高樂氏 (CLX) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Clorox Company fiscal year 2008 second quarter earnings release conference call. At this time all participants are in a listen only mode. At the conclusion of our prepared remarks we will conduct a question and answer session. (OPERATOR INSTRUCTIONS). As a reminder this call is being recorded.

I'd now like to introduce your host for to the conference call, Mr. Steve Austenfeld, Vice President of Investor Relations for the Clorox Company. You may begin your conference.

Thanks. Welcome everyone and thank you for joining Clorox's Second Quarter could be for instance call. On the call with me today are Don Knauss, 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, the CloroxCompany.Com. On today's call, Larry will start with comments on the company's second quarter operating results. Dan will follow with a review of the quarter's financial performance as well as additional details supporting our updated fiscal year '08 outlook as communicated in our press release this morning and Don will then conclude, linking our year-to-date results with key aspects of our centennial strategy, which was introduced last year. We'll then open it up for your questions.

Let me remind you 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's prepared remarks or supplemental information available in the financial information results area of our website, as well as in our filings with the SEC. And on that note let me also point out we'll be filing our quarterly 10-Q today, which can provide additional detail on our financial results.

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 10K filing with the SEC and our other SEC filings for a description of important factors that could cause results to differ materially from Management's expectations. With that, let me turn it over to Larry.

Thanks for joining us on the call. As you saw in the press release we had a strong second quarter across the business and a very good first half of our fiscal year. Dan will review our financial results in more detail in a few minutes.

First, I'll provide some overall perspective on the business. For the quarter, sales were up 8%, and volume was up 6%. Excluding the impact of the bleach acquisition and one month of Burt's Bees volume, base business volume grew 4%. We grew volume in six of eight North American business units. Our shares in track channels held steady overall despite economic pressure on consumers. Our renewed focus on grocery retailers continues to pay off, with a much improved trend in the grocery channel behind our increased focus and increased investment. Overall we saw volume growth in both tracked and untracked channels.

We're very pleased with the performance of our recent acquisitions. Results from the Bleach businesses we acquired in Canada and Latin America in fiscal '07 remain on track or are even slightly ahead of plan. We are beginning to transition the Canadian bleach business from the Javex brand to the Clorox brand and we're converting the product line to the compact ultra format that is standard in the U.S. Going forward, we will be supplying Canada from our existing U.S. manufacturing network.

On November 30, we completed the Burt's Bees acquisition and are including Burt's December results in our financial statements. The transition has been smooth and our organization has a tremendous amount of excitement around this business. For the quarter, including the two months prior to our acquisition, Burt's Bees delivered strong 23% sales growth. Burt's also had significant share growth across the core lip, skin, face, and body natural care categories. As we've said, Burt's Bees has opportunities for distribution expansion, so we're excited to be placing lip balm in all Wal-Mart stores as well as a broader product offering with four foot in line displays in about 500 Wal-Mart stores. The first advertising the brand starts in February with a great print campaign focusing on the benefits of the natural ingredients in Burt's products compared to ingredients in some traditional personal care products. Burt's Bees also has a strong pipeline of new products in the back half of the year.

Moving on to results in the base business, we had strong volume growth despite a continued high level of competitive activity, particularly in Clorox Disinfecting Wipes And Clorox 2 Color Safe Bleach. Home care shipments contributed significantly to overall gains primarily driven by Clorox Disinfecting Wipes behind momentum from the low streak product improvement and incremental merchandising support in response to the continued intense competitive environment. We maintain a strong leadership share position in wipes, despite heavy spending by several competitors in the category. We are also seeing positive results from demand building activities behind Clorox 2 and feel good about the plans we have in place to address competition in the color safe bleach category.

In late December, we began shipping our new Green Works line of natural cleaning products in the U.S, Canada, and Puerto Rico. This is our most exciting launch in recent history and like the Burt's Bees acquisition is generating a lot of positive response throughout the Company. Dan will talk more about Green Works later.

