高樂氏 (CLX) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Clorox Company's fiscal-year 2006 second-quarter earnings release conference call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded.

I would now like to introduce our host for today's conference call, Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, you may begin your conference, sir.

Thank you. 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 with me today are Jerry Johnston, Clorox's Chairman and Chief Executive Officer, and Dan Heinrich, our Chief Financial Officer.

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

On today's call Jerry will start by providing some observations about the quarter, as well as a brief perspective on the near-term cost and pricing environment. Dan will then review our financial performance for the second quarter, followed by additional details supporting our second-half and full-year fiscal-year '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.

On today's call we will refer to certain non-GAAP financial measures including adjusted operating profit and free cash flow. Management believes that providing insights on these measures enables investors to better understand and analyze our ongoing results of operations. Reconciliation with the most directly comparable financial measures determined in accordance with GAAP can be found in today's press release, this webcast's prepared remarks, or supplemental information available in the financial information and results area within the Investors section of our website, as well as in our filings with the SEC.

Lastly, 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 filing 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 second-quarter results.

Thanks, Steve, and hello, everyone. As you saw in the press release, we had a very strong second quarter, with solid performance on nearly all fronts. On the top line for the quarter, we delivered 6% year-over-year sales growth. This result comes on top of 9% growth in the prior year's second quarter.

Notably, this quarter each of the three segments delivered 6% sales growth. On a fiscal year-to-date basis, each segment has sales growth of 5% or more. All of the segments of the business are healthy and are contributing to our results despite a very challenging commodity cost environment.

Now on the bottom line we delivered $0.55 in earnings per diluted share for the second quarter. These results reflect our strong sales growth, along with slightly better-than-expected adjusted operating margin and our tax rate. As a reminder, in the year-ago quarter, we reported $0.72 in earnings per diluted share from continuing operations, and that included $0.13 in onetime gains and equity earnings related to the Henkel transaction.

The year-ago quarter also did not include the expensing of equity compensation, which reduced this quarter's EPS by about $0.04.

Now Dan is going to cover our results in more detail when he comes on, but I want to reinforce something we have frequently talked about, and that is our focus on annual targets and long-term goals. As we have noted there are going to be quarters that come in somewhat higher, like our Q2; or they may come in lower than anticipated.

What is important to us is how our business performs overall and how we stay on track to hit our annual targets and our long-term goals despite the variances in the quarters. Based on our current performance and expectations for the year, we feel pretty good about where we are right now.

Before I turn the call over to Dan, there's two topics I want to address, commodities and pricing. The impact of inflation in the second quarter on raw and packaging material costs, transportation, and utilities in our manufacturing operations were severe, even though it was slightly less than we had anticipated. Nonetheless, the commodity environment remains pretty volatile.

On the energy front we have seen large swings in the price of oil, down to a low of about $60 per barrel before climbing back up to the mid to high 60s right now. Natural gas dropped from $14 per million BTU -- that is the unit of measure for natural gas -- down to $8, then back to $10, and now is somewhere between $8.50 and $9 this week.

In addition to these energy price swings, supply, following last year's hurricanes, continues to pressure major commodities for Clorox, such as the resin and chlor-alkali. As a result, costs remain much higher than a year ago and are expected to continue high for some time.

Now with that in mind, our current projections do appear to be slightly more favorable than previously anticipated, and we expect gross margins to go positive versus year-ago by fiscal year-end. But it is still quite volatile.

Turning to pricing, as previously communicated, we're taking price increases on about 40% of our portfolio in the third quarter to help further mitigate cost increases. These price increases went into effect January 1, except for a 15% increase on Glad trash bags that has just gone into effect February 1.

It is still very early, but right now we feel pretty good about where our pricing and our competitors' price responses at retail have landed. On the whole, at this point in time, things are shaking out pretty closed to our assumptions.

As we have previously discussed, our models project some initial volume and consumption declines in categories where we take price increases. Recent price increases including Glad last February and Clorox liquid bleach last July, have gone better than anticipated, with limited impact from consumers trading down to less expensive products. In fact we have had solid share gains on Glad trash all along, and our past 13-week shares on Clorox liquid bleach are actually up slightly.

We believe the strength of our brands, backed by innovation like Glad ForceFlex or our July Clorox bleach product improvement, along with our continued strong demand-building investment, enables our ability to take these needed price increases and still continue to deliver strong consumer value both near and long term.

At the same time, we recognize the consumer is under a lot of pressure, facing higher gas costs, winter heating bills, growing healthcare costs, higher interest rates and other things. So we're still going to remain cautious until we see how this all plays out over the next few quarters.

That being said, we do feel good about our results in the second quarter and are optimistic in our outlook for the full fiscal year. Now I am going to turn it over to Dan to provide some additional details.

Thank you, Jerry. Let me start by providing more detail about our top-line growth. We delivered strong 6% sales growth for the second quarter. Sales came in better than anticipated, driven by very positive momentum in December, fueled by a solid holiday season and late quarter consumption. Sales growth outpaced volume growth by about 4 percentage points, largely due to the benefit of price increases on Glad products and bleach taken earlier in the year.

The strong top-line performance in the quarter was across the board, as all but one business unit achieved sales growth in Q2. Notably, our charcoal business achieved volume growth versus our expectations of a decline as we prepare for the transition to our Kingsford charcoal product improvement. Charcoals' results were primarily driven by unusually warm weather in much of the country, which allowed barbecuing later into the year, and increased shipments in the areas affected by Hurricane Wilma.

