高樂氏 (CLX) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Clorox Company fiscal year 2007 fourth-quarter and full-year earnings release conference call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded.

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

Welcome, everyone, and thank you for joining Clorox's fourth-quarter conference call. On the call with me today are Don Knauss, Clorox's Chairman and CEO; Larry Peiros, Executive Vice President and Chief Operating Officer, 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, cloroxcompany.com.

On today's call, Larry will start with comments on the Company's fourth-quarter operating results, providing key business highlights, as well as a perspective on our competitive environment and commodities costs. Dan will follow with a review of the quarter's financial performance, as well as additional details supporting our fiscal year '08 outlook, as communicated in our press release this morning. Don will then wrap up with his perspective on our recent performance, as well as future expectations. 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, free cash flow, EBITD margin, and economic profit. Management believes that by providing insights on these measures, it enables investors to better understand and analyze our ongoing results of operations. Reconciliation with most directly comparable financial measures, determined in accordance with GAAP, can be found in today's press release, this webcast's prepared remarks, or supplemental information available in the financial information results area of 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 now turn it over to Larry.

Good morning. Results in the fourth quarter were mixed, as you saw in our press release. While our full-year and even our second-half results were very solid, Q4 sales were disappointing and fell short of our internal expectations.

Sales for the quarter were up 2%. Excluding the incremental sales from the bleach acquisitions in Canada and Latin America, sales were about flat. This shortfall in expectations had a big impact on our financial results, although we were still able to deliver EPS at the lower end of our outlook range.

For the full fiscal year, we delivered 4% sales growth, achieved gross margin gains in every quarter, and drove a 12% increase in diluted EPS. All in all, we feel good about our annual results and the current state of the business.

I'm going to crawl through our Q4 volume results, because I think that is the best way to give you a feel for the business and where our expectations were off. Let me start from the big picture. Total Company volume in Q4 was up about 2%. International had another very good quarter, with volume growth of 12%. International results were driven by our Latin American businesses, where we saw continued category growth in bleach and dilutable cleaners, in the incremental volume from the recently acquired bleach brand in Venezuela, the Dominican Republic, Ecuador, and Uruguay.

In contrast to our international results, our North America volume was flat year over year. These businesses, as most of you know, represent over 80% of the total. North America had a particularly strong quarter in Q3, with shipments up 8%. We talked on the last conference call that a portion of the strong Q3 volume growth was driven by great March weather that helped our seasonal businesses. We also said in the last conference call that April weather was poor and could have a dampening effect on Q4 shipments.

This indeed became true, and a portion of the shortfall in Q4 can be explained by the typical fluctuations in weather conditions quarter-by-quarter. As we have said many times before, our seasonal product sales can be driven up or down in any one quarter because of weather, but we typically see results even out over the course of a full season. This is one of the major reasons we manage to the full year and not the quarters.

The bigger portion of our Q4 volume shortfall, however, was not as well anticipated. Specifically, we had a very strong third quarter in home care and an extraordinarily good Q3 on Clorox Disinfecting Wipes behind very high levels of merchandising that drove trade-up to larger sizes and incremental consumption.

In hindsight, we clearly underestimated how much our strong volume in Q3 would impact our volume in Q4. The shortfall in Wipes alone accounted for about half of our total Company Q4 miss versus expectations. Wipes were up almost 50% in Q3, down 10% in Q4, and still up a strong double-digit in the second half. When you look at all of the North American business for the second half, shipments were up 4%, in line with our targeted 3% to 5% range.

We do not believe we are seeing a new ongoing negative trend in our North American business. Our Q4 share results and track channels were relatively stable, with share up or holding flat in five categories and down slightly in three categories. Our July shipment results were up strongly versus the year-ago period. We have exciting demand-building programs across each of our business units, and we remain confident in our ability to continue to drive 3% to 5% growth on an annual basis.

Now let me turn to competition. We've talked previously about heightened competitive activity that would affect our investment choices on three major brands, Glad Trash, Clorox Wipes, and Clorox 2 Color Safe Bleach. Q4 results reflect additional spending and demand-building activities. Most of this investment was in trade spending and not in advertising, which was relatively flat year-over-year. Trade spending is a more appropriate tactic for short-term defensive activity. Our total demand investment, including both advertising and trade spending, was actually up very substantially versus the year-ago period.

The results behind our incremental spending have generally been positive. Glad Trash was up in volume and share for both the fourth quarter and the second half. As I just said, Clorox Wipes' volume was up dramatically in Q3, down in Q4, but still increased double digits in the second half. We were also able to grow our Clorox Wipes share in the face of extreme discounting by the competition.

Clorox 2 results have not been as positive as the others. We continue to see negative momentum on this business and we are likely to continue to see declines until we deliver some product news later this fiscal year.

Overall, these three categories remain extremely competitive. This is particularly true in Disinfecting Wipes, where we now have a new launch from a major competitor. We will continue to address competitive activity vigorously to protect the long-term health of our brands.

Turning to commodities, we are continuing to see commodity pressure driven by agricultural commodities like soybean oil and cornstarch. Based on our raw material forecast, we have chosen to take pricing up on Hidden Valley dressings in Q2, and we are considering additional price in other brands later in the fiscal year. While pricing moves will likely have some negative volume impact, they are the right thing to do in light of the cost pressures.

Finally, I want to address the consumer and the retail environment in our categories. We've seen slower growth of some customers and channels this fiscal year versus the last several years. Historically, we have seen dramatically faster growth in what we term the untracked channels versus the tracked channels. Customers in channels like Wal-Mart and the dollar channel were growing at double digits, while tracked channels like grocery were actually in decline.

In the last year, the difference in growth rates has narrowed significantly. We've seen a slowdown in untracked channels, as well as healthier trends in tracked channels. Untracked channels are still growing faster, but we see new opportunity in the resurgence of the tracked channels, such as regional grocery.

Overall, our categories are a bit soft, mostly as a result of pricing actions and higher gas prices. As always, we remain focused on building both our brands and the categories in which we compete. For example, we have an extensive backyard tailgate program in our charcoal business to extend the season beyond Labor Day. We are also launching a line of microwave steaming bags under the Glad SimplyCooking brand that will grow category sales through new value-added consumer benefit.

To conclude, while Q4 results were disappointing, we did have a solid second half and a strong overall year. Our brands are reasonably healthy, despite an [unprecedented] level of pricing.

Looking forward, we have some challenges in the form of competition, commodities, and a changing retail environment. At the same time, we have plans in place that we believe will deliver on our growth objectives, including faster growth in international markets, success behind our recent bleach acquisition, programs to reinvigorate category growth, and innovation to address new consumer needs.

We will continue to manage with a focus on full-year results and we will also continue to manage business to maintain the health of our brands over the long-term.

With that, I'll turn it over to Dan to provide a more detailed financial perspective.

Thanks, Larry. With that, let me walk your through our financial results. I will start with the fourth quarter and then review our fiscal year 2007 results before turning to our updated fiscal year 2008 outlook.

In the fourth quarter, we delivered $1.07 in earnings per diluted share, reflecting solid gross margin improvement and a more favorable effective tax rate. Performance in the quarter was impacted primarily by the top-line factors Larry discussed.

On the top line, fourth-quarter sales and volume increased 2%, driven by the bleach acquisitions and strong growth in our international segment, partially offset by weaker results in North America. Sales grew in line with volume, as previously executed price increases and a slight benefit from foreign currencies were offset by higher trade promotion spending to support brands facing competitive pressure.

Fourth-quarter gross margin improved to 44.2% compared with 43.7% in the year-ago quarter. This is the fourth consecutive quarter of year-over-year gross margin expansion. We have added a gross margin change reconciliation schedule to our website, alongside the other schedules we provide you for volume, sales, adjusted operating margin, and other items. We believe this schedule will provide our investors helpful information in understanding the change in our gross margin.

