高樂氏 (CLX) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Clorox Company Fiscal Year 2005 Second Quarter Earnings Release Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press "star" then "zero" on your touchtone 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.

Welcome everyone and thank you for joining Clorox's second quarter conference call. I'm Steve Austenfeld, Clorox's Vice President of Investor Relations. On the call today are Jerry Johnston, Clorox's Chairman and 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 seven days on our website at 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, 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 open it up for your questions.

Before we begin, I need to remind you that the material we're providing during this call contains forward-looking information. Our actual results may differ materially from what we're projecting. Information about factors that could cause actual results to differ materially from our expectations can be found in our filings with the SEC, including our 10-K filing for the fiscal year ended June 30, 2004.

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

Thanks Steve, and welcome everyone. As you saw in the press release, Clorox had a very strong second quarter. Dan Heinrich is going to go into the financial details of our second quarter results in a few minutes.

Now with the completion of the Henkel transaction, we obviously will need to talk about the impacts from discontinued operations. But overall, we feel very good about the results of continuing operations for the quarter across nearly the entire P&L.

Now on the top line, second quarter volume grew 8% and sales grew 9%, versus the prior year. Now, typically the second quarter can be affected by retailers order patterns due to the uncertainty during the holiday shopping season. This generally drives us to take a cautious approach in projecting quarter-end results. We did this in our guidance for Q2. Now ultimately, we saw our volume and sales growth come in substantially stronger than anticipated later in the quarter, across nearly all of our businesses. I think it's fair to say that our top line results reflect the focus and solid execution behind our consumer and customer strategies.

On the consumer front, new products helped drive top line growth as we leverage our carefully developed consumer insights on these brands. Clearly the Glad ForceFlex launch contributed to Q2 growth, as did other new products. Now on a broader note regarding new products, in a January 14th New York Times article, Glad Press 'n Seal was ranked the most memorable new consumer product launch in calendar year 2004. Clorox ToiletWand was ranked third on this same list. Now both of these new products also performed strongly in Q2.

On the customer front, we're continuing to work with our retail partners to leverage our health and wellness platform. This emphasizes the germ killing benefits of Clorox laundry and home care disinfecting products. In fact, volume in home care was up 15% versus prior year, in part due to ToiletWand as mentioned, but also due to significant volume from Clorox disinfecting wipes and other Clorox cleaning products behind our health and wellness campaign.

Moving down the P&L, gross margin grew 40 basis points versus year ago. Now this is better than we had previously expected as we saw favorability in cost savings, manufacturing, and logistics related costs. That offset some of the impact of commodity cost increases. Now, Dan is going to go into the details, but I would like to mention here that we're seeing real benefits coming from our cut costs and enhanced margins, that's the CCEM strategy that includes, lean manufacturing efforts.

In summary, we made progress in the quarter versus the prior year in nearly all dimensions of the business. Stronger top line, lowering operating expenses, offset somewhat by higher commodity costs, and continued investment in the businesses. The important point here is, fundamentally our brands are healthy. We're pleased with our momentum and we are pleased with the quarter's results.

Now, I'm going to turn it over to Dan and he is going to provide some details of our operating results and go into the impacts from the Henkel transition.

Thank you, Jerry. I'm going to spend some time today discussing the results we reported in our press release. Specifically, I'm going to clarify the accounting for the Henkel transaction. I'll then discuss some of the drivers of our strong results this quarter. I'm also going to put the quarter's results in the context of our earlier outlook adjusted for discontinued operations accounting treatment. And finally, I'm going to provide our initial Q3 outlook, along with our updated full year outlook.

With that said, let me start by providing some background regarding how we have reported our second quarter results. Hopefully, you've all saw our press release last week, communicating the updated accounting treatment for most elements of the Henkel transaction. As a recap, the emerging issues taskforce recently issued EITF 03-13, which provided additional guidance for determining when components of a business can be treated as discontinued operations. After thoroughly reviewing this pronouncement, we determined that we should treat the results of the operating businesses transferred to Henkel, the gain on the transfer of the operating businesses, and income generated by our interim service agreements with Henkel, all as discontinued operations.

