高樂氏 (CLX) 2007 Q2 法說會逐字稿

Thank you for standing by and welcome to The Clorox Company fiscal year 2007 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 call is being recorded. Now I would like to introduce your host for today's conference, Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, please go ahead.

Thank you. Welcome, everyone and thank you for joining Clorox's second-quarter conference call. I am Steve Austenfeld, Vice President of Investor Relations and on the call with me today are Don Knauss, Clorox's Chairman and CEO; Larry Peiros, Executive Vice President and Chief Operating Officer of Clorox North America 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, Larry will start with comments on the second-quarter operating results, providing key business highlights, as well as a perspective on the near-term [thoughts], pricing and competitive front. Dan will follow with a review of our second-quarter financial performance, as well as additional details supporting our fiscal year 2007 outlook as communicated in our press release this morning.

Don will then wrap up with observations from his first 120 days at Clorox, as well as share his perspective on our year-to-date performance, future expectations and our strategy (technical difficulty) new projects. We will then open it up for your questions.

Let me remind you that 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 by providing insight on these measures enables investors to better understand and analyze the ongoing risks of operations.

Reconciliation with the most likely comparable financial measures determined in accordance with GAAP can be found in today's press release, this webcast, 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 other SEC filings for a description of important factors that could cause results to differ materially from management's expectations. With that, let me turn it over to Larry.

Thanks, Steve, and good day to all of you on the call. As you saw in our press release, we had a strong second quarter even in the face of consumers continuing to adjust to higher shelf prices, tightened competitive activity in some categories and increased costs.

In fact, diluted earnings per share came in even higher than anticipated. This was due in part to favorability versus our expectations in commodity, transportation and other energy-related costs, as well as some favorable items that Dan will discuss in a few minutes.

To be clear, commodity and energy-related costs were higher than the year-ago period by 190 basis points. They were just not as high as we had anticipated in our outlook. From an operating standpoint, we are pleased that our business continued to perform well. As we have said many times before, while the quarters will have variability, our focus is on consistent annual performance and the long-term health of our brands.

With that as background, let me provide some perspective on what drove our Q2 results, what we anticipate going forward and briefly cover where we are and the recently announced bleach acquisition. On the top line, sales were up 3% with strong gains in two of our three business segments behind the benefits of pricing and innovation.

Overall volume declined 1% due to price increases taken earlier in the calendar year and competitive activity in certain categories. Starting with the Q2 drivers, as usual there are puts and takes across the portfolio. The specialty segment had a particularly good quarter. Our charcoal, (indiscernible) and litter businesses grew sales by 11% behind our very successful scoopable cat litter with activated carbon and a very strong quarter on Kingsford Charcoal.

On our Glad business, pricing drove sales by 6%, but volume declined 6%. We have taken actions to respond to the competitive dynamics in trash bags. These actions have started to play out and we will have a bigger impact in the second half.

Our forecast for the household segment reflected a difficult quarter and it came through in the final results. Laundry and homecare sales were down 4% with volume down 6%. In laundry, volume declines were driven by decreased shipments of Clorox liquid bleach and Clorox 2 color safe bleach. The laundry declines are due to the continued impact of pricing and tightened competitive activity in the color safe bleach segment.

We have now lapped our price increases and we will be stepping up our support on bleach. Clorox Ultimate Care continues to build trial and add incremental share. A new Clorox 2 Free & Clear line extension was launched in January. This new product has the same stain removal and brightening power of regular Clorox 2 bleach, but without perfumes or dies. We anticipate seeing improved results in our bleach brands in the second half.

In homecare, competitive pressures in the wipes category negatively impacted our Clorox disinfecting wipes business and resulted in an overall homecare decline. We are addressing the competitive situation and are optimistic that we will see a return to growth in very short order.

Our international segment had a strong quarter, delivering sales growth of 9% and volume growth of 10% behind new products in healthy category increases in some key Latin American countries. We're pleased to see this high level of volume build following two modest growth quarters in the year-ago period.

I want to reinforce some points about our Q2 results. First and foremost, we're focused on the health of our brands. In the second quarter, we grew share in five of eight U.S. categories. We achieved those results despite the key negative volume impact from large-scale pricing actions and heightened competitive activity.

Our innovation program is on track to deliver our targeted two points of annual incremental sales growth. While our most recent gamechanger, Clorox Anywhere Hard Surface spray, was not as big as anticipated, still a very solid new product for us and performing well.

We have also seen solid results from core growth items like the cat litter improvement, Kingsford Charcoal Sure Fire Grooves and Clorox Ultimate Care bleach.

We are also addressing the competitive activity in a few categories. We remain committed to the long-term health of our brands and we will do what it takes in the short term to support our businesses.

Looking forward, we believe we will see a return to volume growth and more positive trends in the second half of the year. Our previously launched new products will continue to drive top-line growth and we will be introducing some additional new items in the second half, including a line of non-bleach Clorox disinfecting cleaners and organic Hidden Valley Ranch salad dressing.

Our response to competitive activity should also have a positive impact on volume growth. Although there will be some offset in sales due to a higher level of trade promotion spending.

Finally, we will see a positive top-line impact in the recently announced Colgate bleach acquisition. Let me take a minute to give you an update on that purchase. The acquisition includes the Javex bleach brand in Canada, as well as the leading bleach brands in Venezuela and Uruguay and a license for Ajax branded bleach in the Dominican Republic, Ecuador and Colombia.

Total annual sales of these brands are about 770 million -- $77 million. Total sales of these brands are $77 million. These brands are number one in their countries, with the exception of Colombia where Clorox holds the number one share position. These brands obviously fit us extremely well. We know bleach and we love bleach. Over time, we believe this acquisition will give us growing and more profitable bleach businesses, but more importantly, it will allow us to geographically expand our growth platform around killing germs and eliminating the spread of illness.