As you'll see on the schedule, the 50 basis points improvement in the quarter was driven by 200 basis points of cost savings, as we finished the year with another strong quarter, driving savings from initiatives such as world-class manufacturing, strategic sourcing, and product optimization. Gross margin also benefited from about 80 basis points of pricing.

These benefits were partially offset by 110 basis points from higher trade merchandising, as well as 40 basis points from rising raw material costs, particularly agricultural commodities. Our logistics costs were also negatively impacted by higher diesel fuel costs. Notably, our total commodity cost impact was dilutive after being accretive in the third quarter.

Fourth-quarter selling and administrative spending increased on both the dollar and percent of sales basis. This was primarily due to $36 million in pretax costs related to the former Chairman and CEO's retirement from his positions, and charges for non-cash historical stock option compensation expense in the year-ago period. Excluding the year-ago charges, selling and administrative costs were up primarily due to spending to support our strategy work and new strategic initiatives, as well as incremental selling and administrative costs associated with the bleach acquisition.

The total decline in selling and administrative spending and favorable gross margin helped drive an increase in adjusted operating margin to 20.3% for the quarter, compared with 18.1% in the year-ago period. Similar to gross margin, this is the fourth consecutive quarter of year-over-year adjusted operating margin expansion.

Other expense in the quarter was $7 million. This amount is within the typical range for this line item, which contains many smaller items. The largest impact in the fourth quarter was related to foreign currency effects, which were a $4 million expense this year versus a $3 million gain a year ago. Although the Company's overall currency impact for the quarter was favorable, we did have some currency settlements and mark-to-market aspects of certain currency contracts that were unfavorable.

Our effective tax rate for the quarter was 31.3% versus 32.5% in the year-ago quarter. This was lower than anticipated due to the settlement in the fourth quarter of the remaining federal tax issues in our fiscal year 1997 through 2000 tax years. We are the process of negotiating tax issues for fiscal years 2001 and 2002, and have settled or are near settlement on most of the significant tax issues in that period. Audits are underway on our returns for fiscal 2003, 2004.

Going forward, we anticipate the financial benefit of tax settlements will be substantially lower than the last three years. We continue to anticipate our fiscal year 2008 effective tax rate will be in the range of 35% to 36%.

Turning to cash flow, fourth-quarter net cash provided by operations was about $282 million, compared with about $301 million in the year-ago quarter. The small decline was primarily due to slightly higher inventory levels, partially offset by higher earnings.

Free cash flow, which we define as cash flow from operations less capital expenditures, was about $231 million, or about 17% of sales for the quarter. We used free cash flow in the quarter to pay down some debt, pay dividends, and repurchase shares to offset stock option dilution.

Now I will turn to our full fiscal year financial results. For the year, we delivered $3.23 in earnings per diluted share from continuing operations. This compares with $2.89 in earnings per diluted share from continuing operations in fiscal 2006. This 12% increase reflects solid improvements across the P&L and a favorable effective tax rate versus the prior year. Our year-ago results included the costs I discussed a moment ago related to the retirement of the former Chairman and CEO and charges for non-cash historical stock option compensation expense.

On the top line, sales increased to $4.8 billion, or 4%, which is in the middle of our outlook range of 3% to 5% sales growth. Sales growth outpaced 2% volume growth, primarily reflecting the benefit of price increases, partially offset by increased promotion spending.

Despite higher commodity costs, gross margin increased 90 basis points to 43.1% for the year. As noted on our supplemental gross margin schedule, the primary drivers here were cost savings, which added about 230 basis points, as well as 150 basis points from price increases. These benefits were primarily used to offset about 110 basis points from higher commodity costs, as well as the normal inflationary impact of about 100 basis points seen across our manufacturing and logistics operations, and about 60 basis points of higher trade promotion costs, primarily in the second half of the fiscal year.

Cost savings for the year totaled $107 million. We are very pleased to have delivered our sixth consecutive year of cost savings greater than $100 million. Adjusted operating margin increased 110 basis points to 17.9%, as gross margin expansion of 90 basis points fell to the bottom line.

For the full fiscal year, cash flow from operations was [$709] million, and free cash flow was $562, million or 12% of sales, at the high end of our target range of 10% to 12%. Our fiscal year capital expenditures of $147 million were lower in fiscal 2007, primarily due to our transition of certain information technology activities to a third-party provider, which led to a lower level of spending on IT projects during the transition.

In fiscal year 2008, we anticipate that our capital expenditure levels will be about equal with depreciation and amortization, reflecting more normalized IT-related investments and the previously announced spending related to the consolidation of our homecare manufacturing network. Capital expenditures associated with the homecare manufacturing consolidation are anticipated to total about $50 million, with about half of that spending in fiscal year 2008.

With that, I will turn to our fiscal year 2008 financial outlook. As I typically do, I would like to mention several factors you should keep in mind as you consider our updated fiscal year 2008 outlook.

First, let me address our announced restructuring plans. Our previous outlook included pretax charges of $14 million to $18 million, or $0.06 to $0.08 in earnings per diluted share related to the planned consolidation of our homecare manufacturing network. Approximately $5 million to $6 million of these pretax charges are anticipated to be non-cash. We anticipate about half of the total pretax charges will hit the cost of sales line on the income statement, and the other half will be reflected as restructuring charges. We anticipate that these pretax charges will be spread fairly evenly across the quarters.

At our May 24th analyst day in New York, we said we were considering taking additional pretax charges, potentially in the range of $45 million to $55 million. We have now completed our analysis and, as noted in today's press release, we now plan to take additional pretax charges in the range of $35 million to $45 million, or $0.15 to $0.17 in earnings per diluted share. Approximately $30 million to $33 million of these pretax charges are anticipated to be non-cash.

These anticipated charges are primarily related to certain new venture investments we have decided not to pursue in light of our Centennial Strategy and supply chain simplification, primarily in overseas markets. The majority of these charges are expected to be recorded as restructuring charges in the first quarter. Again, these charges are in addition to the $0.06 to $0.08 for consolidating the homecare manufacturing network.

A few other factors to keep in mind. Fiscal 2007 included about $23 million in pretax charges, or about $0.09 diluted EPS, related to restructuring the Company's information technology activity. We anticipate the impact of the IT restructuring to be about flat in fiscal 2008, that savings from the restructuring are offset by the remaining implementation costs for the project, and a return to more normal levels of systems capability spending. We continue to anticipate the project being accretive in fiscal 2009.

We continue to invest to transition and revitalize the acquired bleach businesses in Canada and Latin America. Collectively, we anticipate these businesses adding just under 1 point of incremental top-line growth in fiscal 2008, on top of the incremental sales we realized in the second half of fiscal 2007.

From a pretax profit perspective, we anticipate that these businesses will be about flat as we invest behind them. We have initiatives plans for fiscal 2008 that we expect will increase margins and top-line growth on these businesses for the long-term.

We anticipate the new product innovation will deliver 1 to 2 points of incremental growth, within our targeted sales growth range of 3% to 5%. The majority of fiscal 2008 new products will be introduced in the second half of the fiscal year.

Our outlook is for continued strong cost savings in the range of $80 million to $90 million, or just under 200 basis points of margin improvement. This continues the very strong cost-savings performance we have had over the last six years. We are certainly working to see if we can achieve savings in excess of this target range.

The benefit from cost savings will be partially used to cover two items, the first being commodities. We expect that first-half commodity cost comparisons will be unfavorable, as resin prices have recently spiked and agricultural commodities have risen. To be clear, we expect resin costs to be favorable for the year, but not to the extent that we had previously anticipated. We anticipate that resin favorability will primarily benefit the second half of the year. Overall for fiscal year 2008, we anticipate slightly higher net year-over-year commodity costs, primarily driven by agricultural commodities.

The second item that cost savings will help cover is general inflationary pressure impacting wages, benefits, insurance, and other costs. On an annual basis, this typically impacts us in the range of $25 million to $35 million.

