高樂氏 (CLX) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Clorox Company fiscal year 2007 third-quarter earnings results 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, today's 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.

Thank you. Welcome, everyone, and thank you for joining Clorox's third-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 some comments on the Company's third-quarter operating results, providing key business highlights as well as perspective on our competitive environment and commodities costs. Dan will follow with a review of our third-quarter financial performance, as well as additional details supporting our fourth-quarter outlook and some initial thoughts on fiscal year 2008, as communicated in our press release this morning. Don will then wrap up with his perspective on our recent performance and future expectations, and then we will 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 providing insights on these measures enables investors to better understand and analyze our ongoing results of operations. Reconciliation with the most directly comparable financial measures determined in accordance with GAAP can be found in today's press release, this webcast, prepared remarks or supplemental information available in the financial informational results area within our website, as well as in our filings with the SEC.

Lastly, please recognize 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.

Good morning. As you saw in the press release, we had a very strong quarter. Sales were up 7% with sales gains achieved broadly across the portfolio. We grew both our gross and adjusted operating margins, and we delivered diluted earnings per share of $0.84, $0.04 above the top of our outlook range. Dan will review the financial results in more detail in a few minutes, but first I would like to provide some overall perspective on what drove Q3 performance.

I will focus my comments in three areas -- first, the return to volume growth; second, our response to competitive activity; and third, the impact of commodities on the quarter. Starting with volume, we are very pleased by our return to volume growth. Q3 volume was up 8%, the highest year-over-year increase in at least 15 quarters. Volume was up strongly in each of our three business segments.

Growth drivers were as follows. First, we anniversaried the bulk of our fiscal '06 price increases, and this was a big part of the volume turnaround. We also generated strong results behind demand-building activities and our actions to address heightened competitive activity. In our international markets, we grew volume behind strong laundry and homecare category growth and market share improvement.

Our recently acquired bleach brands in Canada, Venezuela, the Dominican Republic, Ecuador, and Uruguay are being smoothly integrated. This acquisition added about a half a point of volume growth to the quarter and is on track with expectations.

Innovation also contributed to strong volume results. In our specialty segment, major product improvements helped drive all-time record shipments of Fresh Step scoopable cat litter for the fourth consecutive quarter, as well as a strong gain in shipments of Kingsford Charcoal. We also successfully launched a new line of Clorox nonbleach disinfecting cleaners.

Finally, we benefited from some unanticipated strong volume growth in our seasonal businesses, charcoal and auto care, behind great March weather and a three-week earlier conversion to daylight savings.

Turning to competitive activity, we highlighted three brands in our last conference call where we felt we needed to respond with some short-term promotional spending. Glad Trash, Clorox Disinfecting Wipes and Clorox 2 color-safe bleach. The sector was primarily reflected in increased trade promotion which negatively impacted sales by about 2 points.

I'm happy to report that all three of these businesses grew volume in Q3. Glad was up 6% in volume and 3% in sales, our shares in the trash segment were also up. Clorox Disinfecting Wipes had a very robust quarter with all-time record shipments behind some outstanding merchandising support. Both share and consumption increased nicely.

Looking at Clorox 2, we had modest volume growth, but share results were down. We still have some issues on this brand and we are working to address them. Overall our categories remain competitive and this is particularly true in bags and wraps and laundry and homecare where the competitive situation remains very intense. We will continue to address competitive activity vigorously to protect the long-term health of our brands and we feel good about the impact of our efforts in the third quarter.

The last area I want to talk about is commodities. The commodity environment moderated in Q3 with resin costs down versus the post hurricane highs in the year ago quarter. This combined with cost savings helped drive very good gross margin improvement. Resin however remains very high relative to historical levels. In addition, we continue to see increases in transportation and other energy related costs as well as widespread increases on a variety of other raw materials such as agricultural products.

For example, soybean oil, which is the primary ingredient in our Hidden Valley salad dressing, is increasing sharply as farmers switch production from soybeans to corn in response to the demand for biofuel inputs. Cornstarch, which we use to bind our Kingsford briquettes, is also increasing sharply due to the biofuel demand.

To conclude, we are very pleased with our third-quarter results from top to bottom. We feel good about the health of our brands and the ability of our organization to deliver. We expect our positive momentum to continue into the fourth quarter, although we need to acknowledge that we are below expectations for April due primarily to the impact of poor weather on our seasonal businesses during the month. Our integration of the recently acquired bleach brands has gone very smoothly and we remain on track with our expectations.

With that I'll turn it over to Dan for a more in-depth perspective on our financial results.

Thanks, Larry. With that let me walk you through our financial results. In Q3 we delivered $0.84 per diluted share reflecting our strong sales and volume growth, gross margin improvement and a favorable effective tax rate versus the year ago quarter. We came in about $0.04 above the top of our outlook range, primarily due to late quarter strength in the auto care and charcoal businesses and slightly more favorable gross margin.

In addition, our tax rate was slightly better than anticipated. As a reminder, our earnings results for the quarter included $0.04 diluted EPS of costs associated with our previously announced IT services agreement.

On the top line third-quarter sales increased 7% versus the year ago period with strong sales growth in each of our three business segments. Sales came in about 2 points above the top end of our outlook range driven primarily by higher volume in auto care and charcoal. As Larry noted, we lapped the majority of our fiscal year 2006 price increases which helped us return to volume growth as anticipated.

The 8% volume growth outpaced sales growth due to higher spending to support brands facing competitive pressure and product and channel mix in homecare. These factors were partially offset by the benefit of recent price increases.

Gross margin improved substantially in the third quarter to 43.3% compared with 41.5% in the year ago quarter. Now this is the third consecutive quarter of year-over-year gross margin expansion. Let me break down the 180 basis point increase for you.

Contributing to the gross margin improvement were 280 basis points from cost savings which were somewhat higher than anticipated for the quarter. Our very strong cost savings were driven in large part by strategic sourcing and manufacturing initiatives. Note that we anticipate continued strong cost savings in Q4, but not at the same level as in Q3.