We closed on the Canadian portion of the acquisition in late December and are scheduled to close on the Latin American pieces later in the current quarter. We do not sell Clorox bleach in Canada today, although it may surprise you to know that about one-third of Canadian consumers actually believe they use Clorox bleach today.

We have a short-term supply agreement in place and are aggressively transitioning the business and starting to restore market support. There have been no significant surprises to date and we look forward to providing you updates on our progress over time.

To conclude, we are very pleased with our strong results in the second quarter and we are looking forward to volume growth and more positive trends in the second half as we wrap up our response to competitive activity and lap up the impact of our pricing actions. With that, I will turn it over to Dan.

Thanks, Larry. With that operating review from Larry, let me walk you through our financial results. We delivered $0.62 in earnings per diluted share, which included $0.03 related to the sale of the Company's residual assets in a Brazilian subsidiary. We discontinued our operations in Brazil in fiscal 2003. Excluding discontinued operations, we delivered $0.59 in earnings per diluted share from continuing operations, which was above our EPS outlook range for the quarter. This was due in part to lower than expected commodity and manufacturing costs, although these costs were still higher on a year-over-year basis.

Additionally, we reflected a lower than anticipated tax rate and some gains that were reflected in the other income line on our P&L, including a gain on the sale of an international trademark.

On the top line, second-quarter sales increased 3% compared with the year-ago period and in line with our outlook. Consistent with the past several quarters, this quarter's sales growth was driven by price increases, which primarily were taken in January and February of 2006.

Gross margin improved in the second quarter to 42% compared with 41% in the year-ago quarter. Let me break down the 100 basis point increase for you. Cost savings contributed 240 basis points to gross margin improvement while the net impact of price increases contributed another 160 basis points of improvement.

While commodity costs are coming down from their peaks, they still increased versus year ago and impacted us by a -190 basis points. For perspective, this compares with a -400 basis point impact from commodities cost in the year-ago period. Manufacturing and logistics, which includes diesel costs, impacted us by a -110 basis points.

In line with gross margin, adjusted operating margin increased to 14.9% for the quarter compared with 14.2% in the year-ago period. As a reminder, the second quarter includes $9 million in costs associated with the IT services agreement, with $5 million recorded as selling and administrative expense and $4 million reflected in restructuring charges.

The effective tax rate on a continuing operations basis for the quarter was 33.1% versus 30.5% in the year-ago quarter. Our Q2 tax rate was lower than our anticipated full-year tax rate, which we expect to be in the range of about 35%. It was also lower than what we had assumed in our last outlook update, primarily due to Congress reinstating the R&D tax credit and the timing of some settlement activities. As we have said, our tax rate will vary by quarter due to the timing of tax settlements and we anticipate our third and fourth-quarter effective tax rates will range from 34% to 36% and possibly even slightly higher than 36% in Q4.

Turning to cash flow. Second-quarter cash flow from operations was about $122 million compared with $142 million in the year-ago quarter. The decrease was primarily due to timing of tax payments and cash flow from discontinued operations in the year-ago quarter. Free cash flow, which we define as cash flow from operations less capital expenditures, was about $85 million or about 8% of sales.

Our solid cash flow results were due to strong earnings, continuing disciplined capital spending and effective working capital management. A portion of this free cash flow was used to repurchase about 1.1 million shares of our common stock in accordance with our program to offset stock option dilution, as well as to fund the Canadian portion of the bleach acquisition, which closed at the end of December.

As I discuss our second-half financial outlook, please keep in mind the following. First, our current outlook continues to reflect our best estimate of the impact commodity costs will have on our results over the balance of fiscal 2007. Clearly, we've seen improvement in commodities prices and anticipate some further softening as we move into the second half of the fiscal year.

In particular, resin has come down pretty rapidly from those post-hurricane highs, but we are still not anticipating that resin prices will return to historical levels. In fact, two resin price increases were recently announced in the market, although it is unclear whether they will stick.

Commodity prices continue to be volatile and difficult to estimate with precision. As we said last quarter, if there is any material incremental benefit in fiscal 2007, we will consider reinvesting in selected categories to maintain the long-term health of the business.

Second, we continue to experience increased competitive activity on trash bags and other categories. Our second-half outlook includes a ramp-up of incremental spending to respond to these competitive issues. The incremental spending behind these brands will support a number of different consumer-facing activities. In particular, we are anticipating placing a heavy emphasis on trade promotion.

Third, we will anniversary the bulk of the price increases in our fiscal third quarter and we continue to anticipate a return to volume and growth in Q3. We anticipate a closer relationship between sales and volume growth versus the past year, which was heavily impacted by price increases.

As Larry discussed, we closed the Canadian portion of the bleach acquisition and we are in the process of completing the Latin American portion. As noted in the press release, we now anticipate this transaction will reduce diluted earnings per share by about $0.02 in the second half of this fiscal year.

Finally, as Larry also noted, we are launching a number of new core growth innovation products in Q3. Core growth innovation keeps our brands healthy and competitive. We estimate that all of our new product initiatives will deliver about two points of incremental top-line growth in fiscal 2007.

Let me now cover our second-half and full-year financial outlook. As you saw in this morning's press release, we confirmed our third-quarter outlook, updated our full-year outlook and we provided our initial outlook for the fourth quarter.

For the third quarter, we continued to anticipate sales growth of 3% to 5%, which compares with a very strong 7% growth rate in the third quarter of last fiscal year. This sales target range reflects our outlook for the ongoing but declining impact of price increases taken in 2006 and the impact of last month's charcoal price increase. The vast majority of our spending to respond to increased competitive activity will be in the form of trade promotion spending, which is netted against sales.

In the third quarter, we anticipate continued gross margin expansion. This reflects our current outlook for commodities costs and fully lapping the high post-hurricane costs in the year-ago quarter.

