高樂氏 (CLX) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Clorox Company fiscal year 2006 fourth-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 call is being recorded.

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 your conference.

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 Bob Matschullat, Clorox's interim Chairman and CEO; Larry Peiros, Group Vice President of our Household Group; and Dan Heinrich, our Chief Financial officer. Bob Matschullat is joining us from Europe, where he is traveling as part of a long-scheduled trip.

We're 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, Bob will start with some comments on the Company and several items in this morning's press release. Larry will then provide some business observations about the quarter, including perspective on the near-term cost and pricing environment. Dan will then review our financial performance for the fourth quarter, followed by additional details supporting our fiscal year 2007 outlook as communicated in our press release this morning. And finally, Larry will wrap it up and then we'll open it up for your questions.

On today's call, we will refer to certain non-GAAP financial measures including, but not limited, to 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 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 Investor 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 and our SEC filings for a description of important factors that could cause results to differ materially from management's expectations.

With that, I'll turn it over to Bob.

Thank you, Steve. Good day, everyone, and thank you for joining us on today's call. Larry and Dan will provide their comments on the business and financial results in a moment.

Before they do, I first want to address four topics, the overall state of the business, the CEO search, the cost we recorded related to Jerry Johnston's retirement from his positions as Chairman and CEO, and the charges we took related to historical stock option grants.

As you saw in this morning's press release, excluding the stock option charge, Clorox had a good year despite operating in a very difficult environment. Without a doubt, the single biggest challenge we faced was the third consecutive year of sharp increases in raw material costs. I'm extremely pleased with the way the Clorox organization stepped up to deliver a fifth consecutive year of cost savings greater than $100 million, and to execute price increases on more than 50% of the Company's products. Price increases and trade spending efficiencies served to boost year-over-year sales growth to 6%, just ahead of our annual growth goal of 3% to 5%.

Excluding divestitures, this is our fifth consecutive year with sales growth of 5% or better.

While the organization executed cost savings programs and price increases successfully, the benefits were simply not great enough to fully overcome the margin and profit impacts of the cost increases. As a result, gross margin, adjusted operating profit and adjusted operating margin declined versus the prior year.

Although the cost environment remains difficult, I continue to feel very good about the direction of the Company. New product innovation continues to look strong. We've refined consumer insights on each of our domestic brands, which guide our innovation and consumer communication plans.

Cash flow remains very strong, allowing us to pay down debt used to finance the reacquisition of more than 61 million shares of Clorox stock from former shareholder Henkel. And I have confidence in the Company's ability to deliver our full $350 million to $400 million of cost savings by 2008.

Moving on to my second topic, as previously communicated, the Board has formed a committee to oversee an internal and external search for a new CEO. As you would expect, this is the top priority for the Board. Now while I won't provide specifics about the process, we are making good progress. And you can be sure we're moving as quickly as we can while taking the time needed to ensure that we select the best possible person to lead the Company. Once a new CEO is chosen, we will announce it.

Turning to my next topic, as you know, Jerry Johnston had a heart attack in March. We're having a farewell celebration for him this afternoon with our employees, and I'm happy to report he's making good progress in his recovery.

As you saw in the press release included in our fourth-quarter results, our pretax charges of about $11 million, or $7 million after-tax, which is about $0.05 per diluted share, for costs -- the $0.05 is for costs related to Jerry's retirement from his positions as Chairman and CEO.

The charges include about $4 million after-tax related to (technical difficulty) accelerated vesting of stock options, performance units and restricted stock. And about $3 million after-tax for salary continuation under the Company's long-term disability plan, in accordance with the terms of the Company's stock compensation and benefits program.

Now the final topic I'd like to address before Larry comes on is the charge we took related to stock options. As you know, lately there have been numerous news reports regarding option granting practices at public companies. Starting in June, the audit committee of our Board elected to undertake a voluntary internal review of our stock option granting practices with the assistance of outside counsel.

The comprehensive review, which included periods beginning in the third quarter of 1996 through October 2004, has been completed. It identified no evidence of misconduct or intentional deviation from generally accepted accounting principles.

However, during the period reviewed, there were certain instances where the stock option granting practices should have resulted in the recognition of some stock option compensation expense and prior years being recorded under Accounting Principles Board Opinion Number 25.

As noted in the press release, we have concluded that the amount of stock option expense was not material in any prior quarter or year. Therefore, we recorded a cumulative non-cash charge for stock option compensation expense of about $25 million on a pretax basis or $0.11 per diluted share.

The $25 million a pretax charge includes two components. The first component is a $15 million charge resulting from the requirement to record equity compensation expense on stock option grants where the market price on the last day of the measurement period, typically two weeks, was greater than the stock option exercise price. $13 million of this amount relates to certain stock option grants to nonofficer employees that were made prior to October 2004. The remaining $2 million relates to certain stock option grants to officers that were made prior to December 2001.

We have determined that the Company's practice of setting the measurement date as the day used to set the exercise price was not fully in accordance with APB25. APB25 requires that the measurement date be the date upon which all approvals have been received and the number of shares and exercise price are known.

To be clear, this was simply an error in the application of APB25 accounting rules in determining the appropriate measuring date.

The second component is $10 million in pretax charges primarily related to a 2001 grant to officers. In this instance, we have concluded that the final approval of the grant may have been made within six months of the Company having repurchased stock options from these officers.

Under Financial Accounting Standards Board Interpretation Number 44, those options should have been accounted for using variable -- that is marked-to-market -- accounting. The Company and the Board intended to complete all approvals outside of the six-month period. However, insufficient documentation exists to definitively say the final approval did not fall outside this period.

It's clear in reviewing this that it was the intention of the compensation committee of the Board to issue the options outside the six-month period. But again, due to the use of the wrong measurement date, the final approval fell within the six-month period by a few days. It was simply an error.

Now before we move on, there are two important points I'd like to emphasize. First, we regret those errors and that they occurred. But the review is completed and I want to emphasize that it did not identify misconduct. These were unintentional errors in the application of accounting rules to our option granting practices, and these practices were changed for all officer grants after November 2001 and all nonofficer grants after September 2004.

And second, when you add this up over 10 years, the non-cash charges are not material to the Company's results in any single period or on an aggregate basis over the cumulative period reviewed.

With that, I will turn it over to Larry, who will provide perspective on our fourth-quarter business results.

Thanks, Bob. In a moment, Dan will be reviewing our financial results in detail. But before he does, I want to provide some perspective on the business in three areas -- first, commodities; second, pricing and cost savings; and third, brand building.