Also contributing to Q3 gross margin improvement were 140 basis points from price increases and 40 basis points from slightly favorable net commodities cost as we lapped the peak post hurricane commodity costs in the year ago quarter. While we did see Q3 favorability in some raw materials, particularly resin, this was largely offset by cost increases for other commodities such as jet fuel, pine oil, clay, solvents, coal and agricultural commodities such as soybean oil and cornstarch.

These favorable gross margin factors were partially offset by 130 basis points from increased trade promotion, spending and 120 basis points from higher expenses for manufacturing and logistics which also includes diesel costs. All other factors had a negative impact of about 30 basis points.

Third-quarter selling and administrative spending increased versus the year ago quarter on both a dollar and percent of sales basis. Two key factors contributed to the increase. We incurred $10 million in costs associated with IT services agreement, as anticipated, with $5 million recorded as SG&A expense and $5 million reflected in restructuring charges. Also contributing to the increase in SG&A expense was some administrative spending associated with our strategy and growth work. We'll provide more detail at the May 24th meeting in New York.

Favorable gross margin helped drive an increase in adjusted operating margin to 18.4% for the quarter compared with 17.5% in the year ago period. Similar to gross margin, this is the third consecutive quarter of year-over-year adjusted operating margin expansion.

Our effective tax rate for the quarter was 33.3% versus 34.5% in the year ago period. This was slightly lower than anticipated due to the impact of final adjustments from the Company's prior year tax returns and a slightly higher domestic manufacturing credit than anticipated. We anticipate our full year tax rate to be in the range of 34 to 35%.

Turning to cash flow, third-quarter cash provided by operations was about $172 million compared with $138 million in the year ago quarter. The increase was primarily due to higher earnings and improved working capital. Free cash flow, which we define as cash flow from operations less capital expenditures, was about $144 million or about 12% of sales. We achieved our near-term targeted debt to EBITDA ratio of two times in Q3 and will share our plans for capital structure and use of future cash flows in New York.

Before I discuss our financial outlook I'd like to comment on some factors you should keep in mind. Our current outlook continues to reflect our best estimate of the impact that commodities costs will have on our results in the fourth quarter. Commodities costs continue to be volatile and we remain cautious. Clearly we've seen some moderation in commodity costs, particularly resin. However, as we noted, we've also seen increases in other areas such as agricultural commodities. We expect this trend to extend into Q4 in FY '08.

As I already mentioned, in Q3 we had a slightly favorable net year-over-year comparison in commodities costs. In Q4 we anticipate a flat to slightly negative year-over-year net impact from commodities. We anticipate continued intense competitive activity in trash bags, particularly in non-track channels and in laundry and homecare.

Our Q4 and full year financial outlook include higher trade promotion spending to respond to these competitive issues with a heavy emphasis on trade promotion. We also remain cautious about early Q4 consumption of seasonal products given this very poor weather in April across much of the United States.

So now I'll cover our outlook for Q4 and fiscal year 2007. Starting with Q4, we still anticipate sales growth in the range of 3 to 5% with continued solid performance across the portfolio. In the fourth quarter we anticipate continued gross margin expansion versus the year ago quarter, although not at the same expansion rate as we saw in Q3. While cost savings will remain strong in Q4, we will not see the same level of gross margin benefit from cost savings as in Q3.

Our outlook for fourth-quarter SG&A expense is that it will be lower on a year-over-year basis. As a reminder, the year ago quarter included compensation expense related to a voluntary review of the Company's historical stock option practices and costs related to the retirement of the former Chairman and CEO from his position. That said, we'll continue to invest in resources to support our strategy and growth work.

We anticipate expansion in Q4 adjusted operating margin reflecting our outlook for improved gross margin and lower SG&A cost. We anticipate a fourth-quarter effective tax rate in the rage of 34 to 35%. Net of all these factors we now anticipate fourth-quarter diluted EPS in the rage of $1.05 to $1.11. For the full fiscal year, taking our Q4 outlook into account, we now anticipate sales growth of about 5%, which is at the high end of our targeted range, and diluted EPS from continuing operations in the range of $3.21 to $3.27 per share.

As you saw in the press release, we will be providing our initial financial outlook for fiscal year 2008 on May 24th in New York. However, I'd like to provide some perspective in advance of that meeting for you to consider as you start to think about fiscal year 2008.

We anticipate favorable resin cost trends to be offset by cost increases for other commodities. As a result, at this time we anticipate a flat to slightly negative net commodity cost impact next fiscal year. We anticipate that new product innovation will continue to deliver about 1 to 2 points of incremental growth within our targeted sales growth range of 3 to 5%.

Our outlook is for continued strong cost savings in the range of $80 million to $90 million for the fiscal year or about 200 basis points of margin. We anticipate further inflationary pressure in administrative expenses and manufacturing and logistics which will be more than offset through cost savings. Again, we'll be providing further details in New York. With that I'll turn it over to Don for a wrap up and Q&A.

Thanks, Dan. Before we do open it up for Q&A I'd just like to take a couple of minutes and recap some of the key points I think you should all take away from today's call. First, we're obviously very pleased with our Q3 results which exceeded our expectations reflecting the strong sales and volume growth in each of the three business segments.

Notably, as both Larry and Dan have pointed out, this was the highest volume increase we've seen in the last 15 quarters and I think it's worth noting that the sales growth of 7% was on top of 7% growth last year, so it was not an easy comparison period. We improved gross margin and adjusted operating margin and obviously delivered strong diluted EPS results.

I think these results really demonstrate how we're taking a holistic approach to demand creation. We're really focused on building consumer lifetime loyalty through what we call these three moments of truth which I talked about at CAGNY -- desire, decision and delight.

