高樂氏 (CLX) 2005 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon and welcome to The Clorox Company's fourth-quarter fiscal year 2005 earnings conference call. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS) I would now like to introduce your host for today's conference call, Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, you may begin.

Thank you. Welcome, everyone, and thank you for joining Clorox's-fourth 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, as well as Dan Heinrich, our Chief Financial Officer.

We are broadcasting this call over the Internet and a replay of the call will be available for seven days at 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 investors section of our website.

On today's, Jerry will start by providing some observations about the quarter, as well as a brief review of our progress against our long-term goals. Dan will then briefly review our financial performance for both the fourth quarter and the fiscal year, followed by additional detail supporting our fiscal '06 outlook that was communicated in our press release this morning. Finally, Jerry will wrap up, and then we will open it up for your questions.

Before we begin let me remind you that today's discussion contains forward-looking statements. Actual results could differ materially from management's expectations. Please review our most recent 10-K filings with the SEC for a description of important factors that could cause results to differ materially from management's expectations. With that, I will turn it over to Jerry, who will briefly recap our fourth-quarter results.

Thanks, Steve. As you saw in the press release we had a good fourth quarter. Our earnings per diluted share was $1.00. The improvement over our outlook was primarily driven by the impact of a slightly favorable tax rate and a favorable foreign currency gain that Dan will explain in more detail. But even without those benefits we still delivered a very solid quarter.

Gross margins for the quarter came in a little better than we had anticipated, while still down year-over-year. Our 6% sales growth for the quarter came in above our regional fiscal-year and long-term targets. Again, it was a good quarter.

I am going to turn to the full year that we just completed. On a continuing operations basis, earnings per diluted share grew 26%. On the top line, fiscal year sales increased more than 5%, which is slightly above the upper end of our long-term target and our original target for the year. Our gross and operating margins declined versus the prior year, primarily driven by commodity cost increases. We're continuing to take appropriate actions to mitigate the challenging commodities environment, including pricing on many of our key brands.

Our strong full-year earnings per diluted share came from continuing operations reflecting three key factors -- positive top-line growth, the actions we took to help mitigate cost increases, and finally the value created from the Henkel transaction. I am going to spend a couple of minutes talking about each of these factors.

First, our top-line growth. As you have heard me say before we are focused on delivering annual results. Over the past two years, our quarterly sales have had variability ranging from a flat in one quarter to up 9% during the eight quarters involved. The actual growth, for instance, for fiscal year '04 total year was 4.5%; and it was over 5% this past year. Now while we will have quarterly variability, our goal is to deliver consistent top-line growth on an annual basis.

As most of you know, last fall we communicated a new long-term corporate strategy. Essential to the strategy are six strategic capabilities that we call the 3 C's and 3 P's. The 3 C's, consumers, customers, and cost, are focused on our core business capabilities. The 3 P's, people, process, and partnerships, support or enable the business strategies.

Well, we are now well into strategy implementation, and I think it is fair to say our results are reflecting the impact of these strategies. Notably our most important strategy, the consumer. Throughout the strategy work, there has been substantial effort to enhance and deliver discipline to our consumer insights process. This activity has created significant impact in a number of brand-building areas. One major area, innovation, was meaningful to our top-line growth in '05. That included the impacts over parts of the year from three game changers, the Clorox toilet wand system that was introduced in fiscal '04 in April; Glad ForceFlex trash bag introduced in August; and the Clorox BathWand system introduced in April 2005. This continuing consumer focus should enhance our innovation program well into the future.

The second factor I am going to talk about in delivering fiscal '05 is the steps we're taking to address the severe commodity cost environment that we're facing. While it is difficult, we are pleased with the initial results of the steps we took throughout the year to help partially mitigate the commodities impact, including results from our cut costs and enhanced margins work; we call it CCEM. Over $100 million in cost savings contributed to a gross margin benefit of 230 basis points from cost savings.

We're also pleased with the execution of the price increases that we've taken so far this calendar year. Our February Glad price change was executed well, and competitors also increased prices. At this point, our consumption on Glad looks to be favorable versus our going-in estimates. Now in mid July, just the past couple of weeks, we also took price increases on some Clorox liquid bleach, Clorox 2 bleach for colors, and Clorox Clean-Up cleaners.

While it is still early, we also feel very good about the execution of these price increases. New pricing for both Clorox liquid bleach and increased private-label prices are already beginning to appear at shelf. We are also planning some additional pricing actions in the next few months, as we disclosed in our press release.

Now has we move into the second half of '06, our cost savings and pricing actions should begin to outpace the commodity increases.

The third key factor for fiscal year '05 is the benefit coming from the Henkel transaction. As most of you probably know, this transaction closed in November 2004 and included a tax-free exchange of businesses and investments plus 2.1 billion in cash for Henkel's 29% stake in Clorox. This $2.8 billion transaction overall was the largest in the Company's history and allowed us to reacquire Henkel's over 61 million shares at $46.25 a share, which was a significant discount to the market's price at that time. The transaction was highly accretive in '05 and will be again in '06.

That transaction also allowed us in a very tax-efficient manner to dispose of two operating businesses and a joint venture investment that were simply not strategic to us. Finally, the transaction allowed us to recapitalize the Company and lower our overall cost of capital. We're using our strong cash flow now for debt reduction. But I think it's important to note we have also increased dividends; and as you saw in the press release this past quarter, we were back in the market repurchasing shares to offset stock option dilution. Ultimately the transaction was a meaningful benefit for Clorox and our shareholders.

So overall I feel very good about the year, particularly in the face of commodity pressures. Credit goes to Clorox people around the world who stayed focused, drove results across the Company, and who are seeding the future through our innovation and brand-building work along with our other strategy efforts.

