高樂氏 (CLX) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Clorox Company fiscal year 2008 first quarter earnings release conference call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Mr. Steve Austenfeld, Vice President of Investor Relations for the Clorox Company. Mr. Austenfeld, you may begin your conference.

Great. Thanks. Welcome, everyone, and thank you for joining Clorox's first 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 of Clorox North America; and Dan Heinrich, our Chief Financial Officer. We're broadcasting this call over the internet, and a replay of the call will be available for seven days at our website, thecloroxcompany.com. On today's call, Larry will start with comments on the quarter's first quarter operating results, providing key business highlights as well as prospective and the current commodities cost environment. Dan will follow up with a review of the quarter's financial performance as well as detail supporting our updated fiscal year '08 outlook as communicated in our press release this morning. Don will then conclude our discussion on our first fiscal quarter with his perspective on our recent performance and future expectations. Following that, we'll be joined by other members of the management, who will share additional information and perspective on the acquisition of Burt's Bees as was announced in our press release earlier today. We'll then open it up for your questions.

Lee me remind you that on today's call we will refer to certain non-GAAP financial measures including but not limited to free cash flow, EBIT margin and economic profit. 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 information and 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 turn it over to Larry.

Good morning. Happy Halloween. As you saw in our press release, we're up off to a great start this fiscal year. Strong first quarter results across our businesses were driven by healthy top line growth and positive business mix. Sales were up 7% with sales up 5% in North America and sales up 18% in international markets. In North America, volume grew 5% with strong shipments of home care products, Hidden Valley salad dressing, Brita water filtration products, cat litter, and double-digit gains in Canada behind strong base business growth and the recent bleach acquisition. On the international side of the business, volume grew 11% behind strong category growth in laundry and home care in Latin America as well as the bleach acquisition. Our Australia business returned to positive high single-digit volume growth behind increased shipments of trash bags and the new Chux brand wet wipes in the utensils category. Dan will review the financial results in more detail in a few minutes.

Before that, I will provide overall perspective in three areas. First, key brand building activity, second, reinvigorating the grocery channel, and third, the commodity environment. Starting with our key brand-building activity, we feel good about the programs we have in place to both grow our brands as well as grow the categories in which we compete. In home care, our Clorox Disinfecting Wipes returned to solid growth in the first quarter despite competitive activity with double-digit volume gains behind the launch of a new low-streak product improvement and incremental merchandising support. We also saw strong gains in other Clorox branded home care products. In food we achieved strong sales and volume growth on Hidden Valley bottled salad dressings. We've recently seen the salad dressing category grow for the first time in more than a year and Hidden Valley shares continue to increase behind our premium positioning and strong advertising. On charcoal we delivered double-digit sales growth behind Kingsford volume gains and the benefit of price increases. Much of our Q1 success on charcoal was driven by an initiative designed to extend the barbecue season beyond Labor Day.

The creative idea was promoting tailgating at home with the unique ESPN sports tie-in and high-impact in-store execution. Brita also had a particularly good quarter driven by strong category consumption. We believe that the Brita business may be benefiting from a sustainability trend related to consumer concerns about the impact of bottled water container waste. We have stepped up our public relations effort and entered into a partnership with Nalgene, a leading manufacturer of high quality reusable water containers. Finally, the integration of the bleach acquisition in Canada and several Latin American countries is going very well. We're attracting ahead of our objectives and see further growth opportunities beyond our original projections.

With respect to reinvigorating the grocery channel, we have talked a lot about a refocus on grocery retailers, given higher profitability and the improving growth trends in that channel. We continue to focus on all of our key customers, but we did make a choice to add incremental resources within grocery. I am pleased to report that we saw solid growth in this channel during the quarter, a very positive change from the declining trend during the previous four quarters. Grocery will remain an area of renewed focus over the longer term, and we're optimistic that this effort will generate both incremental sales as well as profit.

Last topic I want to highlight is commodities. In Q1, commodity pressure was greater than we had anticipated, as sharply rising energy costs caused resin prices to increase more than our original projections. Agricultural commodities like cornstarch that goes into charcoal and soybean oil used in salad dressings also remain very high. To help offset the impact of commodity pressure, we plan to increase prices on Kingsford charcoal by 6% effective January 2008. In addition, the execution of our previously communicated price increase on Hidden Valley is going well. Beyond pricing, our aggressive cost-savings programs are also a clear component of managing our profitability.

For the full fiscal year we continue to anticipate higher year-over-year commodity costs. Our outlook projects additional increases in resin costs, particularly in Q2. That said, we still believe that commodity costs will begin to decline in the back half of the year, but not as much as we had previously thought. We continue to forecast that resin costs will decrease over the next several years as additional capacity comes online in the Middle East.

To conclude, we had a strong quarter with better than expected results despite continued commodity pressure. Overall, we're building healthy brands, improving our channel mix, and taking the right steps to mitigate the impact of rising commodities. As you'll hear later from Don, the long-term outlook is promising as we work to make our centennial strategy come alive. With that, I'll turn it over to Dan for a more detailed financial perspective.

Thank you, Larry. With that let me walk you through our first quarter financial results. For the quarter, we delivered $0.76 in earnings per diluted share reflecting strong top line performance, including the benefit of increased sales from higher margin businesses and also reflecting slightly lower Q1 restructuring costs than previously anticipated due to the timing of the related initiatives. On the top line sales grew 7% including 1 point from favorable foreign exchange and about 2 points from the recently acquired bleach businesses, while volume grew 6% versus the year ago quarter including about 1 point from the bleach acquisition. Despite increased year-over-year investments in trade promotion spending to support brands facing competitive pressure, sales growth outpaced volume growth due to the benefits of favorable business mix, price increases, and favorable foreign exchange. Given the competitive environment, increased year-over-year trade promotion spending is expected to continue into the second quarter and beyond.

As expected, first quarter gross margin declined, coming in at 42.6% compared with 42.9% in the year ago quarter. Let me break down the 30 basis point decline. Gross margin benefited from about 180 basis points from cost savings and 50 basis points from price increases. These positive factors were more than offset by 140 basis points from higher expenses for manufacturing and logistics, which includes diesel costs and some restructuring charges, and 120 basis points from commodity cost increases, primarily from resin but as well as agriculture commodities such as soybean oil and cornstarch. First quarter charges were $27 million for consolidation of our manufacturing networks and other charges the Company decided to take in light of our centennial strategy. As a reminder, we continue to anticipate fiscal year 2008 total pre-tax charges to be in the range of $49 million to $58 million, of which $35 million to $39 million are noncash. We anticipate the balance of this year's charges of $22 million to $31 million to be spread fairly evenly across the quarters, with about half hitting costs of sales, which will have a dilutive effect on gross margin.

As previously communicated, in the first quarter we executed an accelerated share repurchase agreement or ASR. As a result of the ASR, first quarter interest expense increased due to the debt we incurred to finance the transaction. Final settlement of the ASR program is scheduled for no later than January 24, 2008. The final number of shares the Company is repurchasing under the terms of the agreement and the timing of the final settlement will depend on prevailing market conditions, the final discount of volume weighted average share price over the term of the ASR program, and other customary adjustments.

Turning to cash flow, we had a terrific quarter. For the quarter, cash flow from operations was $163 million compared with $133 million in the year ago quarter. Free cash flow increased 34% to $137 million or 11% of sales compared with $102 million or 9% of sales in the year ago quarter. We define free cash flow as cash provided by operations less capital expenditures, and Q1 capital expenditures were $26 million compared with $31 million in the year ago quarter. Our cash flow increases were primarily driven by higher earnings, excluding $25 million of noncash charges. As you know, we focus on the company's cash flow generation ability, which has been our hallmark. We believe it is an excellent indicator of the long-term performance of the company, but as a reminder $0.01 of EPS equals about $1.5 million after tax. So a variance of a few cents EPS in a quarter does not have a material impact on cash flow generation in that quarter.

Turning to our financial outlook for the year, we continue to expect organic sales growth in the range of 3 to 5%, including the benefit of the recent bleach acquisitions and before the impact of Burt's Bees, we anticipate total sales growth in the range of 4 to 5%. It is possible we could be in the higher end of the range based on the potential of the Green Works launch, our efforts to revitalize grocery, and other positive trends we're seeing in the business. Gross margin for the year is now expected to decline compared with fiscal 2007. This reflects our current outlook for additional downside from commodities costs, particularly in the second quarter. Previously we had assumed greater declines in resin costs over the balance of the year. Given current trends, we still anticipate declines in the second half, but less than previously anticipated. Our belief in moderating resin prices is based on capacity coming online in the Middle East. In light of our increased commodity cost outlook, we're doing a number of things to help offset this impact including evaluating trade spending levels, marketing investments and administrative spending. Additionally, we're taking our cost savings target from $80 million to $90 million, up to about $100 million for the full year. Of course we're always looking to do more on the cost-savings front. In addition to the charcoal price increase Larry mentioned, we're also considering where additional price increases may be necessary, particularly with Glad.