Moving on to our calendar business, we delivered all-time record shipments of Fresh Step Scoopable litter in the 21st consecutive quarter of year-over-year volume growth. In January we began shipping an exciting product called Fresh Expressions, which builds on the activated carbon odor elimination platform that has fueled Fresh Steps growth over the past year. The new product features two scents, Lavender Mountain Forest, and uses essential oils to create a more pleasant aroma than other scented litters, which don't have the benefit of odor eliminating carbon. Turning to international, we saw strong volume trends with the biggest growth in Latin America. Driving the growth was increased shipment to bleach in Argentina, and also contributing were higher shipments of bandage and wraps, cleaning utensils and auto care products in Australia.

The last area I'll highlight is commodities, which continues to be our biggest challenge. In Q2, commodity costs remained higher than our original estimates, particularly for resin. Cost per agricultural commodities also remained very high. We continue to project a decline in resin cost later in the fiscal year, as new supply comes online in the Middle East. The starting point for the decline in resin, however, is quite a bit higher than what was reflected in our original estimates, and prices are likely to be higher versus the previous year for the remainder of fiscal 2008. To help offset the impact of commodity pressure, we've increased prices on Hidden Valley salad dressings, Kingsford Charcoal and Armor All and STP auto care products. We've also just announced we plan to increase prices an average of 7% on Glad trash bags and GladWare disposable containers, effective mid-February. All of these pricing actions are based on recent commodity cost increases and have been successfully executed with our retail partners.

I would like to touch on the concerns about the U.S. consumers given the current economic environment. We are especially attuned to concerns about the U.S. economy and consumer spending; however we do not believe that our category will be dramatically impacted as people tend to buy bleach and other household staples even in difficult economic times. To conclude, we're very pleased with the second quarter and the first half of our fiscal year. Overall, both our bleach business and our acquisitions are driving healthy top line growth. We're also taking the right steps to mitigate continuing commodity pressure and manage our margins. There's a lot of excitement across the organization about the Burt's Bees acquisition and the Green Works launch. As Don will discuss in a few minutes, we're successfully accelerating our growth and beginning to deliver on the promise of our centennial strategy.

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

Thank you, Larry. As Larry said we're very pleased with our Q2 results, especially given the current environment of very high oil and commodity prices. For the quarter, we delivered $0.65 in diluted earnings per share, reflecting our strong top line results across the business. On the top line, sales grew 8%, including about three points combined from the bleach and Burt's Bees acquisitions. Excluding the impact of acquisitions, organic growth was in line with our long term sales growth target of 3 to 5%.

As anticipated and discussed in our last call, in the second quarter, we made increased investments versus year ago in trade promotion spending to support our brands in a highly competitive environment. Even with these increased investments, sales growth out paced volume growth due to favorable foreign exchange and the benefit of price increases. We continue to anticipate increased year-over-year investments in trade promotion spending in the second half of the fiscal year.

As expected, gross margin for the quarter declined, coming in at 40.4% compared with 42% in the year ago quarter. The decline resulted from the following factors: gross margin benefited about 170 basis points from cost savings and about 40 basis points from price increases. These positive impacts were more than offset by about 170 basis points from commodity cost increases, primarily from resin and agricultural commodities, about 70 basis points from logistics and manufacturing, which includes diesel, and about 80 basis points from other costs, primarily related to increased investments behind trade and consumer spending. In addition, gross margin was negatively impacted another 50 basis points from a purchase accounting step-up in inventory values associated with the Burt's Bees acquisition.

Advertising for the quarter came in at 9.2% of sales, consistent with our prior discussions, we continue to anticipate advertising at about 9 to 10% of sales for the year as we balance this with increased investments and trade promotion spending to support our brands in this highly competitive environment. Taken together, investments in advertising and trade promotion spending are greater than they were a year ago on both the dollar and a percent of sales basis. Despite increased commodity costs, we remain strongly committed to investing in our brands. Strong volume growth in the first half of the fiscal year in spite of competitive pressure supports our belief that this has been a good investment strategy.

Interest expense increased versus year ago due to increased debt levels associated with financing the Burt's Bees acquisition and the accelerated share repurchase agreement. As we've previously indicated, we intend to use free cash flow to reduce our debt levels back to a 3.0 to 1 debt to EBITDA ratio or lower. Our tax rate for the quarter was about 28%, which is lower than year ago, due to settling certain tax matters. In recent periods we have benefited from some favorable tax settlements. The timing of tax settlements are difficult to predict and can create tax rate volatility in the periods they occur. That said we anticipate the tax rate will likely be around 35% over time. As noted, diluted EPS came in at $0.65, which included about $0.02 from restructuring related charges and $0.02 of dilution from the Burt's Bees acquisition. Our results benefited from strong operating performance and the lower tax rate I mentioned.