We also concluded our investment in the Spain joint venture cannot be treated as discontinued operations. Therefore, the earnings in royalties, as well as the gain on the exchange of the Spain joint venture investment are still classified as other income in continuing operations. As a result of this accounting treatment, the tax effect from the Henkel transaction was fully reflected in Q2. All said, applying discontinued operations accounting treatment is helpful, as it enables our P&L to provide a view of results from our continuing operations. As noted in last week's press release, P&Ls that have been reclassified to reflect discontinued operations have been posted on our website, thecloroxcompany.com.

Let me now put our EPS results in the context of this accounting treatment. On a GAAP basis, second quarter earnings per diluted share came in at $3.68. This includes $2.96 per diluted share from discontinued operations, which reflects the P&L components related to the Henkel transaction, except the Spain joint venture investment, and the impact on interest expense.

Earnings per diluted share from continuing operations were $0.72 for the quarter on a GAAP basis, which includes about $0.13 per diluted share related to the gain on the exchange and earnings in royalties and associated tax effects from the Spain joint venture investment. As you saw in the press release, when you exclude the gain in earnings from the Spain joint venture investment from continuing operations, we delivered $0.59 per diluted share. That $0.59 per diluted share number is the one that I think most of you are focused on, and is the one that we believe best reflects underlying trends of our performance this quarter.

The $0.59 is about $0.07 higher than our prior outlook, once adjusted for all nonrecurring earnings and gains impact of the Henkel transaction, including lower shares outstanding. About $0.04 resulted from higher than anticipated sales and $0.03 from higher than anticipated cost savings, including trade-spending efficiency and lower than anticipated administrative spending.

I'll now turn to the key items on our P&L that drove our results. Again, all comparisons reflect discontinued operations accounting treatment, meaning current and prior year P&L activity for the Soft Scrub and insecticides businesses transferred to Henkel have been reclassified as discontinued operations. On the top line, we delivered 9% sales growth versus a year-ago quarter. This favorability versus the prior year in versus our prior outlook is primarily driven by the underlying strength on our base business as well as volume from the new products Jerry mentioned a moment ago.

On a year-over-year basis, we also enjoyed a slight benefit from past pricing actions in Latin America, litter and homecare as well as a slight benefit from favorable foreign exchange. As you saw on the press release, gross margin came in up 40 basis points versus the prior year. This was better than we had anticipated. Strong cost savings and higher volume in sales partially offset by higher commodities costs were the primary drivers of this favorable result.

SG&A and R&D came in about as anticipated. On a dollar basis, advertising spending was in line with our earlier outlook, but slightly lower as a percent of sales due to our higher sales growth. Interest expense was $10 million higher than a year ago due to the incremental debt incurred in financing the Henkel transaction. All other income totaled about $29 million, primarily driven by the gain on the Spain joint venture investment as we've already discussed.

Clearly the Henkel transaction was a very significant event for the company and we spent a lot of time to get the operating businesses transferred, the financing in place, and the accounting completed. We are striving to be clear in explaining our results so that you can get an accurate picture of how our continuing businesses performed. On that note, we are pleased with our better than anticipated operating results this quarter.

As I turn to outlook, keep in mind that this reflects the discontinued operations treatment for most of the Henkel transaction for both this year and our prior year results. Before I get into the specifics, there are two points I want to make. First, due to the timing of the share exchange with Henkel, weighted average diluted shares outstanding in the second quarter were a bit lower than anticipated at about 190 million shares.

Our outlook now assumes about 155 million weighted average shares outstanding in quarters three and four and about 180 million weighted average shares outstanding on a full-year basis. Second, because the exchange of this Spain joint venture investment could not be treated as discontinued operations, continuing operations from prior periods includes income and the related tax effects from the investment.

Future quarters will no longer reflect any income from the Spain joint venture investment. For the full year, diluted EPS from continuing operations will include about $0.14 for the first half gain and earnings and royalties and related tax effects from the Spain joint venture investment.

Now with that, I will start with our updated outlook for the full year followed by our initial outlook for the third quarter. Again, both periods use prior year gross and operating margins restated for discontinued operations treatment as the base. For the full year, our outlook for sales is now anticipated to be toward the higher end of our 3% to 5% target range, reflecting our sales strength in the first half of the fiscal year.

Our sales growth outlook anticipates continuing solid momentum on our base business as well as contributions from new products. New products include Clorox ToiletWand, launched last April; Glad ForceFlex trash bags, launched in September; and the new Clorox BathWand disposable cleaning system we're introducing this coming April.