Starting with commodities. As you know, the biggest factor impacting our results in fiscal '06 was the unprecedented sharp increase in commodities driven by increasing demand and exacerbated by the hurricanes last fall. To put this in perspective, commodity and logistics increases cost us about 440 basis points of margin year-over-year, a very large impact and one that we did not fully anticipate.

Moreover, in fiscal '07, we expect to see another year-over-year commodity increase, with the greatest year-over-year increase in the first half of the fiscal year.

Moving to pricing and cost savings. The organization responded quickly to the commodity situation with pricing actions and a step-up in our cost savings program. You already know that we took pricing of more than half our portfolio, including double price increases on two of our biggest brands, Clorox Liquid Bleach and Glad Trash Bags.

We executed our pricing actions flawlessly, and in nearly all cases, the competition followed with price increases of their own.

Volumes on affected brands have declined, as predicted by our pricing models. And our overall company volumes have been about flat, while sales have grown nicely. We expect a variance between volume and sales growth to continue through the first two quarters of fiscal 2007, with overall volumes likely to remain about flat.

We still believe the strength of our brands support these pricing actions and we are confident that consumers will remain loyal to our brands over time, given the strong consumer value and performance they deliver. We are expecting a return to meaningful volume growth in the second half of fiscal '07, as we fully lap FY '06 pricing actions.

In the area of cost savings, we delivered $111 million of savings, well above our original target. As Bob said, this is the fifth consecutive year of generating at least $100 million in cost savings. Unfortunately, our substantial pricing and cost savings efforts did not fully offset commodity cost increases and other inflationary pressures.

Fiscal '06 gross margin declined about 100 basis points, and the Q4 gross margin declined about 40 basis points. Going forward, we are projecting to grow margin in fiscal '07, with most of the gain coming in the second half.

Finally I want to talk about brand building, a hallmark of Clorox. I'm proud to say that despite the commodity cost pressure, we stayed true to our strategy in growing our brands. We are applying new and better consumer insights across all of our businesses. We maintained our advertising and investment at about 10% of sales. We grew our R&D investment, continuing to improve existing products and launching new ones.

We introduced Clorox Anywhere daily sanitizing spray and Kingsford SureFire charcoal briquettes in January. Clorox Anywhere has been a slower burn than anticipated. It is tracking below our trial objectives, but continues to get extremely positive ratings from consumers. Kingsford SureFire is meeting its objective and helping us to grow share in the charcoal category.

Late in Q3, we launched Fresh Step and Scoop Away cat litters with activated carbon. Both of these products are off to a very strong start, driving a double-digit volume gain for cat litter in Q4.

In late Q4 we started shipping new Clorox Ultimate Care premium bleach. We also launched Brita refrigerator replacement filters in partnership with Sears stores, extending our strong equity into a rapidly growing segment of water filtration.

In addition, we continue to build our capability to deliver value-added services to our retail customers. Clorox was ranked seventh out of 200 manufacturers in a 2005 Cannondale study, which provides feedback from a broad base of retailers. This is the second year in a row that we have made the top 10. Our customer strategy is clearly working.

To conclude, operating results were solid in Q4 and we had a very good year in a very challenging environment. Commodities impacted us dramatically, but we have diminished the financial impact with aggressive pricing actions and greater cost savings. We have stayed true to our strategy of building our brands, and we believe that is the right choice.

I'm very proud of the organization's ability to execute in these challenging times. With that, I will turn it over to Dan.

Thanks, Larry. I'll start by providing a few more details about our top-line growth. We are pleased to have delivered strong fourth-quarter sales growth of 5%. We are also very pleased to have delivered 6% sales growth for the year, which was above the upper end of our target range. Importantly, we realized fourth-quarter sales growth in each of our business unit, supported by price increases.

Overall for the quarter, volume was essentially flat. In the household segment, fourth-quarter laundry care, home care and Brita lines declined as anticipated, driven by the short-term consumption impact of price increases. At the same time, auto care volumes increased nearly 10% due to increased merchandising, new advertising for Armorall products and continued success with the STP brand's "Saves Gas" campaign.

In the specialty products, segment cat litter shipments were up sharply for the quarter behind the third-quarter introduction of Fresh Step and Scoop Away cat litters with activated carbon. Kingsford shipments were up, and market share trends were strongly positive behind the Kingsford SureFire product improvement.

Food volumes were down, primarily due to category softness driven by increased lettuce prices following early-season rain. Glad volumes also declined as anticipated, largely driven by the impact of price increases.

Gross margin for the quarter was 43.7% compared with 44.1% in the year-ago quarter. Let me break down the 40 basis point change versus year ago for you. Commodity cost negatively impacted us by 300 basis points. Manufacturing and logistics variances, including diesel, impacted us by a -120 basis points. Substantially offsetting these declines was 190 basis points of gross margin improvement from the net effect of price increases and about 180 basis points of improvement from our cost saving strategy. All other factors contributed another 10 basis point of benefit.

On a full-year basis gross margin came in at 42.2% for a net decline of about 100 basis points. We anticipate improving trends sequentially in fiscal year 2007, although we anticipate a year-over-year decline in Q1, with gross margin expansion beginning in Q2.

Fourth-quarter selling and administrative spending increased versus the year-ago quarter on a dollar basis and at a percent of sales basis. Three items contributed to this increase -- $25 million related to the correction for stock option accounting errors; $11 million for costs related to Jerry Johnston's health-related retirement from his positions as Chairman and CEO; and $8 million in incremental cost related to the impact of equity compensation accounting under FAS 123(R).

Full-year selling and administrative expenses also increased on a dollar and percent of sales basis, driven by the same three factors. Excluding the charges for stock option accounting and CEO costs, fourth-quarter selling and administrative spending was about flat on a dollar basis versus the year-ago quarter.

Our Q4 and full-year advertising spending were about 10% of sales. On a dollar basis, fourth-quarter and full-year R&D spending were up about 8% and 13%, respectively. Despite ongoing cost pressures, we remain committed to demand building investments, innovation and supporting our new products.

Fourth-quarter adjusted operating profit margin declined about 180 basis points to 18.1% compared with the year-ago quarter. For the fiscal year, adjusted operating profit margin was 16.8% of sales, a decline of about 190 basis points. These year-over-year declines reflect the impact of commodity cost increases, the correction for stock option accounting, costs related to our former CEO, and the incremental costs related to the impact of equity compensation accounting under FAS 123(R). Excluding the charges for stock option accounting and CEO costs, fourth-quarter adjusted operating profit margin was 20.8% of sales versus 19.9% of sales in the year-ago quarter.