Our Glad business achieved volume growth, despite price increases, due to continued share gains behind our ForceFlex innovation in trash bags and great execution of holiday promotions. The ForceFlex line of Glad products now has more than a 9% share of the trash bag segment in tracked channels, and Glad's overall trash bag share at 35% is 6 points higher than two years ago.

Additionally, our laundry business realized very strong sales growth, with volume coming in slightly up, delivering better than anticipated results following our July price increases, with what appears to be minimal trade buying in advance of the January price increase.

Food was the one business where sales decline behind category softness and softness in the salad dressing segment overall. Nevertheless, Hidden Valley's share of the Ranch segment continued to grow, achieving a three-year high on both a dollar and a volume share basis in tracked channels. We're well positioned for growth on Hidden Valley once the lettuce and salad category resumes growth.

Gross margin for the quarter came in at 41%, or down 210 basis points versus the year-ago quarter. This was slightly better than our expectations. While still extremely high versus a year ago, Q2 commodity costs were not quite as severe as anticipated. Transition costs for the Kingsford product improvement were at the lower end of our previously communicated expectations. The Company continued to deliver strong cost savings in the second quarter.

Let me break down the 210 basis point decline. Commodity cost impacted us by -400 basis points. The Kingsford charcoal transition cost contributed about 90 basis points to the decline. Increased logistics cost, including the impact of higher fuel prices, contributed about 90 basis points of the decline. Mix and other costs contributed the remaining 90 basis points of the decrease.

Partially offsetting these declines were 290 basis points of gross margin improvement, from our cut cost and enhance margin strategy, and about 170 basis point improvement from the net effect of price increases.

Selling and administrative expense was higher than the year-ago quarter due primarily to two factors. First is the cost of equity compensation. As a reminder, the prior fiscal year does not include this expense, as Clorox has been reflecting the incremental cost of FAS 123R since our current fiscal year began in July 2005.

Second, based on our improved results for the first half of the fiscal year and our anticipated results for the balance of the year, we reflected somewhat higher accruals for annual incentive compensation and also recorded a cumulative accrual for the 2003 performance unit grant in the second quarter. The 2003 performance unit grant is scheduled to divest in September. Based on our total shareholder return performance versus our peer group since the grant date, vesting in September is now more likely.

Our Q2 advertising spending on an absolute dollar basis was in line with expectations, although slightly lower on a percent of sales basis due to our strong top-line growth. On a percentage basis, advertising spending was about 9.3% of sales, and about 8% higher on a dollar basis versus the year-ago quarter, reflecting our ongoing commitment to demand-building activities despite the cost pressures we face.

R&D spending was up about 19% on a dollar basis versus the prior-year quarter, as we continue to strategically invest in innovation behind consumer insight. As I will mention in a moment, you will see the near-term results of this in a significant number of new products being launched in the second half of the fiscal year.

Adjusted operating margin came in a bit better than expected, though still at an admittedly depressed level of 14.2%. Our adjusted operating margin results reflect the continuing effects of commodity cost increases and the higher equity and incentive compensation costs I have already discussed. We anticipate that Q2 will represent the low point in this fiscal year's adjusted operating margin.

Second-quarter interest expense was about $15 million higher than the year-ago quarter, as a result of the additional debt stemming from the Henkel transaction and higher average short-term interest rates.

At about 31% our Q2 tax rate reflects lower than anticipated withholding taxes on the repatriation of foreign earnings under the American Jobs Creation Act and the settlement of some other state tax matters. These benefits will flow through to the full year's tax rate.

Net of all of these factors, earnings from continuing operations were $0.55 per diluted share for the quarter, compared with $0.72 in the year-ago quarter. As Jerry noted, year-ago second-quarter EPS from continuing operations included about $0.13 per diluted share related to the gain on the Spain joint venture investment we transferred to Henkel, as well as the associated venture earnings, royalties, and tax effects.

The current quarter includes about $0.04 per diluted share related to equity compensation expensing, which was not included in the year-ago quarter.

Turning to cash flow, cash flow from operations was about $142 million for the second quarter or 13% of sales. Free cash flow, which we define as cash flow from operations less capital expenditures, was about $96 million or 9% of sales. Our strong free cash flow results were due to solid earnings and good working capital management.

Now I will move on to our financial outlook for the balance of the fiscal year. Before I get into the specifics, there are several factors that you should consider as it relates to our outlook.

First, we're shipping a significant number of new products in the third quarter; and as a result, we will have high introductory spending to support these product launches. Last year, many of our new product launches were in the fourth quarter.

In the household segment we are launching our latest game-changer, Clorox Anywhere Hard Surface daily sanitizing spray. Other new products include Liquid-Plumr Power Jet drain opener; three new Brita Faucet Mount filter systems; and a number of auto care products for both the interior and the exterior of the car.

In the specialty segment new products include Glad ForceFlex Quick-Tie trash bags; GladWare containers with interlocking lids; Kingsford charcoal with Sure Fire Grooves; and three new food items.

The second consideration is the continuing volatility in the commodities markets. As Jerry noted, energy and energy-related costs continue to be volatile and supply remains tight.

Third is the impact of price increases being taken this quarter, which we anticipate will initially depress volume in affected categories while increasing sales. We're cautious not only about the price increases we're taking but also about the share impact of all price increases in the marketplace on the consumer. We need to monitor this closely over the next several quarters.

As we have mentioned in the past, we carefully model and analyze the effects of price of actions to understand pricing elasticities for each of the items, possible competitive responses, and a number of other factors. We target our price increases based on our view of the long-term cost structure for the brand, not to recover all near-term cost increases.