Previously we anticipated our tax rate to be 35 to 36% for the fiscal year. We now anticipate our full year tax rate to be in the range of 34 to 35% based on our outlook for the timing of settlement of certain tax matters. Net of all factors I just discussed, our updated earnings outlook before the impact from Burt's Bees is for fiscal year 2008 diluted EPS in the the range of $3.33 to $3.50, which still includes $0.21 to $0.25 EPS impact from the charges we discussed. This increased EPS outlook primarily reflects the benefits of the accelerated share repurchase. For the year we now anticipate weighted average diluted shares outstanding to be about 142 million, subject to adjustment once the ASR transaction is settled. So we had a very strong quarter. While we're also facing a higher than anticipated commodity cost environment throughout the year, we feel good about the organization's ability to deliver on our plans for the fiscal year. With that, I'll turn it back over to Don.

Thanks, Dan. Good morning, everybody. Certainly as Larry and Dan noted, we had a great first quarter. I am particularly pleased with the strong results across the business, and also that our brands responded well behind our investments to address the competitive conditions we talk to you all about over the last six months. Also that strong cost savings and the ongoing benefit of price increases helped mitigate what we all know to be a fairly intense commodity cost environment out there. At the same time, I think it is still important to bear in mind that we focus on annual targets and long-term goals, and as we noted frequently they're going to be quarter that is come in higher or lower than anticipated as we saw this quarter and last. What's important is how our business performs over time and whether we stay on track to hit our annual targets and long-term goals despite variances in the quarter. Based on our current performance in the outlook for the year, and I will talk a little about the innovation pipeline for the second half, we feel good about where we are right now.

I would like to take a couple of minutes and update you on our centennial strategy and comment on our economic profit outlook for 2008. While it is still very early, I am certainly pleased to note we're beginning to gain traction against several of our strategic choices. Let me give you a couple of examples. As you recall, one of our strategies is to expand our business in and beyond the core, and we're making considerable progress against this strategy. As Larry already mentioned, the transition of our recent bleach acquisition is going extremely well, and we continue to anticipate this business will add a little less than 1 point of growth for the top line. Many of you heard me talk about Green Works, and we plan for that later in this year.

We're also launching in Canada and Puerto Rico with more markets to follow. With Green Works, Clorox is the first major CPG player to enter the natural cleaning category, and as I've talked frequently, unlike other natural cleaners on the market, Green Works cleans as well as conventional cleaners, and is going to be the first natural cleaner with national distribution and significant brand-building investments. We believe we've really hit the sweet spot here because Green Works capitalizes on the convergence of two of the megatrends we've been talking about, that we're seeing taking off with consumers: health and wellness, and sustainability. We're optimistic about the brand's prospects, as it performed very well in test market and customer reaction and interest across channels have been very enthusiastic.

On a similar note, as Larry mentioned, we believe the same trend may have contributed to some positive Q1 results for Brita water filtration systems, as consumers certainly seem to be adopting more sustainable lifestyles. Just for a brief second looking to the second half of the year, we've got a number of new product launches planned. I would just say we feel very good about our second half innovation pipeline leading off with Green Works. Another one of our strategies is to win by building consumer lifetime loyalty through what we call the 3Ds: desire, decide and delight. As I talked before, desire is about prepurchase communication in the form of advertising and other activities to generate consumer interest and create motivation.

Now, to build that desire for the Armor All brand, for example, a few weeks ago we announced Armor All will sponsor two-time NASCAR Nextel Cup Series champion Tony Stewart in the 2008 season opening NASCAR nationwide series race at Daytona. A new advertising campaign featuring Tony will begin early in the spring on TV and print, and this marks the first time we've used a race car driver in the Armor All advertising. Tony is also being featured on the package of the Armor All All Holiday Gift Pack, and we're really excited about the partnership with him.

In fact, to look at the side about communication at the store shelf where about 60 to 70% of purchase decisions are still made. The grocery channel is one that I talk to a lot of you about over time, and it is one of those opportunities we believe has the strong economic profit growth potential. As Larry mentioned, we've added staff to focus on accelerating growth within this channel through improved assortment and shelving primarily, and as Larry also mentioned in Q1, we began to see already those investments behind decide start to pay off, particularly through this focus on the grocery channel. Our trends in Q1 and grocery were certainly quite a change from what they had been the previous twelve months, so we feel very good about our focus on grocery.

On delight, about offering higher quality consumer preferred products based on a deep understanding of consumer insight, so they will keep coming back, a great example is the recent launch of [Fosfe Bamboo] or bamboo forest scented cleaners and air fresheners in Latin America, where fragrance is important to consumers in every aspect of their lives. The product has been very successful. It brings a fragrance that is both contemporary and classic; and people have voted with their wallets in Latin America and the scent has become one of the top three selling scents in the short time on the market. As Larry and Dan said, we had a very strong quarter, better than expected results despite continuing commodity pressure, and overall we do feel we're building healthy brands, improving our channel mix and taking the right steps to mitigate the impact of these rising commodities.

Now with that, let me turn to this second topic for today's call, and that's the acquisition of Burt's Bees which we're extremely excited about. Joining me for this portion of the call are Beth Springer, and Beth as many of you know is our Executive Vice President of Strategy and Growth, and John Replogle, the President and CEO of Burt's Bees. And Beth and John are dialing in from North Carolina where Burt's Bees is based. I think we most of you know a key element of our centennial strategy is to accelerate growth in and beyond our core. I talked about this at length in May at the investor conference, and we are really focusing on growing markets that are, one, aligned with health and wellness, sustainability, convenience and the ethnic shifts in the country, those four megatrends. We're looking at brands that are mid-sized categories that is are economically attractive. Third, we're trying to provide opportunities to build or buy a big share brand and, fourth, leverage our core competencies, especially in brand-building and our customer-facing organization. We certainly believe that Burt's Bees is a compelling strategic fit on all of those lines and strongly aligned with those acquisition criteria, making it a very attractive investment for our company.

Now as many of you may know, Burt's Bees is a leader in natural personal care which is outgrowing the larger personal care industry. The other thing that's interesting about natural personal care is the highly fragmented category where the top five players have less than a 20 share. Consequently, it has a very attractive competitive set with numerous single brand privately owned companies. Now, today natural personal care is a market of about $6.4 billion with a strong growth rate of about 9% annually, in a margin structure that certainly is at the upper end of the consumer products categories that we compete in. Burt's Bees was founded in Maine in 1984 and now headquartered in North Carolina, and in addition to the U.S. the brand is marketed in Canada, the UK, Ireland, Hong Kong and Taiwan where the growth rates are as high or higher than they are in the U.S.

Our valuation of the business, which Dan will talk about in a few minutes, is primarily based on expanding distribution within these current markets. For example, building out distribution in mass, grocery, drug and convenience channel work. As you know, Clorox already has a large presence. We see potential for continuing to build the brand in additional subcategories such as baby care, and expanding the brand into other product adjacencies in other markets making this certainly a global play for Clorox with possibilities for significant upside potential beyond the value (inaudible) that we have. What I would like to do is turn it over to Beth Springer, who will talk more about the strategic fit and how we plan to manage the business. Beth, if you'd go ahead.

Thanks, Don. We are simply delighted to announce this acquisition. As Don said, it is very strongly aligned with our centennial strategy, a key element of which is to grow the company in and beyond our core by focusing on higher growth and higher margin categories. Our goal with this transaction is to make a platform acquisition by acquiring a company with sufficient scalability. With Burt's, we are entering into a rapidly growing market that has gained momentum behind the consumer megatrends of health and wellness, and sustainability.

Let me take a moment to outline in a little more detail how Burt's Bees aligns with our strategy and our acquisition criteria. First, it is in a high growth category that is consistent with the consumer megatrends we talk about. In line with our strategy, we've been actively seeking potential acquisitions aligned with these trends, and we were very excited when we found this brand and this opportunity. Burt's Bees is anchored in the sustainability and health and wellness megatrends, and we believe this business will continue to benefit from those tailwinds for years to come as more consumers adopt these lifestyles. Second, we believe Burt's Bees has the ability to become an even stronger brand.

Currently it is the leading natural care player with strong shares in most of its categories. Among many consumers who purchase natural brands, it is already viewed as the most natural brand -- the most natural personal care brand I should say -- and the leading natural brand in the U.S. And as Don mentioned growth rates in the markets outside of the U.S. are as high or higher than they are here. Third, natural personal care is an economically attractive category, and Burt's Bees margin structure is at the upper end of the range of consumer products. It will be highly accretive to Clorox. Finally, the brand aligns strongly with our strategy to drive demand creation and build consumer lifetime loyalty by focusing on the 3 D's of desire, decide, and delight.