Our outlook for third-quarter selling and administrative expense is that it will be higher on a year-over-year basis. This outlook includes the impact of certain costs associated with the IT services agreement, as well as administrative costs for the newly acquired bleach business.

In Q3, we anticipate another $8 million to $9 million of costs associated with the IT services agreement with about $6 million to be reflected in selling and administrative expense. We anticipate modest third-quarter growth in adjusted operating margin reflecting our outlook for improved gross margin partially offset by an increase selling and administrative cost for the reasons discussed.

We anticipate a third-quarter effective tax rate in the range of 34% to 36%. Net of all these factors, we continue to anticipate third-quarter earnings per diluted share in the range of $0.74 to $0.80. This includes the impact of the bleach acquisition.

For the fourth quarter, we anticipate sales growth of 2% to 5% in line with our long-term target range. Our initial outlook for full-quarter diluted earnings per share is $1.10 to $1.16. This reflects our outlook for gross margin expansion versus the year-ago quarter and lower selling and administrative expense. It also reflects continued high levels of trade promotion activity to address competitive pressures.

As a reminder, the year-ago fourth quarter included costs related to a correction resulting from our stock option accounting review and costs related to our former Chairman and CEO's retirement from his positions.

We anticipate a fourth-quarter effective tax rate in the range of 35% to 36% with a slight chance it could be somewhat above 36%. For the full year, we continue to anticipate sales growth of 3% to 5% and we now anticipate diluted earnings per share from continuing operations in the range of $3.20 to $3.28. This updated EPS range reflects the anticipated $0.02 dilution from the bleach acquisition.

As we said many times before, while the quarters will have some variability, our focus is on consistent annual performance and the long-term health of the business. With that, I will turn it over to Don.

Hello, everyone and thanks for joining us. Before I open it up for Q&A, I would like to take a few minutes just to talk about my first four months here at Clorox and the leadership changes we recently announced, as well as give you a bit of an update on our strategy renewal efforts.

Before I do that, I would like to take a minute and recap what I think you should take away from Larry's and Dan's remarks. First, we are obviously very pleased with our second-quarter results. We exceeded our expectations and reflected an improving commodities cost environment and importantly increased marketshare in five of our eight U.S. categories as Larry noted.

Second, we are achieving strong results from our innovation programs, which are contributing about two points of annual incremental sales growth, which is in line with the targets we have talked you about in the past.

Third, we are experiencing, as you know, an intensely competitive environment in several categories and we believe, as Larry noted, we are taking the right steps to support our brands in the short term and to really help ensure the long-term health and growth of our business.

And finally, we continue to execute our cost reduction strategies and remain I think very disciplined on the use of capital.

So looking ahead to the balance of the year, we certainly feel good about the second half. We believe we have got some good momentum and we are optimistic about the new products we are launching. We are working toward a smooth transition with the bleach business acquisition, which is clearly a really great investment for us, one right in the center of our bull's eye.

Our last quarter when I spoke with you, I gave you an overview of how I planned to spend my first three months or so here at Clorox and I described this as a look, listen and learn period for me and I have spent considerable time talking with employees across the Company in a number of our international locations as well and meeting with key customers and the Clorox teams that support those customers.

This experience has certainly reinforced for me all the reasons I chose to come to Clorox. If there has been any surprise for me, it has really been the passion that folks have here for the Company and its brands and the intense focus on the consumer and the consumer is a shopper. When you come from a place like Coca-Cola with that iconic brand, I think you're usually skeptical that you are going to find that same level of passion in a lot of places and I certainly found that alive and well here at Clorox.

Now some of the other things that have emerged from our discussions with employees about things we should preserve at Clorox and the opportunities we have to improve. As for things to keep, the three topics that keep coming up are certainly the values of Clorox, our people and training focus and clearly the focus on the consumer and the shopper. All of those three things have been critical to the Company's success.

At the same time, people have noted opportunities to reduce complexity in this business and really an overall desire to help increase the Company's top-line growth trajectory, which is really what the strategy renewal process is all about.

One place we did reflect were committee changes we recently announced and they are specifically designed to address these opportunities. As most of you probably know, Larry was named Executive Vice President and Chief Operating Officer for Clorox North America. Having the household and specialty segments both report to Larry, we believe is clearly a better line of sight across our North American businesses and helps really speed up decision-making, allocating resources and streamlining accountability.

Larry has 25 years of experience here at Clorox. He knows all of these businesses while having held leadership positions in most of them. And we look forward to the synergies and opportunities I believe this realignment is going to bring to Clorox.

At the same time, we also announced that Beth Springer who had been heading the specialty business has been appointed Executive Vice President of Strategy and Growth. Beth is leading the strategy renewal process and our efforts to develop even more value-creating growth opportunities.

Our accelerating, profitable top-line growth is paramount at Clorox and by aligning all of our strategic planning and growth activities under Beth, I believe we will have greater visibility into all major growth segments and increase capability to really optimize return on invested capital.

In addition to Beth and Larry's new roles, we also announced that Frank Tataseo was named Executive Vice President of Functional Operations and Frank will continue to oversee marketing sales, R&D, IT and product supply. Now in his role as in the past, Frank is continuing to be responsible for ensuring the functional operations that are aligned to support the strategic priorities across all the businesses.

Now what we have done here with these changes is really create a single point of accountability for operations, for strategy and for functions and for the key drivers of our growth -- which we believe are the key drivers of our growth agenda. Of course Larry, Beth and Frank are going to continue to work closely with me and the other members of the executive committee to help ensure this new structure really maximizes our ability to create value for shareowners. That is what it is all about.

And I said from the start that I am committed to Clorox's leadership team and as I've come to know them over the past few months, I am certainly excited to be working with them to help drive the future growth of the Company and to also meet our near-term commitments.

The last topic I would like to briefly touch on before the Q&A is the progress we are making on our strategy renewal effort. As I noted last quarter, each effort starts with clearly articulating Clorox's definition of what we are calling true north, and that is what is our definition of winning from a shareowner perspective.