Moving to gross margin, our outlook is for the full year to come in down 50 to 100 basis points. For perspective, our fiscal year '04 gross margin adjusted for discontinued operations was 44%. Our lower gross margin outlook primarily reflects commodities cost increases, net of pricing actions, and start up costs for new products in the second half.

To a lesser degree, Procter and Gamble's incremental investment in our Glad joint venture will also slightly dilute gross margin as P&G's minority interest is reflected as cost of sales. Although we have seen gross margin improvements in the first half, we're anticipating gross margin to be down slightly in the second half particularly in the third quarter. Again, primarily due to commodities costs increases.

Selling and admin expenses are anticipated to be lower on a percent of sales basis. Our outlook for advertising is approximately 10% of sales and R&D expenses at approximately 2% of sales. Our outlook for operating margins is a slight decline with a range of flat to down 50 basis points reflecting the gross margin pressures I've already noted.

All non-operating expenses, including interest expense, are anticipated to range from $80 million to $90 million. This includes $32 million in first half pre-tax charges for the Glad restructuring announced earlier in the fiscal year, partially offset by approximately $25 million in earnings and gain from the Spain joint venture investment reflected in our first half results.

Due to the tax impact of the portion of the Henkel transaction included in continuing operations, our full year tax rate on continuing operations is expected to be slightly below 34%. As our second quarter tax rate of 30% was lower due to the impact of the Henkel transaction, our second half effective tax rate is anticipated to be slightly higher than the full year rate.

We anticipate that the externally tracked EPS consecutive estimate for the remainder of the fiscal year will focus on our anticipated GAAP earnings per diluted share from continuing operations. On this measure, our outlook is now in the range of $2.70 to $2.80, which includes about $0.14 related to the nonrecurring gain and results from the Spain joint venture investment reflected in our first half results.

Versus our previous full year outlook, our $2.70 to $2.80 range has two primary adjustments for discontinued operations treatment. The range includes the gain on the Spain joint venture investment and associated tax effects recognized in the first half of the year. And it excludes profits from the exchanged operating businesses; Soft Scrub and insecticides; they are now classified as discontinued operations. These adjustments are about equal and essentially offset each other. As a result, you should compare the $2.70 to $2.80 range for diluted EPS from continuing operations with the previous outlook of $2.65 to $2.76.

Now, with a full picture -- full year picture in mind, let me provide our initial third quarter outlook. On the top line, we anticipate sales in the range of 3% to 5%. Gross margin is anticipated to decline significantly versus the year-ago quarter due to the increase in commodity costs, net of pricing actions.

Selling and administration expenses are anticipated to be significantly lower than a year ago on a dollar basis primarily due to some prior year spending that is not recurring this year. Our third quarter outlook for advertising and R&D expenses is consistent with our full year outlook. In total, operating margin is anticipated to decline slightly versus the prior year quarter reflecting the gross margin pressures I've already noted. All non-operating expenses, including interest expense, are anticipated to be the range of $30 million. Importantly, there will be no been no further Spain joint venture investment activity in Q3's continuing operations.

Our tax rate is anticipated to be about 35%. On a GAAP basis, our initial Q3 outlook for both total earnings per diluted share and earnings per diluted share from continuing operations is in the range of $0.62 to $0.68. Please note that the diluted earnings per share from continuing operations in the year ago period included about $0.01 related to the Spain joint venture investment that will not reoccur in this year's third quarter. The only anticipated Q3 discontinued operations activity will be very modest profit from the transitional services being provided to Henkel.

Now, before I wrap up the outlook portion of my comments, let me make a quick comment on our fourth quarter. It is still early to provide specifics on each line item in the income statement, but we'd like to comment on our EPS outlook. It's important to remember that because our shares outstanding has decreased since the beginning of the year due to the repurchase from Henkel, it's not possible to take our full-year outlook less the first three quarters results to calculate fourth quarter EPS outlook. Therefore, we are providing a preliminary fourth quarter EPS from continuing operations outlook in the range of $0.92 to $0.98 per share.