As a reminder, desire is about increasing consumer awareness and trial. Decide is about winning at the point of purchase. We believe our deep capabilities in desire and decide complement Burt's Bees' strong capabilities and innovation to delight consumers with natural products they truly love. As mentioned in our press release, the business will remain in North Carolina and John Replogle will stay on as President and CEO of Burt's Bees reporting to me. I could not be more pleased with John's decision, and truly look forward to working with the other employees and Burt's Bees' affiliates. Our plan is to operate Burt's Bees as a semi-independent unit leveraging its highly effective strategy and plans, its excellent trade practices and organizational capabilities. And Burt's has a wonderful robust culture and an esprit de corps that we want to build on and protect by minimizing the disruption to the business and the culture. At the same time, we are confident there are opportunities to accelerate the Company's profitable growth, and we will focus on creating these revenue synergies.

Specifically, we'll leverage our considerable capabilities in the food, drug, and mass merchant channels; our expertise in niche brand management; as well as our capabilities in advertising and sales promotion to ensure we maximize the potential of this business. Our strategic rationale in this acquisition was always predicated on the recent strong growth and our belief that convergence of the two trends of health and wellness and sustainability will sustain growth in this category and for this brand for years to come. That said, we believe the acquisition has additional value to be unlocked as our natural platform expands and takes place. Burt's Bees will also be an enabler for international expansion and our broader strategy to pursue health and wellness and sustainability at Clorox. We're truly looking forward to working with John and everyone at Burt's Bees to develop the right principles and protocols for working together and to identify and pursue all the synergies as well as implement appropriate controls.

With that, I am going to ask John Replogle to say a few words, but before I do, I want to let you know that John and I have spent the morning here today in the Burt's Bees' headquarters in North Carolina, as Don said. We've had the pleasure now of meeting with probably about 100 of the employees I would say, I am looking at John, and he is nodding, and we're pleased to say that their response to our message about the merger is positive. With that I will ask John to share some of his perspective about the acquisition.

Good morning, everyone, and thank you, Beth. I am absolutely delighted to be staying on and to be a part of this historic next phase, which presents a great growth opportunity not only for Clorox but also for Burt's Bees. Both companies are built on strong leading brands with a history of delighting consumers, and we have very similar core values and missions. At Burt's Bees, our mission is to make people's lives better every day, naturally, which is a perfect complement to Clorox's mission, to make everyday life better every day. Clorox brings tremendous brand building, customer facing and product supply capabilities to Burt's Bees that can help us take our business to the next level. The combination of our two companies creates great opportunities for more innovation and even stronger growth platforms built on health and wellness and sustainability. I am really looking forward to what the future has in store for Burt's Bees and for Clorox as we begin to work together. Now I would like to turn the call over to Dan Heinrich.

Thank you, John. As Beth said, we're delighted with this acquisition, and we believe Burt's Bees' strategic fit and alignment with our acquisition criteria creates strong sales and margin growth opportunities for Clorox. I would now like to walk you through the details of the transaction and our financial outlook. As you saw in the the press release, we've entered into an agreement to acquire Burt's for $925 million net of an additional $25 million payment for anticipated tax benefits. We anticipate the transaction will close by the end of the calendar year, and it is subject to regulatory approval. Our valuation of the business is primarily based on expansion within the U.S. and the countries in which Burt's is currently marketed with anticipated ramp-up in marketing spending as the brand transitions to a more complete mass distribution model. The business is enjoying very strong distribution gains and we believe we can add value and expand these trends over time through our strong customer capabilities. As Beth noted, we see significant potential for building distribution. While not included in our base valuation for the business, expanding the brand into product adjacencies and seeking more aggressive international expansion offers significant upside potential beyond our valuation.

Burt's Bees has very attractive returns, and we believe it will create value for us. It helps accelerate our top line growth. It helps build our gross margins and EBITDA margins. It is anticipated to be EPS accretive in fiscal year 2009. We're optimistic we can exceed the assumptions in our base business plan for Burt's Bees. We intend to fund the all-cash transaction through cash and short-term borrowings which will initially take our debt to EBITDA ratio to 3.5 to 1. We intend to begin paying down the debt in a relatively short period of time and anticipate bringing the leverage ratio to 3.2 to 1 by the end of fiscal year 2008 and to 3.0 to 1 or lower by mid-fiscal year 2009 or about twelve months from now. Our longer-range target for leverage continues to be 3.0 to 1, and we're committed to getting back to at that level or below that leverage ratio quickly.

Including estimates of purchase accounting adjustments and one-time transaction and integration costs related to the transaction, we anticipate that the transaction will dilute fiscal year 2008 earnings by about $0.10 to $0.15 per diluted share and that it will be accretive in fiscal year 2009. Excluding such purchase accounting adjustments, one-time transaction and integration costs as well as noncash expenses related to the transaction, the earnings per share impact is anticipated to be neutral in fiscal 2008 and solidly accretive in fiscal 2009. On the top line we anticipate Burt's Bees to grow sales in the low to mid-teen range for the next few years driven primarily by distribution gains, adding nearly 2 points of top line growth to Clorox in fiscal years 2008 and 2009. Now I will turn it back over to Don for wrap-up.

So with this transaction, Burt's Bees allows us to expand even further into the natural sustainable business platform in an area where we believe there is certainly tremendous opportunity to build this into a big share brand, and we believe the business is a compelling fit for us strategically. As I said, this is consistent with the megatrends I and others have been talking about since I got here last October. We think it is a great strategic fit and that our complementary strengths, our core values and the parallel missions we have that John referenced provide us really strong foundation for success. So with that I ask the operator to open the lines up for your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Chris Ferrara of Merrill Lynch.

Hey, guys, just wanted to ask on the Burt's acquisition, first of all I wanted to talk about margins and growth rates. So you're saying low to mid-teen sales growth over the next few years and presumably a ramp-up in advertising. What does that mean for that business' EBIT growth going forward and also on the competitive environment? Would you have expected deterioration in margins anyway as the category gets more difficult over time?

Let me start, Chris. This is Don, and I will turn it over to Beth and John. They can jump in. I think you're looking a brand that has had over a 25% compounded growth rate the last three years. We think our valuation which puts it into the low teens growth rate obviously growing off a larger base is fairly conservative. We certainly think as Dan said that we can exceed the assumptions went into our valuation, particularly when you look at the distribution opportunities that are out there.

For example, our focus on grocery, which is starting to pay off we think there is significant opportunity in grocery where Burt's Bees does less than $20 million of revenue. You look at the mass opportunity. You look at the continued drug opportunity and convenience stores where there is very little presence at all. We think we can exceed that valuation. When you look at the pricing power of the brand, we think the margins are extremely healthy and will stay that way but I will let John jump in and Beth as well.

Don, we absolutely agree. We see lots of growth potential in the business. We have no expectation of margin erosion, and in fact see opportunities as we begin to turn our sights after growth synergies to cost synergies potentially to boost those. So we believe -- we are confident that we can deliver the numbers we committed to you, Don.

Dan also wants to jump in, Chris.

Chris, on our valuation model on this business, it does assume over the coming years as we go increasingly with this business to mass channels that there are certain increases in trade spanning and certainly we have a ramp-up in the model on the marketing support for the brand. But as Don and Beth have said, we still expect the margins on this business to remain very strong.

Do you think 30% plus is sustainable over the next couple of years from an EBITDA margin perspective given the ramp-up in spending?

I think when we model this thing out, we believe for the next several years those kinds of margins are certainly achievable. And as Don mentioned, the growth trajectory of this business, the pricing power of this brand are pretty strong, and we believe that will help us sustain margins even as we move in more increasingly in this business into the mass channels.

I think, Chris, the other thing that builds on that is the especially on the purchasing leverage that we can bring to Burt's Bees with our scale. So I think there are some cost synergies here that we really haven't talked about, but certainly they're there to help protect that margin.

It is John here as well, and I will add to Don's point on scale. Organizationally we are a business that has really just hit organizational scale. So as we continue to grow the top line, we should enjoy some scale benefits.

Got it, thanks. Don, I guess what's your view of the EP impact of doing this deal?

I think as we've modeled this thing out, Chris, we think it can be EP positive in five to seven years. It is a little longer than we would have hoped, but I guess what really excites us about this and what we think is unique about this is that as we scour the universe to find brands that fit with the criteria we articulated in the centennial strategy consistent with megatrends, big share brands, economically attractive categories, fragmented categories, et cetera. As we looked at those, we couldn't find anything that got us nearly as excited as Burt's Bees.