Next is identify the a major three to five strategic initiative of growth vectors required to really drive our value creation against that value-creating objective. And then finally, challenging ourselves and determining if we have the capabilities in place to execute that strategy and I have been engaged in this work. I'm really encouraged by it, optimistic about the future for Clorox and I think it affirms several important belief I had coming here.

First, Clorox has an advantaged position with its strategy of building big share brands in mid-sized categories. Second, I think the folks here have built critical capabilities and processes in the areas of consumer and shopper insights and customer development. Third, I think this Company has as good as any company I have been with very good cost and productivity disciplines. And fourth, the Company has been growing well and has strong growth plans and driving profitable top-line growth will be the focus of our strategy through 2013, which we are calling our centennial destination when Clorox reaches 100 years of age.

Now with this strong foundation, we are looking into ways we can further accelerate growth and value creation. I look forward to sharing that update on this strategy with you at the May 24 conference in New York. With that, I would ask the operator to open it up for your questions.

(OPERATOR INSTRUCTIONS). Chris Ferrara, Merrill Lynch.

I just wanted to ask about the trends and you talked about second-half trends looking better, but I guess in essence since you have the acquisition benefit, you are really lowering your I guess Q3 and Q4 organic sales growth rates. So when you say volumes or trends look better, you are referring specifically to volume and I guess sales don't follow that because of the increased promotion that you are going to be seeing?

I think that's pretty much the case. You have to remember that the acquisition doesn't play a big part in the second half given that we hadn't even closed on a big portion of it as yet. So that doesn't deliver a lot of benefit to the second half; some, but not a lot. But the biggest impact is probably the reduction on the sales side because of some increased trade spending, and obviously the improvement in volume largely because we're out from under the shadow of these pricing initiatives.

Okay. Then just I guess on bleach where you said obviously we are lapping the price increases and you said you are going to step up support, I just want to be clear. Are you referring to color safe or you are also referring to I imagine regular chlorine breach, right? And if that is the case, do you see yourself stepping up promo to higher than normal levels or just sort of getting back to it since price increases are coming through or coming off?

I would say that the primary focus is on the color safe bleach segment. I don't think we have an issue at this point on the liquid bleach segment, the Clorox bleach segment. In fact, we are actually growing share based on the benefit that we are getting from Ultimate Care. So it is most mostly focused on color safe bleach. There is an awful lot of competitivity (sic) in the color safe bleach segment in terms of bargain price brands. There is more indirect competition from brands like Oxy-Clean and Tide to Go. So that is where the focus is going to be.

Clorox 2 is a large franchise for us. We have been doing some advertising behind it, largely in the form of advertising tags. So we've actually just put on there some dedicated advertising by increasing our advertising. We are also launching the Free line extension that I mentioned, the Free & Clear line extension that I mentioned. So it is much more on the color safe part of the business that we are talking about.

Then just finally, the manufacturing logistics pressure of 110 in the quarter, that seems pretty high. It looks like the worst you had seen it was last year at 120. I mean is there a reason why given where crude and fuel are that you would have gotten hit so hard this quarter?

Well the way to think about the manufacturing and logistics costs, keep in mind we have a pretty robust cost savings program and so when we report out our results, some of those cost savings are in those areas, but we report them as part of the cost saving bucket.

Second of all in manufacturing and logistics, we do report our diesel costs as part of that as well. So certainly there has been the pressure on the diesel component in manufacturing and logistics.

Amy Chasen, Goldman Sachs.

I'm just wondering if you could give us a little bit more detail on what oil price assumption you are using? In other words, could there be more upside over the next several quarters and I am not just talking about the back half, but into next year given what oil has done?

Let me take that one, Amy, and I will talk more about resin and natural gas frankly than oil. Although oil does impact us in some commodities, it is really natural gas and resin. Post the hurricane, we saw highs in the resin market in the $0.70 to $0.80 per pound range.

Certainly resin has come off of those highs fairly quickly and I think a lot of that had to do with some near-term oversupply in the resin market. Certainly housing has gone soft and I think there was a buildup of resin supply in anticipation of a bad storm season, which didn't come to pass. So certainly prices have come up more quickly and we have seen those dip into the probably the mid-$0.60 range, maybe even drifting out a little bit to the low $0.60s.

As we look at it going forward, we are not seeing that resin is going to return to historical averages, which for us has been probably in the $0.35 to $0.40 range, call it mid to high $0.30 range. We still believe the demand/supply equation in the sector will keep prices higher than what we have seen historically.

Having said that, our outlook does assume that we are going to see some drifting lower over the next three to four quarters. We still believe there is going to be some continuing downward pressure on resin prices. The caveat we have is there is two announced price increases in the market today. We certainly don't believe the operating conditions in the resin market should support those increases, but you never know exactly how much those are going to stick. So basically we do see some softening, some drifting down, but not coming back to what we had seen historically.

Okay. Just on the competitive issue, I think you spoke about the color safe bleach issues. Can you tell us in the other categories, obviously you have talked about bags and wraps and you have talked about disinfecting wipes? Are there any other categories beside those three where competition has really stepped it up or are those the three where we are going to see the bulk of the incremental spending?

There's some other competitive battles going on, but those are the three primary ones. I don't think the other ones scale up to be worth talking about.

Bill Schmitz, Deutsche Bank.

Can you just talk a little bit about the promotions you are using? Are these temporary price reductions or is it more display work? Is it brand diluted stuff to kind of try to take some share back or is this more thoughtful kind of display type activity?

I'd like to think it's all thoughtful. It varies by category and I'll just talk in kind of broad stroke, because obviously we don't want to divulge a lot to our competitors. But in the cases of Glad and to some degree in wipes, we're really talking about pricing and we're talking about pricing even more specifically in some specific customers.