Before I turn it over to Dan, I would like to take a few minutes to talk about our progress against the 2008 financial targets now that we're a year into that plan. As most of you know, we set four financial goals that we believe will deliver top-tier performance for Clorox. First, we're targeting sales growth of 3% to 5% annually. Fiscal 2005 our more than 5% increase was slightly above the upper end of this long-term target.

Second, we said we wanted to achieve double-digit EPS growth on average each year. Fiscal '05, on a continuing operations basis, EPS per diluted share grew 26%. That said, we fell short of our margin goals to the unusual commodities environment.

Third, following the Henkel transaction, we're targeting annual free cash flow at 10% to 12% of sales. In fiscal '05 we delivered free cash flow at 14% of sales including the effect of the initial $88 million tax settlement payments. So we're pleased to have exceeded that goal.

Fourth, we're targeting 150 to 250 basis points of ROIC improvement by 2008. In fiscal '05 using a 2-point average, return on invested capital came in at about 13.9%, which is a modest improvement over last year's ROIC adjusted for the Henkel transaction. Now as a reminder, Clorox internally uses a stricter ROIC definition than most external methodologies. That was briefly described in last year's annual report but using numbers prior to the Henkel adjustment.

Our strong and vested capital management in '05 helped us mitigate the impact of commodity cost increases on the impact for ROIC. We remain keenly focused on driving ROIC increases for both the short and long term. Particular focus over the next two years is going to be placed on top-line growth and our gross and operating margin improvements over the balance of the plan. Now with that, I am going to turn it over to Dan.

Thank you, Jerry. I will start by providing a few more details about our top-line growth. As Jerry noted, we are pleased to have delivered strong fourth-quarter sales growth of 6%, which was ahead of our original target. We're also pleased to have delivered more than 5% sales growth on the year, which is slightly above the upper end of our long-term target range.

Importantly, sales outpaced volume growth in the fourth quarter as we benefited from increased sales in every segment, including a positive impact from premium priced new products and the 12% to 13% average price increases we took in February on Glad trash bags and GladWare containers, and other price increases. As Jerry mentioned, we feel good about the execution of these price changes and we are also encouraged that the initial consumption declines expected from retail price increases have been somewhat less than we modeled.

Moving on to the rest of the P&L, I will turn first to gross margin. Gross margin for the quarter came in a little better than we expected at 44.1% or down 160 basis points versus the year-ago quarter. The quarter's results were driven by a 300 basis point decline due to higher commodities costs and a 160 basis point decline related to higher manufacturing and logistics costs, in part due to increased diesel and other energy-related costs. These were partially offset by the benefits of 170 basis points in cost savings coming out of our Cut Cost and Enhance Margins program, 90 basis points from price increases, and 40 basis points due to slightly favorable product mix.

On a full-year basis, gross margin came in at 43.2%, for a net decline of 80 basis points. Selling and administrative spending was higher than the year-ago quarter, due to increased professional and legal fees, additional investments to support our strategic consumer and customer initiatives, and higher incentive compensation costs based on our fourth-quarter results coming in slightly better than anticipated. Importantly, full-year selling and administrative spending came in about in line with our original FY '05 outlook.

Our Q4 and full-year advertising spending was 10.5% and 9.9% of sales, reflecting our committed to continue marketing our brands to consumers even in the face of commodity cost pressures. We continue to believe our strong marketing support at the level of about 10% of sales is important for our portfolio. We also continue to fully support our research and development efforts.

For the fourth quarter, operating profit margin decreased 220 basis points to 19.9% of sales, primarily reflecting the effect of commodities cost increases. For the fiscal year, operating profit margin declined 20 basis points to 18.7% of sales. As Jerry noted, we did not make the progress we had hoped for on increasing our margins, and in a few minutes I will discuss steps we're taking to help further mitigate the negative impact of commodities cost.

Fourth-quarter and full-year interest expense was higher than a year ago, as a result of the additional debt stemming from the Henkel transaction. Fourth-quarter other income was $8 million primarily resulting from an $11 million foreign currency gain as described in our press release. Previously, the cumulative currency gain was being deferred of the balance sheet as part of an intercompany loan arrangement; and we have now determined that the cumulative gain is more appropriately recognized in the income statement.

As Jerry mentioned our Q4 tax rate was slightly lower than anticipated and favorable with the year-ago quarter. This was primarily due to two factors. First, favorable differences between our prior year's final tax return payments and the amounts accrued for those liabilities; and second, due to increase tax benefits realized from research and development credits. The full-year tax rate was lower than the prior year's rate primarily due to the release of tax contingency accruals in the third quarter and tax benefits related to the Henkel transaction.

Looking at EPS per diluted share from continuing operations for the year, we delivered to $2.88 dollars versus $2.28, which is a 26% increase versus the prior year.

Moving on to cash flow, for the year we generated free cash flow, which we define as cash flow from operations less capital expenditures, of $614 million or 14% of sales, exceeding our long-term target range of 10% to 12%. Those cash flow results include the effect of the initial $88 million impact from tax settlement payments. Our free cash flow was higher than we had anticipated because our final tax settlement payments of $150 million were just made in July. For the year, cash flow from operations was $765 million and capital expenditures were $151 million.

Before I move on to our outlook, I want to recap our Cut Cost and Enhance Margins performance. Following $108 million of cost savings in FY '04, we delivered $104 million in savings in FY '05, which is above the original 85 to 95 million target we had established for the year. More than 85% of the savings was realized in gross margin through a combination of trade spending efficiencies, reductions in unsaleables, cost savings generated in procurement through our lean manufacturing efforts, and in logistics areas such as truckload utilization and direct plant shipments. All of these savings were used to help offset commodity cost increases.