When you look at the brands strength, the fact it has been growing over 25% a year, the fact that we think the trends, the convergence of sustainability and health and wellness are trends that are going to sustain the category growth rates in the future for years to come -- the fact that you do have a fragmented category with the top five players don't have a 20 share combined which plays to our strength. And you look at the fact these margins are very accretive to our margin structure, and we do think we can sustain them, and lastly we think there is a significant impact on EPS fairly short-term. When you add up all those things, we're saying we'll take a little bit longer time to build the EP. Dan?

Chris, the other thing I would say is if you look at the impact of Burt's in the Clorox in terms of our annual goals and economic profit growth, for '08 our annual goal is to increase economic profit at least in the double-digit level annually. As we noted before, in the the base Clorox business, we're not likely to achieve that in fiscal '08 primarily due to the restructuring costs that we're taking in our manufacturing network. Certainly when you overlay the Burt's acquisition with primarily due to the transaction, the one-time costs associated with the transaction in '08, that we're likely to see some dilution on economic profit for Clorox. But in '09 as Don said it becomes accretive for EPS, and for EP for the total company we're anticipating growth in EP. And we anticipate right now in fiscal '10 and beyond that we'll be returning to annual double-digit increases in economic profit. So it does have a bit of a near term impact in fiscal '08 and fiscal '09, but by fiscal '10 we should be back on the trajectory to annual double-digit growth and economic profit.

Got it, thanks. Just on a totally different note, your long-term view that resin going down over time, I was wondering if you could talk about that relative to -- I understand capacity is the reason you think that's going to happen, but with hydrocarbon costs where they are and the general view that hydro costs again are a bigger driver of resin -- if crude stays at $90, do you still get the type of resin declines in the long-term you think you're going to see?

Certainly oil prices have been pretty stubborn at these very high levels, and we still anticipate the long-term thesis in the market is the right one. We're going to be seeing the resin capacity in the world market increase probably by 30 to 40% over the coming years as that Middle East supply comes online. As a reminder, the input raw material input is natural gas in the Middle East versus oil in Asia, so the sovereigns there will be fixing those input costs at reasonably low levels compared to the U.S. And we think just the sheer supply/demand curve with that supply coming online with lower input costs will naturally start to drive resin down, and again we are anticipating that. Obviously we had anticipated the inflection point to be a little sooner than it has been, but we still believe in our longer-term thesis that will bring resin down over time. So we still believe in that thesis. Certainly we're encouraged because we're in swith suppliers in the Middle East and we have an idea what they're thinking of in terms of pricing.

Thanks a lot.

We'll go next to John Faucher of JPMorgan.

Yes. Good morning, everyone. You talked a little bit about the broad strength of the business, and maybe walk us through on some of the businesses whether or not announced price actions have had any impact on the underlying volume or are you generally seeing the strength in top line across the businesses reflected in the takeaway?

John, this is Larry. We have seen very good broad-based growth in the business. We're not seeing a lot of impact from pricing. We took charcoal pricing up a year ago. We saw fairly minimal impact. That business is still very healthy and growing, and we expect it to be health and growing despite another price increase this year. We're obviously doing lots of things on the marketing side to offset the impact of pricing because there is some impact, but overall it is a very healthy business. I would say most of the other businesses have not been dramatically impacted by pricing. Most of our pricing actions have been pretty much anniversaried at this point. We did have some concern about raising prices on Hidden Valley given that we haven't taken pricing on that brand in a long period of time.

We're happy to learn it appears our competitive set is following our pricing action, so we should be relatively unchanged from a price point versus competition. We're seeing growth on lots of fronts. We have been spending aggressively on Wipes. Given the competitive situation, we've returned to double-digit growth. We saw some incredible performance on our Brita business. We're attributing that in part to the fact that this concern around bottled water waste is gaining momentum with consumers. Just a lot of places where we're seeing very good growth. I should also mention the bleach acquisition -- we talked about that. Terrific results versus our expectations in both Canada and Latin America. Also potential over the longer term to broaden that to a very successful health and wellness platform like we have in Clorox in the U.S. in those areas of the world.

John, Don here. Let me just add -- as Larry ticked off the brands and categories, let me talk about channels for a second. I think a little color commentary on the grocery initiative. As you know we brought 15 people on board, and we're bringing another 15 on board, and the focus on AMPS -- or assortment, shelving, merchandising and pricing is starting to pay off. The trend in the first three months of this fiscal year, our grocery business was up about 3% versus the 97 index for the previous twelve months. So that is the significant tailwind behind the growth in the business overall. We feel very good about that. We're gaining traction there even quicker than we thought we might. Lastly in country -- if you look at the countries, strong growth across Latin America. Canada extremely strong growth, and really gratifying we're seeing Australia return to single high digit growth rates as we sort through customer issues there. Really across the board strong growth by category, by channel, by country.

So it sounds like you don't think there is much in the way of loading involved in advance of some of these price increases?

No. Only two price increases we talked about -- charcoal, Hidden Valley, and, no, we basically have policies in place that don't really allow for a lot of loading. But really hasn't been a big issue in the past in our pricing and I don't expect it is a current issue.

Okay. Thank you.

Plus on the charcoal, John, we're going into the off-season, so we're not going to load it up.

We'll go next to April Scee of Banc of America Securities.

Thanks. When we look at margins versus our expectations, looks like part of the beat was driven by less advertising and research and development. When you talk about your pipeline, it sounds like that could be partially driven by timing. Can you talk a little bit more about what we should expect from advertising and research and development as we go through the year, and what's in your pipeline in particular that gives you confidence?

April, let me start with R&D. Typically we're around 2% of sales, slightly above that. A touch lower in R&D this quarter, and that's strictly due to timing in some of the initiatives, and some of the spending that we have there. So a little over 2% is still a good number for R&D. And on advertising, as we said in the past, we tend to average right around 10%. What you do see in the advertising line, though, is there have been some shifts as we've been responding to competitor activity, we have shifted some of our spending into trade merchandising to deal with some of these competitive issues. So you see that reflected in that metric. But having said that we're still strongly supporting our brands and growing our brands.

We have spending -- as Larry mentioned to revitalize the acquired bleach businesses, so that's supporting there, and then we also have some spending we're doing behind C2 to address some of the competitive activity there. So we still believe we're strongly supporting our brands, but you do see some shift from our advertising into trade spending. And for the full year we would anticipate we're going to be in the 9 to 10% range of sales.

Let me build on that. Demand building by looking across both our advertising investment and trade investment is up pretty significantly versus year ago. A lot of that is because of the competitive activity. I also wanted on point out a lot of our trade spending these days goes to what we call brand building within stores, so activity within stores is well beyond price and trying to deliver a message around building our brand equities within store. I think you've heard a lot about that within the industry, and so some of this trade spending -- technically classified as trade spending is really advertising in a different form.

Let me tick off some of the second half pipeline for you in terms of new products while we feel strongly about it. We have two new Clorox bleach items coming out, Cold Water and Anti-Allergen. We have a line of highly fragranced cat litters under the Fresh Expressions brand name, so it is a flanker off of Fresh Step. We have refrigerated Hidden Valley salad dressing coming out in original and buttermilk flavors in the refrigerated case so it gets the brand in another section of the store. We have a 409 formula coming out for natural stone cleaning as obviously houses now have granite, the fixtures in the kitchens and countertops, so we're going after that. We also have an Armor All On The Go auto glass exterior detailing and cleaning wipes coming out and of course the big news is Green Works which starts off with late shipments in early shipments in late December and really starts heavily in January.

Okay. Just another quick question on trash. You mentioned that you were looking at the possibility of price increases there which seems like it should be a layup given what's happening with polyethylene prices. Is there anything that would stop you from taking this price increase and also if you could talk a little about the dynamics you have seen in trash recently, particularly versus (inaudible).

I think I would say stepping back there, multiple levers we might apply on the Glad business with respect to the current situation on resin. So we could choose, for example, to change our trade promotion spending levels versus our pricing, some of which translates to pricing but some of which goes well beyond pricing, how we choose to diminish advertising investments. So I can't say for certainty that we will look at pricing, but obviously given the current resin situation and our outlook for resin, that's something we'll poke at pretty hard. In terms of the business, we describe the business in Q3 as basically overall flat. The good news is we continue to see very good growth on our ForceFlex trash business, so ForceFlex is gaining at a high single-digit rate. And we're still seeing share growth in the trash segment versus Hefty and Private Label.

Thank you.

We'll go to Lauren Lieberman of Lehman Brothers.

Thanks. Good morning.

Good morning.

I am a little bit confused about trade promotion because it seems that clearly you had promotion in-source merchandising step up in investment to some degree, but if we're not seeing at all on the revenue line or in the gross margin breakout that you gave. The second half of '07, trade promotion was around 100 basis points drag to margin, so if you can explain to me what the difference there, that would be great.