On average, our recent price increases are only recovering about 50% of the commodity cost increases we have experienced. Therefore, when commodity costs stabilize we expect our prices will still be at appropriate levels and remain competitive relative to the strength of our brands and the value we deliver to consumers.

With that perspective, let me now provide our financial outlook for Q3. On the top line, we continue to anticipate sales growth of 4% to 7%, which is slightly ahead of our long-term sales growth target of 3% to 5%. Positively contributing to our expectations for strong sales growth are the benefits of new products, price increases, and a shift in certain merchandising events that were in Q4 last year.

Introductory merchandising costs for new products and the volume impact of pricing, including the bleach and Glad price increases, are expected to partially offset these benefits. As we noted before, we increased prices on about 40% of our portfolio in the third quarter, including a higher than previously announced Glad trash price increase of 15% in early February, due to continuing commodity cost pressure in this category.

Our third-quarter outlook anticipates gross margin to come in about flat versus the prior-year quarter, and add a solid improvement versus our 41% gross margin level in Q2.

Selling and administrative expenses are expected to increase versus the year-ago quarter due to the incremental impact of equity compensation expense.

Our plans for Q3 reflect strong advertising support for new products and continued high levels of R&D spending to support our brands and innovation pipeline.

Adjusted operating margin is expected to decline versus the year-ago quarter due to the impact from equity compensation and increased marketing investments behind new products, but up sequentially versus Q2.

Our third-quarter tax rate is now anticipated to be between 32% and 33% depending on the timing of certain transactions and tax settlements.

On the bottom line, our third-quarter outlook for earnings is now $0.68 to $0.73 per diluted share, reflecting updated tax rate assumptions and significant investments behind new products. At this time we're making no material changes to our outlook for the fourth quarter as we need to see how pricing and commodities costs play out.

On the top line, we continue to anticipate fourth-quarter sales growth of 3% to 5% versus the prior-year quarter. Our Q4 plans anticipate gross margin and adjusted operating margin growth versus the year-ago quarter, although additional commodity cost volatility could further impact our margins.

On the bottom line, we continue to anticipate earnings per diluted share in the range of $1.04 to $1.14. As noted in the press release, our strong second-quarter results are being reflected in our updated full-year outlook.

On the top line we now anticipate full-year sales growth of 4% to 6%. We continue to anticipate full-year gross margin and adjusted operating margin to decline versus the prior year due to the high-cost environment we face and the incremental impact of equity compensation on adjusted operating margin.

As previously communicated, we expect cost savings to come in within a range of 90 to $100 million, and more likely at the upper end of this range. We continue to project full-year advertising spending at about 10% of sales. We're now assuming a full-year tax rate of about 32% to 33%. Interest expense is projected to be about 115 to $125 million for the full fiscal year.

On the bottom line, our outlook for full-year earnings per diluted share from continuing operations is now $2.97 to $3.07. Again, this includes an estimated incremental impact of $0.14 to $0.16 related to expensing equity compensation following the adoption of FAS 123R.

In summary, we're pleased with our first-half performance in a very difficult environment. As we look forward to the balance of the fiscal year, the commodity cost environment remains volatile; we have a significant number of new product launches and associated increases in marketing support; and we need to see the impact of the additional price increases we are implementing. Nonetheless, our businesses are healthy and we're very excited about the new products we will launch this quarter. Now let me turn it back over to Jerry.

The one key message I hope you'll take away from today's call is that our strategies are working and we are executing them well in a very difficult environment. Our consumer strategy is all about leveraging world-class consumer insights to build brands and drive innovation and growth.

I think it's very evident across the businesses. We see it laundry and homecare as we continue to enhance our health and wellness platform and deliver game-changers like Clorox Anywhere. We see it in Glad's momentum as consumers respond to innovation, including the stretchable strength of ForceFlex trash bags.

We're confident consumers will respond favorably to the new Kingsford charcoal with Sure Fire Grooves, and we're bringing some innovation to the water filtration category with three new faucet mount filters this quarter.

Now over the past few years, the external focus has really been on our communicating the largest new product introductions; what we call game-changers such as this quarter's launch. However, Q3 is a great example of the breadth of our innovation program, as we're launching new items in six of our eight domestic business units. Now we call some of these items in the new product development area core growth innovation, and they are very important to the continuing health of our entire portfolio.

Next, our cut costs and enhance margin strategy is working. We continue to expect cost savings this year at the higher end of our long-term target range. Among the areas delivering savings and expected to continue over the next several years are our lean manufacturing program; our efforts to optimize product formulas and packaging; initiatives to leverage common packaging elements across multiple products; and we continue to make progress on trade spending efficiency.

We're also making progress against our customer strategy. That is all about building our retail customers' businesses with our brands. We work very closely with our retail partners to devise strategies to grow sales and profitabilities of their categories. That has been particularly important during this period of significant pricing activity. Those retail customer capability efforts and relationships have been essential in this difficult environment.

In summary, we're pleased with our second-quarter results. Our brands and businesses are healthy. Our strategies are delivering results. We are excited about our second-half new product introductions. And we feel good about the business outlook long term. With that, I am going to open it up for questions.

(OPERATOR INSTRUCTIONS) Amy Chasen with Goldman, Sachs & Company.

First of all just on the pricing, can you provide a little bit of color, if there is any to give, in terms of which category you are seeing more success than others? Or should we just take away that you are seeing equal success in all your categories? Because it seems like your comments were relatively bullish about the pricing environment.