Desire being obviously about prepurchase communication in the form of advertising to generate consumer interest and create motivation. Decision about how we communicate at the store level where we still believe, and from research we've seen, about 60 to 70% of purchase decisions are still being made. And then delight and about offering high-quality consumer preferred products based on deep consumer insight so they'll keep coming back. And of course innovation, which has been a clear focus of Clorox, cuts across all three of those key consumer moments of truth.

Now another point I'd like you to take away from today's call is that we continue to experience an intensely competitive environment in several categories, particularly trash bag, laundry additives and homecare products. The homecare category is as competitive as we have ever seen it, but we're taking the right steps in support of our brands in the short-term and help ensure the long-term health and growth of our businesses.

Our Q4 and full year outlook include higher trade promotion spending to respond to those competitive issues and, as Larry noted, we've had some good response in the third quarter. Larry also already told you about our North American results. I would like to take a moment and just review some of the good progress we're making on the international front.

Again, in Q3 we delivered very strong results in international -- 13% volume growth, 16% sales growth and a 15% increase in pretax profit. We're also pleased with the progress we've made against our 2008 international strategy for profitably growing faster than our U.S. businesses. And over the past three fiscal years international sales have exceeded a 10% compounded annual growth rate.

Now we've accomplished these results by focusing really on four core categories -- laundry additives, dilutable cleaners, bags and wraps and then lastly, auto care, and really focusing on our 14 tier 1 countries. Growth has been particularly strong in our bleach and cleaning brands in Latin America. And as Larry noted, our recently acquired bleach business in Canada and Latin America is on track. Notably the acquisition marks our entry into Ecuador which has a high growth potential.

In Australia and New Zealand we continue to face some issues with the continuing consolidation of the retail trade and the drive-by retailers to grow their own brands. We're addressing this challenge through innovation with our market leading Glad, Armor All and Chux brands and by building our service capabilities with customers.

We continue to leverage our corporate capabilities across our international businesses with an emphasis really on two -- brand building and world-class manufacturing. And we're confident about the prospects for future growth through the selected expansion of our model into other categories and countries.

Now taking a step back, I'd like to emphasize that Clorox is healthy. Our shares are good and we're aggressively defending brands that face competitive activity. We've returned to volume growth as we said we would and we expect to continue growing volume in the fourth quarter. We delivered our third consecutive volume of gross margin expansion and we anticipate growth in both gross and adjusted operating margins for the full year.

Importantly, with three quarters behind us we're on track to deliver our expectations for the full year. As we've said many times, there are obviously going to be quarters that come in somewhat higher or lower than anticipated. We're really focused on hitting our annual targets and long-term goals despite variation in individual quarters. Based on our current performance and expectations for the year I feel very good about our position.

And lastly, about finalizing the details of our long-term strategy, this work is all about charting our course towards what I've described as the Company's centennial anniversary in 2013. We've called the strategy our centennial destination. And we're obviously excited about the progress we've made while continuing to focus on and executing against our current year plans. And we really look forward to sharing that strategy with you in about three weeks. So with that I'll ask the operator to open it up for your questions.

(OPERATOR INSTRUCTIONS). Amy Chasen, Goldman Sachs.

Can you just tell us -- you mentioned these agricultural costs several times and it's the first time in all the years that I've covered Clorox that I've heard you mention that. Can you quantify for us how big those are and how much you expect them to actually be up in FY '08?

Good morning, Amy. This is Dan. On our commodities, I think we've described in the past that in terms of total cost of goods sold commodities and raw packaging materials represent about 60% of COGS and resin liner board chlor-alkali comprised about 15 to 20%. So the remaining 40 to 45% is a whole host of other smaller commodities and input into the manufacturing process. And typically we haven't talked about them in the past because they've been relatively static.

But we are seeing a lag trend in a lot of these much smaller commodities; we're seeing a lot of the energy cost run-up starting to hit a lot of these smaller commodities. And in addition, on these agricultural inputs that we used primarily in our food and charcoal businesses, with the shift in production over to biofuel inputs we've seen some pretty impressive increases -- although they're still relatively small dollar spends in total, the amount of increases on those spends have been pretty impressive, particularly in this last quarter and as we look out.

So we are seeing favorability in resin which we had anticipated and that's starting to play out as we thought. But what we are seeing is in a lot of these very small commodities some pretty impressive increases in those costs. And these are more difficult for us because they aren't really hedgeable, there are not a lot of derivative instruments out there and it's a little harder to try to control those costs.

So Dan, if resin and chlor-alkali are 15 to 20% of COGS, how much are these other agricultural inputs as a percent of COGS?

I don't have the specifics on the ones we called out today. We can try to get some information to you later. These are all relatively small spends for us, but when you add them up -- when these things have 1 million to 3 million type increases in our total spend and you add them up for the full year it ends up being a number.

Okay. Because what I'm trying to get a sense for is, number one, how big are they as a percent of sales and how much do you anticipate them being up in FY '08? So maybe I can follow up with Steve, but that's the question that I'm really going to want to ask.

Amy, your second question I think is an important one because, while we expect resin to steadily improve over time, the rate of increase next year on these smaller commodities is going up much more dramatically. So even though they're small their rate of increase is so large that they're offsetting what is still a nice steady improvement on resin, and one that we will continue for sometime. But we'll try to help you afterwards with the percentage of the buy.

That would be great. Thank you.

Chris Ferrara, Merrill Lynch.

I want to talk about the investment in administrative resources and how that layers into the Q4 guidance I guess. And I guess more specifically, what drove the nickel comeback in guidance? I know agricultural commodities might have run ahead of expectations, but what caused the delta beside that and how much of it is administrative resources investments?

Chris, when you look at the fourth-quarter outlook, there are a couple of factors that are reflected in that outlook. First is, as we mentioned before, we had very favorable shipments in our seasonal businesses in March because we had pretty good weather across the U.S. in March, but as good as the weather was in March it was equally if not worse -- poor in April. So we're seeing softness in the April shipments in our seasonal businesses.

I've mentioned the small commodity impacts that we're seeing and we still have a fairly high level of competitive activity that we're facing and we are spending against that. And then we have had some spending against our strategy and growth works. So all of those factors are really what led to the outlook that we provided.