Yes, Lauren, I think what you basically see -- we do have a significant ramp, sizable ramp-up in trade promotion spending. It has been offset, though, due to the business mix we've had. Some of these trends in our higher margin businesses and the contributions we're seeing, that's been tailwind to us in terms of margin, and that business mix is offsetting some of the drag from the trade promotion spending.

Okay. Is that channel or product mix or a combination of both maybe?

It is really both. It is mix of businesses, food, Brita, certainly we've seen benefit there, and it is also channel as Don and Larry referenced -- particularly grocery channel, the improved trends we're seeing there are contributing.

Lauren?

Yes.

It was also noted in our press release -- currency gave us about 1 point of benefit in the quarter, and we're also getting some benefit from pricing, not only primarily the charcoal price increase we took earlier in the year. So those two things as well are masking that stuff of the trade portion spending which has really continued since the last half of last fiscal year.

Okay. But the pricing is a separate line item, right? The pricing is given whatever that 50 or 55 basis points, so maybe it is the FX. As we look forward, is the mix shift theoretically -- I think Hidden Valley maybe is a little slower in the next quarter, Brita maybe maintains momentum. Do you expect trade promotion to emerge as being a drag to margin, even given you're going to be shifting some of your spend from traditional advertising into the store?

I would say that we will -- we see the competitive activity continuing. We're going to continue to support our brands through the trade merchandising efforts that we have. Also in second half, we have a launch of these new products that Don mentioned, particularly Green Works, and we will be spending to support those launches. So in the second half you will probably see a slight uptick in total trade spending in response not only competitive activity but also the launches we're planning.

Okay. All right. That's great. Thank you.

We'll go next to Ali Dibadj with Sanford Bernstein.

Hey, guys, just a couple questions. One is sticking to Burt's Bees for a little bit -- I am kind of surprised given the very strong emphasis we've been hearing for awhile now on EP that you did feel like this exception was warranted to weight -- for EP to become positive five to seven years, typically 5% plus of sales in terms of valuation which is pretty high compared to most recently Tom's of Maine at roughly 2 to 2.4. All of this in the context of it sounds like you didn't have to do anything to the portfolio although you were looking, and EP was a very important driver of some of your decisions. I understand the benefits going forward. I am just trying to get a sense of -- has anything shifted on how you think about EP, or give me just a little bit more detail on why you think this is so great?

I think, Ali, that as I said when I ticked off those five reasons for why we took a little bit more forgiveness on EP, in a four to five-year timeframe versus a five to seven year timeframe, as Dan noted, we believe we're going to return to double-digit EP growth as we get out eighteen months from now. We don't think this is certainly dilutive or inconsistent with our focus on EP. But I do think when you look at this brand, it is a unique opportunity. And as I said the day I got here, it was about making this company larger, not smaller. It was about accelerating the top line and the bottom line growth, and really doubling the value of this company over a five to six-year timeframe, not just doubling EP which we thought was the best proxy of doubling the value of the company.

I think when you look at the brand strength of Burt's Bees and the fact that the strong double-digit growth in this brand is compelling. Second, I do think I really do believe these trends around health and wellness and sustainability are not trends. I think they're a cultural shift, and I think it is only going to build as people are educated about the benefits of natural personal care versus the other personal care. I think the fact that this category is fragmented where five players don't even add up to 20 margin or 20 share really speaks to the whole strategic premise of the Clorox Company over the last 30 years, which is build brands of mid-sized or smaller categories. And then when you look at the margin accretion of this with over a $30 million EBITDA and the EPS accretion that can be fairly significant in a fairly short amount of time, I would say that's a pretty good reason you add all of those up to saying we'll give ourselves another year or two on EP to make this thing positive. Having said all that, we think there is significant potential to go beyond our valuation and move that up a year or so, but those are the reasons that are more compelling to us.

One question about one of the five points you're taking up there regarding the fragmentation of the market. Do you have in your models, do you think about the fact that many people are going towards this kind of organic natural product base and no big player necessarily has made any major, major (inaudible) but that could change?

I will let John speak too, but let me kick it off by saying we believe there are, and as we did due diligence here, there are strong barrier to entry for competitors who want to get into this category. The typical product development approach of mainstream personal care has really been shown to be ineffective at getting into this category. The instability of natural materials makes for a really steep learning curve in reproducing natural formulations, and makes frankly backward engineering really difficult to impossible, and we think Burt's Bees has a one to two-year lead on potential new entrants. We feel very good about that. John, I don't know if you want to add some additional color commentary.

Sure, Don and Ali. I think absolutely we will see other players move into the category. It is inevitable as the consumer moves there and goes mainstream. By our modeling, consumer penetration in natural today is somewhere in the 12% range. We expect that to double over the coming years. So this natural market really goes mainstream, more and more of the mainstream players will look to enter this market. We have a distinct advantage really in a couple of ways. One is we have leadership. We have been in the the market for 20 years. We have a leadership position. Secondly, we have the most authentic brand. We are adored by consumers and trusted, and we built that reputation and that brand over the last 20 years, and third as Don mentioned natural formulations. We have an outstanding formulation development team processes within our manufacturing system that allow us to make the the highest quality natural formulations, and those are very difficult to replicate. So we've got advantage in differentiation that I think is sustainable on at least three fronts.

Okay. That's great. In terms of -- that's quite helpful. In terms of the differentiation of the barriers to entry, how is that different than pushing in with Green Works?

I am sorry, go ahead. Could you ask that again, Ali?

You mentioned a lot of differentiation, a lot of barrier to entry into the organic and natural categories, particularly as it relates to personal care. Is that a completely different dynamic in terms of entering Green Works into the natural household care products?

I think Green Works is just another example of us internally moving into the same space. We do keep the same convergence, health and wellness and sustainability applying to Green Works as well. I think the the so sophistication of our R&D development, our understanding of chemistry, our ability to develop bipolymer technology that uses coconut and lemon juice basically as surfactants to create cleaners that can be as effective as conventional cleaners is something that the smaller players in the space can't replicate. Now, can the multinationals who are in these spaces replicate it? Perhaps certainly they could over time. We do think we've got a six to twelve-month head start. We also think the brand, Green Works, is the significant advantage going forward. So I think when you look at our R&D capabilities in this space and the fact that we've got I think the probably at least a six if not twelve-month head start, we'll really, really play to our advantage.

I think also, as other people get into the category, I think it will continue to drive it, drive the category up. We're also looking at follow-on products into adjacent spaces that we already compete in, Ali, that we think we can get out there fairly quickly. What you should expect from us on Green Works is every four to six months you will see new product and packaged news coming out on that brand to keep it fresh, so we will keep pushing ahead quickly into adjacent spaces to stay ahead of the game.

The only build I will add on that is Green Works is a new brand name, but it does carry a Clorox endorsement. We did an awful lot of work with consumers, and the credibility of Clorox is an important factor in making sure the consumers understand these products do actually work, whereas other green-type cleaners have let them down over the years. It is an important component of our right per win and a barrier to others.

Okay. Thanks a lot, guys.

We'll go next to Amy Chasen with Goldman Sachs.

A couple of things. First of all, you mentioned in passing cost synergies on Burt's Bees, but you didn't give anything specific in terms of either dollars or where they would come from. Can you talk about that?

Let me ask Beth and John to respond to that first, and then we'll come back to Dan and myself.

Amy, we are going to be focusing initially on revenue synergies as we discussed earlier. We do think there are cost synergies, I think the initial focus will be in procurement, some raw materials, a lot of transportation services and the like, and at this point we don't have an estimate of cost synergies that we're sharing.

Okay. So I guess my follow-up would be if we uses kind of a mid-teens sales number and the type of margins that you're talking about, and about 5.5 or 6% financing costs, we're not coming up with any kind of significant accretion in FY '09. So maybe we're doing something wrong, but if you can kind of walk us through that math, that would be very helpful.

Amy, obviously -- Steve here, still a lot of assumptions in these numbers we'll have to finetune to get closer to fiscal '09. I think the message today is that we took a lot of the one time costs associated with the transactions. It's understandably going to be dilutive in fiscal year '08 and we talked about that on a GAAP basis of being in the range of $0.10 to $0.15 as we see it today. The message for '09 is we see it being accretive. How accretive remains to be seen. The message is it is a relatively quick period we believe where it is at least neutral to accretive by '09 and moving into solidly accretive by fiscal '10.

I am sorry, I thought you said solidly accretive by FY '09.

If you look through the charges it is. If you do it on a GAAP basis, it is slightly accretive.

I am excluding the charges. So when you say solidly accretive, that means neutral to slightly accretive or does that mean meaningfully accretive? I am sorry, I don't mean to be getting into the semantics, but our numbers are showing like 1 to 2% accretion in FY '09 which to me is not solidly accretive. I don't know if I am doing something wrong or if our definitions are just different.