I will now turn to our FY '06 outlook. As you saw in this morning's press release we confirmed the full-year outlook we communicated in May. But I want to take just a moment to highlight a number of factors you should take into consideration when thinking about FY '06 compared to FY '05. First, FY '06 operating margins and EPS will be negatively impacted by about $0.14 to $0.16 per diluted share from the impact of new equity compensation accounting rules, include the expensing of stock options. Second, we will continue to benefit from the February Glad price increases and will begin getting Clorox bleach pricing benefits as we go through FY '06.

As I mentioned, we're taking additional steps to help mitigate commodities cost increases, which include a 7% increase on our Glad food bags business in August, and a 4.5% increase on our cat litter products in October. By mid FY '06 we will have taken pricing on nearly 50% of our total portfolio over the last 12 months, which is an important part of taking the necessary actions to improve our margins.

Third, consistent with our 2008 financial targets, we're projecting another solid year of cost savings in the range of 85 to $95 million. However, the combination of commodities cost pressures offset by cost savings and pricing actions is expected to result in declining year-over-year operating margins in the first half of the fiscal year, followed by higher margins in the second half.

Fourth, as we have described in the past, our tax rate will vary by quarter. While we believe that about 34% is a reasonable assumption for the year, it is possible that each quarter could be somewhat higher or lower depending on the timing of transactions, resolution of annual audits and other tax matters, and the availability of tax credits that occur in a specific quarter.

In looking at FY '06, we anticipate that the first half of the fiscal year will reflect lower pretax profit versus year ago, while the second half will show higher pretax profit. This is driven by the following factors. First, comparison against the first half of FY '05, in which we delivered very strong top-line results, including 9% sales growth in Q2. Second, we will benefit from continued EPS accretion from the Henkel transaction, particularly in the first and second quarters due to the year-over-year lower share base partially offset by higher interest costs. The higher interest costs in the first and second quarters, along with the lost royalties and dividends from the transferred Henkel Iberica investment, will reduce pretax profit in the first half.

Third, the impact of costs associated with an exciting new product improvement on Kingsford charcoal that we anticipate launching in January. This new briquette lights more quickly, has longer cooking times, and achieves cooking temperatures faster than our current product. This is the first significant new charcoal innovation since our introduction of Matchlight charcoal in 1980. We expect it to help grow the grilling category and build our share. Pretax launch costs of 10 to $15 million, which will include consumer introduction, inventory impacts, warehousing, transportation, plant conversion, and other startup costs, will have a material impact on Q2. However, the new product is margin enhancing and we expect it to be margin accretive in the second half of the year.

Another factor impacting first-half profit is our outlook for continued rising commodities costs versus the first half of fiscal '05. We don't anticipate the rate of cost increases to slow until the second half; and at that point we will be comparing against the higher cost levels in the second half of fiscal '05.

Finally from a new products standpoint, we will continue investing to support the Clorox BathWand cleaning tool that we launched in April. We will lap the launch of the first phase of the Glad ForceFlex trash bags in Q1. Additionally we will be supporting the second phase or expansion of our ForceFlex technology into the Odor Shield line of trash bags which began shipping this month.

Let me provide more specific details regarding our FY '06 outlook, which as I noted a moment ago is the same full-year top-line and bottom-line targets we communicated to you in May. Starting with the full year, on the top line, we continue to expect FY '06 sales growth consistent with our long-term target range of 3% to 5%. This will be supported by our outlook for solid results across most of our eight domestic businesses; international, which is expected to continue growing faster than the company average; new products, including the Clorox BathWand tool launched in April, the August extension of our Odor Shield technology into the Glad ForceFlex line, the Kingsford charcoal improvement, and other new products we will launch later in the year; and the net benefit of the pricing actions I already mentioned.

As a reminder, we expect sales growth to be greater than volume growth, as we anticipate continuing benefits from premium priced product innovation, and that our pricing actions will have a moderating effect on volume growth while increasing dollar sales. At this point, we don't expect foreign currencies too materially impact our sales line or margins in FY '06.

In the first quarter, as we communicated in May, we expect sales growth to be within our annual target range of 3% to 5%. We expect second-quarter sales growth of 1% to 3% due to comparison with the very strong 9% growth we achieved in the prior-year quarter and due to reduced charcoal shipments in anticipation of the improved Kingsford charcoal in January.

Moving on to gross margin, our outlook anticipates gross margin improvement for the full year in the range of 25 to 75 basis points, with a year-over-year decline in the first half, followed by a year-over-year increase in the second half. Our CCEM initiative is expected to deliver about 85 to $95 million in FY '06 cost savings and contribute approximately 200 basis points to gross margin. Continued commodities cost pressure is expected to cause the first half decline.

Operating margin for the full year is expected to decline modestly due to the impact of equity compensation, including expensing stock options. The trend, however, is expected to be similar to gross margin, with year-over-year declines in the first half followed by accretion in the second half. Interest expense will be higher than the prior year due to the year-ago recapitalization of the Company followed the Henkel transaction. Due to the higher debt level as well as the rising interest rate environment, we anticipate interest expense to be in the range of 115 to $125 million for the year.

As noted a moment ago, we are assuming a full-year tax rate of about 34%, but with the understand that it will vary by quarter. Our tax rate could be as low as 30% in the first quarter depending on the resolution of certain tax matters.