With that as background, let me walk you through our fiscal year 2008 full-year outlook. We continue to anticipate organic sales growth in the range of 3% to 5%, including the impact of the recently acquired bleach businesses that I already mentioned. We anticipate the competitive pressures will continue, and we plan to increase demand-building investments in the first half of the fiscal year. Most of our new product launches will occur in the second half. Net of these factors, we still believe sales growth of 3% to 5% is the right target range for the year.

We continue to anticipate year-over-year gross margin growth for the full year, primarily driven by cost savings of $80 million to $90 million. That said, however, we now anticipate gross margin in the first half of fiscal 2008 to decline due to the higher near-term commodity cost environment we are experiencing.

Also, as I previously mentioned, a portion of the restructuring charges will hit cost of sales and will have a dilutive impact on gross margin. Finally, our full-year tax rate is anticipated to be in the range of 35% to 36%, as I previously noted.

Net of all the factors I just discussed, our updated outlook is for fiscal year 2008 earnings per diluted share in the range of $3.27 to $3.46. This includes approximately $0.21 to $0.25 in total charges from the homecare manufacturing network consolidation and the additional charges we confirmed today. If you exclude the $0.21 to $0.25 in total charges, the adjusted diluted EPS range would be $3.52 to $3.67 per diluted share, which is the same base EPS outlook range, before charges, that we discussed at our May analyst day in New York.

Let me conclude by talking about our planned uses of cash. One of the hallmarks of Clorox has been our very strong cash flow generation, and we expect that to continue in fiscal 2008. In the second half of fiscal 2007, we achieved our near-term targeted debt level ratio of 2.0-to-1 debt-to-EBITDA. We do not believe that further reducing debt would be in the best interest of shareholders.

As we said at our analyst day in New York, we are anticipating higher debt levels over time, and prefer to use that debt to finance inorganic growth. That said, in the near-term we intend to use our free cash flow to return cash to shareholders in the form of dividends and share repurchases.

With that, I will turn it over to Don.

Thank you, Dan. As Larry and Dan noted, the fourth quarter was obviously tough, and we certainly expect competitive and commodity cost challenges to continue, at least through the first half of fiscal '08, although I think the competitive pressures is not something we have not dealt with in the past.

But we are managing for fiscal '08 performance, obviously, the long-term and not just one quarter's results. In fact, I think as both Larry and Dan noted, if you look at the second half of FY '07, not just the fourth quarter, you'll see in that half we delivered 4.9% volume growth and 4.4% sales growth -- pretty much in the high end of our 3% to 5% growth range. So we feel good about that.

And certainly while we anticipate near-term headwinds due to higher commodity costs and ongoing pressures, as I noted, from the competition, we're certainly committed to meeting our fiscal '08 objectives.

Looking back at FY '07, I would say I'm certainly pleased with the overall performance for the fiscal year. We delivered the sixth consecutive year of strong sales growth at the middle to upper end of our 3% to 5% targeted sales growth range. Despite those high commodity costs we talked about, we expanded gross (inaudible) operating margins and delivered our sixth consecutive year of cost savings greater than $100 million. And we delivered bottom-line results in line with our outlook for the year.

We also continued, as Dan just noted, to generate significant free cash flow, which we plan on deploying for our long-term shareholder value creation.

Now let me give you an update our economic profit outlook for 2008. As a reminder, our Centennial Strategy is focused on achieving double-digit annual growth in EP. We refer to this measure in New York as our True North, and we'll use economic profit to drive portfolio choices and resource allocations as we go forward. We certainly believe it is the right goal because it correlates strongly with market value and it can be readily operationalized into the businesses. At the end of the day, we're taking nothing more than our historical focus on return on invested capital and really making it more operationally friendly for our business units.

In fiscal '07, we generated about $379 million in economic profit compared to $348 million in fiscal '06. That is a 9% increase. The year-over-year EP growth was driven by improvement in all three economic profit drivers -- solid top-line performance, the margin improvement we talked about, and very disciplined capital management. As a reminder, we have included details of our economic profit results on our website, which you can take a look at.

As we look at FY '08, our outlook anticipates mid-single-digit EP growth due to the recent charges that Dan just talked about and decisions we're making to help ensure the long-term health of the business. And although we are reducing the growth rate of economic profit in the near-term to mid single digits, I certainly believe, as does the management team here, that these decisions are right for the business, not only for '08, but will help us drive accelerated profitable growth over the long-term by creating further cost efficiencies and (technical difficulty) activity (technical difficulty) producing economic value.

As we discussed in May, we have identified opportunities that we believe have strong economic profit growth potential, including investing in the grocery channel, our Glad business, and, of course, our international business, as well as focusing on key trends in the areas of health and wellness, sustainability, convenience, and building our multicultural consumer base.

We are continuing to evaluate our opportunities and we're going to make decisions later this fall regarding the biggest value drivers to pursue. As these decisions are made, we will certainly provide to you both more visibility in future calls and at conferences we attend, while at the same time balancing the amount of information shared with obviously our need to protect our competitive position.

I would close by saying at the end of the day, while we face discontinued competitive pressures, as we always do, and commodity headwinds, particularly in first half of fiscal '08, we still feel good about our '08 plans, which deliver results, as Don noted, when you exclude the restructuring charges, consistent with the outlook we gave you all in New York about 10 weeks ago.

So with that, let me open it up for your questions.

(OPERATOR INSTRUCTIONS) Ali Dibadj, Sanford Bernstein.

A few questions. One is just around kind of the margin growth, and the really helpful table you've put in here. Just want to focus on trying to disaggregate this 80 basis points for the year. You mentioned, I think, 50 or 60 basis points was around trade spend. I think you've seen some of the work that we did around the market momentum analysis, which suggests that your fastest-growing categories are actually your lowest margin categories, i.e. there is a negative margin mix there.

How much of that is in that number? Is that the right way of thinking about it? Basically, what is the other 20 or 30 basis points in there?

As you think about mix, the impact of mix in the businesses on margins, certainly some of our lower margin categories are growing a little more quickly these days. But we also are seeing a resurgence in the grocery channel that tends to have higher margins there. So as we look out on the impact on margins of the differential growth in the different categories, we're not anticipating right now that that is going to be a significant impact on margins, particularly as we go forward.

So certainly we're thrilled with the growth we're getting in those categories, and we are also working to improve the margins in those businesses as well, which will help margins over time.

I just had a couple things following up. One is, as you do look forward, doesn't it, though, get worse -- or at least we're going to offset it more with grocery as cat litter, and particularly as Latin America starts to grow more and the margin there is even lower?

Actually, let me address that first. Latin America's margins on an overall basis are about equal to the Company average. Certainly in any one quarter, you may have a mix issue within individual countries. With the strong growth that Latin America had, which is really broad growth across the region, they are not impacting us right now in any significant way in terms of the mix. So Latin America in and of itself is actually a good story for us right now.

Now, as the other categories grow that have lower margins, obviously that does have some impact to us. But again, we're working on the margins in those categories. And in some of these categories, we're getting growth from products that have a higher contribution to margin. If you look at the carbon improvement, particularly in the litter business, that is a higher margin product for us. So that is actually positive within the litter business that the sales are shifting to the higher margin products.

Let me build on that. We talked a lot in New York about the move toward getting more granular on our businesses, so looking at a SBU like cat litter and saying it has lower margin is probably not the right way to think about it. So if you dig down to cat litter, for example, the Fresh Step part of that business is premium-priced, so it's a higher margin than the Scoop Away portion of that business.

Similarly, we talked about on Glad how ForceFlex has a much higher margin than base trash, which actually has a negative EP margin. So not just about kind of the overall business. It is really getting on the granular level, and in some cases down to the SKU level.

The only thing I would add to that is if you look at our performance gross margin on litter, in FY '07 we picked up almost 2 full margin points of gross margin versus '06. As Larry said, the mix shifts into the Fresh Step, where we've got premium pricing. We're certainly focused on improvement in gross margin, trying to get it up to the average for the Company. So we're seeing some good improvement there.