Through fiscal '09 on an as-reported basis, I would describe it as neutral to accretive, slightly accretive, recognizing you still have to do a lot of the finetuning around final purchase adjustments, updating assumptions and so forth. Excluding one-time costs, some of which will be subject to those purchase adjustments, we would see it as being solidly accretive.

My numbers are wrong. Can you tell me where I might be wrong?

It might be easier to cover this after the call on a one-off basis because even for ourselves we're dealing with assumptions at this point and business (inaudible) portfolio.

That's fine. I will call you after the call. On a totally separate note, on your annual guidance, you obviously beat the first quarter in a very meaningful way. You're getting some ASR benefit, you're getting some benefit from the tax rate as well, and yet, well, you did include the ASR benefit in your raised guidance, but you did not include the higher tax benefit which suggests that your underlying core fundamentals are going to be weaker than you originally anticipated. Can you just talk about that?

Amy, I don't think our fundamentals are changed. Essentially the way we view our outlook for the full year is certainly we had a very good quarter in the first quarter, and that gives us a bit of a leg up. We will get a little benefit of the ASR which is in our outlook. Tax rate will be a little bit better than we anticipated. But the offsetting factor, the weighting factor again is our updated outlook on commodities costs. And the updated outlook we have on that is that we're likely to see between $30 million to $40 million of additional commodity cost pressure over the balance of this year. So we're a little better in first quarter, but we're going to need all of those factors to help overcome the commodity costs impact there, certainly taking cost savings up from our range of $80 million to $90 million to $100 million will help. As I mentioned, we're going to be looking at admin spending, trade spending, Larry discussed that. There is a number of things we'll need to do to overcome that pressure, and until we get farther along, that's why basically what we've done with the outlook is updated for the impact of the ASR.

I am sorry. Last thing. Is it safe to assume that the most difficult quarter for you out of the next three will be the second quarter?

That's certainly our view at this point is Q2 we should see the peak, particularly of commodity costs.

Thank you.

We'll go next to Bill Schmitz of Deutsche Bank.

Good morning.

Good morning, Bill.

Can you talk a little about the [battlefield] categories, Clorox 2, Wipes, and Glad versus Hefty and what's going on there and what the sense is especially (inaudible) category.

Let me start with Glad. I think I mentioned previously we feel good about our results on Glad. We continue to gain share. We continue to see strong growth on ForceFlex which you'll recall is a very good brand for us from an EP perspective, so very good shape on Glad. We feel very good about the results on Wipes. We regained our momentum. We're up double-digits in the quarter. We did have a variation in the previous two quarters where we had a very significant -- very significant growth and then a bit of a decline, but over like calendar year today results, we're still up strong double-digits that business. In the last month, given the impact of some of our activity increase in spending we actually saw share growth on that business despite the fact that Mr. Clean is on shelf and starting to gain some share. Their share is in the 5 to 6% kind of range.

It is obviously well, well below our share. The other threat in Wipes has been and continues to be aggressive spending by Lysol, but our results in Wipes are very good and healthy. We're growing strong double-digits. We continue to have a very strong share in that category. Clorox 2 we talked about previously. I think we're more disappointed there. We didn't expect a lot in the first quarter. We expect more healthy results in the back half as we introduce some innovation on that business. We're still down a bit both in terms of volume and share on Clorox 2 and we're looking to improve that business in the second half of the fiscal.

And then are you guys done on the acquisition front for the time being there?

I am sorry, Bill, the question being are we done on the --

Are you done on the acquisition front now that you (inaudible)?

I think we've got some time to digest what we've got here, Bill. I don't think that we're out in the market right now looking actively. There may be some things that are modest tuck-in acquisitions, but I don't think we're active as obviously given the events of the day.

Bill, I would certainly say -- this is Dan. We're certainly going to focus on integration in this business of helping John and the team there drive their business plans. That's certainly going to be a focus of the group, particularly over the next couple of quarters. We're obviously targeting to get back to 3.0 or lower on our debt leverage, and we're committed to doing that. Our debt ratings are very important to us.

So we'll be focusing free cash flow on that debt paydown. The good news is we generate as you know a lot of cash flow, and within about three quarters we're projecting that we'll be at or below the 3.0 debt to EBITDA level. So while we'll continue to look at other acquisitions, obviously we're going to balance any of those points of view with making sure that we get our leverage ratio down to where we'ed like it to be.

Our primary commitment right now as Dan said, Bill, is to integrate the Burt's Bees business as Beth alluded and John as well. we're going to run this as a semi independent company because we don't want to certainly do anything that would negatively impact the culture of Burt's Bees. Having said that, the other thing is that we're very committed to getting back to the 3.0 to 1 debt to EBITDA ratio within twelve months, and that's what we're going to make happen.

And then this is a random one for you. (inaudible) shortage impact in the cost structure at Burt's Bees? Apparently there's (inaudible)

We've been aware of that. John, I would ask you to respond. Did you hear Bill's question?

I am sorry, I couldn't hear Bill.

Bill's question was around the bee shortage in the United States, the dying off of certain bee hives.

Terrific, Bill. It is an issue that obviously we're quite familiar with. It is called colony collapse disorder here in the U.S., and it is something we're obviously very concerned about. However, Bill, we source our beeswax from Africa, so we do not expect a commercial impact on our business. But we're taking a very active stance right now on that, trying to educate consumers and build awareness, and in fact tomorrow is the release of our first public service announcement. We'll be doing a national PSA on colony collapse disorders in theaters around the country to build awareness about it, and what consumers can do to help understand and remedy the issue.

Is that going to be in conjunction with The Bee Movie?

It is not in conjunction with The Bee Movie. We happen to be breaking tomorrow in theaters around the country.

Okay. Great. Thank you.

We'll go next to Kathleen Reed of Stanford Financial.

Good morning.

Good morning.

Can you talk a little bit about on the Burt's Bees business -- is this a very different business than your existing kind of core focus on household products? Is there a lot more SKUs or is it a lot smaller than what I typically think and what specific I guess personal care categories does been compete in? I know of some of them, but is it haircare, deodorant, if you can go through?

Why don't I ask Beth and John to comment first, Kathleen, and we'll come back.

Kathleen, there are definitely some differences from the businesses we're in today. If you will allow me, I want to start by focusing on some of the things that are most common and thenwe'll talk about the differences and I will ask John to dimensionalize a little bit more about SKUs and where we participate. Fundamentally we are talking to many of the same consumers. We are talking about building great brands. We have significant channel overlap, particularly as we look to the future where we grow distribution.

I would say the greatest points of difference if you will in how we add value are these are personal care products, all natural formulations. That's why we would not have entered the space organically. We wanted to acquire a leading player like Burt's. You will find that we have more SKUs, and the brand is already fairly broad in its participation in personal care. I am going to ask John to elaborate on that.

Kathleen, we -- our business is really focused in two areas, one we have a core care business. We are also then in cleansing categories, and our core strength is in care. We play in lip care, skin care, and baby care, and those are leadership positions we have in each of those. And we're quickly growing our share in our position in the cleansing areas of haircare or hair cleansing, and body wash and personal cleansing. We see those as very good growth opportunities with the business going forward. And we'll look to continue to grow into wide space areas where we don't play today really in the oral care and deodorant space.

The current distribution of Burt's Bees, is it primarily in specialty organic stores or can you just I guess walk through where it is now, and is there a risk that you'll alienate your core consumer if you move a lot of distribution out of specialty stores into mass? Or is that not the problem because more consumers are adopting the trend and finish off in mass anyway?

It is a great question. I will go back to a dynamic I talked about earlier which is really the increasing penetration or household penetration in consumer adoption of natural personal care. It has doubled in the last three years in terms of household penetration. We expect it to double again in the next call it three to five years. So this is really becoming a mainstream consumer choice, so we are just moving with the consumer. What we continue to do is make the best most efficacious high-quality products that we can, and they continue to be available in those channels where we started and grew the business, where if you will the core natural consumer tends to shop. But we are increasingly reaching more and more in new consumers, and moving into those channels where that consumer shops a regular basis.

The only thing I would add to what John and Beth have said, Kathleen, is if you look at some of the larger customer footprints that Burt's Bees has done over the the last eighteen months, some of those large customers are our large customers as well. Target, Walgreens, the chain drug channel in general, grocery, clearly there is opportunity to accelerate in grocery, but a lot of these customers are the same types of customer that we call on every day. The specialty and gift and the natural side is actually an add to us. I think it will give us increased capability and exposure for our other brands, for example, Green Works. So we think there is a nice synergy play here between both customer-facing organization.

Kathy, one other thing. For you and the other listeners, I would encourage you to go to our website. We have presentations -- probably 15 pages or so of really good reference information related to the Burt's Bees business, the strategic fit for Clorox, and in addition Burt's Bees has a fantastic website that provides a lot of great information on that kind of business.