Yes, I think we are relatively bullish, knowing that we just launched pricing on 40% of our portfolio, and it's very early in terms of getting a real consumer read on that and consumption and category consumption.

If you looked at just what happened in the past calendar year, I think we would be bullish pretty much across our portfolio on the things where we did take pricing.

Now as we get into now this new calendar year, where we have some new pricing, about all I can be bullish about so far is the fact that the pricing gap that we have, and particularly in some key items like bleach, are landing about where we expected them to land. So the percentage difference in price hasn't really changed from where it was historically.

We're going to have to wait to see how consumers react to that. As you know, we have lots of analytics and modeling that we do in looking at those things; but we're happy that it came out where we had hoped it would come out there.

But we still have to play that out over the next six months. My personal view it is it's going to come out okay.

Okay, great. So then, in light of that, and in light of what we saw in this second quarter, is it fair to say that your second-half guidance is conservative?

I don't think so, in light of the fact that we really don't know what the consumer is going to do, and there is an awful lot of activity. We have got all these new products that we have been successful launching in. So as I looking at the third quarter, I feel pretty good about that. But then they have to play out for the balance of the year, including into the fourth quarter.

Then you still have, I think, appropriate caution in terms of looking at how the consumers will respond to this pricing. So I think our guidance is right in line with where it should be.

Then let me just ask you this, Jerry. Does the guidance assume a similar response to pricing to what we saw in calendar '06? Or does it assume that the consumer is more cautious and that volume weakens, relative to what you saw last year in the categories where you took pricing?

The assumptions assume that we have some category weakness. Category weakness. Now in some cases we may be willing to give up some share, but usually not willing to give up share. And based on what's happened so far, I think that while you could lose some share, I don't think that is probably in the model.

What we really are saying is that last year, it did better than our models say; and then as we look at calendar '06, what we are modeling is what we're projecting to happen. Could it be better than that? Yes. Could it be worse than that? Yes. But we're modeling what actually happened, not what happened last year.

Okay, so in other words, despite that experience, you are still -- okay. You are being conservative basically in your modeling.

I don't know if it is conservative. You are sort of in new turf here, and as prices go up, the consumer has to respond. And the two responses are, one, how do they respond from a category standpoint? Do they hold off buying for a while? Do they change their consumption habits? Ultimately, we feel confident that they will get back into normal habits there. But there's a category impact.

And then there is the impact on shares and who does better in all that; and we have to play that out.

Wendy Nicholson with Citigroup Investments.

My first question relates to the international business. Could you comment a little bit on not just the sort of sluggish volumes a little bit there, but more importantly on the profit margin contraction we saw in the second quarter? What contributed to that?

Dan, you want to cover the profit margins? Let me cover the volume piece first. First of all, I think our business is very healthy, particularly in Latin America. We did have a couple of things that happened in Asia-Pacific. One, we got out of a low-margin business in Australia, which was pretty meaningful. It was something that we actually wanted to do, and that impacts volume; but over the longer term I think that is going to be a positive for us. It was private-label contract kind of thing.

The second thing is, in the commodity environment that we have in the U.S., for those markets, the non-strategic markets that we sell export volume to, those prices have gone up quite a bit. There is an initial reaction, just like there always is in the categories when the prices go up, because we base our price based on the local costs in the U.S. that we export. There was some reduction in some of those non-strategic markets.

So neither of those things bothers me too much in the near term, even though they dampened the Asia-Pacific numbers.

Latin American numbers continue to be solid in terms of the kind of growth that we're getting on the business itself. Let me -- I am just grabbing some numbers here. We were up double digits in sales in Latin America, so I still feel good about that.

I do want to sort start moderating both the Latin American and the international numbers a little bit from where we have been, because that is been in the teens kind of growth. I want to moderate that. As I look at international, I think that it will continue to grow faster than the U.S., but probably not at the rate that we were seeing over the past fiscal year.

Is the exiting of the Australia business, is that something that's going to continue to pressure us for the next couple of quarters until we anniversary?

Just until you anniversary. It is mostly on the volume line, a little bit in volume and sales. It is not very meaningful when you look at the profit line.

Wendy, your question on the profit margin; there's a couple items there. The biggest is Henkel Iberica investment was in the numbers a year ago. Those were -- that is the investment in Spain joint venture, the royalties and the earnings from that, which didn't repeat this year because that was transferred to Henkel.

Also, while much lower than the U.S., we have seen some commodities cost pressure internationally as well. We also had some launch costs around new products around the world. So that is all combining there. But the biggest factor is clearly the Henkel Iberica investment that we transferred to Henkel.

But wouldn't that have pressured margins in each of the last couple of quarters? But margins were up last quarter.

The biggest item we had was the -- in the second quarter a year ago is when we did the Henkel transaction. So we are starting to anniversary that. But the biggest impact is in the second quarter.

Okay, fine. I've got it. Thanks very much. I appreciate it.

Chris Ferrara with Merrill Lynch.

Can you guys talk about the CCEM program a little bit? Am I right, is it pacing pretty far ahead of, I guess, a 90 or a $95 million potential growth rate or potential total proceeds for the year?

Chris, we look at it on an annual basis, the timing of when our cost savings come on can vary from quarter-to-quarter. So we continue to look at it less on a quarterly basis, more on an annual basis.

As we look at the annual basis, again, our target range was 90 to 100 million, and we still continue to feel very good that we will be able to deliver that for the full year, and likely at the higher end of that range. But still pretty consistent savings. It's just how they calendarize that we don't focus on as much. It's more delivering the total year savings.