I guess though what I'm trying to get at is what caused the difference in the outlook between last quarter and this quarter?

Again, it's all those factors versus where we were thinking a quarter ago to where we are today. Again, we had a significant ramp up in our seasonal shipments and now we're seeing those be a lot softer in the fourth quarter. So we're reflecting that in our outlook. That's one of the primary drivers in there.

But your sales guidance is unchanged, right? Does that mean that you would have expected to exceed that sales guidance? And also, the fact that those seasonal businesses -- is that a margin mix issue too with those businesses being slower than you thought?

Our range is 3 to 5% on the quarter on the top line, so that does allow for some variability in the quarter itself. In terms of the profitability of those businesses, those are reasonably profitable businesses for us in our gross margin mix.

So that mix is part of why the guidance is lower for the quarter, is that right?

Again, it's reflected in the -- there are a lot of different factors here, Chris. There isn't any one that we would point to. The biggest impact on the quarter is the impact from the seasonal businesses. That's the primary one driving that.

That's great. And then can I just also ask -- so the trade spending was a negative 2 impact on the top line, right? Was the other point mix and what was the mix issue in the quarter if that's what it was?

The trade spending impact was a dilution by basically 200 basis points. Offsetting that was price and mix combined with pricing really helping us out. We still had a little bit of carryover effect from price increases we took on Glad a year ago which won't be present in Q4 because we'll have fully anniversaried it by that time.

Chris, it's Don. Basically the pricing offset the trade spending, but the unfavorable mix was more of a channel mix than it was really a product mix. We had some robust growth in the club channel which gets into some of the unfavorable mix. But when you look at trade spending and you look at pricing, they virtually -- actually pricing was a little bit more favorable than the trade spending was -- negative. So it was a pretty good offset there.

Got it. Thanks a lot, guys.

Kathleen Reed, Stanford Group.

Just sticking with the trade spending, do you expect the trade spending to accelerate in your fourth quarter or should we still expect that same 200 basis point level? And are you expecting trade spending to continue into fiscal '08?

Don't expect it to accelerate in Q4; we do expect to continue the trade spending effort. Again let's focus on those key brands that I mentioned. Probably too soon to call whether it will increase in fiscal '08. I wouldn't expect a dramatic increase at this point, but we're really responding to what happens on the competitive front and that's pretty hard for us to predict.

Okay. On the cost savings side, I think when you were breaking out your gross margin components you just said the cost savings were better than you had thought in the third quarter. And with that same -- in your press release you read that less cost savings in the fourth quarter. So were some projects done just earlier, they came in earlier in the third quarter on the cost-saving side and what is your full year cost savings still for fiscal '07?

I think that's one way to think about it is we got a little more cost savings in the third quarter than we had anticipated. When you look at our total cost savings trends, through the first three quarters we've delivered about $80 million of cost savings. And in this quarter we're a little bit ahead and it was primarily in our sourcing areas in our world-class manufacturing, we were a little bit ahead of where we thought we would be. That delivered a positive benefit of about 280 basis points to margin.

Typically cost savings for us average about 200 basis points of margin improvement in -- for a full year. And that's probably the right figure to think about for the fourth quarter.

Okay. And when did the Latin American portion of your Colgate bleach deal close?

All those countries have closed in Q3 with the exception of Colombia which we expect to close in this quarter.

Did it close late in the quarter? I'm just trying to figure out how much of the --?

It closed the last day of February.

So essentially we took over March 1st.

So basically -- and how much of the volume in the international is due then to the Colgate deal?

Pretty small. Overall company was about half a point. Most of that was driven by Canada.

Okay, great. And then just last question is the restructuring charges that you just posted on your P&L were $9 million. I think you said $5 million of that was IT. What was the remaining $4 million?

The remaining $4 million in restructuring -- two things. There was some redundant equipment that we had in one of our businesses that we took a charge for and we had a very small charge for closing a small manufacturing facility in Chile.

Okay. Thank you so much.

Bill Schmitz, Deutsche Bank.

Good morning. I think you referenced channel mix as one of the drivers of the volume line. Was there a big distribution gain in the quarter in any of the products?

We had a particularly big event in clubs. So if you happened to be in club stores over the last quarter you would have seen lots of Clorox products at the front of the store as well as coupons that were distributed to homes. This is pretty much something that we do annually. It was bigger and better than last year and so we saw a pretty substantial increase versus what we did last year and some of that's reflected in the mix.

Okay, and then just a follow-up on the promotional spending acceleration. In the last two or three years you really focused on reducing your promotional spending and increasing it's effectiveness. So I'm wondering have you applied the same kind of return on promotional investment analysis to the new spending you're doing now, or is this more of just a response to competitive activity?

I would say more this is a response. Some of it's in effect addressing pricing issues, particularly on Glad which is probably the biggest piece of it. So it's not of as much about getting merchandising and display activity, it's more around getting our pricing right versus the competition.

Is any of that due to the channel shift or increased focus on the supermarket or food channel?

No. We do see differences, particularly in the trash category. We are seeing more activity in untracked channels on the promotional front than we've seen in the tracked channels.

I think, Bill, when you look at it historically, even with the increased spending to defend brands in the third quarter, the level of spending is lower than it was in '04 and '05 and it's slightly higher obviously than '06, but we apply the same rigor certainly to the returns on that spending.

Okay, great. And then lastly, just on the bleach business. It seems like there's been a lot more activism on the sort of corrosive activity of bleach and redoing a lot of the transportation networks. And also a couple of the big terrorist attacks actually involved chlorine bleach. So are you seeing anything in the trade where they're trying to find alternatives to chlorine or making you do things differently to kind of control the distribution a little bit more?

I think you know our standards for handling chlorine are among the best, we're well above any kind of regulatory requirements. The issue does come up because of the press, we don't see it I would say in a big way from our customers, but it's obviously something that we look at from a business perspective, particularly from a long-term perspective to see how we can address it. But no material difference in consumption, share, volume results. We're up a bit in bleach this quarter and it's pretty much tracking with what we've done over the last several years.

