter and then ForceFlex, the launch is done. So where are we at on inventory going into the quarter?

Well, I think we're still in, you know, the launch period for ForceFlex. I think you will continue to see inventory levels reflective of what you would have to support the launch. Also, recall on charcoal, it is a seasonal business, and as we go into second quarter, we actually start building inventory for the selling season, so I don't think you will see a significant change in charcoal inventories. If anything, they may be up slightly from from where we finished the end of the quarter.

But this is all seeming to be normal, and we wouldn't need to see higher trade promotion or anything like that in the next quarter to move some of the inventory that was built up during the --

Absolutely.

No, you should not expect that.

Okay. Great. Other question was going to be on ForceFlex. If you could give us a read on take-away versus shipments and sort of progress on the launch from the consumer standpoint and not just customer.

You know, let me just take a second, I want to check something there. The -- because I'm not sure that our data is very good. We're pretty early in this thing, it started shipping in August and I think the only read we've got right now is either 1 or 2 reports, but let me grab that real quick. Somebody is getting it for me. And -- but I do think we still continue to feel very good about the early take-away that we're seeing on a by-retailer basis, where we can read that information. And it is absolutely meeting our expectations. Not only from an acceptance from a retailer standpoint, but also from the early turnover that we're getting on the product at retail.

Okay. I guess while we're waiting for that last bit of information, on auto, obviously the seasonal impact I would think in the beginning of the quarter, but you also mentioned competition. I'm going to guess that's the auto dry, the Mr. Clean auto dry product. What do you see now going into kind of the more fall and winter months on auto? What are your strategies for improving that business? I know it has been a little bit soft for several quarters, but sort of strategy for auto going forward.

Let me -- I got these numbers. Our trash share on ForceFlex was a 6.5 dollar share during the most recent 4-week period, which is a very positive number, in terms of the entire category.

Does that include -- is that all outlet or just food drug mass?

Just food drug mass. Not unmeasured accounts. But we know more information about the unmeasured in terms of specifics and feel very good about what is going on there.

Great.

I can't give you guidance on that, though. The auto business is one of -- if I looked at the entire portfolio, it is the one business that had some softness for some time. Our products don't interact with the auto dry product. I mean it is a completely different product in terms of its usage. But the kind of merchandising that's gone on for Armore All has not been very good over this past year, and I think we're looking at doing some things in that area. We also are looking at innovation. We can't disclose exactly what is going to go on there, but the second half of the year we have a number of things going on that I think should help the trends back there.

You know, when I got into this job, about 18 months ago, I looked at the entire portfolio at that point in time, and said that the one business that we needed some more work on was the home care business. During that period of time, we've made some substantial progress in terms of both our strategy and the execution against that strategy in home care, to the point where this last quarter, we had a nice overall pickup in market share, and category consumption for our business. In spite of a lot of activity going on in home care.

Auto is about where I -- is what I think right now is similar to what I thought about 18 months ago, on the home care business, there's some work to do on that business. Now it has -- it only represents 6% of our portfolio. But nonetheless, all of the work isn't done there and we've got some work to do strategically, and executionally to meet what I would call the standards that we would expect out of the business in our portfolio.

Okay. Great. Thank you so much.

You bet.

Our next question comes from Joe Altobello of CIBC. Your question, please.

Thanks, good morning. First question I had, on the $30 million restructuring charge, did all of that flow through the North American household products business? Or segments?

About $28 million of the charge related to the closure of the Cartersville plant, which did come through North America. There was an additional $2 million charge that came through international in the Australian business related to some restructuring in the Glad manufacturing operations there.

Okay. So 28 million, that implies I guess that your North American margin on a pre-tax basis was 28%. Is that sustainable or do you think that will probably come down second half with the commodity cost pressures?

It will probably mitigate slightly, Joe. The 28% number you quoted is more consistent than historically, but clearly with the commodity pressures we're now assuming the back half of the year to slightly higher rates than previously expected. I don't think you should expect we'd go right back to that 28% level, if that's the right number. The other thing is we continue to have a little bit of the -- there's another roughly $10 million worth of the charge to go through the P&L in the next couple of quarters, you know, directionally maybe $5 million a quarter, and that's going to impact the margins slightly until we're complete with that.

Okay. And how much visibility do you guys have in terms of commodity costs, second half of this year, with contracts you've already locked into? Is there upside if commodity costs come down, I guess is my question?