So you are not necessarily pacing ahead of where you thought you would be at this point?

We are on track. These things come online at different times. We are on track to deliver the 90 to $100 million for the full year.

Got it. Then you talk about the operating income? I guess relative to your estimates coming in -- I know the EPS number is coming up a little bit -- but is your own internal operating income forecast coming up? Or is it coming down slightly? Or is it basically unchanged for the back half of the year?

Just a second, I'm going to -- grabbing something here.

We're looking up numbers, bear with us. Can you ask the question again?

Yes. Basically trying to figure out if, relative to your own expectations, if your op income forecast for the back half is coming up. Because I know your outlook EPS outlook is coming up. But it looks like the tax rate might be a little lower. So shouldn't it get at what you guys are thinking on operating income?

Chris, Steve here. I think on a big picture, from a big picture standpoint, our full-year operating income is coming up primarily because of the strength in Q2 that we have just delivered. But I think consistent with Dan's comments around our outlook for Q3 and Q4, there is not a big change in the back half of the year. The top-line numbers are the same.

The margin? Dan mentioned our outlook for gross margin in Q3 being about flat. I think that is probably a little bit less than maybe what some of you folks have. But that's pretty consistent with where we have been. All that is yielding a number that isn't changing significantly at the operating profit line.

Then just one other. I might be getting this wrong, but is your mix this quarter -- did it get a little bit worse sequentially? In other words, its impact. Did its impact to gross margin come down a little bit? And if that is right, why?

There is a little bit of mix effect, a little bit negative, in the quarter. Again it's larger sizes primarily is typically where we get our mix impact. Probably a little bit of mix as well in the international businesses, based on the country mix.

Got it, thank you very much.

Kathleen Reed with Stanford Financial.

Quick question on the charcoal. I actually was really surprised that it was positive. I know you said it was largely due to some warmer weather and Hurricane Wilma. But I think previously we were expecting, or at least I was, like a double-digit decline for charcoal; and I think you said it was up slightly positive or low single digits.

I just wanted to see if that was solely just on the base older products, or if you actually shipped any of your new product in the December quarter. Then I have a follow-up after that.

The volume was clearly better than we were anticipating on charcoal. We had -- and it really was primarily driven by the early in the quarters some consumption that came out of the -- both the hurricanes that happened in Houston and the hurricane that was in Miami. It did not happen with Katrina in September; but it did happen in the subsequent hurricane. That is something that we typically see.

We also had fundamentally better weather that went all the way through the year. I think that it is not very material, but my recollection is that either one or two customers wanted to have their shelf sets done in January, which is a little earlier than normal, on the charcoal business. But it's not a material number in terms of really impacting everything. They just wanted to get their shelf sets done.

That is the only product that I am aware of on the Sure Fire that went in December versus going in January and on.

And we were a little bit better on the transition to the new charcoal improvement late in the quarter.

So we should see most of the upside from the new charcoal shipments in your third quarter?

Absolutely.

Third and fourth quarters.

Look at this as we are clean from a -- we're starting fresh even though we shipped a little bit of transitional inventory on this late in the quarter.

So it's not even like a percent or anything on your top line?

No, absolutely not. Think of it as tenths of a percent.

Okay. Any other onetime items, restructuring charges, or anything going forward? Charcoal, the charges for charcoal should be completed now; or should we see any other additional charges?

Charcoal is completed, we are -- no significant charges in the second half as we look forward. Everything is reflected in our outlook, so nothing repeats. Obviously, a year ago we had some charges around the Glad plants, and those benefits that we had anticipated this year are being realized and are in our financial outlook.

Okay, finally, can you just elaborate a little bit more or just clarify? I think you were explaining something on the S&A line with either postponed a vesting accrual or something, and I wondered if that was a onetime event. I think you said it moved to September. So we should expect that hit in September? If you can just explain that a little better.

We have two performance unit program grants that are based -- the vesting on those units is based on our total shareholder return performance from the grant date over the three years of the grant; and it's comparative to our peer group.

These two performance unit grants are subject to the old accounting rules; they are not subject to FAS 123R. So the threshold that we have in accruing those grants is when we believe it's more likely than not that they will actually vest.

We reached a conclusion on our 2003 performance unit grant that it's more likely than not that those are going to vest. So we had a cumulative catch-up adjustment to accrue that. We have -- and those will, the actual vesting, measurement and vesting will happen this September.

We have one additional performance unit grant that was the 2004 grant that we have not accrued for yet. It's still a little early to believe that it is more likely than not to vest; so we have not accrued anything against that. We will continue to monitor that program in our total shareholder return. And at the point that we believe it's reached that threshold, we will do the accrual then.

So you already booked the accrual this quarter, but it will vest in September?

The actual measurement is in September, but we booked a cumulative accrual. We will continue to accrue against that over the next two quarters until the vesting date.

Okay, thanks very much.

Bill Schmitz with Deutsche Bank.

When you give us those cut costs, the cut cost and enhance margin numbers, and you have like the gross margin walk, does that include the gross to net savings in there? So is it more profitable promotional spending?

Yes, it does.

Yes it does, so the CCEM numbers in total could gross to net; it could cover anything that comes in the COGS lines; and it could cover anything that happens in the below the gross margin line that happens to be savings and efficiencies. That is how we manage that overall program.

How many more years are left on CCEM? Like of the 90 to $100 million per year?

As you know, our strategy only lasts until '08; but my guess is that '09, '10, '11 and '12 are still going to be as critical in terms of us having a formal program that identifies meaningful, large, step-change kinds of structural ideas that can continually enhance the margins of the business.