One last note before I wrap up my comments. As you know, the American Jobs Creation Act of 2004 was enacted last October. This legislation contains significant changes in the US Internal Revenue Code, and we're evaluating the foreign earnings repatriation provisions to determine whether we might repatriate un-remitted earnings from foreign subsidiaries of up to $250 million during either fiscal 2005 or 2006. No decisions have been made, but we anticipate reaching the decision on whether to repatriate foreign earnings in the second half of this fiscal year. We have not included an EPS impact from foreign earnings repatriation in our FY '05 outlook, as we have not made any decisions. Any remittances made would be subject to a federal tax rate of 5.25% plus potentially some foreign withholding taxes.

Before I call the call back over to Gerry, I want to provide a couple of preliminary thoughts about our fiscal 2006. Per our typical practice, we plan to provide our preliminary FY '06 outlook in May. There are several factors we're taking into consideration as we look at fiscal '06. First, we anticipate the significant commodities cost pressures in the second half of this fiscal year will continue impacting us in FY '06. Even if the energy costs moderate, the continuing effects of higher demand and supply capacity issues are anticipated to continue pressuring many commodities. To help offset the rising cost of commodities, we previously announced a 12 to 13% price increase on portions of our Glad business effective February 1st, and we continue to evaluate additional pricing actions to help offset some commodity pressures in fiscal 2006.

Second, the payments to Procter & Gamble for their increased interest in the Glad JV will create greater dilution in our FY '06 earnings than in FY '05. As a reminder, effective last month, P&G increased its interest from 10% to the 20% maximum allot in the Glad joint venture. This EPS dilution is anticipated to be in the range of $0.02 to $0.05 greater than in FY '05.

Third, FY '06 will reflect the full year accretive effect of the Henkel transaction. As we communicated in our mid-December press release, we now anticipate diluted EPS accretion from the Henkel transaction of $0.12 to $0.13 in FY '05. While it is too early to give a specific range for FY '06, the accretion will be higher than in FY '05 as we benefit from an entire year of reduced shares outstanding.

Fourth, FASB Statement Number 123(R) will require the expensing of stock options beginning in our first fiscal quarter of FY '06. Now, we're still in the process of evaluating the new statement, including determining the valuation model and assumptions we'll use. We anticipate reaching some conclusions on the new roles when we provide our preliminary outlook for fiscal '06 in May. The implementation of this standard will impact FY '06 earnings and earnings per diluted share. For perspective in our June 30, 2004 Form 10-K, using the Black-Scholes model, we reported a pro forma earnings impact of about $19 million or about $0.09 per diluted share under the then existing Statement Number 123 rules.

Finally, we plan to continue our spending in support of the game changers and other new products we're launching in FY '05. We're pleased with the innovation we have introduced and will be introducing this year, and are making the appropriate investments to help achieve long-term success. That said I'm pleased with our second quarter performance. Here's Jerry to provide some additional comments on our performance and to wrap-up.

Thanks Dan. Before we go to Q&A, I'd like to emphasize three points, and then I'm going to summarize. First, we remain committed to improving our annual consistency and quarterly visibility in delivering our goals but I realize that our financials contain a lot of reclassifications right now. After all, the Henkel deal we've just completed is the largest transaction in the company's history. In addition, our outlook also contains continuing pressure from commodities over the next six months and beyond. However, even with that expectation, we still have an improved outlook for our full year results, that is, the 2.70 to 2.80 per diluted share from continuing operations. Now that's a key measure for assessing our progress against the original targets that we set for the year. Net-net, I feel very good about our performance.

The second point I'd note is that we feel optimistic about our innovation pipeline. As we've shared with you at our Analyst Meeting in September, we segment our new product innovations into three groups, game changers, core growth, and rapid response. Our larger game changer items usually get more attention in the investment community since they add more to our top line growth. We target to have about one game changer per year on average adding a point of top line. Our recent game changers, including Glad Press 'n Seal, Clorox ToiletWand, and Glad ForceFlex, have certainly had strong results. As we recently communicated, we're launching another game changer, Clorox BathWand in April. We also feel good about its prospects. All said we've been pleased with both the pace and the equality of our game changer innovations.

But I'd also like to reinforce that we have a healthy pipeline of medium sized core growth initiatives. Now, while they are not as large as game changers, core growth items are highly incremental and are innovations that help keep our core brand portfolio healthy and growing. In Q3, we're launching a number of core growth initiatives, including Glad Press 'n Seal freezer wrap, Brita AquaView faucet-mount filter, and the new gel-based Armor All Wash & Wax products. We're also launching several food product line extensions, which we categorize as rapid response.