So on Glad, for example, we have chosen not to take a price rollback. We may make that call at some point, but at this point it seems more prudent for us to deal with that with some specific pricing actions more on the trade side.

On wipes, it is some pricing activity by competition that we are responding to. It's also been some aggressive claims in advertising that we are trying to address both from a product standpoint as well as an advertising standpoint. So it is a combination of things, but there is definitely some trade spending component involved in the near term.

Great, thanks. And I'm just having a tough time with the math on this Colgate bleach acquisition because it sounds like you are using cash to pay for it. So assume that is a 4% cost of capital and then you pay $126 million for it, if I kind of back into the margin on that business, it is like 6% or 7%. So what I don't understand is is there a big sort of purchase accounting adjustment? Do you have to mark the inventory up or is it just you have to plow a ton of resources back and try to grow the business again?

I think the way to think about it, Bill, is these were non-core brands to Colgate, and so what we need to do is we need to do some near-term investments to revitalize those brands. So we just closed on the Canadian piece right at the end of December. We anticipate closing on the Latin American piece some time in the third quarter and there will be some revitalization investments both on the trade spending line, as well as advertising against those brands. So that is really near term what is impacting the margins on the acquired business.

Okay. So there is no material purchase accounting adjustment or markup or any of that kind of stuff?

Obviously we are getting goodwill and intangibles with the transaction, but there is no markup in inventory. There is very little inventory frankly that is coming over as part of the transaction because of the turns of the business.

And then just one final quick one. Is the 500 million pounds of resin number still a good one to use, 50-50, high-density and low-density?

Probably 450 million to 500 million. That's correct.

That 50-50 split is still right?

No, it is probably three quarters low (indiscernible) and a quarter high-density.

Connie Maneaty, Prudential.

I have a couple of questions. Could you tell us in last year's fourth quarter the one-time impact of the severance and options so we can figure out how they affect this year?

Yes, the stock option charge a year ago, non-cash stock option charge is $25 million, and the CEO related costs were $11 million, both of those pretax.

Okay, great. Also, on Glad, I know that volume is supposed to pick up in the third quarter, but when do you suspect Glad volume will pick up?

I think we would hope to see return to volume on Glad in the third quarter. Again, we are addressing the competitive situation I think more surgically at this point. It hasn't shown up much in the IRI numbers, but quite frankly, most of the battleground is in the untracked customers, not in the tracked customers. So we've already fixed some of our pricing differentials probably affected mostly in December, so they are starting to show up at retail now. So I would expect some volume growth in the third quarter.

Should we expect what is going on with Glad is more than Hefty, that that private label is able to reflect lower spot prices quickly on store shelves and there is that dynamic going on as well?

Definitely impact from private label. They have always been -- obviously, had big share in this category. So if you look at just the differences versus year ago, private label has gone up significantly less than Glad or Hefty. We went up the most, so our differentials or our gap versus private label are pretty significantly above what they were year ago. So private label is definitely an issue.

The good news is ForceFlex remains a very strong item for us. Recall that we built our share, about five points [over last five] for two years. ForceFlex is still gaining share, still growing shipments, so a lot of this pricing pressure is on the base brand where our differentiation versus the competition is less than it would be on ForceFlex.

Connie, it's Don. I think if you look at -- it depends on the SKU you're looking at. I think if you look at the [mid cap] which is the 20-count bag, it really isn't on a price differential versus Hefty year-over-year; it's private label as you alluded to. If you get into the 40-count, then you start to see a bit of a swing, a little bit of a swing versus Hefty, but it's private label where the gap is clearly the larger.

My final question is on your fourth-quarter preliminary outlook, because it is considerably below the consensus, not that the consensus is always right, but the factors don't quite make sense to me yet. You are going to have a higher tax rate in the fourth quarter and we figure that that might hurt earnings maybe by $0.03 or so. But your gross margin expense then ought to be higher in the fourth quarter than in anything you have seen so far this year.

So what else is going on in Q4 such that the outlook is lower than what we thought?

I don't think there is anything material from an operating or really a P&L standpoint in Q4 to note. Just to reiterate some of Dan's comments, sales expectations of 3% to 5%, that's pretty consistent with our long-term trend. Looking at a few of the analysts' numbers, that might be just a bit shy of where folks are, so that might help in terms of getting back into the range.

But I think to echo your comments, we could expect gross margin to grow at a healthy rate, probably a little bit better than you have seen in the first half of the year. Our selling and administrative costs will be down because of some of the one-time charges a year ago that we noted. And then the other item with the tax rate which you also noted, which was probably closer to maybe a $0.04 differential versus the consensus given that the tax rate could be higher in that quarter. But from an operating standpoint (indiscernible), I don't think there is anything materially different or unusual.

So it sounds like it is primarily non-operating things than any change in the operating environment or new products or ways you might be supporting your sales.

Not that is top of mind. What I might suggest maybe we can talk after the call and just review the assumptions.

Lauren Lieberman, Lehman Brothers.

I just wanted to know if you guys are looking into the second half and you have made all of your spending plans, to what extent is that based on your outlook for raw material costs inflation/deflation or is it a separate decision-making process from what is going on with commodity costs?

I think, as you know, that we have hung pretty tough to that rate of spending that we established of about 10% despite all the commodity pressures. And that is essentially what we generally target again despite the commodity situation.

I would say that we are increasing some components of spending because of some of these competitive pressures more on the trade side, which is included in that 10% overall number. So there is some increase there, but my guess is our spending -- our advertising spending will be about the 10% rate or slightly above or slightly below that number in the second half and where you will see a pickup is maybe in the trade spending component. But we kind of hang to a fairly consistent spending rate over the corporate portfolio despite the commodity issues.

It's the trade promotion piece? Sorry, Larry. It's the trade promotion piece I'm time trying to get at. You absolutely continue to spend very consistently on the advertising line.

The trade promotion piece does vary over time.