So while it only goes out to '08 right now, I think you would anticipate the next time we give a strategy presentation, there will be something around CCEM beyond that.

On the specifics, Bill, again we look at our lean manufacturing program; that is a multiyear event and has many years to go on that. When we look at optimizing our packaging and our product offerings, that is multiyear in nature.

But we still have in front of us a fair amount of efficiency that I think we can get out of our transactional systems that we have just put in place. Certainly we are focused on administrative efficiencies as well. So we see a very robust pipeline of savings opportunities in front of us.

Great, thanks. This might be minor, but I was wondering if this might be some of the reason you took down -- not really took down, but kind of tempered expectations in international. Has there been pressure for you to go along with these pricing accords in Argentina?

I think almost every company now has had meetings with the government. I happened to be in Argentina last week, so I can speak to it. But every company has gone in and had discussions with the government on selected items that they would hold their price or have a reduced price on.

We had those meetings with them. I think that, while it may have some modest modifying effect on Argentina's business, I don't it's going to be material to us when you look at all of Latin America in terms of that. But that would be just some of the tempering.

But I think probably my tempering of it in general is we're working on very high comps from the previous calendar year. I want to make sure we're not getting ahead of ourselves in terms of what I still think is a very healthy environment. But for us it is probably going to be one or two SKUs in Argentina that are involved in this.

Okay, great. Thanks very much.

Joe Altobello with CIBC Global (sic) Markets.

Just wanted to go back to something Dan, I think, said earlier regarding the top-line growth in the quarter. I think, Dan, you said that you did not see any retailers buying ahead of the price increase. I was curious what makes you think that, because if you look at the top-line number you gave us, your mid-quarter update, which I think was mid-December, you did about 240 basis points above that, most of which came from the last half of December.

Joe, when we look at -- we have controls in place in front of price increases where we do monitor the ordering patterns of our customers. We have put some controls in place to not allow very much in the way of advance buying in front of price increases.

We believe, it appears at least, based on what we have seen early in January, that there really hasn't been anything material in terms of any pull ahead in terms of the buying. So based on the procedures we use, as well as what we are seeing early in January, we do not believe there was any material advance buying in front of the price increases.

Joe, I am going to reinforce that, because, frankly, if we had buy-in against this we would be very transparent about it. There would be no benefit to us having a weaker third quarter than second quarter.

The fact is there just was some minimal amount of buy-in, both because of the controls we have put in place and because the environment at the end of December for a lot of retailers is not one where they even want to bring in inventory. The fact is, as we have looked at our January business, everything looks fine in terms of what happened at the end of December.

Joe, in terms of the upside versus the mid-December guidance we gave you, I think one of the businesses to emphasize there is the Glad business. A lot of our businesses don't get a lot of merchandising during the holidays, because it's just not appropriate.

But Glad typically does, because of big family gatherings and dinners and the need to store leftovers and so forth. The reality is we had great execution against our holiday program this year on the Glad business and it saw very strong results.

Okay. Secondly, just going back to, I think Bill's question earlier, regarding CCEM. It is probably a little early to get specific here, but as you look into '07, is there another $100 million potentially plus of savings next year?

It is a little premature to specifically target what that range will be. I think what I would say is when you look at the total four years of the program, the 350 to $400 million in savings that we had identified, that we're certainly on track to deliver that. Probably more likely be towards the higher end of that range.

Now in terms of exactly when it comes online and how we calendarize that, there is still more work to do around that for '07 and '08. But we still feel very good over the plan period in being able to achieve that range of savings.

Okay, great. Thanks.

Lauren Lieberman with Lehman Brothers.

My first question was about the home and laundry care business. Just kind of backing into it, it looks like home care as a portion of that business is up kind of high single digits, like 8%-ish. Anything in particular there?

One thing I noticed in the press release is a mention of BathWand, which previously you have kind described as a little bit of disappointment versus expectation. So was there any new distribution this quarter or something notable that changed?

In terms of the strength in the laundry and home care, you're right. The predominant portion of that was in home care. Laundry, as I think we mentioned earlier, was up just slightly, which we thought was quite positive given the price increase we took on bleach back in July.

I think specific to home care, let me start with BathWand. I guess the reason we called that out is that it is completely incremental volume versus a year ago at this time, because we had not yet launched the product.

But separate from that there's a number of other products, particular in the bath care area, where we've seen great success in the last year. They include Clorox disinfecting wipes; gains on Clorox Clean-Up, and again that is despite a price increase we took on that brand in July; Clorox disinfecting bathroom cleaner; and a few others as well. So it's really our success in the bath area under the home care franchise.

In fact I would like to add on to that because, I think it is meaningful. The BathWand has been a disappointment relative to some of the -- both the targets that we set and the expectations that we had.

On the other hand, a year ago at the same time we launched BathWand, we launched a line of Clorox disinfecting bathroom cleaner items at the same time. I got to tell you, we're delighted with our overall progress that we're making in the bath. Even if the BathWand was short of the numbers, the disinfecting bathroom cleaner items -- which consumers probably thought of as an easier way, a new way of thinking about cleaning their bathroom, even though they were more traditional kinds of products -- were somewhere in the range over the course of the last nine months some 2.5 times the expectations that we've had.