Got you. Are you hearing that there's a nonchlorine bleach hitting the shelves soon?

We have a nonchlorine bleach called Clorox 2.

Okay. But a competitor, something -- a new competitor to the category? I heard some rumblings in the trade press.

No, it would be very difficult to duplicate the benefits of chlorine bleach at the right kind of value equation.

Okay, great. Thanks very much.

Connie Maneaty, Prudential Equity Group.

I want to talk a little bit about what's going on in SG&A. Did the increase in the third quarter where you talked about your investments in strategic and growth work -- I would imagine that if you were doing this internally there wouldn't be an increase. So does this suggest that you have consultants helping you out on a growth strategy?

Yes, Connie, we have. And I think that spending in the quarter is in the $3 million to $5 million range. And we've been working primarily with Galt & Associates who have added some capability here as we've looked at really pulling apart the businesses from an economic profit standpoint as we've talked about through various roadshows. So that's where the spending is. We're building that capability in-house at our strategy and growth office under Beth Springer. So it's kind of a -- as you look at the third quarter and the fourth quarter you see that spending in that range and it obviously would mitigate as we go into 2008 as we build that capability in-house.

I'm sorry, I missed the name of the consultant, who is it?

Galt, G-A-L-T. It's part of the -- a number of people from the old [Mericon] group.

Okay, fine. You also said that in the fourth quarter SG&A was going to decline. Is that as a percentage of sales or in absolute dollars?

It's actually both, Connie, but what I would point out is that last year in the fourth quarter we had some almost onetime items with Jerry's retirement as well as some accounting cleanup and I think it was in the neighborhood of about $36 million. So I think for a real comparison you'd want to take last year's selling and admin costs, probably back out $36 million for a more normalized run rate and then grow off of that for this year's fourth quarter. So we will be down but I think it's down because last year's base was so high.

That's a very big increase -- or that was a very big expense.

Correct.

How much competition are you seeing from OxiClean now that it's part of Church & Dwight than when it was part of a private company?

That brand has been generally very successful, it was successful before it was purchased and it continues to grow. It's definitely part of the issue that we look at on our Clorox 2 business. And I said we were growing -- we grew our business in Q3 on Clorox 2, but we lost share and part of that picture is definitely OxiClean. I wouldn't say we've seen a dramatic ramp up in their performance, to they're definitely still growing.

They're making the claim that if you add OxiClean to your detergent you don't need to buy Tide because it boosts the cleaning power of everything else up to Tide. So it's -- do first of all, do you believe that? And secondly, does that have an impact on regular bleach sales as well as Clorox 2?

You'll have to ask Procter about performance versus Tide. I'd be suspicious but they're the expert so I'd let them answer the question. I would say Oxi is more of a threat to Clorox 2. In terms of its performance profile it's more like Clorox 2. It doesn't deliver the kind of benefit that Clorox bleach does, liquid bleach does. However, it can be used safely on colored clothes where Clorox liquid bleach cannot. So it's quite a different profile and performance from liquid bleach very similar to Clorox 2.

And in terms of performance, the trade spending aside what's the performance difference if a consumer uses OxiClean versus Clorox 2?

Nada.

Okay. So this is just a marketing war at this point?

Yes.

Thank you very much.

Bill Pecoriello, Morgan Stanley.

Good morning, everybody. On the trade promotion, I was surprised at the extent you were saying that it wasn't letting up at all for the fourth quarter. We heard some comments last week from Pactiv in terms of the trash bag category and it sounded like they were backing off a bit and almost crying mercy a little bit. But you're not seeing that yet in the marketplace at all, not anticipating it?

Again, the behavior we're seeing from our competition is a bit different in untracked channels versus tracked channels. We watch this stuff very carefully week to week. It's hard for us to turn things off on a dime, so we do have plans with our customers that go out typically at least a couple of months.

I think the long and the short of it, Bill, is I think we've got to see it to believe it. So I think to Larry's point, we'll watch and see what happens. We're going to be competitive, we're not going to be stupid.

So in terms of looking out into your Q4, you haven't seen any indication yet what they were talking about? Because they weren't talking about the track channels, they were talking about what was hitting their P&L and how the promotional spending was going to back off in the next quarter.

No, again, we're seeing different behavior by customer group. I think a lot of what they were addressing in their conference call was around the track universe, but again, we're just seeing significant differences.

I think the other thing to keep in mind, Bill, is this is a fragmented category with a lot of private-label capacity. And in the last quarter I would say as much of the monitoring of price gas versus competition was relative to private-label who can probably move a little bit more quickly as resin prices change. So it isn't just us versus the Hefty product, it's us versus the other competition including private-label who collectively had the number two share in the category to us.

And as the resin is moving up a little bit sequentially here you haven't seen the change in the private-label behavior?

It's relatively recent. Again, we've really got to see how this plays out.

Okay. And then one follow-up also, the manufacturing logistics. The hit you had in the quarter you said it was 120 basis points to gross margin, similar impact in Q4?

Those trends have been pretty consistent the last couple of quarters.

Okay. And that's primarily -- that's where the diesel is moving through, what else is impacting that line?

Normal inflationary pressures that you see in manufacturing and logistics plus the diesel piece. And again, on cost-savings, we pick up cost savings and report that as part of the cost-savings component we don't net it against the cost increases that you see for manufacturing and logistics, so we do report those gross.

Thank you very much.

John Faucher, JPMorgan.

Good morning all you guys in California. A quick question for you. One of the things you've talked about is you've said that resins will be favorable in 2008. And as you look at the cost save number, I think that does include certain products where if you use less resin that goes in the cost saves number, not the raw mats number. So can you walk us through maybe what you've saved on that over the past couple of years. And as you look at resins going the other way, what that does to your cost save projections either in Q4 or over the next couple of years? Thanks.