But it is based on what we think we need to do to support our brands. It is not tied to any limit in terms of if we get favorability from commodities costs, then that is the amount that we have to spend. The investment in building those brands and supporting those brands is based on what we need to do to keep them healthy.

Don here. I think in the context of commodity costs, we will look at, as Dan and Larry said. Trade spending is kind of the flexible marketing mix element there, but if we don't get our pricing right and we understand I think terribly clearly what our price elasticities are by these brands and where we gain share, where we hold share, where we lose share.

So it is kind of the trade spending piece in the context of commodity costs is kind of the flex that we have and say, okay, how do we make real sure that we are not getting our pricing out of whack based on our modeling so that we know we can kind of hold and gain share.

So we are not -- I guess then tying that back to some of the comments you made on the outlook for cost inflation at this point, we are not crossing any line to say you are going to be spending back over 100% of any kind of raw material cost relief that you might be getting at this point?

No.

Bill Pecoriello, Morgan Stanley.

When you talk about the volume growth possibly being ahead of sales growth in the third quarter in the release, what are you seeing in say January in terms of volume growth? Are you seeing the sticker stock starting to subside? Are you counting on the volume response into February and March as you increase this trade spending?

Our trade spending plans are -- obviously we did some of those -- started implementing in second quarter and they are ramping up here in Q3, Q4 and our outlook reflects what we think the response to that will be. As you think about volume growth in the back half of the fiscal year, Q3 and Q4, we are expecting volume and sales, the delta between the two probably to be in about a 1% to 2% range and in fact, with the additional ramp-up in trade spending, we could see volume growth being ahead of sales growth because of the spending that we are doing. Also because of the spending we are doing on the revitalization of the acquired brands, that will have an impact as well.

What kind of negative price can we see move through the P&L from this increased trade spending in some of these areas like trash bags and wipes through the back half? In this quarter even, there was one (indiscernible) with the [water can] and [auto] division, price was only up 2% but you had that 17% increase in STP. So what kind of price decreases are we seeing in some of these categories?

Bill, in a given category, it'd be mid to low single digit type (indiscernible) and for the entire Company, we don't expect volume and sales to be off by more than a point or two at the very most.

Negative 1% or so on the price mix at the corporate level?

Correct. That is our assumption, right.

And then a question on the commodities. We are seeing Pactiv who just reported earnings and they are already seeing a pretty nice margin benefit from the lower resin move through their P&L. Is the lag that we see in your P&L more related to hedges or contracts or different accounting methodology than we are seeing in their P&L?

Bill, that's certainly some of it. As we said before, because of our contracting, hedging and other techniques, we tend to lag on the way up and lag on the way down. I think the other factor to keep in mind is resin is just one component of commodities and there are many others that we have had to cycle through these peaks like chloralkalai and other things. So how it plays out in our P&L, it can be different than say Pactiv, which is more a resin story.

I just had one final one on the innovation front. When you are looking out to '08 and beyond, you have talked about having a gamechanger in '08. Where is your focus area in terms of categories where we should look for you on those gamechanges going ahead?

I would say broadly and general, gamechangers tend to come in the categories we have designated as best categories, which would be categories like homecare and Glad. That is not to say that gamechangers can't come elsewhere, but they are more likely to come there because that is where we have the innovation and R&D focus.

And the other point I would make Bill is while we are certainly continuing to focus on delivering a gamechanger in '08, I think the broader point for us is that we are trying and we are comfortable with getting over two points of incremental growth out of innovation and that is a combination of not only a gamechanger, but other core initiatives that we are driving.

If you take for example the litter success that we are having right now, that never described as a gamechanger, but it is certainly having brought success in the market. So I think it is more about are we getting -- are we feeling very comfortable that our program is delivering 2% or north of that in innovation.

Alice Longley, Buckingham Research.

Could you give us more color on the litter, food, charcoal category and that 11% increase? Was there any forward buying ahead of expected price increases in charcoal in there? And can you tell us more about the cat litter market? How fast that is growing and your share in that category?

Let me start with cat litter. It is a pretty healthy category, growing more than 5%. Our share is up over a share point in total driven by the Fresh Step franchise where we have this improvement where we are advertising the improvement. So if you looked at the scoopable portion of Fresh Step, it is up over 30%.

And that is all retailers then? Wal-Mart, etc.?

No, I'm sorry. I am quoting tracked information, IRI information. We don't have good quarterly data for all outlets. It's just not that reliable. We look at it on a 52-week basis, but not on a quarterly basis.

I think the other interesting thing about it on the litter, as Larry said, about 5% growth in the category full year, but when you look at the category, it tends to be flat the first three months of the calendar year. Then it really started to ramp up into the 6% to 9% range. So we think that was clearly driven by this innovation. So the category looks pretty robust.

And then any forward buying going on?

On charcoal we have controls in place to limit any forward buy on an announced price increase and there was nothing material in charcoal. Charcoal did benefit in the quarter from some favorable weather around the country and some early-season, off-season consumption.

And then did I hear you say that there's no rollbacks, price rollbacks going on going on with Glad because I have seen quite big ones at Wal-Mart?

Specifically what we have been doing is doing some trade promotion, temporary price reductions to affect our retail shelf price. What we have not done as yet is take a truckload, permanent truckload discount or price rollback. And again it is a choice we may make, but we have not yet made at this point.

Wendy Nicholson, Citigroup.

Could you talk a little bit more about the international business, the strength that we saw in the second quarter? I noticed volumes were off some and I wonder kind of how you are thinking about the second half. Is that just great category growth for some particular reason or what is driving that?

Then secondarily, I guess why we wouldn't have seen more market expansion there. I would have thought with just favorable operating leverage, the margins would be up year-over-year as opposed to down?