Our current assumption is that the Company will continue its practice of repurchasing shares to offset stock option dilution. Our outlook for-full year earnings per diluted share remains $3.00 to $3.11. Our outlook for the first quarter continues to be in the range of $0.65 to $0.72. For the second quarter we anticipate earnings per diluted share of $0.50 to $0.57, which reflects startup costs for the Kingsford product improvement and the profit impact of lower charcoal shipments. As a reminder, the year-ago second-quarter EPS also included $0.13 from a onetime gain in continuing operations from our investment in the Henkel Iberica joint venture which will not recur in FY '06.

From a cash flow standpoint, we expect another fundamentally solid year, driven by continued discipline in fixed and working capital management. While Q1 will include the remaining $150 million in tax settlement payments, we will be repatriating approximately $200 million in foreign earnings during FY '06 in accordance with the American Jobs Creation Act of 2004. While this doesn't improve our cash flow as shown on our cash flow statement, it does free up these funds for reinvestment in qualifying activities.

We anticipate using our excess free cash flow, after dividends and repurchases to meet stock option dilution, to reduce debt levels. Excluding the tax settlement payments made last month, our goal is for free cash flow for the full year to be within our long-range, long-term target range of 10% to 12%.

Before I turn it back over to Jerry, I want to remind everybody of our focus on achieving our annual goals on a consistent basis. Our goal is to deliver on our full-year targets, understanding that there will be some variability by quarter. What is important is our ability to consistently deliver our annual results. For sales growth, double-digit EPS growth and free cash flow generation, we met our goals in FY '05. We did not achieve the progress we had hoped for on gross margin and operating margin; and that remains a key area of focus for us.

In FY '06 we expect some variability quarter-to-quarter, but we feel very good and remain fully committed to delivering our annual objectives. With that, here's Jerry to wrap up.

Thanks, Dan. Before I wrap up, I want to address some option exercise activity that you are going to see in the months ahead. We have several executives -- in particular myself, Larry Peiros, and Frank Tataseo -- who have stock options that we have all held onto for nearly 10 years, the full life of the grants. These options will expire before the end of '06, fiscal '06. So there is limited time when the options can actually be exercised before they expire.

In addition these options represent only a portion of the total options each executive holds. As a result of the expiration, each of us will be executing exercises and some sales over the coming months. It is important to note that even after these options are exercised and any shares are sold, each executive will still exceed Clorox's stock holding guidelines which help align senior management's long-term interests with those of our shareholders. The guidelines, which are described in our proxy, require certain executives to hold stock; and that excludes options, restricted stock, or unvested performance shares; but it required them to hold shares in excess of multiples of their salary.

Now to wrap up, we have good momentum followed the 5% sales growth for the year. We are also optimistic about new products coming later in the news fiscal year and about the basic health of our core brands, particularly our market share growth. We will continue to focus on improving margins. We anticipate improving margins by the second half of '06, due in part to the pricing actions we are taking along with the continued benefits of our CCEM program.

In particular, we're pleased with the execution of the Glad price increase and bleach pricing appears to be going well so far. Bottom line, adjusting for the impact of stock options expensing, we anticipate good performance in FY '06 against all of our long-term goals. With that, I will ask the operator to open up the lines for your questions.

(OPERATOR INSTRUCTIONS) Amy Chasen of Goldman Sachs.

First question is on just working capital. Your working capital trends were very impressive in the quarter. I wanted to know I guess what the catalyst was for the sharp improvement that we saw? What drove, it and whether you expect that to continue?

On working capital, the primary driver of the improvement in the quarter and actually the second half of the year had to do with improvement in receivables. That was driven by a terms change in our auto business. We shortened the length of our terms in the auto business. That has had very favorable effects on our Days Sales Outstanding and receivables.

Your inventory levels were down as well.

I'm sorry, the question was?

I believe that the inventory days were down as well. At least the way that we calculate.

On the days? Inventory in total is up slightly at the end of the year, and that is primarily driven by not necessarily days on hand but higher commodities costs that are being reflected in our raw and packed materials.

It just look to me like in the fourth quarter, and we can follow-up off-line, but in the fourth quarter it looks like your average days were down on a year-over-year basis. It was great. I was just curious whether there was something.

We will go back and check. I think they were about flat, but we can go back and check.

Okay. So then it sounds like on this accounts receivable that that will continue to benefit you until you lap that. When was that change made?

I believe we made that in the mid-year point. Mid fiscal year.

January (ph) 1st.

So we will see some continuing benefit on a comparative basis in the first half of the year.

Okay, great. The second question is, you're keeping your guidance the same for the full year, even though you are bringing your second-quarter guidance down, and you have this big expense for the new charcoal product that wasn't in the numbers previously. What are some of the factors that will drive the acceleration that you now expect in the second half, both in terms of sales as well as in terms of margins? I guess I hear the comp issues, but aside from that.

Amy, we had not actually given guidance for the second quarter. So when we gave our full-year guidance, internally at least before we just gave you our guidance, we had already anticipated the second quarter and then the net impact of that in the third and fourth quarter. So there is really, from our standpoint, there was no change. That is why there is no change for the full year as it relates to that.

I think -- I know we have a little bit of benefit -- I mean a little bit of negative coming from options expensing versus the original projections. But we feel pretty good at this point in time about the early stages of the bleach price increase. So we saw no need to look to make a change to the full-year guidance.

Okay. So terms of -- I guess let me just ask it a different way. What happens in the second half that allows trends to be better than the first half, aside from the commodity comp (technical difficulty)?

I think it is two primary drivers. One obviously is commodities, rising costs in the first half of fiscal, and we anticipate moderating increases in the second half. But also the impact of the pricing actions that we are taking. We're taking the bleach price increase in July. We're taking an increase on food bags. We are taking an increase on litter. It takes a little bit of time before those fully show up. But we should benefit from those price increases in the second half.

We will also get the benefit of the charcoal business improving in that second half because of the new product.