At 32.5% our Q4 tax rate was slightly lower than anticipated, primarily due to the ability to realize additional foreign tax credits and additional benefits realized from domestic manufacturing deductions.

Net of all these factors, fourth-quarter diluted EPS was $0.92 compared with $1 in the year-ago quarter. Excluding the $0.11 impact of the correction for stock option compensation expenses, fourth-quarter diluted EPS was $1.03.

For the full year, diluted EPS $2.90. Excluding the $0.11 impact of the correction for stock option accounting compensation expenses, full-year diluted EPS was $3.01. As a reminder, Q4 and full-year EPS results include about $0.05 for CEO costs. Excluding charges for both the historic stock option accounting and CEO costs, our fourth-quarter and full-year EPS results were $1.08 and $3.06 respectively.

Moving on to cash flow, for the year, we generated free cash flow of $342 million, or 7% of sales. As a reminder, we define free cash flow as cash flow from operations less capital expenditures. Excluding the $151 million tax settlement payment made in July 2005, free cash flow would have been $493 million, or about 11% of sales, which is within our annual target range of 10 to 12% of sales. In the fourth quarter, we also completed repatriation of funds under the American Jobs Creation Act.

Let me now turn to our fiscal year 2007 outlook. As you saw in this morning's press release, we confirmed the first-quarter and full-year outlook we initially communicated in May. I want to highlight several factors you should take into consideration when thinking about fiscal year 2007.

First, as we've noted, we anticipate that our first-half volume results will continue to be impacted by the price increases we took in fiscal 2006, as consumers adjust to higher shelf prices. Second, as noted in our press release, we anticipate absorbing about $12 million to $15 million in pretax charges, or about $0.05 to $0.06 per diluted share, primarily related to restructuring a portion of the Company's information technology services.

Specifically, we are looking at ways to achieve virtual scale, reduce costs and increase resources for innovation and brand building. To be clear, we haven't made any final decisions yet. However, we are looking at the potential of shifting some IT activities to a third party that may be better equipped to provide them and at a lower cost than we can.

Any decision will ultimately depend on our ability to reach a definitive agreement with a service provider and will require Board approval. But we have included the estimated potential impact and we wanted to identify it so that you had a better sense of some of the costs embedded in our outlook.

Third, as we communicated in our May earnings release, we anticipate about $0.05 per diluted share due to the second year of incremental costs related to the impact of equity compensation accounting under FAS 123(R).

Fourth, we're projecting another very solid year of cost savings in the range of $90 million to $100 million, which equates to about 200 basis points of margin improvement. Our outlook is that the combination of anticipated commodity costs, offset by cost savings and the ongoing impact of pricing, will result and slightly lower year-over-year gross margin in the first quarter, followed by higher margins in quarters 2 through 4 and an overall increase for the year.

With that, let me provide you more specific details regarding our fiscal year 2007 outlook. Starting with the top line, we continue to anticipate full-year and first-quarter sales growth of 3% to 5%, consistent with our long-term target range. Contributing to this is our outlook for solid results across our business units; new products, including our improved cat litter introduced in the third quarter; the fourth-quarter launch of Clorox Ultimate Care premium bleach and other new products we anticipate launching in fiscal '07; the net benefit of price increases we took in the second half of fiscal 2006; and continuing trade spending efficiencies.

Our outlook anticipates gross margin improvement for the full year, but first-quarter gross margin will be slightly down given the current commodity cost environment.

Advertising for the year is anticipated to increase on an absolute dollar basis. As a percent of sales, advertising is projected to be about 10% for the year, but will vary by quarter.

We anticipate adjusted operating margin expansion for the full year, and that it will follow a trend similar to gross margin -- that is, down slightly in Q1, followed by growth in quarters 2 through 4.

We anticipate interest expense will be lower than the prior year due to lower average debt levels, partially offset by rising interest rates. Our outlook is for interest expense in the range of $115 million to $125 million for the full year.

We are assuming a full-year tax rate of about 34% to 35%, but with the understanding it will vary by quarter.

Our outlook for full-year earnings per diluted share remains $3.20 to $3.30. Our outlook for the first quarter remains $0.67 to $0.73. We're also assuming another year solid year of free cash flow generation, in line with our annual target of 10% to 12% of sales.

Now I'll turn to our second-quarter outlook, which we're providing today for the first time. Our top-line outlook is for sales growth of 3% to 5%, consistent with our long-term target range, but likely at the lower end of the range as we lap the year-ago second quarter, in which we delivered strong 6% sales growth.

As noted, we expect sales growth to outpace essentially flat volume due to the ongoing impact of price increases.

Our second-quarter outlook assumes that more than half of the potential restructuring charges will fall in the second quarter, with the balance in Q3. A large portion of this will be reflected as restructuring cost on the P&L, although a portion will likely be recorded as part of cost of goods sold and selling and administrative expense.

We anticipate gross margin will improve in the second quarter versus the year-ago quarter due to the benefits of cost savings and price increases, partially offset by commodity cost increases.

Advertising and research and development spending are anticipated to increase over the year-ago quarter to support core brands, new products and our innovation pipeline to drive growth. Our outlook is that adjusted operating margin will increase slightly in the second quarter.

We anticipate that our second-quarter tax rate will be about at our historical level of 34% to 35% versus 30.5% in the year-ago quarter.

Net of all these factors, our second-quarter outlook for earnings per diluted share from containing operations is $0.48 to $0.54. Again, this includes costs related to the potential restructuring and healthy advertising levels.

Overall, we feel comfortable with the ranges in our financial outlook. That said, the commodity cost environment remains volatile and consumers continue to experience economic pressure. Of course, we will continue to closely monitor these factors. As we look to the second half of the year we anticipate an improving environment.

Before Larry comes back on, I'd like to make one final comment. If you'll recall in May 2005, about 15 months ago, we communicated our initial outlook for fiscal year 2006, which was for diluted EPS in the range of $3 to $3.11. Our plans at the time did not contemplate the significant run-up in commodities, nor the extensive pricing actions we took.

If you exclude the impact of the stock compensation correction and the CEO expenses, we delivered $3.06 for the year, in the middle of the original range, which I believe is quite an accomplishment in view of a very difficult environment. The entire organization executed very well in fiscal year 2006 while staying on strategy.

As always, we are focused on meeting our annual goals. While quarterly results may vary, as they did in fiscal 2006, we remain very focused on our fiscal 2007 target of $3.20 to $3.30 in earnings per diluted share.

With that, I will turn it back over to Larry for wrapup and Q&A.