We are very pleased with the international results in the second quarter. There was really two things underway. There was actually very good volume growth and we also saw some pretty strong category growth in a couple of the Latin American countries. So we feel very good about that. We are also -- on the margin front, we are supporting a series of new products, particularly in Latin America, which is impacting -- some spending we are doing there does impact what you see on the margins. So there's both new products, as well as brand building underway there.

And then also on the margin side, the international, while it had some increases in commodity costs a year or so ago, they are fairly benign and we are actually -- it is lagging a bit what we saw in the U.S., but we are actually seeing some upward pressure on commodities costs. So a combination of really the investment behind new products, growing brands and some of the commodities that we are seeing in the international impact the margins that we reflected there in the second quarter.

Could you give us a sense for what you are looking for from volume growth -- in terms of volume growth for the international business in the second half?

What we've said about international, which continues to be true, although we've had a couple of quarters where it has been a little bit lower and a little bit higher is we are still anticipating that international -- that volume and sales growth will grow at or above the Company average as we look out. That is probably a fair estimate to use.

Terrific. And then very last question, did you say there was a gain on the sale of a trademark in the SG&A? How much was that? It has got to be tiny, I assume?

Very small. I think it was worth maybe $0.01 in EPS. It was a very small gain, $1 million to $2 million, a non-strategic trademark.

Need to be clear, though, that was down in the other income line. It wasn't in SG&A. So it is one of the reasons why you saw some favorability in other income.

Got it. Fair enough. Thank you very much.

Kathleen Reed, Stanford Financial.

A quick question on the sales line. Can you just break out -- volumes were down one. How much was the currency price and what the trade promotion spending was in the December quarter?

Kathy, the delta, the 4-point delta between the 1% volume decline and sales being up 3% was almost solely due to pricing. Mix, currency, trade spending, really didn't have much of an impact.

And on your new products that you talked about that are going to be launching in your third quarter, can you just give us any idea what categories they are in? I know they are not the gamechanger ones. But any specific category information you can tell us without divulging too much?

I talked about the Clorox 2 product, the Free & Clear product, which is a line extension of our color safe bleach. We're also launching the organic Hidden Valley Ranch product, which I think I mentioned. We have got the Clorox disinfecting cleaners. This is really a line of cleaners, both a spray version and a dilutable version. So they are disinfecting products that do not contain bleach. Obviously we have bleach-based disinfecting cleaners in that area, but we don't have any non-bleach products.

We also have some smaller items coming out. We have an odor shield extension on our trash business with a vanilla scent. We have a light version of our bottled Hidden Valley Ranch buttermilk product. We have a new scent on our Pine-Sol product. We are restaging our Clorox toilet bowl cleaner to the new formula and an improved package, and we also launched a hand sanitizer in our institutional business. Clorox Anywhere hand sanitizer.

And I think on your last call, you talked that you were going to relaunch the Anywhere spray during the March quarter. Has that already happened and if you can give us any information on how that is going?

We have done some things on kind of a broad scale basis. In Anywhere, we have actually taken the bottle out of the box and we have seen some improvement on shelf just by doing that. We actually have changed the packaging a bit, which should be hitting shelves relatively shortly. We did a couple of test markets and tried some new advertising approaches. We're encouraged by those results and my guess is we will probably turn those on at the beginning of next fiscal year versus this fiscal year, although that is still to be determined as yet, but still a solid item on shelf.

We still get pretty excited about this one because the consumer playback, those who use it over time, consumer playback is just pretty incredibly positive. So we are pretty committed to keep focusing on this one and once we get the equation right, we will be back in the marketplace with some heavier spending. Although we are spending on the product today.

John Faucher, JPMorgan.

I apologize for sort of beating a dead horse on this thing. I am just trying to get a better handle. It seems as though the three categories where you are highlighting the higher promotional spend have just entirely different dynamics in terms of what is going on. So I just want to make sure I have got this because it seems like the wipe thing is much more of a competitive issue in terms of like a brand relaunch, which is less raw material-related. The bags and wipes thing is more of just an existing price gap given previous pricing and then the color safe bleach is more of a traditional sort of negative price war type of environment. Is that a fair way to look at it?

I think I would call the color safe bleach a hybrid because we did take a couple of price increases on color safe bleach. A bit of that issue is on competing brands that are simply lower price within the color safe bleach segment, and a portion of it are premium products playing a competitive game.

Don here. I think your description on the Glad side and the disinfecting wipes is pretty accurate.

So it doesn't sound yet like the activity is really -- I guess if you could put a percentage on the raw material related activity that we are seeing here, it sounds like it is probably lower than what people would initially think. Is that a fair statement to make?

I think it probably is. I think if you look at Clorox disinfecting wipes, I think a lot of the activity going on there from Lysol is just due to the success of Clorox disinfecting wipes and the fact that that product category is very much on consumer trend, and people want a slice of that pie regardless of what the cost environment is. So I think your description is accurate.

And then one follow-up on the Lysol wipe piece, which is you guys have always felt very comfortable in terms of your product quality and your consumer acceptance relative to Lysol. So as you look at their relaunched product, where do you feel you guys are now sort of top two box relative to the Lysol guys?

On a blind product basis, we are probably parity. Branded, we are still significantly preferred. Clorox is still a much more powerful equity and what we have established in that business is a pretty substantial difference versus Lysol.

Linda Bolton Weiser, Oppenheimer.

I was just curious in terms of after you complete the bleach acquisition, in addition to reinvestment behind the brands, what other actions might you initially take? For example, are there any opportunities to take some of your other brands into the channels where Colgate had presence with the bleach?

It's a little different by country. In one case -- let me speak to Canada specifically. We are buying the bleach brand and we don't have a Clorox presence there of any significance. Our hope would be to revitalize that bleach business and then take on what we have done in kind of the homecare side within the U. S. into Canada based on this health and wellness or disinfecting germs platform. So that is a big opportunity for us not only to revitalize the business, but also to expand upon our health and wellness platform.