I guess lastly just in terms of the pricing and characterizing how that is going, are you seeing equal success in all of your categories with the pricing? Or are some categories realizing the pricing and witnessing less volume disruption than others?

At least from the pricing we have taken since the beginning of the calendar year, which includes the Glad price increases, everything so far seems to be going as well as or better than our going-in projections. Everything.

No variability from category to category?

The two most important categories are the bleach and the trash bag business; and both of those are going pretty well so far.

Great, thank you very much.

Kathleen Reed of Stanford Financial.

Your volumes, while up 4% in total, it seems like other than the cleaners, Glad, and charcoal you were down in your other categories. I don't see that you mentioned many new products for some of those other ones. Can you just talk about what is going to drive volume improvement in some of your other categories in fiscal '06?

Some of it just has to do with comps and a comparison in '05 versus the previous year in certain categories. In some cases there may be some category softness. For instance the salad dressing business has been unusually soft, the entire category. Our shares are just fine in salad dressing. Our all-outlet share for both salad dressing and barbecue sauce looks very good when we look at all outlet consumption. As you know, we do panel data that covers the non-track channels. So we feel very good about the basic health of our shares, but the category is very soft.

When you look at the cat litter business that is a comp issue versus the previous year. The same with the water, the Brita business, which is a comp issue. In fact, we feel pretty optimistic about the plans in place for Brita for the balance of the year. And our comp on the laundry care business was versus a very strong second half of the year last year.

So most of this I think is probably comparability kinds of things when we look at each of the businesses, which I think we are pretty good at projecting what is going to happen in businesses and categories. We feel confident about those. Plus you don't have all of the new products announced at this point that we will have out in '06.

But for instance in Brita, we launched an AquaView product for the faucet mount business, and we feel very good at least initially on its performance out in the marketplace.

Was that launched in your fourth quarter?

It was launched in the third quarter, I believe In fact just the most recent, and I don't like to look at the most recent shares and given any long-term trends out of that. But in the most recent share period, for the first time we were the market leaders in the faucet mount segment. I think that is a pretty positive trend, because that is the growing part of the overall water filtration business. We have a big share in that pour-through pitcher segment.

I think, though, from your third-quarter call Brita was also down because you had a really tough comp of up 21%. If I remember from that call, it was because you did a special promotion in your third quarter of last year that you were going to do in your fourth quarter this year. I just wondered if that promotion had been moved.

The promotion has not moved. There was some absolute weakness in terms of consumption on the Brita business. We still feel good. We have done an awful lot of strategy work on the Brita business, and the plans that we have a place and the things that are in place we feel very good about. That happens to be a pretty good growth business for us over the next fiscal year.

Okay, also on your cat litter, your comments (indiscernible) on that financial sheet on your website say that you had some increased competition in the cat litter category. I wondered how that is going to work if you're going to raise prices. I know that is in October, but just what your feelings are specifically in cat litter?

At this point, the competitor, the major competitor in that category is also taking pricing on that timing or maybe a little earlier timing. So we are following in that case. We will have to sort of see how that plays out as we go through the balance of the fiscal year.

Okay, great. Also you gave your CCE savings projection of 85 to 95 million fiscal '06. Are you also still expecting the restructuring for the Glad business to be in the 15 to 20 million range for '06?

Yes, included in our '06 outlet is the benefit from the restructuring charges that we took both in '04 and '05; and that is in the range of 15 to $20 million.

But that is in addition to that 85 to 95 of CC&E?

That would be included in that range.

Included in that? Okay. Just finally can you just breakout on your top line the 2% difference between volumes and sales? I know in your press release it was -- it's up (ph) slightly, up X, and then price? Is it mainly just like zero point something on FX; then it is really the 2 full points on price?

Are you speaking of the full year or the fourth quarter?

Sorry, just the fourth quarter.

The fourth quarter, we had -- on the top line we had a little bit of FX, probably about 60 basis points of FX on the top line. We had some slightly favorable mix in assortment, which was fairly small. Most of it is going to be -- we have a little bit of cost savings in there as well related to trade spending efficiency. But most of it is really the pricing. Pricing and FX are probably the two primary differences between volume and sales.

Right. Thanks very much.

Lauren Lieberman of CSFB.

Following up on Kathy's question actually on mix -- sorry, on the gap between volume and sales. In North America it was actually negative. What was the dynamic there? Or more negative I should say.

Steve here. If you look at the segment results that we disclose in the press release, I think what you're pointing to is a difference between volume and sales growth in the two North American segments. In the household segment, there was a decline in sales growth versus volume growth, primarily due to a lot of the introductory merchandising cost behind the new products that we had in the third and fourth quarter.

As Jerry noted, we had the AquaView product in Q3. We also had a new auto product at that time. Then probably most significantly we had the Clorox BathWand this last quarter. Any time you launch those new products you tend to have a lot of merchandising costs upfront which will reduce your initial sales relative to volume.

Alternatively, though, in the specialty segment, which is the other North American segment, I think you saw that sales significantly outpaced volume growth. That was thanks to the benefits we got from the Glad price increase.

Sorry, I was just referring to the household products. Then for the charcoal I guess relaunch it would be, or launch, in January, then should we be thinking about the third quarter having a pretty significant negative gap between sales and volume?

I don't think so. I think that those should be about comparable to each other. We're not taking a price increase on that product but the margins are accretive, because of the formulation of the product, which is a really improvement for consumers. So like a win-win on both sides of that. There will be very modest introduction since this is a replacement for the old product. Very modest new product spending going inside in the third quarter.

Most of the cost that we will incur will be in the second quarter, the run-up to the launch of the product improvement. This will be a margin accretive product and it will be accretive in the second half. So most of the launch cost will be in the second quarter.