Okay, great. Also on your full year revenue guidance raising it 1 percentage point I think there was a lot of discussion or some confusion on your last conference call with the 3 to 5. Did that include the bleach acquisition? Did it not include the bleach acquisition? And now it is up 4 to 6 with 1% on the bleach business. Is the raise then due to stronger organic volumes in a certain area or --

I think, Kathleen, there is certainly a higher confidence given the first quarter performance across a number of categories and brands that the organic side of this business, the fundamentals of it we think are healthy. The 4 to 5% uptick does include the roughly 1 point, slightly less than 1 point in volume from the bleach acquisition. Obviously anything that Burt's Bees would be additive to that, so that would take that 4 to 5 range more like into the 6 to 7 range with Burt's Bees.

Okay. And just lastly, with the Burt's Bees business -- tough to say -- closing at the end of the calendar year and the $0.10 to $0.15 dilution for fiscal '08, is that spread pretty evenly for the last two quarters. And are you going to break that ought owl in the restructuring line or will it be embedded?

We still have work to do exactly the timing and sequencing of when this closes and which quarters all of these things hit, so the $0.10 to $0.15 that we have -- we'll be probably on our next call able to provide more of information as to how that's going to sequence. A lot of the one-time charges are things like the write-up in inventory you're required to do. Then there's some other transactions costs and then some compensation programs we're putting in that will be -- the inventory will hit fairly quickly. Some of the compensation programs will be over time. So probably on our next call we'll be able to give better information as to the exact impact and the timing.

Okay. And it will be broken out separately or you still don't know?

The inventory adjustment certainly would go through the COGS line, but we'll be able to call that out when it occurs and provide additional detail on that. Some of the other transaction costs and compensation programs go likely through the SG&A line, but there is likely to be impacts on several lines of the P&L. And after we've done our work and know exactly when it is going to close, we'll be able to provide more information.

Great. Thanks.

We'll go to Nik Modi of UBS.

Good morning, everyone.

Good morning, Nick.

A couple questions. Don or John or Beth, can you provide a little context on the ACV penetration for the Burt's Bees business, where the brand index is today relative to your business?

Yes.

And I have a follow-up.

Let me start now and ask Beth and John to comment. Burt's Bees distribution today is about 54% of the ACV of food, drug and mass, Nik, and of course we have 100% ACV coverage there. I think -- in that 54%, well over half of it is the drug channel where they're extremely well developed relative to food and mass, given that Target not Wal-Mart is the presence in mass. So in terms of store count, we probably Clorox is in four to five times as many stores as Burt's Bees is right now, and clearly that's where we see some of the upside, so, John or Beth if you want to add to that.

We absolutely see upside, and we've roughly half the stores that we're in today Burt's is not in and belongs in. Beyond just getting the distribution, we're very excited about the opportunity to continue to build on what you know us to say at AMPS, particularly the assortment and shelving. Burt's has done a great job there, has innovated with their [hives] and has more opportunity. We think combining their capabilities with ours, the big upside there. And I do want to reiterate also excellent presence in the natural channel which is above and beyond the 50, roughly 50% number that Don quoted and of course a lot of specialty distribution like bookstores where you probably were first introduced to the lip balm.

Just on the drug store, it seems like that's where Clorox has the least amount of penetration in the distribution channels. Is there any opportunity to use Burt's ACV in drug stores to push some of your other products?

We think there can certainly be an opportunity around Green Works. We think of drug stores as a convenience store for women. When we look at brands like Green Works, we think it has real application there and gives us a real entry in a brand that is really relevant for that channel. I think there could be synergies there for sure.

Okay. Last two questions. KIK Corporation was as we all know bought by private equity, I think eight months ago or so. Have you noticed any changes in the marketplace on the pricing side, and the last question is do you think it makes sense to maybe put Glad through a SKU rationalization program to trim down the commodity based business and focus more on ForceFlex?

With respect to KIK, haven't seen any change in pricing. If you looked at Clorox liquid pricing versus year ago, you can see the same relationships between Clorox and private label, whether it be the track channels or the untracked channels or Wal-Mart. So no change there, no change in behavior from KIK. The SKU rationalization on Glad, I would say very specifically we're very focused particularly in trash on building the higher EP items. So in the trash business that would include both ForceFlex as well as our odor control products, both of which have much, much higher EPs than base trash. So you will see our advertising is very much focused on ForceFlex and the added value products and most of our trade promotion programs are focused on that as well.

Okay. That's it for me. Thank you.

Thanks, Nik.

Next we will go next to Connie Maneaty with BMO Capital Markets.

Good morning. As I was looking at the additional costs you're going to pay for raw materials over the next three quarters, assuming no offsets, is it a good calculation that the gross margin may decline about 50 basis points year-over-year?

I am sorry, could you ask the question again, Connie?

I was taking the $30 million to $40 million in increased raw material costs and just calculating that could force the gross margin to decline about 50 or 60 basis points year-over-year assuming that you don't have any offsets. Is that a reasonable assumption?

Connie, the commodity components the last couple of year as you know has been so volatile we really tried to shy away from being too specific on gross margin change. I think what we're clearly indicating today is we're going to look at a number of things and try to offset the commodity pressure we think not only we've seen but we think is still in front of us, SG&A spending, and potentially pricing as well. One of the other things that Dan noted is we have taken our cost savings target up from $80 million to $90 million to about $100 million this year. So assuming we can achieve that, that will certainly help. With that said, the commodity pressures right now are pretty significant. That's going to cause certainly some material gross margin dilution versus what our earlier expectations were for the year, which is why we're now signaling we do see gross margins decline.

The other factor which makes it a little difficult to know exactly what the net impact will ultimately be -- we talked in the past about we're qualifying a broader spectrum of resins into the mix, and that we hope will help offset some of this. And certainly we're continuing our discussions with Mideast suppliers, and that could impact it as well. Again, the $30 million to $40 million is sort of kind of an estimate out there right now we're working against, but we're working against various factors that may ultimately bring that down.

Secondly, with the flow of new products in the second half of the year, I imagine that advertising will really ramp up, then, as well. That makes sense that most of the earnings growth for the balance of the year will take place late ore the next nine months?

With respect to the second half advertising ramp up, I don't think you will see an appreciable ramp up in advertising in the second half. Yes, we do have new products in the second half, but we had new products in the year ago period as well, and we're doing other things in terms of advertising. So I wouldn't expect much of a change from kind of this overall range of 9 to 10% on the advertising line. As we talked previously, you will probably continue to see some ramp-up on trade spending side.

In terms of earnings flow, we have a tough comp from Q3 year ago that we'll be up against in the third quarter where a lot of our product launches are going to be. So we would expect to see a greater earnings accretion in the fourth quarter than the third just simply versus year ago simply because of the comp we're up against and the launch.

Okay. That makes plenty of sense. Over to Burt's Bees, I only know the company or the brand because of the lip balm, so I am asking to ask an uninformed question. Is it the biggest product and what percentage of sales does it represent?

Connie -- go ahead. Beth and John, why don't you jump in.

Sure. Go ahead.

John and I are both looking at each other. Connie, John is going to test me to see how much I have learned. Lip balm, the lip line, I should say, lip care, is a little less than 40% of revenue. It is the original lip balm, some extensions of it and the lip shimmers. There is another 30% of business in face and body care, and the remaining --I think, what am I looking at -- 30% is split across several categories including baby, outdoor, some gifts and kits. So the business is fairly diverse. It certainly moved beyond the original lip balm. Is that about right, John?

You've done well.

All right.

And what part of the product line is growing the fastest?

We've been innovating quite rapidly over the last few years. We see tremendous growth in the cleansing area in personal cleansing and haircare, so we've seen some very nice growth in that area. We have a wonderful face care portfolio that is growing, and we have some terrific innovation coming in Q1 much next year which should drive our business a good bit. And our core remains very, very strong. Our lip business continues to grow in double-digits, and we expect it to continue to do so as we innovate there and expand our distribution, our lip business, especially our lip balm is an expandable consumable. And we find if you put it in arm's reach you can really drive sales growth. It continues to be a real engine for us as well.

The only thing I would add, Connie, when we looked at this business as well, one of the things that really excited us about it is the innovation that John and the team have brought to the baby care section, and that's a relatively under developed part of the Burt's Bees portfolio and the category, but we think that's going to continue to build significantly over time.

If I could just ask one final question which I wouldn't have thought to ask unless Bill Schmitz had started all of this. So since it is going to be in theaters tomorrow, what can consumers do about colony collapse disorder?