That does give us some additional scale in several of the Latin American countries and I think we can build upon with not only homecare type products, but also potentially some other Clorox lines.

I think if you look at Venezuela where we have a really good basic business in Venezuela, we don't have any bleach business in Venezuela. So we have got really good infrastructure in that country and I think this will give us something that is a really great opportunity that is right in our wheelhouse.

Why don't we take one more call?

Alec Patterson, RCM.

I have got six questions. Just quickly, sorry. The IT charges in the second quarter, $0.04 to $0.05 roughly per share, is that right?

Yes, pretax basis charges in the second quarter were about $9 million split between $5 million in selling and admin and $4 million in restructuring, and we see another $8 million to $9 million in the third quarter. And I think about, if I recall the math correctly, it is going to be about $6 million probably in the selling and admin line and the balance down in restructuring.

Okay. And then your S&A comment for Q4, are you still looking for S&A to be up year-over-year when you back out those one-time options charges?

Yes, we would anticipate that selling and admin will be up when you back that out. We have some incremental investment in our strategies. We obviously have the admin impact of the bleach acquisition and then there is a few other things that will be there. But yes, we are expecting, year-over-year, to be up after you adjust for those charges.

Then the CCEM, up 240 basis points contribution, that is a pretty strong run rate on a comp basis. Can one take that as a run rate? In other words, are you running ahead of plan this year or should we expect the back half of the year to see those benefits ease off?

I think the best way to think about it is for full year, we are still in this $90 million to $100 million cost savings range and it can be a little lumpy by quarter. So if you are thinking about it, I'd think about $90 million to $100 million. We certainly are trying to deliver at the high end of that range, but it is always difficult to exactly quantify what will hit in any one particular quarter, but we still feel good about the $90 million to $100 million for the full year.

I guess I can't help but think of it as these are cost savings and once you have achieved them through whatever structural changes, etc. you have taken that they should be in place and thus ongoing and thus the run rate you have got on a couple years basis now would suggest some good benefits in the second half of the year. But am I misinterpreting the way the CCEM flows through? It is lumpy next quarter, could not have anything to do with the prior quarter?

The timing is strictly dependent upon the nature of the activities that we are driving. To your earlier point though, CCEM, yes, it takes costs out of the base. Then we can improve upon as we go forward. So this is incremental cost savings over the balance of this year.

Okay. And just to clarify the response you had to Bill's question about volume and price and the sales mix. I just want to make sure I understood it. If for example sales are up 4%, you are suggesting then that might be a mix of volume up three and price up one to give you that delta that you were talking about. Is that roughly what you were, as an example, talking about?

We were really saying that we would be volume up four, price down one, for a net three.

I see. Okay. And then lastly, just an overarching question. The strategy you guys had in taking the price increases you took over the past two years has theoretically reflected your perception of kind of where the raw material environment might go over time and you were trying to price up to kind of the midpoint of an ongoing range. Theoretically the pricing didn't capture the peak in the raw materials we recently had theoretically. So as raw materials come back down, there was supposed to be some cushion in your pricing strategy, but now that seems to be changing a little bit talking about the price gaps. Is that overarching strategy of your pricing versus raw material on the long term, has that changed?

I think the overarching strategy is basically still in place and I think it's broadly true. I think the one obviously big exception is Glad where we have just seen so much increase in commodity, so much increase in pricing in a relatively short period of time. So we are still well above the historical average in terms of resin costs on the Glad business.

Our pricing hasn't nearly approached capturing all of that back so we are still below from a margin standpoint versus kind of historical trends. So some correction there given how much pricing we have taken is not to be surprising. But generally speaking, I think our strategy has played out. We try to price to what we thought would be the ongoing normal pricing, not pricing to the peaks and I think that has largely held true with the exception of Glad where we have just seen a much more dynamic environment.

But even in Glad, as you look at it, we are probably still up 70% from historical resin cost averages and if you look particularly at the trash business, probably our price increases that we have taken over the last two years are probably in the 35% to 40% range. So we are still well below what we have seen in the cost run-up, but certainly we have to pay attention to the price gaps and we do have to respond.

I understand the response and maybe it is a short-term issue, but is it your impression that over the next say 12 to 24 months that the raw material rollover or getting to the point, where you have tried to price the product, that is your theoretical long-term costs of raw materials. If it gets to that, are you suggesting that you are not looking to spend 100% of that raw material back into the market? I'm sorry, I don't know if I asked that question clearly.

Could you restate that?

Yes. Again, along the lines of the notion that your pricing strategy has been for a long-term raw material environment. Raw materials are rolling off of a peak down to whatever that theoretical long-term raw material price point is. Are you looking at spending 100% of that raw material rollover back into the marketplace or are you, because of your pricing strategy, hoping to capture some of that?

I think it is a combination of both, trying to capture some of that and looking at gross margin improvement over time.

If you think about the Glad business more broadly, obviously the place where we have the most kind of commodity issues and the most pricing pressure. Our long-term strategies that differentiate our productline in a way that drives value for the consumer so we are not so much in this commodity pricing game. We obviously have done that very successfully with our ForceFlex business, which is improving our margins and is still growing after being in the marketplace for more than two years.

So at the end of the day, that would be our long-term solution to getting out of this box we have and simply respond to commodity pressure and pricing pressure by competition.

In the short term, we obviously need to play in a way that we are still keeping our brands healthy until we get all the way to [bright], but we are making some good progress on the Glad business certainly since ownership.

Thanks for answering all my questions.

That's only five, Alec. You have one more.

With that, this does conclude today's question-and-answer session. Mr. Knauss, I would like to turn the call back to you for additional or closing remarks.

Okay, thanks. And just I would like to echo my thanks from everybody around the table for all of you being with us today. We look forward to talking to you again in early May for the third-quarter results and then of course on the 24th of May, we will be in New York and I'm assuming we will see many of you there. Thanks for being with us today.