That conceivably could have had an impact on BathWand too. But the net of it is we feel very good about the continuous progress we're making in the bath. In fact, as I was looking I just asked our folks and laundry home care the other day to give me an update on what has been happening in bath. And in the last three years, if you looked at our overall dollar market share of bath cleaning products -- so that would include things like some Liquid-Plumr and Tilex and our toilet business -- back in '02 we had about a 17 share. Today, we're approaching a 30 share of the bath segment, and all of that incremental business is under the Clorox name.

So we feel very positive. A lot of that is driven by this continuing focus on consumer insights and how consumers think about cleaning, and it's paying off.

Okay, that's great. Second thing which is probably more for Dan is about debt paydown in your plans for the year. Because I had been modeling that debt came down a bit; and now it doesn't look like it has started yet. So I didn't know if that was the right thing to be assuming.

Yes, you should assume debt paydown for the full year. We were up a little bit in the second quarter. There is really a couple of factors there. The timing of our foreign earnings repatriation is shifted out a little bit more into the second half. We also have some seasonal build in our inventories that typically happen in the second quarter, particularly in light of the charcoal launch that we are doing.

We also, as you saw from our press release, we have finished the repurchase of shares to offset option dilution for the full year. We essentially did that all in the first half versus doing it ratably throughout the year, so that increased our short-term debt levels a little bit.

Plus we also had the settlement, the IRS settlement, in the first half. But as we look forward we will continue to see debt paydown towards the end of the year. Our guesstimate at this point is we will be about 2.3 debt to EBITDA type ratio by the end of the year.

Okay, great. Then just one more, which is just getting back to the issue of pricing this month. Have you guys modeled in any expectation of reallocation of shelf space at retail? That you lose any facings with your pricing at retail, either to other competitors who have been less aggressive or to private-label?

We usually try to accommodate any kind of changes that are going on; and in our business, they constantly change. So you could have one retailer who is adding on a new brand; and then you have to reallocate what is the impact of, one, the new brand or the new item or the changed shelf space.

But it generally is also offset by other positive things that are happening, which in the case of bleach happens to be the case. So as we look there we try to accommodate all of the data and information that we have, in terms of the way we think it will impact us. Usually those are judgment corrections to the modeling work that we have done rather than inputs to the model itself.

Okay, all right, great. Thank you.

[Alec Patterson] with RCM.

Yes, a couple of quick ones. Dan, the CCEM guidance, still around 200 basis points for the full year.

That is in the range, yes.

Okay. So that is what -- I am trying to square this what the roughly 280 you guys have done so far this year. This probably explains why your gross margin outlook in the third quarter is still a bit soft. You must have a significant deceleration?

I wouldn't view it as a deceleration of cost savings. Again, the timing of those come on when they come on, and it's been included in our financial outlook. As you look at the third quarter in terms of our margin perspective, again, we have a fairly high level of introductory marketing costs against new product launches, which is going to impact our margins. We still have the continuing impact of equity compensation in our margins in the third quarter. And commodity costs relative to a year ago still remain extremely high, so we have to work through that. But the cost savings timing is about what we had anticipated, and again we're on track for the full year.

I would like to reinforce that we will have variations on a quarterly basis on a lot of things. We could range from 9 to 11% on our advertising spending because of what we need to do in the business. We could have higher rates of cost savings that go on in one quarter. And no one quarter, unless we tell you differently, suddenly means a new trend either negative or positive; that we try to manage this over the course of the year and try to then give you an outlook that accommodates the things that are actually going to be different as we go forward, which is the case here.

The other thing, Alec, I would mention is the second quarter is our smallest or lowest sales quarter of the year typically, with the fourth quarter ending in June being the largest. So you can have similar types of dollar savings that seem to be higher basis point benefits on the cost savings line in the second quarter than you would in, let's say, the fourth quarter later in the year.

Okay, I am focusing on the full year. I guess the numbers I am looking at here do seem to imply, if you just trend line the first two quarters, you would be getting well above your 200 other basis points of improvement. So I just -- it's a timing issue. I just want to make sure I should not extrapolate the health of the cost savings in the first half into the second half necessarily?

That's right.

Okay. And secondly, there has been some talk about the pricing that has gone in so far in this quarter in the marketplace, and spotty competitor follow-through. And I was just wondering, Jerry, if you could speak to that a little bit in terms of what you are seeing, what you think maybe -- how does this play out and any thoughts you might have on that?

Yes, I think if you looked at the general trend -- now there could be minor differences here -- but competitively, particularly on the major price increases, the major items that we've had that are involved here that would have a real impact on us, our competitors have matched, have generally matched our price increases. So the net of that is that our relationship with those brands have both already happened or we expect to happen as this continues to play out.

Have they matched in terms of that is what we see on the shelf, or they've matched in terms of what they have taken to the retail trade?

Mostly for the purposes of this, I'm going to describe it as what they've taken to the retail trade. Some of what is going to happen at the shelf still needs to be played out, although my understanding at least at this point is that most of the bleach has already played out, even though we are only a month into it; that most of the retailers have already done their changes on both Clorox and private-label. But the Glad business, for instance, still has to play out over the next few months. And I don't know how long that will take to play out.

Yes, I guess I was thinking, too, Reckitt in particular seemingly dragging their feet.

Dragging their feet on -- ?

I guess Lysol and some of the other categories.

I actually can't speak. All I know is that they took their price up pretty substantially. I can't tell you any things that might be happening between them and their customers that would alter the timing of the increases or anything that plays out at retail. I just don't know.