Just on the piece Larry did say, I understand in theory how you can go down and say, look, these SKUs are better or lower margin and I want to shift to the better ones, obviously. My experience has been a little bit more difficult in bringing that to practice.

So many companies -- and if you do have these tools, that's great -- but many companies I know just don't the tools or the ability to get down to that level to then be able to make the decision to shift around SKUs. Broader categories? Sure. But down to the SKU level, particularly at the SKU account mix? It is really hard. So do you have the tools, I guess, to make some of those decisions?

I think where it becomes most applicable on SKUs is in club volume, where SKUs represents significant amount of volume. And it becomes very clear where your profit is, whether it is gross margin profit or economic profit. So we do have that data and it is pretty useful, and it does not change very dramatically, very quickly. So you can do that on kind of an annual basis and get a pretty good feel for what you need to focus on.

And most of what we're doing is really what I call kind of family of -- part of the family of the franchise. ForceFlex is a great example. So there's lots of SKUs within ForceFlex, but all of them are far more profitable than base trash is.

The other thing I would add, I've been out with a lot of customers in the last three months. And in practice, I think what you say makes some sense, although what we're finding is when you look at basic assortment and shelf sets -- and as Larry said, when you look at the family of SKUs in a particular brand like Fresh Step -- we're having quite a bit of success with resetting sections to drive category growth, getting that family of higher margin SKUs focused on by the retailer, because they want the higher rating and the higher margin as well.

So in practice, we're getting some pretty good success in our top 25 customers resetting the sets.

That's real helpful. One last thing, if I could just squeeze in, related to the top line. Just the price gaps with private label, given that it's often your biggest competitor in some of the key categories. I mean, clearly Clorox 2, we've seen some issues there, but even the more broader ones -- so just chlorine bleach -- plain old chlorine bleach or bags or wraps. How has the price gap expanded there or has it not at all?

So if you look at what I call kind of the key categories we would look at, relative to your question, one would be Glad Trash. And there has really been no difference in terms of differential. There's really no big change in price versus year ago and no change in the differential versus private label versus year ago.

Similar story on bleach -- not a big difference versus year ago and not a difference versus private label. So on bleach, for example, we're about $2 on our primary size, which is 96 ounce, and private label's around $1, $1.50. And that has not changed versus the year-ago period.

If you look at our -- as Larry said, if you look at our 96 ounce, where our pricing the last 13 weeks is holding firm with (technical difficulty) $1.94. Private label is still quoting -- it's dropped a couple sense, from $1.48 to $1.46. We're still looking at basically the same kind of premium we had a year ago. So we don't feel like it is getting out of whack at all.

If you were to think about what is the driver of volume then? Because I would expect it to be some sort of elasticity, but I guess it is not. What would you pinpoint as the volume decline problem, certainly in kind of the laundry businesses and the --?

It really is a -- I know it is easier to say this in hindsight, but if you just look at the numbers we had in our forecast versus the number we came out with in Q4, it is very clearly a couple misses on brands that had some pretty incredible consumption in Q3. So if you start with the seasonal products, we had double-digit kind of increases on charcoal and auto in Q3.

And we had loss in volumes in Q4, but really the biggest piece of it was Homecare, in particular wipes. So the wipe change alone accounts for more than half of that gap versus our expectations. Wipes is a pretty elastic business, so we have found that if you can get merchandising, you can get people to buy bigger sizes, you can get them to use more. We had some pretty incredible merchandising in Q3 behind, in part behind some of our defensive efforts.

We drove our business up on wipes, which is a big business, up about 50% in Q3. It came down in Q4 more than we thought. It was down 10% in Q4. If you look at the total second half, we're actually up about 15% or 16%, so we had a very strong second half. Consumption was strong. Our share was up, but definitely there was a flip in terms of volume between Q3 and Q4. So if there was a miss here, it was a misestimate of how big the volume in Q3 affected the volume in Q4.

Just to add a comment on that, none of us could have predicted that Q3 our wipes business, which has been in the market for over five years as you all know, would grow at almost 50% through some extraordinary merchandising. So it is not so much that there was volume softness on our brands in the fourth quarter. Again, extraordinary performance in the third quarter, which accounted for half of our miss versus expectation in the fourth quarter.

For example, if you look at our liquid bleach shares in the last 13 weeks, we're up almost half a share point. So this wipes thing really did impact significantly our fourth-quarter volume results. Because the other volume miss was in Clorox 2, and that's something we've been talking about for the last six months.

Okay, so lots of pantry loading then. Okay. Thanks very much, guys.

Amy Chasen, Goldman Sachs.

I guess I just wanted to talk about your fiscal '08 sales outlook. You said that organic sales would be at 3% to 5%. Does that actually include the bleach acquisition, or is it true organic sales number?

Well, the bleach acquisition probably contributes about three-quarters of a point of growth next year, so even if you come off our 4% sales growth target, we're still inside the 3% to 5% range, just on pure organic growth, albeit at the low end of it, but we're still in that range.

And then just on the gross margin in the first half being down, is that including or -- that is including the restructuring. If we exclude the restructuring charge, would gross margin still be down in the first half?

On gross margin, I think they would still be down slightly for the first half of '08, if you exclude the impact of restructuring. And that is poorly coming from the spike we're seeing in commodities.

Okay. And my last question is just on the returning cash to shareholders. I just want to understand if this is a change from what you said in New York. At that time, you had said that you were looking for acquisitions, and if you could find some, great, but if not that over the next 18 months you would consider adding more leverage to the balance sheet and returning cash. Can you sort of put the comments today into that context?

Certainly, when we were there in May, what we talked about is operating the Company at higher average leverage ratio levels over time. Our first proposed use of that increased leverage would be to help drive the inorganic growth trajectory for the Company.

We also said that we did not want to delever the balance sheet any further at 2.0-to-1. So our comments in press release and my comments this morning are basically saying that cash flow generation for fiscal '08 -- that free cash flow, that we're going to use that to fund dividends and share repurchases. So we're not going to delever the balance sheet further below the 2.0-to-1.

Over time, as we look at inorganic growth, our first choice would be to use that additional capacity to fund that agenda. But as we said in New York, if over the next 12 to 18 months we do not see anything on the acquisition front, then we would certainly consider levering up the balance sheet and returning more cash to shareholders.

Finally, the last comment I would make, is certainly at today's share price and share price reaction, we will give serious consideration as to whether we want to use more than our free cash flow in '08 to repurchase shares.

Okay, so regardless of acquisitions, you may step it up in '08?

We're certainly going to take a very strong look at that.

Great, thank you.

Chris Ferrara, Merrill Lynch.

I just want to go back on the top line '08 number. And not to nitpick too much, but even with the 3/4 of point from acquisitions, I'm just trying understand, is the base organic sales growth -- again, I know it's nitpicky -- but being 3/4 of a point below what you would normally guide, is that because you simply do not want to promise more than just the regular 3 to 5 range, or is that because, to your point before, competition is a little bit tougher than you had anticipated?

Probably the only thing that would go into that top-line growth is about 1 to 2 points in new products. And new products tend to be skewed more towards the second half of this fiscal year. But I think my answer would be at this point in time, looking at the competitive picture, it is really that competitive pressure which would maybe tend to make us a little bit more conservative with this for '08.

Recall that we are making a lot of trade spending investment in defending our businesses, and that takes down the sales --.

Got it. So excluding those acquisitions, you think you would have put out a 2 to 4% sales growth range?

As I said, we would have kept the 3 to 5. We just would have been in the lower end of the range, but we would still be in that 3 to 5 range, excluding the acquisitions. As Larry said, we've had a nice start to July. We'll see how that trend goes over the first quarter. But no, we would have been in the 3 to 5 range regardless.