International was definitely one of the bigger surprises this quarter. Is this now -- is it something just this quarter, I guess the last two quarters, or is this business now a high single digit, low teens grower?

I think that when we did our original strategy we projected it was going to be a little bit higher than the rest of the Company. I think that right now, that the environment, particularly in the environment in which we compete, which is Latin America and parts of Asia-Pacific, including Australia and New Zealand, the environment is pretty positive.

I also think that we have been -- we don't talk about it very much, but the reality is just in the fourth quarter alone, if you looked at every country and every new product that was launched, we launched 19 new products in the fourth quarter if you went on a by-country basis. So we're very active in terms of our innovation program in Latin America and Asia.

The basic health of the brands and businesses -- as they are for most companies right now in those developing countries -- is very good. So we're being very aggressive in terms of -- and we have fixed a lot of the core fundamentals of those businesses. So we have rationalized an awful lot of SKUs, and we have very solid brands, brand shares, and businesses in our international business right now.

So I am optimistic that we can probably, at least over the near term, without changes from the way things are right now, exceed what our current external expectations that we have given folks can be. Whether it is double-digit or whether it is slightly less than that, I am not sure yet. But we feel very good about at least the near term over the next couple of years' outlook.

Okay, great. Just one more thing on gross margin, the progression through the year. I understand the pattern first half versus second half. But would you say proportionately is it positive pricing that is more driving acceleration in the second half? Or is it the raw materials cost will be easier or start to normalize? Which one are you more reliant on, I guess?

I think both have an impact on the growth in the second half. Clearly commodities cost, we're expecting that to moderate; so that will have a fairly sizable impact in the second half. Then pricing will continue to ramp up as the other pricing actions phase in. We start getting the full effect from bleach; the litter price and the food bag price start to settle in. So we're going to be getting both benefit in the second half of the year.

(inaudible) on the charcoal business, we also by the end of December will be out of all of our contract packing, which was lower gross margin, into this new product which has a higher gross margin. So you get sort of a double benefit of that particular activity as we go into the second half.

Okay, all right. Great, thank you.

Connie Maneaty of Prudential.

Could you just comment on what the higher professional and legal costs were in the quarter? It is an odd thing to call out.

Yes, in our fourth-quarter results in admin spending we did have some higher professional services these, primarily related around audit costs, our Section 404. As you know, most companies are impacted by the costs of that implementation, and we were affected by that in the fourth quarter. On the legal fees side, it was really related to additional activity that we're doing around patent activity. So we had some costs associated with that.

Should we expect those to remain at elevated levels or was this --especially the patent litigation, is it confined to a certain time?

I think we should look at SG&A over the course of fiscal years. And over the year we actually delivered against the SG&A number that we expected. As we look at '06, we feel confident that we will continue to have SG&A growing slower -- other than the impact of options expensing -- growing slower than sales growth.

To be clear, Connie, the patent work is not litigation. It was new patent activity that we were investing in.

Oh, great.

Including some work in the charcoal business.

Do you have any gain changers for fiscal '06?

I don't think we have explicitly been talking about when -- yes; there is going to be a game changer in '06. It has not been announced yet.

So is it first half or second half? Is anything in the -- is it second quarter? Is that part of the reason why the costs are high?

No. You should assume it's in the second half.

Okay. That's it for me. Thanks a lot.

Chris Ferrara of Merrill Lynch.

I was wondering if you can give a little more color on the bleach price increase. I know you said execution was good. Is there a differentiation between that and whether competitors are following? I guess, what are you seeing on that front?

I think the big thing is, our objective would be to get all the pricing moved to the place -- the retailers ultimately make the choice on pricing -- but getting the numbers we would like to hit and hitting the gap between us and private labels. Because private labels pretty broadly have gone and taken their prices up comparable to ours. And ensuring that our price gap remains proportional to us. That was probably the most important part. The old early going on that is we feel good about all of the early signs of the folks that have already made those changes.

Got it. Sort of a related question, are you talking about with additional pricing coming in the back half, I know we generally expect volume to drop a little bit. But Glad has held on pretty well; I guess 3 isn't what it was running at before that, but it is still a pretty good number, I guess. If you expect in general for price gaps to stay pretty stable, where specifically would you be looking to lose volume and why? Or do you really have any specific guidance as to where you don't think price gaps might stay the same?

I just think we have to take a cautious view. There's two things. One is there is no assurance that the competitors will stay where they are. You have to play it out over time and let the market settle. While we don't expect that to happen, we are cautious about that.

Then the second factor is certainly the consumer. They have got to react to the new prices, and that actually is the more meaningful. When we look at volume and we look at our sensitivity analysis, it really is the consumer as they have to get used to these higher levels of pricing. There is sometimes a dip in consumption during some transition period. We have modeling that tells us that, and that is really the primary driver of the lower consumption. If the consumer can get over that faster, good.

Just one other thing on dressings and sauces. I know you said the category in general is down. Just looking for a little color on that. It is that something that you see happen sometimes? Could you relate it at all to macro factors? Why would you see that declining like that and why would you be confident that it's going to turn if it is a category issue?

It almost always has some other mitigating factors attached to it. One of them is lettuce and lettuce . Prices that has not improved much. So I think that we have got some issues surrounding the category as it relates to all vegetables and lettuce pricing in particular. So that right now, there is actually -- recently it is looking like the category is more flat than down. But it was down. So the question is, when is that going to shift? And will it shift completely as we go through the next fiscal year? But at this point, there are sort of factors outside of our control.

Thank you very much.

Joe Altobello of CIBC World Markets.