Okay, and last question. This is sort of back to Amy's question on your guidance for the back half. I know it is probably unfair to use your ranges as a way to look at this, but implicitly with the raising of the guidance for the full year by $0.06 on the low end and a penny on the high end, but you are running about, I think, $0.08 to $0.11 ahead of where the first-half guidance was before this quarter, implicitly you lowered the second half by $0.05 to $0.07. Yet by quarter you have raised the low end by $0.02.

So there is kind of a -- I'm sure I'm missing something here -- but there is either a lowballing going on here, or something else. Help me out on that.

There is no lowballing going on. What you have in our financial outlook is our best point of view at this point in time as to how we think the second half is going to play out.

Certainly in the second half, we have a lot of new products. We have additional pricing. We have continuing commodities costs. So we have reflected in our outlook what we believe to be our best point of view as to what our ranges are likely to be over the second half.

There is a wider range in the fourth quarter because, again, there is still volatility on commodities costs and we need to see how this next round of pricing plays out. So we have a little bit wider range in the fourth quarter than we would typically have. But our outlook, that is our best point of view at this point in time as to what we think is likely to happen.

Do I have it right, Dan, that basically the raising of the low end of the full-year guidance is not necessarily jibing with what has gone on so far in the first half of the year and what you have implied in the quarterly guidance going forward?

Our outlook as we look at the second half, whatever strength you see in the first half is fully reflected in the full year. You have to recall we had a very wide range on the full year because of a lot of uncertainty that we had to get through here in the second quarter. We had the continuing impacts from the storms; we had commodities costs at unprecedented highs; we were still in the middle of executing price increases.

So that is starting to settle out. We are seeing less of an impact from the storms, but commodities continue to be volatile. But to the extent you see strength in the first half that we believe will continue for the full year, that is in our outlook.

But not clearly. Okay, thanks.

To the point that we did not raise the bottom by $0.08, only says that we continue to believe it's appropriate for us to use ranges, because things happen. And that we want to have a wide enough range to accommodate all of the things that we believe, at least with the information that we have, could happen during the next two quarters.

Okay, understood.

Linda Bolton Weiser with Oppenheimer.

Thank you. Just I have a question on the trash bags. We actually saw in some of our store checking that it looked like some of the private-label SKUs had actually moved up in price already. Do you think that that narrowing of the gap between the branded and the private-label might have helped your Glad volume growth in the December quarter?

Yes, I'm not sure we see that yet. Because if you looked at it broadly, their prices have not gone -- there have gone up, selectively, they have gone up; and conceivably during some period of time with those selected retailers where it's already gone up you could gain something.

But we don't -- when we look at the average gap even for the most recent periods, we just don't see a lot of change going on. It is modestly down. As we go forward, we're expecting the gaps to be about what they have traditionally been and will play that out from there.

Do you have any idea when the private-label price increases went through?

Let me check, I've got a little note here. You know, as you know, private-label has different arrangements with different customers. So they don't actually go up broadly with everybody at the same time. But in many cases, they went up in the -- my recollection was they went up in the November and December timing; and some of them in January. Remember this varies by retailers.

So that by the time we are in effect, which is the February 1 timing, we believe that most retailers would have both us and private-label up.

Okay. Just going back to Lauren's question on the BathWand, we actually thought we saw a price increase on BathWand at Wal-Mart from $8.54 to $9.64. Is that accurate and if so is that hurting the volume growth a little bit?

I actually don't know the answer to that question. It would be news to me. I am not aware of it. It could have happened. My guess is that that change probably isn't having a material impact on BathWand one way or the other. I'm just not aware of that.

To be clear, we did not take pricing on BathWand; otherwise we would have communicated it to you consistent with the other price increases we announced earlier last year. So if it is up on shelf, and we're not certain if it is, then that is more of a retailer decision.

Most of our analytics say that if you are between $8 and $10 on this thing, there is not a lot of price sensitivity in that range. When you get down below that, then there is.

Okay, great. Thanks a lot.

Connie Maneaty with Prudential Securities.

I have a couple of housekeeping questions about last year's third quarter, just to put this year's third quarter in perspective. Last year's S&A declined 14%. It was the only time during the year why it declined. Do you remember why that was?

In the year-ago quarter, SG&A is down; that is your question?

Yes, S&A, that portion of operating expense. S&A was down 14%.

I would have to go back an look. I don't have the year-ago analysis in front of me. You are correct, it was down; I'm a little less clear on the specific drivers. I would have to go back and look at that.

We (multiple speakers) do that off-line.

We can get that back to you.

Okay, then I have another question while you -- when you search that out. In your other line, there was an $18 million expense in the third quarter. All the other quarters had profit in them. So if you could search that out as well that would be great.

Are bath -- are bleach pen sales declining, or are they just coming in under budget right now?

I think there is a little weakness in general on bleach pen. So that that is declining. We are actually looking at that right now from a marketing standpoint to see what we can do to beef it up. It's been around for a while now, and there may be some new things we need to do. But it is declining right now.

Okay, great. That's all I had. Thanks.

This concludes the question-and-answer session. Mr. Johnston, I would now like to turn the program back over to you.

Okay. Well, thanks, everybody, for joining in. I want to make sure; I think there was some question surrounding whether we were being conservative or not in the outlook. My view is we're not being conservative. We're being totally appropriate in the environment that we are operating in right now, which is more volatile than we have seen historically.

I think we still have two to three more quarters of moving through the kinds of things that have gone on over the past six months before you get comfortable saying now we can go back to a more normalized approach to giving your outlook.

But nonetheless we feel good about where we are right now. I particularly feel good about the work that we have done on our strategies and how those strategies are being executed right now. So we have a positive outlook for the future. Thanks a lot.

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