Got it. No, that's helpful. Just to try and understand Wipes a little better, I know you're saying competition has ramped up. You're also saying -- and it is a very fair point -- that you had 50% growth in Q3, so you would expect Q4 to back off a little bit.

So as you look forward, I guess, what do inventory levels look like? Do think you had pantry loading at the consumer level or do you think retailers bought in more than they needed to in Q3? What is, I guess, the source of Q4 going down at the expense of Q3, and then how do I think about that going forward? You think inventory levels are where they should be and we get back to a normalized growth rate in that business?

This is definitely not an inventory-loading issue; maybe a pantry-loading issue. Again, a lot of our merchandising in Q3 was associated with some club event, one particular big club event -- very large sizes, lots of wipes. While this is pretty elastic category and people will use more wipes if they have more wipes on hand, I think we did load people up a bit.

So I would say it is more of a consumption phenomenon. I think it is basically kind of been in and out of the system by now. I do not think it will have much impact in fiscal '08.

Great. Then just one more on the bags businesses. I know a lot of this is rumor based, but when you read [Pactiv's] press release, they talk about less promotion and advertising -- pretty clear about their view. And you're saying you invested a lot more in demand-building, I think, in the trash bags category this quarter.

I guess why did you promote so much more? What was the demand-building stuff going toward? And was really direct one-on-one competition? And also, is there a chance that they have eased and you had promotions set six months ago that you were running through this quarter that ease a little bit going forward?

I would say we did address some competitive issues and this is the trash business, on Glad Trash in Q3 as well as Q4, I think we feel good about where we stack up today in terms of our competitive response. We grew volume in Q4 as well as the second half, share in the second half. So we feel good about where we are.

What we had noticed about our competitors is they behave somewhat differently by channel by customer. So you may get a certain kind of impression based on their press releases or conference calls that might not be what exists in every customer, every channel. So some of our stuff is tailored at specific customers or specific channels to meet competitive threat.

Got it. Thanks a lot.

Bill Schmitz, Deutsche Bank.

Actually, most of my questions have been asked. But going back to this wipes thing -- and I hate to keep beating this to death -- but if you knew it was up 50% last quarter and you knew Lysol was getting a lot more competitive, and they were being competitive in third quarter and it was sort of spilling over to the fourth quarter, and you kind of did not match some of their pricing, which we kind of saw on shelf, why wouldn't your outlook change a little bit into the fourth quarter?

Obviously, with 20/20 hindsight, it probably should have. Again, a pretty elastic category. We've seen people -- we've been growing wipes at more than 20% rates for the four years prior to fiscal '07. And in fiscal '07, we had a very big growth rate for the year. So this is a category that has responded very well to marketing investment, merchandising investment.

So in retrospect, I would say, boy, we should have thought more about that Q4 number. But at the time, we thought we were investing pretty heavily in merchandising, we were getting pretty good impact with consumers, and we just did not anticipate the negative downturn in Q4.

I think the other -- the other thing, Bill, I think the other thing is we still had Memorial Day merchandise and Fourth of July merchandise in front of us. And so I think there was certainly a belief that given the strength of that merchandising and around those two key holidays, and given the elasticity of the market, that we could weather that storm. But obviously, we missed it.

The only other point I would add is it is a competitive category. You mentioned our key competitor. If you look at the pricing of our key competitor on a cost-per-wipe to consumer, you would now see that their cost-per-wipe is basically equal to private label. That gives you an idea of the kind of dealing, wheeling and dealing they are doing. So probably they stepped up their response in Q4 more than they would have ordinarily --.

Some of the scanner data I saw suggested the category was actually expanding in the quarter.

The category is robust.

Okay. So there is share losses, I guess?

Our share is up. Shipments do not necessarily get tied to an individual quarter. But if you look at the consumptions in each of the quarters, our consumption is good.

Okay, great. Thanks. Dan, just to kind of go through the financial model again. It looks like you're sort of guiding to, for the full year, a very modest increasing gross margin, call it 30 or 40 basis points for the year. Then you also said that the kind of S&A line, X charges, of course, have 3 to 4, 3 to 5% inflation.

It is kind of hard to get down to even the midpoint of your guidance if you make those assumptions. Am I missing something?

Do not assume all the inflationary pressure is sitting on the S&A line. So the 25 to 35 is a general inflation we have as a Company. It is really spread into various line items in the P&L. So not all of that sits on the SG&A line. So I don't know if that helps with the explanation on that.

It does. And it should go down, S&A, so I have it down as a percentage of sales. But is that a correct assumption going forward as well, X charges, obviously?

On the SG&A line or on the margin line?

Just S&A, so not even the advertising and promo side. So S&A as a percentage of sales.

I think our number for '08, I would probably say SG&A is probably going to grow about in line with sales. But keep in mind that does have some incremental investments in there for some of our strategic initiatives, completing our strategy process, and a few other things.

We also have the full-year impact on admin spending from our bleach acquisition that is coming in, and there is a little bit of a ramp-up in the IT spending, as I mentioned. So I would say probably SG&A for the year is going to be up about in line with the sales growth rate.

Okay. So I'm not sure how you even get to the midpoint of the range then, unless there is a big reduction in share count. You kind of go to the midpoint of sales guidance, you have 30 or 40 basis points of gross margin expansion. You have S&A down a little bit. You have A&P kind of the same. A little bit of increase in operating margin. It is kind of hard to get to the middle -- or even to the high end of your range. Am I missing something?

It is the shares, Bill. The outlook that we have assumes that we're going to use our cash flow in '08 to repurchase shares.

Okay, got you. That's very helpful. Thank you.

Connie Maneaty, BMO Capital Markets.

Which relationship or investments are you ending that is the source of the second restructuring charge?

Connie, we have a number of things that are in those restructuring charges. We have some small venture investments that we've made over the last couple of years that we've decided not to pursue. And then we have some supply chain adjustments, primarily in our overseas manufacturing networks. So those are all blended in there.

So it is safe to assume that the joint venture you have with P&G is still part of your portfolio?

Yes, none of this has any impact on the venture.

Okay, great. Why are you confident that resin prices will decline in the second half of fiscal '08? We know there is new capacity coming on, but why shouldn't it all be sopped up?

I guess our belief in that is we're in discussions today with Middle East suppliers, as these new resins come on board. So based on these discussions and our view of the market, we still believe that we would see favorable resin coming out of -- call it the back half of our fiscal '08, certainly in calendar year '08.

So obviously, near-term there is a lot of pressure on resin. Recently what has happened is these spikes of foreign demand for U.S.-produced resin has gone up, particularly China. And that has kept operating rates very high. As you know, there was a $0.06 price increase in resin in the fourth quarter. There's another $0.05 near-term increase that has been announced. Don't know if it will stick.

So certainly, near-term, with the operating rates where they are, it will probably remain high, and we're seeing that in the first half of our fiscal. But we still believe the fundamentals of the market, the supply and demand, will lead to lower resin prices as we get to the back part of our fiscal 2008.

I seem to recall that at the start of the year when the price of oil was between $50 and $55 a barrel, I guess I would have imagined that there would have been all sorts of negotiations at that point trying to lock in some better prices. Did that not happen?

Again, this market is very short-term, in terms of contracts that you can do, and there is a lot of volatility, and obviously, that does impact it. So ability today to go out a year or two, three years, that does not exist any longer. It is a more short-range thing.

And also, the market is really driven -- the type of resin we buy is natural-gas based, and it tends to be more a function of the operating rates than necessarily the inputs. Inputs are extremely important and they remain at high levels, but it is really the operating rates that have a tendency to drive it.

Got it. Another question, as I look at the flow of the earnings -- I know you manage for the full year, but as I look at the flow of the earnings, the margin pressure in the first half from commodities, and your comments about most of the new products being launched in the second half, is it reasonable to expect that because of commodity pressure and slotting allowances that earnings in your second and third fiscal quarters would decline, excluding charges?