Thanks for asking. First and foremost is we need to build awareness for the issue. It is pretty dramatic. 30% of the food that we eat relies on a pollinator, mainly a honeybee to produce that food. First of all, really, we don't have an answer. We need to find a solution. Burt's Bees is investing in research to help find an answer or find the cause of colony collapse disorder. I think the more consumers are aware, engaged, and really provoking a debate for an understanding here makes a difference. We can support local farmers, and organically grown food and we can plant seeds that will create a natural habitat and an environment for the bees to flourish. So those are a couple of things. Consumers can also visit our website tomorrow, www.burtsbees.com and they'll learn more about it. And we'll have a special page on colony collapse. They can learn more and what they can do. And we'll also send consumers a seed packet they can plant to create that environment for the bees to flourish.

Thank you.

Why don't we take three more calls in the interest of time?

Certainly. We'll go next to Joe Altobello of CIBC World Markets.

Good morning.

Good morning.

A few quick questions here for you. On the Burt's Bees deal, was that negotiated or was it an option?

Beth, do you want to comment?

Dan, how would you say we should describe it? I know how I would describe it. Being a little less of a technician in this area, I will actually defer it back to Dan.

I would say it was competitive bidding environment that we were engaged in on the business.

Rough number of other bidders?

We don't have those details necessarily.

Okay. And secondly, if you look at your EBIT on a company-wide basis year-over-year was about $30 million, but the segment EBIT was flat. Was there a significant reduction in corporate spend this quarter versus last year?

Well, EBIT is impacted by our charges, so --

Charges were below the line, though.

Not the way we report out EBIT.

In fact, if you do this on a pro forma basis, our EBIT was up over 9%. I am sorry, almost 15% year-over-year if you exclude the charges.

There is a schedule on our website that reconciles EBIT from our pre-tax earnings, and to your point it is about flat, but that includes $27 million in one-time costs the restructuring this quarter. So if you add that back you get a pretty healthy EBITDA.

It is about 15% when you exclude the charges.

I thought I did that, but I will follow up with Steve after the call.

Okay. All right.

We'll go next to Jason Gere of Wachovia Capital Markets.

I guess first question wanted to talk about the international piece. I know it is 11% volume growth but 8 came from the acquired business. Seemed like you had some pricing in there, and I was wondering about 3% organic volume growth and how you looked at that internally?

On the international side let's see, I am trying to remember all the details. The total increase in the sales for international was --

18%.

I think about 4 points of that were foreign exchange, and I believe 8 points were the bleach acquisition, so that's about 12. So the core organic piece of that is probably about 6 to 7, and then pricing as a component of that. Generally our pricing practice international are to follow inflation, but call it maybe 2 points probably, we're probably on the international piece. But again I don't know that that's the right number. Steve can always check me on that.

Okay. And then I guess how did that measure to what you were planning internally in terms of the 6%?

I think the 6% organic volume growth is pretty close to what our target was. I think we had a little upside on currency as I think everyone did and obviously the weak dollar helped the top line from that perspective, and the bleach acquisitions continued to exceed our expectations. Total company numbers it isn't that material, but the international segment was probably a couple points ahead of what we might have anticipated at the end of the quarter.

We're really pleased with international. It continued a long string of quarters of nice growth for us and as Steve said probably the two areas that is were better certainly were in currency and we're pleased with the bleach acquisition is ahead of expectations.

The second question -- over the last couple of days we've heard the mantra being the health of the consumer and if you look at the consumption in food, drug and mass, I guess two things. One, can you talk about overall how you feel about your price positions versus private label and your branded competitors and two in terms of the trade spending maybe versus last quarter and going forward -- any thoughts there?

So I guess the best indicator for us is share growth and category consumption. Overall category consumption is about flat, which is actually a little healthier than what we've seen in previous quarters. We feel good about that. Our total Clorox shares is up slightly which is also an improvement in trends, so we feel very good about that. Three of the eight categories we look at and track channels are growing. Three are flat, and two are down which again is better than the trends have been. So feeling pretty good, very good about our share performance, certainly relative to last year or so, and feeling like the categories are in good shape.

And just in terms of the trade spending maybe looking ahead, just the overall magnitude versus maybe what we saw in the fourth quarter and just with this quarter as well?

See the trade spending increases continuing, hard for us to predict when we may pull back on that lever -- really depends on what's going on both in terms of our results as well as what the competitors are doing. But do see it continuing at this point.

You will see an uptick in the third quarter behind the new product launches.

Okay. The last question, this one is an odd one, too. With the new Hidden Valley product, the refrigerated, in terms of distributing that, do you have to go through DSD system or it's kind of different than what you've I guess your core businesses are?

We're using a partner.

Okay.

Refrigerated warehouse system.

Okay. Thank you very much.

We'll go to Linda Bolton Weiser with Oppenheimer.

Thank you. I was kind of interested in the comments you were making about Brita, and I was wondering if your projections for the future economic profit growth of that business is changing. Because you had highlighted that as one of the three businesses with the lowest projected economic profit growth back at your analyst meeting, so I am wondering if you're changing on that -- and is your thinking changing on any of the other categories you talked about?

I think in New York we talked about three. As you know, that was one of them. Brita, as always, from an economic profit standpoint always had attractive margins. The issue is we couldn't grow the business the last five to seven years. I think we're certainly changing our outlook in terms of the Brita business and in the tailwind that appears to be behind it right now. That's why we're stepping up marketing spending behind that brand. And the partnership with Nalgene will continue through the second half. So if Brita can continue on this trend which we think it can given the sustainability focus of consumers, it's a terrific brand to have a growth trajectory. The EP margin is one of the best in the company.

It sounds like your thinking is changing a bit.

We're certainly thinking the growth trajectory of that business has a lot more to it than we did nine months ago to a year ago.

Linda, it is in early days. We're certainly encouraged by the trends we're seeing, and we're hoping that those trends will continue, and we're certainly investing behind those trends with Nalgene and other activities we're doing. We are encouraged and we're looking forward to see if we can drive that higher level of growth.

I think just finishing comment on it, I think it is amazing what's happened in the the last four or five months in terms of consumer awareness around the bottle waste issue, and the fact that we're throwing 38 billion bottles in landfills every year is starting to really gain momentum out there -- not only with consumers but I am hearing it from retailers. I have been out with a number of retailers the last 90 days and some of those retailers are giving more and more section space in bottled water sections to Brita. And traditionally we've been stuck in the small appliance aisle or somewhere else buried in the store. And you get in the water section and you get a lot more consideration from consumers.

I have to build on. This we're seeing an incredible just wave behind this sustainability issue on multiple fronts. It appears to be driving our Brita business in a big way, it definitely is helping the resumption in our Green Works introduction and obviously it will play into the Burt's acquisition. And it doesn't seem like any of it is going to stop any time soon. It feels like something it going to build and build and build, but it is really helping us on multiple fronts right now.

Okay. And just one question on the Burt's Bees, clearly Wal-Mart is a big retailer. You mentioned it is not in. Are there imminent plans to take it into Wal-Mart or is that not an appropriate retailer for this type of product?

I don't think we want to comment on exactly where we would go for competitive reasons, so I guess I would have to punt on that question.

And is it possible you could consider extending the brand into cleaners or is there no applicability there?

I think we will stay true to the core of that business which is natural personal care. We see so much upside there over the the years to come. I think we're going to focus there. And with Green Works we have a significant platform we think already to take into the natural cleaning space.

I do think there is synergy between these business that share this kind of sustainability in health and wellness platform, however. And there is probably learning we can get on natural ingredients that could potentially help our Green Works product, for example.

And just to build on that, in our conversations with the Burt's team over the last several months and particularly today, we've first reaffirmed that we share a common consumer for Green Works and Burt's and our depth and breadth of insight is going to grow there. Second, we're very interested in learning more about the natural channel where products like Green Works would get extra cache, and Burt's is clearly going to establish relationships there. And third, we think particularly in sustainable packaging and general waste reduction versus innovative thinking, if they can bring to us and in turn we've done some innovative thinking we can bring to them.

Okay. Great. Thanks.

Thank you.

I want to thank everyone for their questions today. If there is anyone who we were not able to get to in the interest of time, please feel free to contact myself or Li-Mei. With that, let me turn it to Don to wrap up.

I would summarize by saying we're feeling very good about the performance of our core business. We obviously had a really solid quarter. We're feeling good about a solid start to the second quarter as well as, and as you look to the second half of the year and our innovation pipeline we feel very good about that. On Burt's Bees we think we've got a great brand and a great team with John leading it to take that business to the next level. Extremely high growth in that natural personal care category, which is certainly accretive to our growth rates. The margin structure of the business we feel terrific about.

We think that's sustainable, and as Larry just talked about, we think we have a new business platform where we can actually learn from each other around the whole naturals sustainability spaces and leverage both of these companies' capabilities. So we feel like we're off to a new day here. Thanks, everyone, for your participation, and we'll talk to you at the end of next quarter.

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