Now whether it's game changers, core growth or rapid response, we have confidence that our innovation pipeline will make important contributions to our near-term and long-term top line growth objectives. The third point I''d like to emphasize is I feel good about progress against our strategies and goals. While this is going to take some time to sort out the commodities and pricing environment and its impact, I'm very pleased with how we are executing against the strategies and activities that's going to drive our brands and business in continuing operations over the longer-term.

So, let me summarize. We have strong commodity headwinds over the next 12 to 18 months, but our core brands and businesses are healthy, our new product pipeline is strong, we continue to support our brands with high levels of advertising and marketing support. Our international business is strong. We're executing well against our cut costs and enhance margin strategy. We're building capabilities in our people and process work, and we continue to generate strong cash flow. Finally we've successfully completed the largest transaction in our history and we feel positive about the ongoing benefits from that Henkel transaction. With that, I am going to ask the operator to open up lines for your question.

Thank you, sir. At this time if you have a question please press the "one" key if you question has been answered or you wish to remove yourself from the queue please press the "pound" key. Our first question comes from Amy Chasen of Goldman Sachs. Your question, please.

Thanks Jerry. First of all congratulations on your new title.

Thank you.

I may just a little bit confused by your caution about the second-half because when I look at the divisional results, you saw a profit -- pretty significant profit acceleration in all three segments. Your gross margin trends were better than expected and based on everything that I can see which isn't as much as normal because of the restatement, but it just looks like your cost savings initiatives are more than offsetting the rising raw material costs. So can you just talk about number one, why you're so cautious and number two, the slight reduction in your guidance for the second half? Which quarter is that coming from?

It's actually coming from both quarters. So that's the answer to your part of the questions. Let me go back and I'll add sort of give my take on what's going on and what our feelings are right now. I think the second half expectations, we feel very good about what I call the fundamentals, but the activities that happen with regard to cost savings offsetting some of the commodity pressures in the second quarter are going to look different in the third and fourth quarter. There's going to be more pressure from the commodity front in which our cost savings activity will not be able to offset to that same degree in both the third and fourth quarters. And so I think at this point, we feel that it's appropriately cautious in projecting the outlook that we have for both of those quarters.

Can you comment on your hedging programs? My understanding is that your 80% to 85% of your resin exposure is hedged through the end of calendar year '05. So obviously, there's other materials besides resins that are hurting you, but how does the resin outlook -- look and how are your hedging programs as you look into fiscal 06?

Yes, Amy. This is Dan. On our contracting, in the past, we've provided quite a bit of detail in terms of how we contract for all our commodities and how we hedge that and frankly, as we've gotten into the renewal period, we're seeing that as we move forward with the renewals it's going to become harder and harder to easily describe exactly how well our contracting techniques and hedging techniques will impact our commodities costs going forward. And in fact, we've had some issues as we've gotten into renewal discussions with a number of our suppliers, given the level of details that we've provided in the past.

So we're now changing. We're not going to go to a lot of detail in terms of the specific contracting that we do or the hedging that we do. I will tell you and reaffirm that obviously, we look to try to stabilize our buys as much as we can through either contracts or hedging. But we're not going to go into a lot of additional details as to how that works. As Jerry said, though we do see fairly sizable commodities cost pressure that we're facing in the second half and therefore, are cautious on the impacts in terms of both our gross and operating margins.

Can you just comment on, I appreciate not wanting to be specific, but I guess two follow ups, number one, sort of the percent of your resin exposure that you expect to hedge in 06 and then number two, is the issue here that you really having to renegotiate at much higher rates and so maybe you're not locking them in as much because maybe your expectation is that those higher rates are not sustainable?

Amy, I think the way we would like to talk about our exposure to commodities as we move forward is to give the implications of exposures in our projections, in terms of overall commodity costs and impacts on gross margin. As Dan said, part of the problem is that we've explained some of the details historically on these commodities, it's made it more difficult for our negotiations with our suppliers and has created some competitive issues. And as a result of that, we just feel that while we certainly want to give visibility to the impacts of the specifics that we are dealing with on commodities, we just feel like we can't go into the details of any one commodity or supplier for competitive reasons.