We're not going to comment specifically on quarters any longer. You know, as I look at the full year, if you are asking on profitability is it going to be a little more back-half loaded, I guess that would be a fair statement. We have the near-term commodity pressure. We have some increases in trade spending. So there's more front-end pressure in the first half.

And then we get more of our lift from new products in the second half. So it will be more of a back-half story than a first-half story.

Just one last one. Does that mean you would pay slotting allowances in the second quarter instead of the third?

We actually do not do slotting allowances. We do typically have introductory marketing funds with our new products. We obviously invest more heavily in advertising in the first couple of quarters. But we do not actually do slotting per se.

Okay, so the support for the new products would be more the first half than the second?

(multiple speakers) Actually, Connie, it would be more in the back half of the year. The accounting rules have become much clearer on this and really require that you account for those introductory marketing costs as you're shipping the product out the door. So it will be more back-half driven.

So we do have some new products in the first half, but there are more new products going out in the second half.

I will follow up off line with that. Thank you very much.

Bill Pecoriello, Morgan Stanley.

I just wanted to follow up on with the EPS guidance that you held for next year -- and I know you've mentioned the higher repo and lower share count -- but on the margin, the commodity pressure is going to be higher than you thought on the full year, and the Q4 came at the lower end, helped out by tax and you said organic sales growth is lowering the range.

So anything else that you're counting on? You had mentioned the price increase in salad dressing, and you were going to evaluate pricing on other brands. Anything you're counting on there? It doesn't sound like you're counting on any extra savings in there or any reduction in the trade promo. So it is the share count. Anything else there?

I think you've got the big ones. There may be some pricing actions, but if there are, they would be in the second half and they would not have, I don't think, a huge material impact.

Okay, so you're not counting --. And then on the trash bags, with the resin environment in the next couple of months moving up a bit sequentially, are you seeing anything still in those untracked channels, competition, be it private label, Pactiv, letting up at all on the promos because of the resin pressure that they are going to be facing?

I would say the activity is still pretty competitive, but it has come down from its height. So if you went back to, let's say, Q1 of fiscal '07, you would see a more heightened competitive atmosphere than you see today. But it is still pretty competitive.

Okay. And then just finally, on the July being strong, particular categories that you can talk about relative to the fourth quarter that have picked up? I mean, July 4th being on a Wednesday was a little bit soft. I'm not sure what that did with your charcoal sales and where you saw the biggest pickup in July.

Strong homecare results, is the one I would tell you. That's the one that definitely stuck out to me, looking at the numbers today. But relatively, pretty much on expectations in most categories, I would say.

Okay. And charcoal, which was weak in April, how did that track in May, June, and in July? Was it all the weak April? You saw weakness in June?

You know, I do not have the by-month breakouts. Maybe we can follow up on that one. I would tell you we definitely had a strong Q3 and a weak Q4 in charcoal, and I think was just that swing in the good March weather and the poor April weather.

Okay, thanks.

Nik Modi, UBS.

Just a few quick questions. I understand that the temporary investment funds for the glass business ended as of June, and I'm just wondering what is driving that? Are you just saying the competitive environment just getting a little bit better, or you just weren't seeing the returns? Then I have a follow-up.

I would say we feel very good about our defensive activity on the Glad trash business, certainly as well as the wipes business. Unfortunately, I just do not feel comfortable talking about our future activity with respect to competitive response.

Okay. And Larry, on the Kingsford business, weather obviously had an impact, but I'm just wondering if there is anything going on with the price increases you've taken and perhaps price gaps with private label. Can you talk about just the fundamental health of that business?

I would say given the pricing we have taken, I would say it has been a pretty healthy business for us.

Are you seeing just increased pressure recently? I'm just trying to understand.

Again, we are seeing the Q3 to Q4 shift. We saw a softer category in Q4 than Q3, but again, I think that is just because of the weather phenomenon.

The last question is just on grocery with other channels. You're focusing a lot on that area. I was just wondering if you're starting to see the traction -- I don't know if you can quantify exactly how fast grocery grew relative to the rest of the business.

I would say grocery is getting more and more attention from the Company. Don has been driving a large part of that. I can't point to where investment has yet paid off, but we certainly anecdotally are seeing more attention and focus and good response based on our efforts. I think we talked about putting some incremental resources in place for fiscal '08. We are actually out hiring those folks as we speak. We have hired some of them. So I think I would say we're feeling good about where we're going, but we do not have a lot to talk about as yet.

It is a little premature. I think we can give you much better insight to it after we get through the first quarter.

Okay, thank you very much.

Lauren Lieberman, Lehman Brothers.

I was hoping you could talk a little bit about the homecare business outside of wipes -- anything and everything -- homecare, not laundry -- just outside of the wipes business.

I think I would say that this has always been our most competitive category. You look over last year and fiscal '07, I think you would see reasonable growth, kind of close to the middle of the range of our growth trends. Tends to be a category driven by innovation, so when we have good innovation, that does really well, we tend to have big spikes. Where we have less innovation or less successful innovation, we tend to have less success.

Wipes has definitely been the success of the homecare business, but we have had good success in some other major brands, like Pine-Sol. And I would say the rest of the portfolio is up and down, depending on how you look at it. Clorox franchise overall, if you were to add up all of the Clorox franchise is definitely seeing growth.

You'll recall the products that we all love called Anywhere. We are actually restaging that a bit; we've got some new advertising in there. We are seeing a good resurgence on that business, just based a few weeks of advertising, although it is still a very small business at this point in time.

So I'd say that it is a competitive category. We have kind of held our own over the last year, with wipes being the big success. And wipes was still a great success over fiscal '07.

I think the other thing I would add, I think when you look at the innovation that is coming for '08, I think we are particularly enthusiastic about Green Works, which we talked a little bit about in New York. It is an all-natural line of cleaners. And we've got a product line there that is significantly consumer preferred line, without even telling consumers it is all natural. So we're feeling pretty bullish about that. We think we have some good innovation in the pipeline.

The only other thing I would add, on the international side, homecare is definitely part of what is driving our success and our growth. So I think up the dilutable category alone is up double digits in that part of the world. So that is an important piece as well.

Okay. And what about price points? I know this was a topical already, but price points relative to private label or the competition, particularly in homecare, again X wipes? It is just such a difficult thing for us even to go and look at on the shelf because of the complexity of the category.

Unfortunately, it can be difficult for consumers as well. Actually, we have not taken a lot of pricing in homecare. So if you look at all the pricing we have taken over the last several years, which has been pretty enormous, very little of that has actually been in homecare. I think there was a price increase on Tilex at one point in time.

It is a very intensely competitive category. Based on our modeling, the net economics of a price increase probably would not be advisable. So generally speaking, we have avoided taking pricing in that category. So while we have premium priced products and while we are well above private label, we're not seeing any big changes in terms of price differentials or price points.

Okay. Then final thing is just relative to some of your larger customers, have seen any -- was there anything toward the end of the quarter in terms of inventory management from your larger customers?

Nothing significant. We get asked about this all the time. So all of our customers as well as us are working on inventory management, inventory control. There may be an individual category big customer that has some kind of inventory control at one point in time, but certainly nothing broad-based and nothing that we're really concerned about, or nothing that we would point to as a cause of the flat shipments.

Okay, right. So there was nothing that sort of accelerated at the end of the quarter in terms of the softness of the top line?

No.

Okay. All right. Thank you.

Wendy Nicholson, City Investment Research.

My first question has to do with sales and volume as we look out for full year '08. I know you said sales would be in the kind of 2 to 4% range on an organic basis. Are volumes (multiple speakers)?

Actually, I said 3 to 5.

But that includes the acquisition.

No, I said without acquisition, it would be 3 to 4.

Okay. But I think the press release said almost a point. So whatever -- 2, 3, 4, whatever -- it does not really matter. But the gap between sales and volume, how notable is that going to be?