In cost savings, there isn't a lot in there related to the resin business. So I'm a little unclear on that part of your question. We certainly have seen, as you know, you've seen the impacts that we've been reporting on resin over the last six to eight quarters. We do see it, it is starting to turn, we're off of the post peak highs. We are starting to see that favorability come through our numbers. We certainly saw some of that in Q3, Q4. Expecting that to continue in '08.

We have had a little bump in resins this past quarter. They're $0.06 an ounce in the marketplace and there was another $0.07 increase that was announced, unclear what's going to stick. We view that more as sort of a normal seasonal piece as opposed to any change in the long-term trend, but it is in the market right now.

As we look out into '08 in terms of commodities obviously -- particularly in the back half of fiscal '08, we do expect some of that global resin supply to come on and start to further drive down our resin pricing. So that's sort of our outlook for resin right now. In terms of cost savings, as we said, we're looking for another $80 million to $90 million next year and it's the continuation of the same programs that we've had for a couple years that drive those cost savings.

So point of clarification then. My understanding was that if you guys had figured out how to use less resin in certain products, some favorable benefit from that would actually show up in the cost saves number, not in the raw materials number, is that right?

Actually I think what you might be referring to is ForceFlex bags actually use slightly less resin than a comparable trash bag. So there's a bit of savings in resin, but that just kind of accrues to the P&L, that item, we don't really count that as cost savings per se.

John, what does show up there is like if we reformulate our bottles and we take resin out, we have talked about some of those favorabilities have gone through and we do report that as cost savings. That represents a change in the packaging or the bottling.

Okay, great. That's what I was talking about. Thanks.

Nik Modi, UBS.

Good morning, guys. A couple questions. Is there an opportunity over the next few years to reduce your packaging costs -- as Wal-Mart goes to this whole eco friendly direction, is there an opportunity for you guys there? And then the second question is for Don. I'm hearing a lot of -- not a lot, but large chains finally going through some SKU rationalization programs in the center store. And I'm just wondering your perspective on that. And it's been talked about for so long, what's finally leading to the actual action at the shelf?

I'll let Larry take the first one and I'll get the second one, Nik.

Nik, I would say we've done a lot of packaging work over time, but there remains lots of opportunity. In particular what we're doing in our homecare business today is a lot of simplification around our packaging. So using common bottles, common triggers across a line which actually allows us to save a lot of cost, both inventory holding costs as well as manufacturing costs. So there's still a lot of opportunity there. And as we start to address the sustainability efforts we'll be looking very hard at that and implementing more. So we've done a lot today but there's still more to come.

And have these cost saves been part of the CCEM?

Yes.

And on the SKU front, I think the rationalization -- to me what's going on is I go out there and talk to retailers and I've been out with our top two or three grocery customers in the last few weeks and I was over at the Western Association of Food Chains event for all the West Coast chains over the last couple of weeks.

I think that obviously that rationalization I think is being driven by a concerted focus not only across grocery in general, but particularly with some key regional grocers like the AGBs of the world, around driving their own retailer brands. And I think that can be very good for category leading brands. As you know, we compete in 17 different segments and we've got 12 number one brands and four number two brands.

So we feel pretty good about either maintaining or increasing some of the fundamentals in store particularly around shelving because of that focus. And we've had some recent successes in homecare where we've got a 30 SKU positive swing in distribution I think because of some of this mix. But I think that's what's happening.

A number of these grocers, particularly the regional guys, but I would say Kroger and Safeway as well, Alberts and SuperValu are really getting refocused on the center of the store, not seeding that part of the store to Wal-Mart anymore, getting some fairly decent growth out of the center of the store and just getting refocused there and saying we're going to drive the number one or number two brands and our own brands.

Great. And then Don, just real quick. Coming from Coke and a DSD environment, as you come to Clorox which is primarily wholesale driven do you see any opportunities to perhaps apply some DSD principals in-store to perhaps better your in-store execution in some way, shape or form?

I think one of the things you get in the DSD world is a lot of store level execution intensity, particularly around merchandising, with more of a four corner offense, if you will, to displays around the stores, particularly driven by temporary shippers and temporary programming that goes on in the stores. So I think from our standpoint you'll continue to see us focus on what we call maps or merchandising assortment, pricing and shelving and how do we make that more user-friendly for the retailer particularly around merchandising and display of our products?

You don't have in a number of these categories quite the impulse nature that you have in beverages, but you to have certainly impulse. To give you an example, if you look at Clorox Disinfecting Wipes, as we've talked, this is one of the most successful new brands that's been created here in years. We're heading into year six and we still have two-thirds of the country that haven't tried it. So to a lot of people in this country it's a new product. Well, as we'll continue to focus on perimeter displays and other things that we can do with that brand, it takes a little bit out of the page of DED companies to get at it.

Thank you so much.

Jason Gere, AG Edwards.

Good afternoon. Just a question about your new hand sanitizing product. It's in retail but also I think it's focused for the B2B market. And this is a new channel for you. Can you just talk a little bit about that and -- I'm not trying to steal any thunder from the analyst meeting in a few weeks, but how big is this B2B channel growth opportunity for you and can you talk maybe about some of the costs on the distribution or sales that might be associated with it?

We have a successful professional products business, it's roughly about $100 million in sales. We have focused our efforts in those channels recently on our health and wellness platform. So we've done a lot of work around getting disinfecting products into places like hospitals and nursing homes. We have launched some specific products for that channel and the hand sanitizer right now is only in that channel. And what we've found is that both the Clorox equity as well as our general capabilities in anti-microbial products plays very well. It's a very, very large channel, it's a very fragmented channel and there actually are pretty healthy margins in that channel.

So we've seen considerable growth. It continues to be part of our health and wellness focus. You'll probably hear more about it at the May meeting. We think it's a pretty exciting growth opportunity for us.

But do you think that this is something that could be much bigger than the $100 million that you have?

Yes.