Well, we're not seeing a lot of upside. I mean when -- I just went through a commodity review on all of our raw materials and if you looked at, you know, resin which only represents 10% of our entire cost of goods, and frankly, it wouldn't matter whether it is a protected part of that or an unprotected part, we see pressure on the entire commodity front, and even if oil prices come down a little, I think we're going to see some pretty good pressure for the balance of the year. I will tell you also, though, that we're looking more aggressively at pricing than we've looked historically, and we're always looking at it but there is enough cost justification in some of these numbers now that I think we are going to be a little bit more aggressive there. I don't expect a lot of the benefit of that -- the pricing, to ultimately be able to be generated in fiscal-year '05. But we're looking at it very seriously.

That was my next question. Okay. Thank you.

You betcha.

Our next question comes from Connie Maneaty. Your question, please.

Hi, my question also relates to raw material costs. If I recall correctly, at your investor meeting, it seemed as though you had real good visibility on resin costs, almost through calendar '05. Is that right? Or am I misunder -- did I misunderstand?

Well, we do, but I would like to reinforce that there is an energy-related impact across the entire cost of goods framework that we're looking at, and while we've had pretty good visibility, that is still a moving target. It affects, you know, whether it affects our diesel fuel cost, it affects our solvent costs for Match Light, it affects our operating expenses in our plants, it affects some of the other raw materials like chlor-alkali and packaging materials, and so this whole issue of energy is increasingly looking like it is more unfavorable. I think the good thing is that while we plan, we take appropriate conservatism in looking at our entire year's plan but this is going to be -- my view is it is going to be more of an impact than the original plan entailed, but we still are going to be able to deliver the overall numbers that we projected.

Have surcharges been applied to the contracts you already have in place?

We don't comment on the specifics of individual contracts that we have and how they may work. I think Jerry summarized it correctly. We had expected some slowing of the increases in costs in the second half and we're now seeing that not happening, and so we're being appropriately cautious in terms of how we're viewing our commodities cost pressure in the second half, but again, we are committed to delivering the full year.

Okay. One final question. On this Magic Eraser, that's going into Australia and New Zealand, where did you get that?

Well, there -- the Magic Eraser product has actually been in Japan for a long time, a Japanese company sells it there, it is broadly known and as you look at the application, it like a pretty good proposition, I think Procter launched it here and did pretty well with it and we've launched it under the Magic Eraser name down in Australia and New Zealand. But it is a nice little business, but as we looked at moving forward, I think that we're just going to continue to try to grow our overall home care presence, both in Australia, New Zealand and the U.S.

So just to be clear, you licensed the same Magic Eraser that P&G has in the U.S. but you licensed it for Australia and New Zealand?

You know, I would have to check whether it was a license or not. I actually don't think it was a license. I think it is available technology.

Great. Okay. Thanks a lot.

Our next question comes from John Faucher of J.P. Morgan.

Good morning, everyone out there. Quick question for you on the advertising expense, which I think following up on Wendy's question, you had said that advertising to sales should be at about the 10% range which is roughly in line with '04. And I guess just sort of a philosophical question there, which is, you're launching more new products and with the game changers you have to support previous year's game changers as well, and you're selling businesses off that I'm assuming really don't have much advertising support, so should that number be higher or do you think you have enough there just in absolute dollars this year in order to support the new product launches?

We feel pretty good about the absolute amount of dollars that we have to support what we've got. I mean we're going to use about 10%. If you looked at our sales rate, that means it is up year-over-year in terms of our total advertising promotion dollars. And we've got a pretty good comparability basis from a historical standpoint on these game changers, so as we have new ones, that spending was in the previous year's numbers. So at least at this point in time we feel very good about the absolute level and the rate at which we're spending in the advertising line, including new products.

And how are you feeling about game changers spending sort of year 2, so as you look at previous year's game changers, do you plan in multiple years of spending so that you have that support on an ongoing basis?

Yeah, I think you have to now a days. These things -- when you look at a game changer in particular, where it is a substantive new usage, I think you simply have to continue to spend against those, because you're still generating trial, even as you go into year 2. And so you want to create repeat on that, too. And so all of these game changers, almost always have an element of a year 2, and sometimes a year 3, what I would call investment spending, but that's all in the foundation of what we've been doing over the past 3 or 4 years.

Okay. Thank you very much.

You betcha.

Our next question comes from Andrew Shore of Deutsche Bank.

Good morning, Jerry.

Hi.