Steve Austenfeld I do not think you would expect to see a material difference, unlike in past years, where we've taken a lot of pricing. If anything, there might be a little bit stronger volume growth because we will still be spending -- shipping the first half of the year behind some of the competitive activity that is taking place. But generally, they should be within a point of each other. Okay. Because with the Hidden Valley Ranch, I head you say that you could see some volume softness. But it sounds like that is the only major pricing initiative, so that is the only business you'd expect to see volume softness in.

That is the one we're announcing at this point, so that goes out in the second quarter of the year. Any other pricing actions would more likely be toward the end of the fiscal year.

I think we have heard a couple times you say that a year's going to be back-half loaded from an earnings perspective. But can you give us a sense directionally from a sales growth perspective? I guess the good news is in the first half you've got really easy comps on the volume side, but you have kind of tough comps on the sales side because of all the pricing you took in the first half of last year.

Right.

If you back out the acquisition benefit in the first half, what's organic sales growth going to look like?

Over the first half and the second half, it is probably going to be pretty similar, but for different reasons. In the first half, to some degree we have easier comps, but it depends on the business. We are also spending behind several of the categories; we're seeing competitive spending, so that is going to help. So we would project to be in the same general range in the first half as perhaps the full year.

If you look at the second half, a little bit tougher comp, particularly in Q3, where we were very strong, as we've discussed today. But we have more renovation coming out in the back half of the year, which should give us some incremental growth.

Just to give you a little bit more perspective on the first half, given what you noted. I think you'll certainly see, as we talked about, 3 to 5% organic. And, as I said low 3s without the acquisition. I think you'll see sales growth at the upper end of that range in the first half clearly, because of the some of the heat in the volume comps, not necessarily the sales comps. But we should be at the upper end of the range.

Got it. Thanks.

[Alec Patterson], RCM.

Don, I just wanted to follow up on your EP outlook for '08 -- mid single digit with charges. And I understand you cannot really back out the charges when you're going to look at that number. Would you expect to recapture a double-digit trendline going into '09?

Our expectation -- because, as you know, there is no performance holiday here that we -- to achieve this Centennial objective of doubling by '13, it's got to get back on a higher trajectory as we approach double digits at the beginning of '09 and '10. So clearly, our expectation is that we would get into the 10% or north of that as we get to '09.

Okay, and Larry I think I hear from you an overall read on the marketplace where market shares for the bulk of your business in North America were flat to up, but shipments were out of sync due to Q3 kind of a load-in, so to speak, -- bad choice of words -- and Q4 having to pull back. Is that a fair assessment of what happened?

I would say in Q4, overall share was kind of flattish and shipments were kind of flattish. So I think they basically mirrored each other pretty much.

So categories were flattish?

Categories were a little bit on the soft side.

Soft side of --?

And now we're talking tracked channel, so I think if you'd run this --if we had an all-outlet look, you'd would probably see more flatter categories. But if you looked at the tracked channels, the categories are a bit soft. As we talked, that is probably a result of the pricing actions, as well as gasoline prices and short traffic and things like that.

But I would describe the last six months probably as kind of flattish in terms of share results, probably flattish in terms of category results. I wish I could be little bit more exciting than that, but that is probably the picture.

As you look at the IRI data in the eight major domestic categories we track in, three of those eight were up and five of the eight were down slightly, so --

On a category basis, Don?

On a category basis.

And that was particularly acute in the fourth quarter?

That is the fourth quarter. That is the last 13 weeks.

Oh, I'm sorry. Okay, so then I should not presume that there are any segments where you had a surprisingly good quarter in the fourth quarter that might suggest a pullback in the first quarter of next year?

No, I would not think so. No.

Okay, you highlight in your gross margin breakout the logistics manufacturing, continued pressure. You have usually suggested diesel being a big part of that, but from what I have seen, diesel has been basically flat year-over-year. Is this more of a kind of an increased surcharge flowing through cost of goods from your vendors? Or should I be looking more at the manufacturing side of this as a driver of the gross margin pressure?

Certainly on the logistics side, diesel is still an item that continues to pressure us. Anything that has an energy component in running the plants, that sort of thing, we're still continuing to see pressure. And the whole run-up in the energy cycle obviously does have an insidious way of filtering back through a lot of the things that we buy, and obviously our contract manufacturers are impacted by it as well and have to price for it. So there is sort of a broad spectrum impact from that. But diesel is still pressuring us.

So the bulk of that basis point impact from that line item is diesel related or energy related, as opposed to some manufacturing overhead of inflation issue?

There is a combination of the two. There is the normal inflationary pressures that we have in the manufacturing cycle, and then there is the energy component that comes through as well. So on the logistics side, it is going to be more of the carrier rates that have gone up and it is going to be the diesel impact. On the manufacturing side, it is going to be more the inflationary pressure that you typically see in the manufacturing network.

Okay. And lastly, Dan, the share repurchase potential, precluding acquisition activity at any point in '08 or even pending in early '09, the debt-to-EBITDA ratio, which seems to have gone sub 2.0 now, any reason why that should not be at least holding its level if not rising through the year, if acquisition opportunity doesn't present itself?

You know, it dipped a little bit at the end of our fiscal year. That is primarily because we limited share repurchases to option dilution in the fourth quarter. But certainly as a base, you can anticipate that the 2.0 will be the floor, certainly. And then depending on the timing of share repurchases, you could actually see a near-term increase in the debt-to-EBITDA ratio. And then the question is by end of year, will we be above that? It will be strictly dependent on how much in share repurchases we do for the year.

Just to build on that, we ended up below 2.0 at the end of Q4. And to a degree, that is impacted by or helped by Q4 being our strongest cash flow quarter for the year. So as you get into the middle part of the fiscal year and as we're building inventories for some of our seasonal businesses in the second half of the year, you tend to see some of our commercial paper balances build. And that is where you would probably get maybe back closer to a 2.0 number, more towards the middle of the year. As Dan said, that is probably the right number to be at over time.

Yes, but why wouldn't you be looking to take it up higher? And as EBITDA is growing through the year, your debt levels would be rising faster rate.

Certainly, as we look -- when we talk about using free cash flow for the year to repurchase shares, to the extent there is additional leverage or additional share capacity, repurchase capacity that comes from leveraging that incremental growth in EBITDA, we would certainly use that.

The real question on leverage will be, do we do share repurchases that exceed that cash flow for the year, and that causes us to finish the year at a higher debt-to-EBITDA level.

Okay, well explained. Thanks.

John Faucher, JPMorgan.

Just to clarify something that Alec had just asked. As you look at these charges, it seems as though you have sort of recurring charges every year, which is probably more in line with the 6 to 8, and then you have the additional, let's say, 15 to 17 this year. Going back to Alec's question, should we look at the 15 to 17 truly as sort of a one shot deal that really does sort of bounce back as we look at 2009? Is that the right way to look at those specific charges relative to the entire, let's say, $0.22 to $0.24 that you have baked in there?

I would view those as you've suggested. Those are true incremental charges that we're taking here in fiscal '07 -- excuse me, in '08. I do not think you ought to assume that there is some higher base level of restructuring that we might do going forward.

Okay. So going to Alec's question, if we look at 2009 -- and I realize -- I am not trying to -- I realize you probably are not going to give us much guidance there -- but we should expect sort of a normal organic growth rate in 2009, followed by -- not followed by, but -- and then additionally, we should see a benefit from that group of charges going away?

As I think about restructuring we've taken over call it the last 18 months, and I think about what we're planning to do in '08, if you look out to '09, ITSM, which we took charge on in fiscal '07, we would certainly expect to be accretive. The homecare restructuring that we're going through in '08, there will still be a small impact from that in '09, but it will be fully accretive out in 2010.

Then these other charges that we're taking here, that level for those types of charges will not repeat in '09, and we will get some benefit. To the extent they are accretive, that will be accretive in '09. So we would expect out in '09 that we're starting to see the accretion from a number of these activities.