Okay. So you won't even talk about whether you're going to be hedging as much as you did in the past or whether your outlook is such that those costs will be coming down so you haven't been willing to lock in as much?

Yes, I think the way we'll be describing it as a move forward is only what are the impacts of our actions going to do to the gross margins or the commodity costs in general and the gross margin impacts of those moving forward. And I -- we're not going probably get into any of the other details on these things.

Okay.

Specific to commodities, though again, as Jerry mentioned we do see headwinds going into '06. While we do, have seen a little bit of decline in terms of the energy input costs, we still see supply and capacity issues that we think are going to continue to pressure commodities costs as we move into FY '06. We're just in the beginning stages of discussions with suppliers on FY '06.

Okay. All right, thanks.

Thanks.

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

Good afternoon. Can you quickly break out, gross margin was up 40 basis points in the quarter? Can you just strip out and tell us how much your cost savings program added and then what the raw material negative impact was?

Yes, if you look at the improvement in gross margin for the quarter, there are several pieces to it. But the biggest impacts were about 260 basis points or so from cost savings offset primarily by about 220 basis points of commodities cost pressure. Lot of other parts to it, but essentially those are the two big drivers.

Okay. Also on your A&P line, obviously, you stated that on dollar basis that was relatively flat, but due to your higher sales level, can you just describe, are you just getting better bang for your buck with your advertising and what percent of your advertising line is fixed versus variable?

I'm not sure that we have the details on the fixed versus variables here with us, maybe touch base with Steve later. I mean, I think the dollar -- there is always an ongoing effort to be more efficient and effective in the quality of our advertising and I do think that we're making continuing improvement in the quality of our advertising efforts, and certainly, we look for effectiveness. I think in this particular case that the plan that we have on the dollars to spend was worked very well with -- for us during in the quarter but as a result of higher sales that the percentage went down a little bit.

Okay. Great. And then finally, can you just comment on plants now that the Henkel transaction is complete, what's your either long-term or just your goals for free cash and then debt reduction?

Near term in terms of free cash flow, obviously we'll be using fairly substantial portion of free cash flow to reduce debt. Although we believe even at current levels we have flexibility for some share repurchases, primarily to offset share dilution and we believe we still have capacity at these rating levels to consider a small acquisition if we need to, but I think...

Or to provide dividends.

Or dividend increases. I think you can assume that a fair amount of free cash flow will be used to reduce debt over the next several quarters.

And have you given any goals for that in terms of dollar amount or just a percent of total cap where you'd like to be?

Yes. I think, that we haven't given any specific goals and we may at some point in time. I think, at this point we're going to be focused on improving or just getting to a level on our commercial paper that's a grade up from where we are. And that's probably the biggest goal we have. After that, I think that we have lots of flexibility in terms of higher -- having higher levels of debt than we've had historically.

Okay. Thanks very much.

You bet.

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

Thanks. Good afternoon. Jerry, I also just feel little, I guess, it seems that you guys are being little overly cautious in terms of second half of the year for commodity costs. Has the environment changed that much since September at your Analyst Day?

Yes. I think as it relates specifically to commodity we've seen substantial changes as it relates to the near term and longer-term commodity environment. And at least for us, as we're looking out, we see that going out a ways, and it's predominantly on the supply and demand areas. Because even if oil prices go down and -- or natural gas prices go down, it doesn't necessarily affect the supply and demand activity and as we make our projections, we are just being, what I would describe as, appropriately cautious in our viewer things.

Okay. Second question is on inventories. It was up 12%, I think, you guys explain thataway a little bit by the demobilization of the charcoal inventories, which seems interesting in the December quarter, but I was curious, what was the other drivers behind that?

The two primary drivers, one is the one you cited, which is the charcoal, the seasonal impact of charcoal inventories. We also had some inventory build on new products, specifically, ForceFlex product in the second quarter and you see that reflected in the numbers.

Okay. And then the last question if I could. You know, with all the game changers you guys have launched in the last couple of years, what percentage of your sales today and this is probably a tough question, but what percentage of sales today comes from new products that you've launched? And I'm not sure how you define it, but over the last two years or three years and how has that been trending?