You were up in gross margin I think 0.9 of a point and I was just wondering shouldn't that have been up much more considering that you gave up 3 points last year from higher manufacturing costs and outsourcing of Match Light? And I assume that that's not an issue now.

It has some --

Or is that all offset by higher oil or energy?

Well, we had -- maybe I will have Dan go through sort of the mechanics of the 90 points, basis points.

The charcoal outsourcing, we are -- you are correct, we are starting to comp periods that had that high level of cost, but that higher level of cost is obviously still in the base. And the other cost pressure that we saw in the first quarter, again, about 100 to 110 basis points was somewhat higher than what we had anticipated for the quarter.

Andrew, I will just point out as well, if you look at the, in our press release, the specialty products segment, the sales decline was 1%, but we actually had 1% pre-tax earnings growth and some of that was driven by the fact that we are seeing more favorable comparisons now on that charcoal contract manufacturing, so we are getting savings from that. It is just as Dan and Jerry pointed out, there were other cost pressures that were greater.

Yeah, it just doesn't explain it all the way, though. You did get 3 points. Anyway, I will figure that out. But, Jerry , just in terms of what Connie asked, do you know about the Magic Eraser, is it BASF's technology or is it some other chemical company's technology?

No, I'm not sure. You know, this is -- in fact, for us, this is a pretty small, I mean when you think about it, we're talking about Australia and New Zealand, it is getting a lot of attention today, but it is -- but relatively, it is a pretty small business. It is a nice little unique product for that market, and that consumers like, and it is exactly the same product that has been selling in Japan for some time.

Okay. Great. Thank you.

You bet.

Our next question comes from Linda Bolton of Oppenheimer. Your question, please.

Thank you. Just an additional question about the launch of ForceFlex. I remember with Press 'n Seal, it had launched into kind of different waves into different channels of distribution. Is that the same case with ForceFlex?

I think it is a pretty common channel. The Press 'n Seal was sold broadly through our entire food, drug, mass dollar store, home depot, et cetera, so it is really all the channels in which we operate in, and the ForceFlex is sold exactly in the same way. And I don't think there would be much differentiation between the 2 from a channel standpoint. I think the important thing, as you know, on Press 'n Seal, the demand was higher than the original supply, and we -- there was a little bit of pressure there. We have not had any supply issues whatsoever on the ForceFlex.

Okay. And just to make sure I'm kind of understanding here about the guidance, you know, because you're kind of lowering margin expectations, because of commodity cost pressures, does that mean that when the Henkel deal closes, you may not increase the guidance range due to the accretion?

The Henkel increase is really separate and apart from the base guidance that we provided. And again, what we're guiding there is that we're on a full -- full-year weighted average basis we're expecting about 7 to 10 cents accretion from Henkel. In the base, you know, we are -- on the margin line, we are guiding for additional pressure in the second half. But we're still fully committed to the 2.58 to 2.66 that we have for the full year, so we did have some favorable lists in Q1, we haven't dropped that to the full-year bottom line. We're assuming the cost pressures will tend to offset that in the back half of the year. So we're still committed to the range we provided on the base, and the Henkel impact, again, we continue to anticipate in the 7 to 10 cent range.

You know, Linda, I'm not sure I completely answered your question on the Press 'n Seal because I was thinking about it a different way and that was over the entire introduction. We did phase in the sale of Press 'n Seal by -- from a channel standpoint. In other words, clubs weren't sold at first and a number of other channels weren't sold at first. Where as on the ForceFlex launch, it has gone into all channels up front.

Okay. So then with regard to the inventory increase, the piece of it that is due to the ForceFlex should kind of correct itself at the end of the next quarter?

It should generally correct itself, but it really will depend on what the supply and demand situation is at that point in time.

Okay. All right. Great. Thanks.

You bet.

Our next question comes from Chris Ferrera of Merrill Lynch. Your question, please.

Hi. I was wondering if you would still be expecting sales in the back half of the year, and I'm sorry if you addressed this already, but would sales in the back half of the year still be slower than in the first half of the year for '05?

I don't think so. I think they're very -- probably if you looked at the full year based on our current expectation I think they're going to be very similar, as you look at the quarters.

Chris, when you get to Q4, it might be slightly lower than our ongoing run rate just because at that point we will begin to anniversary the launch of Clorox Toilet Wand, but at the same time we should have slightly favorable trade spending amounts because at that point we won't be support at the same levels we are today behind both Toilet Wand and ForceFlex. So when all is said, they will probably even each other oat and we'll probably be about where we are on the annual basis if not just slightly lower.