If you think about '09 -- and you're right -- we're probably not going to give you much guidance on that right now -- but we're looking out at that point to look at resin that we would anticipate would be a tailwind at that point, based on what we know today and what we think the world capacity of resin is going to be. So we think that will help benefit '09. And we also have a continuing high level of cost savings that we're driving to, and we would expect those savings to continue as to go out into '09 and '10.

Let me just in and reinforce what Dan said. I think all those things coming together in '09, obviously we feel pretty good about that convergence. I would strongly reinforce what Dan said about these 15 -- these charges that we just talked about in '08 being onetime deals that we see being accretive in '09.

You know, a lot of these charges -- and most of them are non-cash by the way, as we noted -- are new ventures activities that we're just not going to pursue. We do not have any more of those in the cupboard. So we've got this stuff. We are dealing with it and we're moving forward.

Okay. So one quick follow-up on that. When you talk about this being accretive, so have, let's say, $0.15 to $0.17 additional charges in '08. That goes away. Is there, to your point, an accretive sort of cost saving component there, so the real swing year over year in '09 is not $0.15 to $0.17, it is $0.15 to $0.17 plus some sort of additive piece to it from a cost save standpoint?

There will be a modest effect, because some of the charges that we're taking relate to supply chain activities, primarily in overseas markets. So there will be some accretive benefit from that, although it is going to be reasonably small, but there is an accretive impact.

Okay, great. Thank you very much.

Kathleen Reed, Stanford Financial.

Just a quick question on trade spending. I think I have in my notes from your March quarter that trade spending was a -200 basis point hit to your top line in the March quarter. And I think, Dan, you said that trade spending was a -110 basis points in the June quarter. So first thing is just why did you come off the trade spending from March to June?

Then in your comments that trade spending would continue at high levels or maybe increase in September and the first half of '08, does it go back to the 200 basis point level or is it something higher than that?

Just to confirm the numbers, you're right. Q3 was about 200 basis points. It was about the same approximately in Q4 as well. You know, Larry talked about the higher level of investment spending seen both across in total advertising and trade spending and I think that 200 basis point increase in Q4 represents that.

I can't speak as to whether we will have the same level of spending going into the first half of the year, but it will be elevated relative to a normal period because of all the competitive activity taking place. So I would not describe it is a lot of quarterly changes in terms of the level of investment.

Didn't Dan say in his prepared gross margin breakout that trade spending was 110 basis points? Is that not the same on the revenue line?

Yes, we did say 110 basis points. I think are a few other probably smaller items that we netted in there. I think in this range of -- we did say 200 basis points last time -- netted it with a few other items, it is 110. Call it in this 150 to 200 basis point range. While the timing on the spend may be a little bit different by quarter, I think the relative levels of spend, though, are going to be I think fairly consistent. You also have a denominator effect on size of sales in the quarter, that sort of thing. That impacts it as well.

But high level of spending in Q3. We had a high level in Q4. As Larry said, to address competitive issue in the first half of '08, we're going to continue to see a high level of spending.

So not a step up, but just a continued level of high spending?

Versus levels that you saw in Q3 and Q4. And again, it depends on the competitive situation that we see and whatever actions competitors take, whether we may do incremental spending in the first half.

Okay. And just a clarification question on the IT spending in '08. I think you said it would be flat with '07 levels. Did I hear that correctly?

Yes. What I said -- well, ask your question and then I'll answer the question.

Well, that was the question. I just wanted to make sure I wrote that down -- that it would be flat in '08 versus '07, and it is included -- it is not restructuring charge -- it is included in S&A, and just what that actual total dollar amount was for fiscal '07.

Fiscal '07, it was about $23 million associated with our information technology outsourcing, our partnership. As we look at '08, there is probably another $4 million, maybe $5 million of transition costs that are going to be incurred, which will be in the SG&A line, associated with the data center outsourcing, which we have not fully completed.

And then the balance, when I said flat on a pretax basis, because we are in the middle of transition in '07, we really did constrain the amount of spending we did around new systems and systems capability. So in '08, now that that transition is behind us, we are returning to a more normal level of spend for our IT activities. And so that pickup again will cause the pretax to be about flat to the $23 million that you see. So piece of it is continuing to finish the sourcing and the rest is returning to a more normal level of spend. As we look out into '09, we would expect that to be accretive.

Okay, thank you very much.

Jason Gere, AG Edwards. Jack Russo, Edward Jones.

Don, just a quick question, big picture, regarding your comments on grocery and getting back, focusing more on that segment. I'm just curious what you are thinking there. Granted, Wal-Mart is slowing down its Supercenter growth and certainly the grocery stores have rebounded a little bit here in the past two or three quarters.

But I think all the data that we see as analysts still indicates that market share is shifting to the clubs, the Supercenters. And of course, Target is just really getting started with that. I'm just curious if -- just how serious you are with your intentions. And I guess there's just some concern on my part that you may be focusing on the wrong channels. Because what we continue to see is that Wal-Mart, with Supercenters and even dollar stores clubs, and Target, at the end of the day, they are going to be the market share winners in this game.

So just curious to getting your thoughts on it.

I think, Jack, one of the things we have got to make clear is I think there is some misinterpretation around investing in grocery and deinvesting against Wal-Mart, Target and the clubs, because we're not doing that. I think what we're doing is adding incremental resources against the grocery investment.

The data we are looking at it is if you look out over the next three years, we see some strong, fairly strong same-store sales coming out of Kroger, Safeway, some of the bigger strategic grocery customers we have, as well as some of the strong regionals, like Hy-Vee, (inaudible), Publix's, Wegmans, Stater Brothers, Haggen's up in the Northwest, you name it.

I would not want to mislead people and say that we're backing off investment in the strategic customers that we have traditionally invested in, like Wal-Mart. You cannot back away from a customer that is 26% of your sales. And we still are very bullish about our business with Wal-Mart. All I have been saying since I have gotten in here is you look at our forecast out, in my travels around talking to a number of these grocery customers, is they are not ceding the center of the store as quickly as they have in the past to some of these other players.

So the incremental investment here is a handful of people. It is really getting renewed focus and not just ceding or allowing our broker partners to manage that business, but getting in there and getting in dialogue with these people.

And where we're particularly seeing some benefit is getting our assortment and our shelving right with these customers, because our profitability tends to be higher in these customers because of the broad mix of our products that they carry. Given what we talked about in New York, where half of our economic profit is in this thing, that we want to really make sure that we're doing everything we can to make it is robust as possible.

You think some of your competition is ignoring the grocers and the regional grocers now?

I think that there has certainly been a trend by packaged goods companies in general, and we are part of that trend, over the last few years to "win with the winners." Just as you said, where is the market share shifting to? So I think a lot of us, and rightfully so, have put a lot of resources against club, against Wal-Mart, against Target, you name it. And I think we have taken some resources away from some of these grocery customers, particularly the small regional guys, who I think know their marketplaces fairly well.

And we're seeing some strong double-digit growth in a number of our smaller regional grocery chains. And that is already starting to change. We're getting 10, 12% growth out of a number of these chains that are in the 100 store to 200 stores size.

So I think as we go through the first couple of quarters of this year, we will really see if that is making a material difference in our business. But I think a lot of people have pulled some resources back from those customers and have not been as visible with those customers.

Thank you.

Connie Maneaty.

I was just wondering, can you just bring us up to date on what sort of authorization you have for a buyback at this point and do you need Board approval to get more aggressive?

The current board authorization is for $750 million for open market repurchases. We have an evergreen authorization for repurchasing shares to offset option dilution. If we wanted on open market to go above $750 million, yes, we would need to go back for Board approval.

Thank you.

I think that concludes -- I think we have probably had a pretty good range of questions, so I appreciate everybody's attendance today and your interest in our business. We will look forward to updating you as we get through the first quarter. Thank you.

This does conclude today's conference. Thank you for your participation.