Before we go to Q&A, let me recap what we hope you'll take away from today's call. First, our business is fundamentally healthy. All business units grew sales in Q4. We have recent innovation in every business unit and we had another great year of cost savings.

Second, while we continue to face strong commodity headwinds, we are confident that the continuing benefit of pricing actions combined with strong cost savings will allow us to grow our gross margin in fiscal '07.

Third, we remain true to our strategy in building our brands. We will continue to invest in advertising at high levels and continue to drive innovation that delights our consumers.

Finally, despite the anticipation of ongoing cost pressures, our first-quarter outlook remains unchanged and we are committed to delivering our full-year EPS targets.

With that, I will ask the operator to open up the lines for your questions.

(OPERATOR INSTRUCTIONS) Bill Pecoriello of Morgan Stanley.

Good afternoon, everybody. My first question on commodities in the quarter with the gross margin down, and you were originally expecting it up, can you talk about which particular commodity had created that extra pressure versus forecast in the quarter? And looking out into Q1 and Q2 when you see the gross margin improving sequentially, is the raw material pressure -- we should see it less pressure than the 300 basis points going into Q1?

Yes, Bill, on our commodities, as we look at the quarter, we did anticipate that we would have some gross margin expansion in the fourth quarter. Commodities cost actually came in about where we anticipated they would be, as did our pricing actions and our cost savings. Versus our anticipation for the fourth quarter, the weakness in our gross margin more had to do with a mix issue really than commodities being beyond our expectations.

We had a little bit of a mix issue in our international businesses and we had a couple of our higher margin businesses, specifically our Brita business and our food businesses, being a little bit softer to our expectations. So the fourth quarter issue had more to do really with a mix issue than our commodities being higher than we anticipated.

As we look out into the first half of fiscal '07, obviously we still have not anniversaried the impact of the storms and the run-up of commodities. So we are still anticipating a relatively high level of commodity costs, particularly in the first and into the second quarter. In the second quarter, we do start to lap the impact of the storms from a year ago, and we are expecting margin expansion in the second quarter.

Now as we look at our specific commodities, we have seen resin stabilize of late. I think we talked a little bit about that on the last quarter call. But it's still at very high levels. And even at the levels that we see today, there are some announced price increases in the market related to resin, and it's always a question as to how much of that will ultimately stick. But we are seeing more upward pressure right now in resin versus where we are today.

We also are being impacted -- again to your question on first quarter and second quarter -- by increases in some of our other commodities. Certainly resin does get a lot of attention with respect to us, but we have other cost increases that we're absorbing. And in particular, cost increases related to chlor-alkali and also we're seeing increases in some of our other more minor commodities, but they still impact us -- things like pine oil.

Dan, if I could just also ask on the pricing, you had mentioned pricing up at over 50% of your volume. When you had talked about 40% in the past, has there been any incremental pricing? And then in fiscal '07, do you think you will need incremental pricing?

I think the pricing we took in January was about 40% of the volume. There is some other pricing actions we took previous to January that get us up beyond 50%. At this point, we haven't announced any kind of broad-scale pricing for fiscal '07. For competitive reasons, we wouldn't talk about any future pricing actions that we haven't previously announced. But the hope would be that we are taking a lot of pricing action in fiscal '07.

Okay. So the gross margin guidance that you've given anticipates the sequential trend in commodities, given that forecast, and the pricing that is already in place?

Yes, essentially that is the case.

Thank you very much.

Kathleen Reed of Stanford Financial.

Good afternoon. First, just a clarification question. When you initially gave your fiscal '07 guidance back on your May call, had you already forecast at that time doing the IT restructuring? So this isn't something new for the Company; this is just the first that we're hearing about it.

Kathleen, you are right. The $3.20 to $3.30 that we gave on the last earnings call did anticipate potential restructuring charges. We are just at a point now we're in a position to talk more about it. But the original range did contemplate those restructuring charges, potential restructuring charges.

So therefore if they don't occur, then we would expect that you would come in a bit higher than that range?

If its is finally determined that we don't move forward with the restructuring, then yes, I think that would be correct to assume.

Okay. Anything that just prompted you to decide that now is a good time to start to outsource some of your IT? Was there any event or something that you had -- was it something that you had used a lot of your other cost savings and this is a final area for you to tap? Or if you could just give us a little more information on how you came about that decision.

Let me mention one thing -- this is Bob Matschullat. I mean, understand that people are our single most important resource, and these people are dedicated, very good people. And we depend on them, as well as all our other employees.

Having said that, we are also responsible, obviously, to our shareholders to save cost wherever we can. And IT is an area that we have been examining for some period of time and we will be making a decision on this very soon. But we've got to be very responsible about costs in that area. And it's something that we think we need to look at all savings.

The only thing I would add to that is, if you recall a couple years ago we went through what we call the Delta conversion, which is to convert to SAP and Siebel. And that actually provides us with a platform to look at additional cost savings, and so we are continuing to look at that.

Okay. On the flip side of taking additional pricing in fiscal '07 to combat commodities, is there any likelihood, due to just the volume softness -- I know you said this was -- the volume being flat was what you had forecast and another flat couple of quarters. Anything that would make you or any categories that you are considering rolling back some of the pricing that you've already taken?

I think the first thing I would say is that the pricing effect has been basically right in line with all of our estimates. So when we did our pricing modeling back before we took the pricing, and now look at that relative to actual results, we're basically in line exactly with what the models predicted. In fact, in some cases, we are slightly above what the models predicted. So we are feeling very good about our ability to predict the outcome of our pricing actions.

At this point we don't plan any rollbacks. When we took these pricing actions, we took them at what we estimated to be the long-term cost future to be. So we did not price to the spikes in the commodities; we priced at what we thought the long-term averages would be. And therefore we thought we would not have to take rollbacks subsequent to those pricing action. So no plans in place at this point to roll back any of these pricing actions.

Okay. And then lastly, just on the sales line in the quarter, volume is flat. And can you just give us the breakout of how much then of this 5% was positive price versus improved trade efficiency?

Yes, there is about one point of a trade spending efficiency and the balance is pricing.

Is that similar to what we should expect for the next two quarters as well?

Certainly over the next quarter or two, you will see a continuing gap between volume and sales, primarily due to pricing, some trade spending efficiency. But we will start to lap some of our price increases from a year ago starting in the first quarter. So while there certainly will be a gap, it will start to diminish until we get into the third quarter, when we will fully lap all of last year's pricing actions.

Thanks very much.

Amy Chasen of Goldman Sachs.