Yes, Joe. That happens to be a topic in which there's lots of debate in our business and both in consumer packaged goods and lots of other businesses is how to calculate those numbers. We have not given a number, and one of the reasons is that the way in which various companies report those numbers is so different from one another that we don't know whether it will be an accurate reflection of the success of innovation. And -- so we have hesitated to be giving specific numbers, because we are concerned they would be compared against apples and oranges in the comparisons.

Okay. Great. Thank you.

If you have a question at this time, please press the "one" key on your touchtone telephone. Our next question comes from William Schmitz of Deutsche Bank. Your question, please.

Hi. Good afternoon.

Hi.

Can we just talk about what Joe just asked a little bit more on the game changer front? It seems that...

Sure.

... if you start -- I know, ReadyMop wasn't a game changer -- but it seems that these were fine the first year after launch and they got a lot marketing support, but it seems year two, three, four -- there is, sort of, a sustainability issue there. And, I think, you're starting to see a little bit of that in the Press 'n Seal quite frankly. I know one month of IRI data doesn't make a trend, but it kind of suggests that Press 'n Seal was down 42% or something year-over-year.

Yes. I guess, I'm not sure that I would conclude the same thing you concluded on the Press 'n Seal, in particular. We're seeing month-to-month share improvements on Press 'n Seal. Our trial numbers are going up consistently on that brand. We still think we're supporting the brand with the right kind of advertising and marketing levels, because I think sustainability is exactly the question that people should be asking on these game changers. And any one period is not the best indication of things, from my standpoint. And we feel very confident about the current range of game changers that have been out there, and particularly these last three.

Great. Then just, you know, one question. I hate to keep beating this to death -- but on the resin side. It was my understanding that a lot of the manufacturers on the resin side have been eliminating forward contracts completely. So if you want to hedge, you have to do it independently. I mean, I was told that best-case scenario you get one or two months price protection and then some sort of volume discount. But the old days of collars and things are, kind of, gone now with these guys operating at, you know, between 90 and 95% capacity.

Yes. This sort of falls in that category of what we were trying to avoid. I think some of our conversations that we've had with investors have lead to difficulties in our negotiating what we want to negotiate. We're going to have some general principles that we have in terms of trying to minimize the volatility of commodity prices through a variety of mechanisms. We've just elected to say we're not going to do it -- we're not going to publicly disclose all the details of what we're specifically doing with our suppliers.

Okay. That's fair. Thanks very much.

You bet.

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

Thanks. Can you just tell us what percent of your quarterly volume comes in the last two weeks of the quarter? And is that the same for every quarter or just the December quarter?

Yes. It actually varies quite a bit depending on what activity is going on in any one particular quarter. Probably, the one quarter that has the most variation is the December quarter, just because it is impacted by what's going on with retailers that may have nothing to do with the particular company's consumption on their brands -- because sometimes retailers, during the holidays, may hold off on buying, because of inventories they have on many other things in their shop. And so that quarter typically has more variation, but our quarter-ends aren't typical any one ending two weeks may depend on what activities we have going on, on a brand or business or new products, et cetera.

Okay. And how much are you figuring into your guidance for the third quarter for restructuring charges related to Glad? And can you also just remind us what the timing of the cost savings is for that program?

Sure. In the third quarter, we anticipate another penny or two of charges associated with the Glad restructuring. Most of those charges will -- I think all of those actually will come through the cost of goods sold line and will impact our margins. We're projecting a total impact in FY 05 of about $0.12 a share resulting from the restructuring action. And as we look into '06, we're looking for annual cost savings coming from those actions of probably $15 million to $20 million, in that range.

Okay. And just one last thing. On your other income line, this would be separate from the Iberica joint venture? It was $7 million. What was that in the other income line?

There is primarily two things in that item, Linda. By the way, this is Steve. We show equity earnings from other joint venture investments we have around the world that come through that every quarter, and that's pretty consistent. It isn't a large amount. Additionally, this quarter, we had some benefit from a commodity swap contract that was in our favor on a mark-to-market basis. So that's reflected in there as well.

Okay. Thank you.

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

Hi. I have two questions. The first is -- on your outlook for the year -- sorry -- by my calculation, in order to get to your fourth quarter range, it suggests a decline in operating profit of about 6%. So, if the gross margin impact is going to be worse in the third quarter than in the fourth quarter, what other costs are in there that are going to lead to an operating profit decline.