Okay. And then the second question, with the bleach acquisition I think you're now saying it's neutral by the end of year and just kind of what's changed there, was that more sales driven or just on the cost side?

I think it's probably more on the cost side. Our estimates to integrate the business, the integration has gone very well and our original estimates were a little bit high. So we're now projecting to be neutral.

Okay, thank you.

Lauren Lieberman, Lehman Brothers.

Great, thanks. Just wanted to hear more about the Free & Clear product launch. I know you talked a little bit already about OxiClean, but at least in the tracked channels it looks like Free & Clear and the lower priced colorsafe bleach is having a significant and positive impact on your shares. So if you can talk a little bit about that and maybe what's different between the tracked channels and the untracked and why, if there's a difference in performance, if that's a sustainable difference or if it's something that you think can be made up?

Let me try and understand the question. You're talking about Clorox 2 business and the impact of OxiClean.

You can talk about that, but the Free & Clear.

The Free & Clear item. Free & Clear is just basically a line extension of a base brand. It's a segment that's gotten fairly big on the detergent side, so it's just an [eskew] that people like to have in their collection. I don't see it as a huge big initiative. The performance of the product is very similar to the other products in the line but it has a benefit of being dye and perfume free. So that's the Free & Clear story. In terms of going back to the performance versus OxiClean, we would say that we are parity if not better performance.

Sorry, Larry. I don't mean performance in doing laundry, I mean the performance of the product like how it's selling through. Because in the Nielsen data it looks like it's having a positive impact on your marketshares.

Right. I think if you look at the marketshares sequentially we are improving, but we were still down based on our look at the category.

Okay.

So again, the volume was up slightly, but our shares were actually down in the quarter on Clorox 2 specifically.

Okay. And that's including Free & Clear?

Right. Free & Clear is -- it may be a little bit early to see much impact from Free & Clear at this point. It's probably more on the shipment side than the share of consumption side. Clorox 2 is also very well developed in untracked channels.

And are you now looking at the category overall as including OxiClean? So when you talk about losing share it's in an overall laundry additive category, not just versus traditional colorsafe bleach?

Yes, we think of Oxi as basically a substitute for Clorox 2. And the things we're doing on Clorox 2 to build -- for one thing we're getting back into dedicated advertising. So we focus a lot of our Clorox advertising on health and wellness and our laundry focused advertising typically had a tag for Clorox 2. So we've been on the air with dedicated 3 second ads for Clorox 2 since the beginning of the calendar. And we think we'll see some pickup over time in the business because of that. (multiple speakers) to be very responsive to advertising spending.

Okay. The other question product specific was on the bleach free disinfecting cleaners. Is that in full distribution yet?

Yes.

So you're pretty far along in the launch?

Right. And that's doing fine. There's a spray version in a couple of scents and a dilutable version that's out there, it's doing fine.

Okay. And then the last question was just -- with all the input cost increases any thought around taking a price increase in the dressing and sauce business?

No announcements today.

Okay. And no announcements last week that I missed?

No announcements that you missed. We're always looking at this stuff pretty intensely, particularly when we have margin issues because of raw materials increasing. We're always trying to pay attention to what competitors are doing. We're a small part of that overall category. We carry a premium today, but it's something that we always look at pretty aggressively.

Okay, all right, great. Thanks so much.

Joe Altobello, CIBC World Markets.

Good morning, guys. First question is for Don. Obviously you're going to talk about this in more detail at the analyst day, but can you give us an update on the business review process and whether we should expect a pretty meaningful change in the portfolio over the next couple of years?

I think what we've said, Joe, is that we have a -- as Dan noted, we have a debt to EBITDA ratio now of 2.0 and we've got a more flexible balance sheet. And I think through all the strategy work that we've done, one of the things we obviously know is that inorganic growth has to become a more important growth lever for the Company going forward. And the 3 to 5% growth target that we have out there for the top line excludes acquisitions.

So it's clearly a capability that we are going to build, that's why we put Beth Springer in charge of strategy and growth. So we're building the capability internally, we have the flexible balance sheet, we have significant free cash flow. We will be more aggressive in looking at the portfolio. Obviously we will communicate to you in New York the criteria we're using to look at those various adjacencies and other categories, but we feel pretty bullish about our prospects there.

In terms of acquisitions, are there any categories you're most high on or any geographies in particular?

Well, I'd rather get into that in New York when we see you in about three weeks. But we'll take you through in some detail, both from a category perspective, a channel perspective and a country perspective.

Okay, fair enough. And then secondly, the bleach acquisition, the impact on fiscal '08?

Right now we project that to be fairly neutral I believe for fiscal '08. We will have revitalization spending that will continue into '08, and so current plans are to have that about neutral.

Okay, thanks.

Alice Longley, Buckingham Research.

You've talked about competitive pressures in homecare, can you tell us about any that we haven't talked about today? We've talked obviously about trash bags and OxiClean, what else -- what other brands are giving you trouble?

I think we previously have talked about the wipes category; we've done exceptionally well in wipes. It's become a very big healthy category. In many stores today you would find four foot sections totally devoted to wipes and we continue to see the competition trying to catch up. So I'd say that's probably the hottest area of competitive activity in homecare today. But healthcare always has its challenges and there are lots of subsegments -- bath care with tools and non-tool and variations on both products. So we continue to see an awful lot of activity across the board I'd say.

So wipes and bath care are the two that we had talked about earlier?

Right.

Okay, thanks.

Alec Patterson, RCM.

Good morning. First, just on the competitive activity, I guess I just want to make sure I'm reading the way you're communicating it right. Obviously it was an area of considerable consternation heading into the March quarter. You came out with a plan, you implemented it, it seemed to be relatively successful, competitive activity remains. Are you suggesting that the competitive activity has taken a turn for the worse or you just feel you need to keep the promotional lever working as it has been working?

I would say we need to keep the lever working and we need to keep an eye on it.