Hi. Just two quick things. The working capital recovery continues to be impressive. Do you see more opportunities there?

Amy, we continue to look for opportunities. I guess we view ourselves as awfully good in the receivables area. We were able to improve it over the course of this last year. A lot of that had to do with some terms changes in our auto business.

I think at this point, we should assume that on the receivables side it is more holding sort of against those numbers. I think there is continued opportunity in the inventory area and we continue to work on that closely. We did see improvement over the course of this past year.

But I believe there are further opportunities there, and I think we continue to manage payables reasonably well. So some more opportunity in inventory, but I would say it's anything really big at this point.

Okay. And can you just also talk about whether you see any new opportunities with the P&G-Glad joint venture?

I think we are three to four years into that joint venture. I've got to tell you, we feel great about that partnership. Press 'N Seal was a success and ForceFlex has just been an outstanding success. And I think you know we work closely with P&G and about half of the folks that work on the R&D part of the Glad joint venture are actually Proctor employees.

And I think you also know that we have access to basically all Proctor technology that can be applied to our categories. So we have rights within our categories on a global basis. And I would say we have a very robust pipeline in Glad, we're benefiting from the Proctor alliance, and we continue to feel extremely good about that partnership, as I think P&G does.

Can you give us some sense of when we might see incremental new products?

Again, we wouldn't talk about any new product that we haven't talked about publicly, so I can't give you any specifics around new products. We'll continue to play out ForceFlex. We recently launched in Canada and we hope to launch at other international locations. But beyond that, I can't really talk about anything.

Okay, thank you.

Bill Schmitz of Deutsche Bank.

Good morning. Could we just start with Clorox Anywhere and kind of what changed versus your going-in assumptions? And I think when you launched it, this was going to be sort of a core platform to launch other products around that. Have you changed your mind on that, given some of the softness you've seen with consumption in that product?

Bill, I know you know this product well. As I recall, I think you sprayed this in your eyes to make sure that it was as safe as we were saying it was. This is obviously a bit of a paradigm shift for consumers, the fact that something could kill germs and be very effective and yet be perfectly safe around kids and pets. We thought this would be a slower burn than other game changers. To be honest, it has been a bit slower than even we anticipated.

The bad news is the trial rate is lower than what we thought at this point. The good news is as we talk to consumers who use it, as we look at some of our long-term panel data with consumers that have used it for a long period of time, we continue to get just pretty incredibly positive feedback from consumers. So we still believe in the concept.

We are still supporting the product. We actually did adjust some spending out of Q4 into fiscal '07, because we thought some of our marketing elements needed to be improved to get at this paradigm shift. So I guess the bottom line here is we are below objective. We continue to believe in the proposition, and we continue to support it.

Are you making (multiple speakers) with it?

As to the platform, just so you know, I'd just add this to Larry's comments, we are still very committed to health and wellness and still believe in it, and still think we have a lot of potential there.

Okay. Is distribution being maintained for the product in most of your retail partners?

Yes, it has not been an issue.

Okay. And then just, I don't know if this is in your price elasticity model, but what does it say about consumers returning to the category? I know they defer purchase, do some pantry deloading, and then come back in. What kind of time period should we expect before people sort of run out of their bleach inventory and have to come back to the store and buy some more?

Unfortunately, we probably don't fully recover until we're basically at lap the price increases. So you do get some recovery. In the case of bleach, you're losing a lot of merchandising behind some key price points we've talked about in the past, $0.99 price points. So we are seeing improvement in volume in the third quarter and hopefully in the fourth quarter, the price increases. But we really don't expect kind of a full recovery until we lap the price increases starting in the second half of fiscal '07.

Okay, great. Just one more if I can. Dan, can you just comment on sort of the resin environment and why -- because I think you buy a lot of stuff in the ethylene chain and natural gas prices are down so much -- why don't you think there is a correspondent reduction in resin prices?

Bill, I think we've talked some of the dynamics of particularly the linear low density resins that we buy that input prices are certainly important, but it's also supply, demand and capacity. And while we have seen things stabilize and come down a bit off of their peaks, they certainly are not returning, even with lower input prices, they are certainly not returning what we've seen historically.

So as I mentioned earlier, even in the market today, we are seeing announced price increases which suggests more upward pressure than downward pressure. And we are in the storm season right now, and I think there will be volatility on the inputs. And we always see a spike in this when it gets into the winter heating season.

So we just have to play this out. But we're seeing more upward pressure right now than downward, even where it's the input prices at the levels that you do see.

Great. Thanks very much.

Alice Longely of Buckingham Research.

Good afternoon. The volume in bags was down more in the fourth quarter than the third quarter, I think. Do have any comment on that?

Alice, this is Steve. You may remember we took additional pricing on Glad in the third quarter. And the largest component of that, which was on the trash bag business, which was a 15% increase, didn't go into effect until, I believe, mid-February. So you are actually seeing a bigger impact from that this quarter than we saw last quarter. That is the primary reason.

All right. And is there any competitive change? I mean, are you losing share to somebody else there or the whole category suffering, volumewise?

Again, in the Glad business, it's a number of different categories. It's containers, food bags, plastic wrap and trash bags. And several of those categories -- or segments I guess I should call them -- were performing very well. Trash bags actually is performing equal to if not slightly better than our expectations, despite the pricing we've taken. The containers business continues to be very strong, and we just had some innovation on that last quarter as well.

The food bags business is a bit soft, at least as it relates to us. And after some very strong results over a couple of years in the plastic wrap business, it's a little bit soft right now as well. So it's a bit mixed. But overall, the overall expectations for Glad are not any different than what we were anticipating.

Just to be clear, specific to trash bags, we are continuing to grow share in that segment.

Okay. Thank you. In volume terms? In volume terms?

I'm looking at dollars; I don't have the volume chart in front of me.

Okay. Do you look at all retailers then or are you looking at Nielsen?

This is just IRI.

Okay. Your press release said something about competition heating up in a couple of the categories, and I think bath cleaners were referenced. Can you comment on that?

Can you repeat which cleaner?

The bath cleaners, Clorox bath cleaners.

Homecare is always an intensely competitive category and remains so. I don't know that is anymore intensely competitive than it was a year ago or the year before that. But it is intensely competitive. Particularly in bath cleaners, we've seen a new product from SCJ that is gaining some traction and has a particularly high price point. And there are a few other smaller brands in the category that are also spending pretty heavily against that.

So it's not worsened?

I would tell it's bad, but about as bad as it always is.

Okay, good. Thank you.

Joe Altobello with CIBC World Markets.