Actually most of my questions have been answered. I did want to go back; the tax rate next year I think you had mentioned, Dan, was this (technical difficulty) little bit different than the 35% you had mentioned back in May. I assume the savings there is going to offset the higher stock based comp spend for '06?

I am sorry, we had a little bit of a fuzzy in out there for a second. Can you repeat the last part of that question?

Sure. The drop in the expected tax rate for next year, that essentially offsets the unexpected increase in stock based comp for '06.

No, I don't think that is the way you ought to think about it. Essentially we are looking at an overall effective rate of about 34% for the full year. You should not view that one offsets the other. In terms of the stock option we have updated our outlook on the impact on that. Most of that is really just refinement of our assumptions around how we are going to calculate the values of those, and updating the numbers, and we believe we can absorb that increase inside the outlook we have already provided.

Okay, just to clarify, the 10 to 15 million of spending in Q2 on charcoal, that was incorporated in your original guidance of (inaudible) ?

For the full year.

That was already included when we provided our preliminary outlook for '06.

Okay, great. Thank you.

Wendy Nicholson of Smith Barney.

My first question has to do with the pre-tax income decline in the household segment. It sounds like you did an awful lot of advertising in that segment. But to have three of the four businesses in that segment show volume growth declines surprises me. Was all of the advertising put on the home cleaning business, and nothing on the others? Or is there something moving there that I am not understanding?

I think there is a couple of things that are impacting the results in household. Obviously, we have launches of new products including the BathWand, so there is support spending going on against that. We also have the impact of the health and wellness platform that we have been running. But one of the biggest impacts is really commodities cost impacts in the household segment.

Without pricing to offset it.

Without the pricing to offset it. As you know we are taking the bleach pricing starting here in July, and we did not have any of that pricing in, in the fourth quarter.

As we look forward, I know one of your competitors is launching a big household product, it looks like in the second half. Do you have something from a competitive standpoint you are going to be doing, either in terms of aggressive spending or promotion to offset that? Should we look for pre-tax income in household to be down for the next couple of quarters?

I don't thank you should -- well, the first half of '06 there is pressure from a commodity standpoint across the entire portfolio. As we go into the second half, I don't think you should look for anything unusual from a pre-tax profit standpoint. That we should be able to improve pre-tax profit in the household segment.

In terms of the competitive, we actually don't get into all the details of everything we're going to do on the competitive front. We feel very good about the plans that we have, particularly in the home care business, to ensure that we remain competitive on all fronts, whether it's our core brands or if it is our new product activity.

Okay. My last question is, it sounds like you're attributing most of your margin pressure to commodity prices. But if I look at your three segments on the full-year basis, household's pre-tax margins are down 80 basis points; specialty down only 60 basis points; and international is really where margins deteriorated sharply, down almost 200 basis points. But I would think that given the product mix shift -- or mix, whatever -- with international being mostly cleaners and laundry you would have a less commodity pressure there. So it seems like in the businesses where you have got really more exposure to resin, which is North America and the household group, you didn't see as much margin pressure. What am I not getting there?

International also includes -- in Asia-Pacific actually Glad is the biggest business in Asia-Pacific and particularly in Australia, but also in China. So it is a mixed portfolio. Down in Latin America you are right, I think it is predominantly home care. But there is pretty good pressure. I think all consumer product companies would say in the household segment the commodity pressure still exists there, whether it's on bottles or other kinds of commodity. Energy-related and energy driven commodities, or transportation costs. So we have the same kind of commodity pressure there as we do other places.

So it is not as if just your investment spending -- I know you've taken prices up in international. It is not as if your investment spending has been skewed to that market?

Not at all.

Okay, terrific. Thanks.

Ann Gillin of Lehman Brothers.

As you just described the charcoal rollout, it sounds like it is a complete changeover. So I just wondered if you could walk us through plans to make sure that inventories at retails will be depleted in time for that launch.

Part of the reason we are going to have some weakness in shipments in the second quarter overall, why we have a lower range, is really driven by the charcoal business. We intend to sort of watch how much we put into the system, the retail system, as we go into this second quarter. So that by the time we get to January we have a very sophisticated run-out plan, so that the majority of customers -- by the time the real season starts, which is in March and April -- everybody will have the new product at retail. So we are driving that with a lot of detail and discipline. But it does involve winding down on production of the old product, while gearing up on the production of the new product.

Okay. If we got an unusually great second-half calendar year, which you have had in the past in charcoal, how would you handle that? Would you be willing to just have supplies depleted? Or would to continue to ship through the end of the year?

We are in good shape from a production standpoint. We have been building capacity. I will tell you what; I am not going to go into the details of the product, because when I do, I am going to do that at a later time. But I think you'll understand when I go into the details of the product that our capacity has been improved with this new product. But the reality is we're going to have plenty of capacity to cover whatever we need to do from a new product or a shipment standpoint through the fiscal year, within all reasonable ranges that you could have from a sensitivity standpoint.

Okay. Then just bigger picture, Jerry, I think it's almost two years ago that you laid out a game changer idea to all of us. At the time you had a number of them in the pipeline, not all of which I think you expected would come to fruition. I know you have had a great success rate with those. I am wondering if you can just comment longer-term about what you have been doing to replenish that game changer pipeline?

I think one of the things is making sure that we have what we call technical platform or strategic product platforms. For instance, disinfecting is a major platform that has many dimensions of it. And now it relates directly to what we also call our consumer health and wellness platform. But thinking about all of the different ways you can deal with disinfecting as it relates to health and wellness, and I think that we have done some fabulous work in terms of continuing to replenish the supply of would you might call game changers in this area.