Got it. I'm just trying to get a sense for what might have changed relative to last quarter. Because I know last quarter you guys had been saying that either you would see better sales growth in the first half and the second half, then it only comes in at 4 this quarter, which is good, but it was a little bit below what I was looking for, and then I was wondering if that's because maybe seasonal was a little bit worse than you had thought, you know, back 3 months ago when you originally talked about guidance for this quarter or if that's not the case at all.

I think that is probably exactly the status that we -- if you look at it, I think we came in a little bit ahead on Glad and laundry home care. But our seasonal was soft. But we had those potential expectations when we had our conference call in August, and I had actually flagged it at that point, is that we had seen some softness through the holiday period, and that while it was starting to come back, we had lost that 1 period of time in terms of take-away because the retailers were having soft consumption during that July period, and July 4 period on the merchandise brands. And so that the specialty did come in softer than what we had originally planned for the quarter, in that it wasn't completely offset by gains that we made in the other -- the household segment.

You know, with that said, though, Chris, we gave our target for Q1 of 3 to 5%, we landed nicely within that, and I think -- I think in Dan's prepared remarks, he talked about, you know, the benefits of having a diverse portfolio and I think this is one of those quarters where that played out. We had some maybe unexpected softness in the charcoal and food businesses earlier in the quarter, as Jerry just noted, but it was offset by some really solid results in laundry and home care behind the Clorox brand names. So again, that's bit of our portfolio and I don't think we feel badly at all on where we landed on the top line this quarter.

No, that's very helpful. I appreciate it. And just one other, on the gross margin side. They were obviously a lot better than what you guys had originally expected them to be and definitely what I expected them to be. I was just sort of wondering if we could, just for clarification, should we think of that more as a mix issue, or should we think of that more of an accelerated savings number? Because it seems like a lot of savings to be accelerated at that level.

I think it is a little of both. We definitely were a little bit better on the mix side and we were a little bit better on the cost side. So it really is a mixture of the 2 in the first quarter.

But I would be cautious to accelerate the rate of cost savings versus what we did -- even if you get a 1-time benefit of some incremental -- some extra cost savings early, that doesn't necessarily translate to better cost savings in every quarter as we move out.

Got it. Thank you very much.

You bet.

Our next question comes from Andrew McQuilling of UBS. Your question, please.

Thank you very much. Jerry, I guess should you decide in the March and June quarters that the competitive environment will permit price hikes to recover raw material, will that alter your guidance for the back half? And how long does it typically take to get price increases through, you know, if everyone sees that it is obviously raw material and the competitors want to have those price increases through?

Yeah, there usually is a transition period before you can really get the full benefit of a pricing action. Now, I say that in the context that, you know, that the entire environment allows you to not lose a bunch of business, but we're looking at all of those things very carefully. But usually it is going to take a few months before you can -- following the price increase before you can get the benefits of the action itself.

Okay. But since you don't -- you don't really budget right now for any price increases in the back half of the year; is that fair?

What I'm -- I'm giving a full-year guidance number and saying that we're more aggressively looking at pricing in light of what appears to be a more aggressive cost environment.

And I guess if you could talk about maybe businesses, you're not going to answer but --

We can't simply get into any of the specifics from a competitive standpoint. We don't want to get into any specifics around exactly what businesses or brands we might be thinking about, with regard to that. What I can tell you, that whatever we do is going to be cost justified, and cost driven and cost justified.

Fair enough. Thank you.

You bet.

Our next question comes from Kathleen Reed of Stanford Financial. Your question, please?

Good afternoon. First just a clarification question. I think when you were talking about the Glad charges, it was 9 cents a share in this quarter and you said about 5 million for 2Q or 3Q or just 10 million left to go. But you thought they were going to flow through the cost of goods line. So including that extra 10 million, is that included in your guidance for weaker-than-expected gross margin?

Yes. That is in our gross margin guidance, we're anticipating about $5 million each in Q2 and Q3 on those charges to come through the cost of goods sold line.

Was that always in your guidance or is that something new?

No, that has been in our guidance all along. None of that has changed at all. And the benefits coming out of all these things, we will see very little until we get to FY '06.

Okay. Great. And secondly, the Brita business was flat in the quarter and I'm just reading your comments that the category was soft. But you did see some market share gains and it is off of very easy comp where the volumes were down 13% from the year-ago period, can you just give us some more color on the Brita business?