Good morning. I just wanted to follow up on the previous question regarding whether or not people are using less of your product or trading down. It sounds like in bags and wraps, they're just using less. I was curious if the same situation applies to bleach. Are you seeing the category down or are consumers trading down essentially?

On a volume basis, the category would be down in bleach. But obviously, it's up on a dollar basis, based on the pricing. So we are seeing people walk away from the category or use less or pantry load less or be less influenced by merchandising because the merchandising is not as attractive as it once was. All of those kinds -- all the expectations that we would expect based on our modeling.

Okay, so it is not trading down per se? (indiscernible) the category in general?

I'd say in general, no, it's not.

Okay. And secondly, in terms of the free cash flow, I guess going forward starting in '07, you'll probably put up a normalized $500 million plus a year in free cash. It sounds like the first priority there is debt reduction. Is there a certain debt level you want to get to before you'd go back to aggressively buying back shares?

Joe, what we've talked about is an interim target of 2.0-to-1 on our debt to EBITDA, and our present projections would indicate that probably late in the fiscal year, maybe in the fourth quarter, we would hit those targets. So near-term, we would continue to use our free cash flow. We would repurchase shares to offset option dilution. We may then once we get to our 2.0-to-1, we'd look at other uses for our free cash flow.

Okay, great. Thanks.

Connie Maneaty of Prudential.

Hi, I have a couple of questions. I think you were able to quantify for us what you thought the tax rate would be in Q2. But did you say what it would be in Q1 since it's going to vary by quarter?

Connie, I think 34% to 35% for the full year is good, and variability around that is probably going to be less in '07 than you've seen in the last year or two. We just, as we look on the horizon, there are fewer tax settlements that we've been engaged with over the last two years. So I think a 34% to 35% range, while there will be some variability there, I think it's going to be a fairly close range.

Okay. So within that range, you're not going to have a quarter where it's going to be 30% and another one where it will be 36, right?

Yes, as we said, we've got variability, Connie. and it just depends on the timing of transactions or tax settlements. But there's nothing on the horizon right now that we would say would indicate that kind of variance.

Okay. I'm curious about your gross margin outlook for the first quarter. Because we know that commodity costs are high relative to where they were a year ago, but they also seem to be not surprising you. Maybe they are on your budget, is what the fourth quarter commentary sounded like, in that the weakness in the market was due to lower sales of higher-margin products. Would that be the reason why the gross margin declines a little in the first quarter as well?

I think, Connie, we have refined our estimates around commodities cost, and particularly the more minor commodities costs as we look into the first quarter, we're certainly seeing some impacts there. Also internationally we're continuing to see a little bit of commodities cost pressure. And so I think those are factors as well.

Mix, I don't believe right now in the first quarter should be a huge issue for us, but it's something we continue to monitor.

Connie, one other thing you might keep in mind -- and Dan mentioned this earlier -- but we are anniversarying a pretty material price increase that we took last year in Clorox Liquid Bleach. So as we anniversary that, that incremental benefit that we are seeing in this last quarter, we won't see.

We would still expect to get some benefit from pricing and gross margin because we, again, took material pricing in January. But it should be slightly less than what we saw in the last quarter.

Can you help us quantify a little bit the magnitude of the gross margin decline in Q1 as well as the increase for the full year?

I don't think were in a position right now to provide a range on that. Again, I think it will be down versus the previous year and we're expecting expansion in Q2 through Q4.

Okay. My final question is on your second-quarter outlook. Now I know you didn't have an outlook before, but the consensus was $0.62 or $0.61, and now you're thinking $0.48 to $0.54, which is going to include a couple of cents for the IT restructuring, so let's say it takes it up to $0.50 to $0.56, which is essentially flat to down on the easiest comparison of the year. Because in fiscal second-quarter of '06, the $0.55 was up 25%.

So the question is, are you introducing a game changer in the second quarter? And is that why the earnings growth is the way you're projecting?

Connie, obviously we don't talk about game changers until we're ready to launch. And as I think about the second quarter, a couple things to keep in mind. There is some potential restructuring in there, as you've identified. We also have a much higher tax rate than we had in the year-ago quarter, which is going to impact us.

We're also likely to be at the lower end of our sales range in that particular quarter. 3% to 5% in our target, and Q3 -- or excuse me -- Q2 will likely be towards the lower end, and that is because we had a very strong year-ago quarter. So we're going to be a little bit lower there.

There will be continued demand building investments, perhaps a little bit higher than you saw in the year-ago quarter. And commodities, that is the quarter that we finally do anniversary the impact from the storm. So all of those factors have gone into the outlook that we've provided.

Well, I've got to say that I think most of us have a lot of that in our models already, so I think there was something else going on. But that is it for me. Thanks.

Alec Patterson of RCM.

Just peeling back on the gross margin factors, you mentioned the diesel plus category, 120 basis points. I was wondering was diesel an overwhelming factor in that.

Alec, the 120 was a reference to manufacturing and logistics transportation. Diesel is certainly a component of that and we have seen volatility there. The whole transportation area has been in a state of flux. We've seen increases in transportation rates that we started seeing the spikes really after the impacts of the storms, and that is continuing into the numbers that we gave you. And there is also other inflationary pressures.

One thing to point out when you think about the 120 basis points is we give you sort of the gross cost increases associated with that. There are activities in our cost savings program where we are realizing benefit, but we don't net them when we report them out to you. They are combined as part of cost savings.

But probably the most volatile component in our logistics area has been transportation, and certainly the diesel component. As well as the energy costs for running our plants; that continues to contribute as well.

So is that a meaningful factor going forward then on your gross margin outlook? I mean it seems to have been something that has stepped up quite a bit recently.

I would say the step-up, again, has been primarily related to energy and some of those impacts. I mean, we'll always have normal inflationary pressures on our manufacturing and logistics. I think the main thing that is changing is we're starting to anniversary these levels, and we are at higher levels than we have been historically, but we do begin to anniversary them.

And our level of cost savings are continuing at a high level, and right now our projections are in the second quarter you'll see the ongoing strength of those cost savings will start to overcome the cost increase pressures that we've seen.

Okay. And the IT system restructuring charges, is performing those restructurings part of delivering CCM goals?

Yes, the CCEM program is a broad program; it encompasses an awful lot. Certainly, as Bob mentioned, we look everywhere for where can we get efficiencies. And IT is more than just cost savings, although that certainly will be a byproduct of it. It is also about access to technology, it's about speed, and delivering the business needs on the information technology front. So there is a lot of reasons for it.