I wouldn't say we would classify it as getting worse, we've just got a wait-and-see attitude. We hear a lot of swirling out in the marketplace, but we're just going to take a wait-and-see and we'll believe it when we see it, but we're poised to be competitive.

I guess I can't help but think with this kind of problem -- it's the kind of problem -- you guys seem to be fairly successful in managing it. So I again just want to make sure you're not suggesting that there's another leg down?

We don't see another leg down at all in this. If anything I would expect it to moderate, but we just have a wait-and-see attitude about it.

Okay. And the charcoal trends, you cited weather and this is the third year running I've heard weather is charcoal an issue. I guess could you maybe give a sense of how the end of April ended up as weather normalized?

On charcoal, what we've talked in the past is generally when you look over a 12-month period charcoal has a tendency to average out. So in certain periods there could be a spike, in another quarter there could be a dip. But generally over a 12-month period weather tends to average out. But what we do have is pretty good weather in March and then really lousy weather in April.

The key issue for the charcoal business is fourth quarter and first quarter next year are the peak periods for shipment. So a lot of the final results of the charcoal business are going to be based on weather, particularly around as we get into the holiday season around Memorial Day, Labor Day -- or excuse me, Fourth of July and then ultimately Labor Day. So right now we saw the spike in third quarter, the dip in fourth quarter, we'll just have to see how it plays out over the balance of this quarter.

I just want to reinforce that. We've looked at this issue over the course of many years and generally speaking there's no one year that's totally affected by weather -- it switches by month, switches by quarter. But generally over the first of a year this kind of stuff kind of nets out.

Okay. The commentary about the CCM program into fiscal '08, I heard two things, Dan. One was looking for another $80 million to $90 million of savings and another comment was I'm looking for another 200 basis points of gross margin support. Which one is it?

They're one and the same, Alec. I was just trying to describe for you that that $80 million to $90 million in savings should represent about --approximately 200 basis points on the margin line. So it's just identifying the cost-savings component.

Okay. You've been running well above the 80 to 90 over the past few years and with a higher sales level I would presume that you'd be either taking the dollar amount up or the basis point impact down. So it's basically unchanged?

As you point out, the last couple years we've been probably slightly above 200 basis points for the full year. As we get into our planning cycle, which we're in the middle of right now for FY '08, earlier in the year we target based on the plants that we have in place, and that's indicating to us about $80 million to $90 million. We certainly work over the course of the year to see what we can do to improve those cost-savings. And over the last couple of years we've been reasonably successful of exceeding some of our internal targets.

So I think from a planning standpoint right now, $80 million to $90 million feels about right. I would say those will increase next year, but I still think it will be somewhere around 200 basis points of margin.

Okay. The SG&A support services type spending, consultants, what have you, you talked about in Q3 $3 million to $5 million. Is that roughly what you're referring to as the expenses that are flowing through in Q4 that's impacting the Q4 SG&A guidance?

Yes, that's the same thing.

Okay. So there's nothing incremental necessarily that's infrastructure related on SG&A above that?

No, not at all.

The options expense incremental this year, Dan, versus last year. I believe it was supposed to be about $0.05 a share. Is that number still good?

Yes, that's still pretty close. It's kind of in that $10 million to $12 million range and that's about where we're going to come in.

Okay. And then just lastly, you talked about the resins outlook, especially back half of '08, where capacity comes on and gives you an opportunity. To what degree do you have greater capacity to maybe bring forward some of the cost savings in negotiations with global suppliers allows you to maybe anticipate further out lower prices and thus bringing them forward sooner than you may have in the past?

There may be an opportunity there. Obviously the closer we get to that supply coming on line the dialog certainly starts to change. So as we're in communications with our suppliers we're already talking to them about back half of '08, '09 and what that looks like. So again, closer it gets the better conversations we have. We'll just have to work through that to see is there any way to try to accelerate any of that benefit.

So the guidance you gave doesn't include any of that potential negotiation?

The outlook that we have is based on the trends that we had already seen in resin, it does not assume that we somehow get a windfall or a separate negotiation that would create more favorability.

Okay, great. Thanks for answering all those questions.

Linda Bolton Weiser, Oppenheimer.

Thank you. I just had a question about the trade spending. It seems in the personal care categories, when companies are trying to combat competition we often see an increase in the advertising and promo spending and that's very effective. Is it just different in the nonpersonal care categories or have you reached the point of diminishing return in terms of increasing the A&P? And also, rather than trade promotions, is it a consideration to make permanent list price reductions to combat competition?

I would absolutely say that we use all the tools to address competition. In this particular instance a lot of this focus was on Glad and was on the pricing issues on Glad. So in this case it made sense to do more in the way of trade spending than the other elements, but we use all the elements. And obviously at some point if you're basically doing pricing through trade promotions that tends to be an inefficient way to do that.

So if that becomes a very long-term issue you may want to address it with permanent pricing. We're not doing that, we haven't come to that conclusion or anything like that. But we see this as a temporary competitive response that probably goes on for some months and we'll obviously address it as we see it change over time.

I think as you point out, it very much varies by brand and by category. If you look at examples of our competitive response on Clorox C2 it's about returning to dedicated advertising. If you look at, as Larry said, basic trash bags, it's about getting price right first before you put money out there in terms of increased advertising. Although even on Glad you will see increased advertising potentially on ForceFlex where we have a value added product to talk about. But clearly on some of these products that are more commodity oriented like basic trash we're going to get our pricing right first.

Okay, great. Thanks a lot.

Mr. Knauss, I'd like to turn the conference over to you for any additional or closing comments.

I'd just like to thank everybody for their time. Obviously we're very pleased with the third quarter. I think the bottom line is we feel very good about the fundamentals in our business and we feel very good after going through about four or five months now of strategy work about the prospects for the future and our flexibility in terms of our balance sheet and cash flow. So we're really looking forward to sharing the new vision with you as we get to New York in three weeks. So thanks again for your time and we'll see you in about three weeks.

This does conclude today's conference. Thank you for your participation. You may now disconnect.