This has always been the one business, because we highlight it out separately, that probably has a bit more volatility attached to it in terms of a quarter-to-quarter basis. In other words we could be up 20%, as we were, 20-plus percent in a quarter, and we could be down 2% in another quarter. Because it is so driven by what kind of activity may be going on with regard to customer support during the year. What we try to look at that business is, how is it looking over time? In particular, in the entire fiscal years, and we continue to feel good about the water filtration business, our Brita business, and in particular, the plans that we have for the second half of the year.

So we should see some sequential volume improvements as we move throughout the year?

I don't know if I can describe it as exactly sequential, but you should see, if you looked at first half and second half, I think you will see a pretty decent difference.

Okay. Great. And finally, can you break out the -- on the top line, your sales and volumes were both up 4, was there any currency pricing, I think you said mix was a positive, can you break out those components for the top line for this quarter and what you expect for second quarter?

Foreign exchange was fairly minor, I think it was about 30 basis points on the quarter, and --

As a negative or a positive?

Slight positive.

Positive.

And then pricing, this is really care-over effects of previous pricing actions that we've taken, added about 70 basis points. And then we saw mix and assortment at about, let's see, about 140 basis points there.

And then that was offset, that was all offset by trade spending?

And then trade spending was up behind the new products.

Okay. And for 2Q, do you expect similar amounts as your first quarter? For those components that you just broke out?

Probably pretty similar, Kathy. Although the pricing piece will probably soften a bit just because we will be anniversarying one of the more material price increases we took last year, which was on the Glad trash business, we're now anniversarying that as of the end of Q1. So pricing probably won't be quite as favorable next quarter, but the same dynamics of high trade spending offset by favorable FX pricing and mix will probably play out. I wouldn't expect there to be be a material difference between volume and sales next quarter, either.

Okay. Thank you very much.

Our next question comes from David Lewis. Your question, please. Mr. Lewis of J. Goldman, your line is now open.

Why don't we move on to the next question, please.

Again, if you have a question at this time, please press the 1 key. Our next question comes from Connie Maneaty of Prudential Equity. Your question, please.

Hi, I just have a follow-up. I think you said that resins were 10% of the cost of goods. What are total raw materials as a percentage of cost of goods?

Total -- if you look at our cost of goods sold and you look at raw and packaging materials, it is slightly in excess of $1 billion of our cost of goods sold are in the raw materials. The resin component there again is about 8 to 10%. And the balance are all the other commodities, the corrugate, chlor-alkali and the other raw material inputs that we use, so think of it in terms of slightly in excess of $1 billion represents the raw impact spend that we do on an annual basis.

What is the second largest raw material after resins? I'm going to guess -- I don't have the numbers in front of me, I'm going to assume it's corrugate, but I could be wrong.

I think liner [ph] board and corrugate and chlor-alkali --

Chlor-alkali would be the next one in, and even soy bean is a fairly sizable commodity for our salad dressing business.

And just to go over the price increases you've taken. It is -- I think you took an increase of charcoal, in charcoal in October of 2003, maybe on the order of 5%.

Let me just walk through them, Connie. At least during the course of the last year.

That would be great.

As noted, we took a price increase on Glad trash last fall. And we're now anniversarying that. We took a price increase on the charcoal business in -- call it January, but it really didn't take material effect until the warmer weather in the spring last year, so we will have another quarter or so of that. And then we took a price increase on our litter business in about the April/May time frame, so we have a couple more quarters of that benefit. And since then we've taken some modest increases on a couple of our small, smaller home care brands. We've also generally been taking pricing across our Latin American portfolio to offset what has been a longer term devaluation versus the U.S. dollar. That's a pretty consistent trend. So all of those have really been what we've seen over the course of the last year.

And when was the last time you took a price increase in bleach?

Was it 2001 or 2002?

I think it was 2002.

We would have to double check. Maybe we can get back to you on that.

It is a couple years ago now.

I think it was 3 years ago, but we can double check on the specific timing.

That's great. Thank you.

You bet.

Again, if you have a question at this time, please press the 1 key. I'm showing no further questions at this time, sir, if you would like to go ahead.

Thank you, everybody, for calling in. I would like to reinforce, we feel good about the basic health of our business. We feel good about the strategy that we've employed. And I think we will be wrapping up our Henkel transaction shortly and we should put a little more color on all those things as we move forward. But I appreciate everybody calling in and have a good day.

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