I think what it gives you a sense, though, is we're looking everywhere in the Company for cost savings. So every area, we're going through to look for opportunities to be more efficient. And if we can be more efficient by partnering with somebody from the outside that has better capability than we do, then certainly we're going to look in all areas to be able to do that.

Just to be clear, the benefits coming from this, assuming that it is executed, would be reported in the future through CCEM. So I don't know that I could tell you right now there's a lot of that in fiscal '07. But as we look at fiscal '08 and beyond, a component of our CCEM benefits would come from this, among other things.

And this being an incremental program?

If you think about the $350 million to $400 million, I mean it is a component of our cost savings, and that's how we would approach it.

Okay, it's part of that 350 to 400, the savings from this?

Yes, that is the way to think about it.

And the selling and administrative line, are any part of the CCEM savings, a material increase of that, flowing through that line now?

Well, certainly we do have components of our cost savings that do go through the selling and admin line; certainly that is in there. If you look at our cost savings in this particular year, probably about 85% to 90% of those came through either the sales or the cost of goods sold line; they are sitting up in margin. And then the balance are going to be spread below the line. But certainly there are efficiencies in selling and administrative that are reflected in there.

It just seems to be the continuous source of upside in some of your results. And so just trying to track that back to what those upside sources are.

Well, certainly we're trying to be very disciplined on our selling and administrative spending, and we've been trying to control that very carefully through any number of programs, including CCE.

Okay. And just lastly, the advertising and sales, clearly down and the fourth quarter. It seems like you've, as you suggested, deferred some spending. Is it suffice to say the first half is going to see considerable step-up and then plateau in the second?

I would not say that our fiscal '07 -- let me go back and talk about fiscal '06. I did mention that we delayed some spending specifically on Anywhere, and so our spending in the quarter on advertising was actually down year-over-year. However, if you look at the absolute level, it's about 10% and was about 10% for the full year.

You also might notice that our R&D investment was up for the year, actually pretty appreciably; we're up double digits -- I think about 13% for the full year and up about 8% in Q4, which is obviously another component of our demand building.

So we think our advertising is at about the right level. We kind of look for about a 10% rate and we don't think of 9.6 or 9.7 as being much different than that. So we might tick up and down versus the 10% in a given quarter, given plans, particularly on new products. But probably wouldn't expect a huge step up overall in fiscal '07 versus what we did in fiscal '06.

And that trend I was talking about? First half, second half?

Again, depending on timing of new items and things, the trend would be affected by that. We do have a number of what we call core growth items that would play out in the first half. The cat litter that you heard about, the launch of Ultimate Care Bleach. So I would expect there would definitely be some incremental spending against those initiatives.

Okay, thanks.

Linda Bolton Weiser of Oppenheimer.

Thanks. I just had one more question about the gross margin. When you gave the disaggregation of the change in gross margin and you said commodity costs impacted by 300 basis points, would the mix effect be in the All Other number that you gave, that you said was a positive 10 basis points? And does that mean that if mix had been what you expected, that All Other would have been a 50 basis point positive? Am I thinking of that correctly?

The mix issue was negative for us in the quarter. So, yes, what I -- I grouped it in the All Other in the callout for you. So certainly the other number would change. It was about -- I think about 10 basis points positive. So, yes, I think you are reading it would be about right.

Okay, thanks very much.

Lauren Lieberman of Lehman Brothers.

Thanks. On SG&A, the leverage on SG&A ex advertising was pretty considerable. I wanted to know if you could give us a little bit more color on what it was, where you found some additional savings.

Lauren, we're across the board looking for opportunities to be more efficient. Certainly we're working with our functional businesses on a number of different initiatives to constrain that. I don't think there's any one particular area I would point to that would generate it. It's more an across the board program that we're trying to drive here to be efficient.

So really specific to call out. It is just more of a mindset that we're trying to get to on controlling our SG&A.

Okay. So in terms of what we saw this quarter on that kind of base SG&A leverage, we can think of that as ongoing, not reactionary to tough costs and not sustainable?

I think our base trends probably will continue. I guess a couple of thoughts for next year, as you are thinking about fiscal '07. We will have -- assuming we do the IT restructuring, we will have some of those costs flowing through. So that is going to put some upward pressure on our selling and administrative expenses.

We do have the year 2 of FAS 123(R), which are going to flow through there. And then you always have sort of the normal inflationary impacts on benefits and things like that. So there will be some pressure on our selling and admin line, but certainly we're trying to contain that as best we can.

And we're continuing to do -- you know, we've talked an awful lot about process improvement in the Company. And I think Jerry in the past has talked about that as a strategic corporate capability that we are driving. And I think you are starting to see the benefit of that in a number of areas, where we're getting much better from a process standpoint, metrics management, being able to measure our efficiency and try to drive that. So I think over time you'll see more of that coming into play as well.

Okay. Then a quick question on market share trends. We're not really -- I know that the IRI or Nielsen data isn't necessarily all that reliable as an indicator of full market trends. But we're not releasing all that much tickup in share from private-label, despite all the pricing that's been out there and that private-label has taken a bit less pricing than branded players in a number of categories. Is that consistent with the dynamic that you are seeing in total market trends?

Generally speaking, we're seeing private labels pretty much go up pretty much in line with our increases in our categories. We're not seeing dramatic share growth by private labels in general. We talked about the fact that IRI doesn't cover very well, and I think for our businesses, it's only about 30% or 40% coverage.

But based on the trends we are seeing just in our shipments (multiple speakers) the contract channels, we feel pretty good that we are probably maintaining or growing share, even where we're taking pricing actions.

Okay. And that goes for trash bags as well, right? The numbers you cited were just IRI?

Correct.

The other thing to keep in mind, Lauren, is we've had -- I think Larry mentioned earlier -- we've recently had innovation in every single business unit. And so that is helping to stabilize if not actually increase shares, we believe on an all outlet basis for most of our business units.

Okay, thanks. And just one final thing. On raw material cost pressure overall commodities, Q1 versus Q4, is there sequential improvement or is it worse than it was in Q4?

I think the general expectation would be that commodity pressures are going to be about what they were in Q4. Because as Dan noted, it isn't really until the second quarter before you begin to anniversary some of the effects of the storms last year.

Okay. And does the same go for that manufacturing logistics and transport line?

Well, where certainly going to continue to see some pressure there year-over-year. But trends probably in first quarter be somewhat similar to fourth quarter. Maybe slightly better than it, but those trends will continue.

Okay, great. Thank you.

Wendy Nicholson of Citigroup Investments.