I would also say in our innovation program, and Glad is probably the best example of this, from a platform standpoint, that you not only lay out the one big initiative like ForceFlex or Press 'n Seal, but that becomes a platform -- for instance under stretchable plastic -- that you're able to continue to expand, that continues to drive, while they may not be what we call game changers at that point, but deliver margin accretive new products that we would describe as core growth. Such as the recent announcement of our ForceFlex with Odor Shield trash bags. The same thing with Press 'n Seal and its sealing benefits that I think you can see as we move down. That is a platform for continuing extensions, such as we did with the Press 'n Seal freezer launch that we recently launched.

As I look at the output from a game changer standpoint, I believe we will continue to be able to deliver our target of one per year. We have delivered more than that. But more important than that is I believe we can continue to deliver the kind of incremental net customer sales from our overall new product plan, including core growth, that is consistent with the kind of results that we have achieved this last two to three years.

That's very helpful. Thank you.

Bill Schmitz of Deutsche Bank.

On the last conference call I think you talked about three of the high flier businesses you were focusing on. So it was food, litter, and charcoal. You told us about the charcoal initiative. What is going on in food and litter?

It can not talk about it yet. We've done an awful lot of work on the strategy front on both the litter and our salad dressing and barbecue sauce business. We do have the high flier work completed on that. Sometime, probably either late fall or in the spring, we will be talking to you more about sort of what are the likely outcomes.

Some of the high flier work doesn't always mean technology and innovation. It also can be other kinds of brand-building kinds of activity. But I think at some point in the near future we can talk more about that. We feel very good about the plans that we have on those two businesses.

We don't spend a lot of time on it, but on the auto care category it looks like it's been two solid years of quarter-on-quarter volume decline. What is the problem with the category and how do you kind of get out of that rut in the next couple of years?

I think if I had to describe one business that is the most challenging over the past couple years it would be the auto business. First of all, if you looked at the total business, we have one piece of the business -- I don't think I will give you the exact percentage, but it's a pretty good size business, the STP business -- in which the business is declining. It is non-strategic and so we're managing that business as an optimized kind of business. So I think we will see continuing modest declines in that business; but that hurts the overall auto numbers.

The Armor All business I do think has some potential. We have been continuing to do high flier work on it. While we have not finished all of that work yet, I am hopeful that we can see some meaningful growth come over the longer term. As we look out over '06, though, I don't see much growth coming from the auto business. We will do some tactical things to basically keep it healthy; but I don't think there's going to be anything meaningful at least over the next year.

I will tell you that Armor All has picked up 7 points of share. We launched a new product, a gel product; and overall Armor All in its category has picked up about 7 points a share in the recent period. But I still am a little disappointed with its overall production over the past, in the near term, and probably over the next year.

Great. Can we just drill down a little bit more in international and talk about which countries were the outperformers there? Which ones lagged?

I think Argentina certainly has been a positive sign. I think it is for a lot of -- now, remember we took big hits in Argentina two or three years ago. So it continues to progress. Consumers are back in the market. The categories are growing. Our brand and brand shares are increasing. We're very focused on execution down there.

In Mexico, we have had some pretty good success with new products, and it has been a growing business. Our Puerto Rico business has been solid. Our Venezuela business, although not really large, may be making some of the best improvement overall in terms of just its absoluted (ph) shares and its growth both in top and bottom line. So we feel very good about Venezuela. Those are probably the primary.

Can you just tell us roughly how big Argentina is as a percentage of the international business?

I would have to calculate it. Steve, do we give out the specific detail on that?

Directionally we have shared that before.

It is over 10%.

Total Company it would be less than 10%.

Over 10% I am saying of the international business.

Correct.

Okay, thank you.

Linda Bolton Weiser of Oppenheimer.

In terms of the negative 3% pricing in the North American household, is there any way to kind of roughly break that down between the trade promotional spending and the unfavorable mix?

Just a second, Linda. I will tell you what. If you could get back to Steve on that, we actually do not have the details at that segment level handy with us right now here. But if you can get back to him, he can probably cover that for you.

Okay, thanks. That was my only question.

I think I will take one more question if somebody is in the queue.

John Faucher of JP Morgan.

Two quick questions here. First, can you update your accretion guidance for the Henkel transaction for the first half of fiscal 2006? It didn't sound like you gave official numbers there.

Secondly from a modeling standpoint, can you give us a directional idea in terms of where you think charcoal volumes will be in the second quarter as you work down the distributor inventories? In terms of a rough idea from a sales standpoint. Thanks.

On the first question related to Henkel, we have not provided any specific detail on that. I guess the way to think about it is we have had about roughly $0.15, maybe $0.16 of accretion from Henkel in fiscal '05. As you know we did that about midyear. So I think a reasonable estimate is to say to about double that accretion for FY '06; or about call it $0.30 or so in FY '06.

Some of the accretion that we will see -- it is over about $0.15 to $0.16 better '06 versus '05. A lot of that obviously will come through in the first half; and I have not broken it down specifically first quarter, second quarter. It is just roughly call it $0.15 to $0.16 in the first half. But you also have to keep the mind that in the second quarter, we will be on a comp basis comparing against the year-ago quarter that has the gain from the Henkel Iberica that is part of continuing operations. So actually, you might actually see a little bit -- on a comparative basis -- a little bit of dilution in the second quarter.

The $0.32 does or does not include the gain?

That does not.

Okay.

On the charcoal question, first of all you need to realize that the second quarter is always our smallest quarter on charcoal, no matter what. But it is likely to be in the 15% to 20% range that we would be down in sales in that period.

Great, thank you.

I would like to thank everybody for calling in, and we're going to be working hard on all the things that we talked earlier in the call. So thanks for calling.

This concludes today's conference call. You may now disconnect.