Connie, this is Steve. I think, for the total back half, I don't know that we would support an operating profit decline based on our guidance. And again, there's a lot of moving parts here, as Jerry suggested, and I think you also need to take into account the restatement of our first quarter and last year's earnings per share numbers for continuing and discontinued operations. If all that is done, I think, you would find that our operating profit for the second half of the year would be flat to slightly up or slightly down in total.

I thought we restated -- we already did that. So, I'd talk to you about this off line.

That's fine.

Jerry, can you give us your impression of what you think the P&G-Gillette merger means for the industry?

You know, I -- I'm -- I've heard a lot about, a lot of comments in terms of what it means. I tend to look at it probably from -- does this transaction make any sense and, as an outsider, who views it, itt appears that it's strategic in nature that, I mean, global brand positions with big shares and that it will generate both growth and cost saving synergies. And so my view would be that almost any of these transactions would have to be viewed in and of themselves as events and whether they're good or bad.

When I look at many, many companies in the sector, I don't believe that we -- for instance, that we have disadvantages in terms of our position in our categories. In other words, what is our position in the categories in which we compete? And as you know, we've got some of the highest shares of any company. So that would be the most important criteria that I'd be looking at.

The second would be, what is the capability for companies that are certainly much smaller than this merged company? Whatever their ability to continue to add value, and I am still quite optimistic about our ability to execute against our strategies. And I personally don't believe there will be meaningful impact from this merger in terms of -- unless I was competing in some way directly on something that's contained within that. As you probably know, I think, Proctor, their sales of products that compete with Clorox is less than 1% of their sales. And so it just doesn't have much impact on us from a competitive standpoint. And I still believe that we can compete effectively as it relates to dealing with our customers and being effective in our categories. So I continue to be optimistic about the ability for lots of companies to be effective irrespective of the size of this merger and the size that Procter will be afterwards.

Thank you.

Thanks Connie.

Again, if you have a question at this time, please press the "one" key. Our next question comes from Ann Gillin of Lehman. Your question, please.

Thanks. Good morning, everyone.

Good morning.

Hi Ann.

The question of the revenue outlook, I understand your commodity, but you also seems to be moderating revenue growth pretty significantly second half versus first half. Can you talk about what's playing there?

Well, I think we just have to be cautious a little bit in terms of looking at that. I mean, I think we did express in the comments at least that it's more likely that for the full year will be at the high end of our range on volume. I think that we are moderating certainly versus the second quarter in which the numbers were out there. But we do have some price increases on selected lines that are out there and we are waiting to see what's the net impact of those price increases on volume and so we'll have to sort of play that out. We still feel pretty confident about looking at both of the quarters and being comfortable with the 3 to 5% range that we have in those two quarters.

And any early read on the pricing impact yet, Jerry?

No. You know, the price increase on Glad, for instance, doesn't take effect until February 1 and so that's going to have some time to play out.

Okay. And then, if I could, just one more time just kind of get to this guidance, if we kind of exclude some of the noise around the number of shares, it seems like you are continuing net income guidance year-over-year, right now, is flat, if we also adjust for, say, higher interest rate -- sorry, interest expense year-over-year. Is that what you're really telling us, is how to think about this?

No, I don't think so. I think on the operating profit, we will, in fact, be up over the prior year levels. So I'm not sure what numbers you are calculating.

I'm just trying to look at the net after taxes and all of that, all the below the line.

I think it gets a little confusing because of the continuing versus discontinued operations. It might be something better to address offline, to try to walk through all those details, in as detailed a matter, as we can.

Ready to do it.

Yes. I think the net of it is we don't see net income from any operations going down.

No. Actually looking like it's going to be flat, the second half versus second half, if we've backed out all the guidance you have given.

Based on our guidance, that's true, I mean, directionally up, directionally down, around flat. You are right.

Yes.

All right. Then I don't need to call back. Thank you.

Okay. Thanks.

Again, if you have a question, please press the "one" key on your touchtone telephone.

Well, I guess that probably wraps up all the questions. I appreciate everybody dialing in. I hope you -- I mean we do have a lot of moving things on this because of the -- our need to reclassify this. I think once everybody gets the details in their models that show what the real base is, I think, you'd see that we feel pretty good about the health of our continuing businesses with the one exception of just sort of playing out this commodity environment that we have in front of us. So I would like to thank everybody for dialing in and we will talk to you soon.

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