Hi, my question -- two questions first. On the Ultimate Care bleach, I think you said that started shipping in the beginning of June or mid-June. Mid-June? Where is that priced now relative to private-label; what is the private-label price gap in bleach?

Ultimate Care is priced about double regular bleach, is a simple way to think about it. So kind of the main size, we're about $1.75, $2 on our regular beach product. We're about $4 or slightly above that on the Ultimate Care product.

Okay. But fair to say that Ultimate Care -- I mean, at that price -- I didn't realized it was so high. It is going to be pretty much of niche product. I mean, that is not a game changer in the category potentially, it doesn't sound like.

We do not regard it as a game changer. It may end up being a game changer over time. But it's generally not a game changer, because it's somewhat cannibalistic of our existing bleach. So it's a trade-up. It's a good opportunity for us from both a profit and sales standpoint. But incrementality is a little bit limited because it is highly cannibalistic.

And if there is already consumer sensitivity to higher pricing, what is the initial read on -- I know it's really early -- but what is the initial read on that product? Are you having any retailers push back and say, my gosh, volume growth in the category isn't so hot right now, this thing is just way too expensive?

This is actually an unusual one because we've actually been in a small test market for about a year. And we've gotten very good results in that test market based on this kind of pricing. And I think you always have to think about pricing not as pricing but as a value equation. So this product does offer a superior value based on what consumer needs are.

It is quite a different product from our regular bleach. It's friendlier to use, it's more aesthetically pleasing. It can be poured directly on white clothing. It also comes in a preferred bottle with a drain back cap, a measuring cap bottle.

So this is a fairly well-tested proposition, which is unusual for us, because most of the time we can't afford to do test markets because of competition. In this case the only competition is private-label. So we did do a test market and we are essentially trying to duplicate those results.

And can you give us a sense of what the -- because we heard from one of the private-label manufacturers in bleach that they don't think they've followed your price increase to the same extent you have. So how big a gap is there, ex Ultimate Care, in your core bleach product relative to private-label now? Has it expanded significantly?

The gap has actually expanded a bit in terms of absolute cents. And I think that's really a function of them taking maybe about the same price increase -- percentage price increase on a lower base. So we have seen an expansion in differential between our base product and the private-label base product.

However, again, based on all of our read, if you go back to our pricing modeling, we're actually doing a bit better on bleach in terms of our results than we anticipated based on all our modeling. So despite that bit of an increase in gap, we are still doing well.

Good, good, good, good. My second question, though, had to go back to this question -- I forget who asked it -- about the lag relative to the volume growth that you see after you take pricing.

I mean, if I go back and I look at some of the transcripts when you guys first announced pricing and the hit to the volumes -- I mean, Jerry always used the word there would be an initial slowdown in volumes. And at that time, I don't think any of the read initial slowdown in volumes as meaning more than a year.

And I guess it was Larry, you, who said, yes, we think we are going to have weak volume growth for the whole year after the pricing. And I guess I just don't understand that. I mean, if I'm a house mom and I need bleach, do I wait 12 whole months? That just strikes me as a really long time.

And I guess I'm just wondering is it really more a sense of lack of new product activity in the first half of this year that's keeping the price down, or how do you know it is really just the pricing that is hurting your volume growth for the next six months?

Again, the modeling was just there is definitely a lingering impact. Remember that you're not looking for 10% or 20% swings in volume. We're holding ourselves to swings that are between 1 and 5% kind of swings; so fairly minor changes in consumer behavior patterns.

If you think about bleach in particular, a lot of our volume was driven by the magic of $0.99 features, particularly in the grocery channel. And so you are basically indexing off of a year in which you had those $0.99 features encouraging people to buy a lot of beach, in some cases, to pantry load bleach, that have essentially got away.

So for that full year, you're indexing against that in your base period. And that is why you see continuing volume erosion throughout the year. Obviously, consumers do adjust to the absolute price on a shelf and obviously they probably adjust to that in a shorter time span than a year. So you hopefully have some pickup based on that. But generally, you do see depressed volume for a full 12 months before you see a full recovery. does that make sense?

That does, that does. I guess we will wait and see. But the back half, it sounds like not only easy comps but the anniversarying of the pricing and it sounds like maybe a little bit more new product activity in the back half, and that is what should make us confident that volume growth is going to reaccelerate?

Yes, I think that is accurate.

Okay, thank you very much.

Why don't we take just one more question?

John Faucher of JPMorgan.

Yes, good afternoon, I guess for us, and good morning for you guys. A quick question on the options issue. If I'm reading this right, it sounds like -- were these options priced at normal times in terms of this was a scheduled options pricing, and the question simply revolves around what timing was used to calculate the option price?

Is that the way we should be looking at that, as opposed to what we've seen from some other companies, where it's, okay, the option timing was moved around within the year?

Yes, I think very much that is how you should be looking at it. It's basically the options were, for the most part, very much right around the compensation committee meetings and regularly scheduled. They are obviously new-hire options and there are other options that are done at various times, promotion options.

But this is I think exactly as you stated -- it's basically a date and time and then there's a two-week period. And it was the miscalculation of how you actually determined that date that caused this to happen. And it's just simply that. And it is very different than the other option issues, as we read them, that have appeared in the press with other companies -- very different.

Okay and sort of one follow --, I apologize. It sounds like what happened there was the second piece was a bit of a misunderstanding in terms of the rules for officers versus the rules for sort of general employees?

No, I don't think there was necessarily a misunderstanding of the officers. The other piece of it has to do with options that were repurchased, and an effort to issue options to officers in this case. And that intent, as is documented in all of the minutes and everything, was to have that issuance of options, granting of options be more than six months from the repurchase of options, which is what is required under the -- accounting did not have variable accounting, which is mark-to-market.

There was simply again the same misunderstanding and not enough documentation for us to be certain as we looked back on it -- remember that is five years ago almost at this point --that we could be certain we were outside of that six-month period and we may well have tripped over that wire by just a few days unintentionally. By doing that, we had to go variable accounting, which is mark-to-market which created that additional charge. Dan, you want to add anything to that?

No, I think that summarizes it pretty well, Bob.

Okay, thank you very much.

Okay, let me do a final wrap-up. Again, we are very pleased with the results in fiscal '06, given a very challenging environment. In particular, we're very proud of the fact that despite the commodity pressure we fully supported our brands and remained true to our strategy.

Our first-quarter outlook remains unchanged and we are absolutely committed to delivering our full-year EPS targets. Thanks for joining us on the call today.

Ladies and gentlemen, that concludes the Clorox Company fiscal year 2006 fourth-quarter earnings release conference call. You may now disconnect.