Turning to cash flow, cash flow from operations was $148 million or about 12% of sales compared with $122 million or about 11% of sales in the year ago quarter. Free cash flow increased 21% to $103 million or 9% of sales compared with $85 million or 8% of sales in the year ago quarter. Our cash flow increases were primarily driven by collection of receivables, partially offset by higher inventories. As a reminder, we define free cash flow as cash provided by operations less capital expenditures. Q2 capital expenditures were $45 million compared with $37 million in the year ago quarter.

As you saw in the press release, we've updated our fiscal year financial outlook. For the year, including the benefits of the bleach acquisition and Burt's Bees, we now anticipate 6 to 7% total sales growth. As discussed last quarter, our current outlook projects a gross margin decline compared with last year as we anticipate unfavorable year-over-year resin and agricultural commodity prices. We're pursuing a number of actions to mitigate this impact. As Larry mentioned, we're taking price increases on a number of products impacted by higher commodity costs. As I discussed last quarter, we've also increased our full year cost savings target to $100 million. The benefits of these actions as well as better than expected results in the first half of the fiscal year are anticipated to help us offset much of the commodity cost pressures.

We continue to anticipate some declines in resin pricing in the second half of the fiscal year, although resin will continue to be higher on a year-over-year basis. Softening resin demand in the United States, slightly lower oil and natural gas prices, and the influence of longer term resin production capacity increases in the Middle East should lead to downward pressure on resin prices over time; however commodities markets remain very volatile. As discussed in our press release, we've updated our fiscal year diluted EPS outlook to reflect anticipated dilution from the Burt's Bees acquisition, additional restructuring charges and some of the benefit of our strong first half operating results. Let me walk you through each of these factors. Previously, we projected a $0.10 to $0.15 earnings per share dilution range for fiscal year 2008 from the Burt's Bees acquisition. We have now narrowed the dilution range and anticipate about $0.13 to $0.15, which is at the upper end of our previous range. This range includes pre-tax costs of about $4 million for amortization of intangible assets, $19 million for the purchase accounting step-up in inventory values and the impact of financing the transaction.

Our updated outlook for restructuring related charges is about $58 million to $60 million, or about $0.25 to $0.26, around the high end of our previous estimated range of $0.21 to $.25. The increase in anticipated fiscal 2008 charges reflects asset write-offs, accelerated depreciation and amortization, and other restructuring-related costs associated with the decision we've made to exit the remaining components of our private label food bags production. As you may know, we inherited a private label food bags business when we acquired Glad in 1999. We've been rationalizing this business over time and are now taking the final step in exiting the business. Private label food bags currently contribute about 1% to total company volume and sales on an annual basis and do not contribute any profit. We will phase this last part of the business out over the balance of this calendar year.

The actions we're taking to restructure our manufacturing network and exit the private label food bags business are multi-year projects and fiscal year 2009 will be impacted by the remaining restructuring related charges associated with these actions. On a preliminary basis, including the carryover restructuring related charges from Fiscal Year 2008 restructuring actions, we are anticipating about $20 to $30 million in total restructuring-related charges in fiscal year 2009, which is a more typical range for us. We will provide our financial outlook for our initial financial outlook for fiscal year 2009, including anticipated restructuring charges, during our Q3 earnings call in May. Finally, as I mentioned, our updated outlook reflects the benefit of some of our strong first half operating results. Net of all of these factors our outlook is now for diluted earnings per share in the range of $3.20 to $3.35.

With that I'd like to comment on the second half of our fiscal year. We continue to expect solid performance in the back half of the year as reflected in our financial outlook. It's important to keep in mind the following as you think about the second half. We will be comparing against a very strong year ago third quarter. Q3 was our strongest quarter and last fiscal year with 7% sales growth, including very strong growth in Clorox Disinfecting Wipes. Resin is at a higher price than we had anticipated, and commodity prices remain very volatile. As I noted a moment ago, we anticipate a continued unfavorable year-over-year comparison throughout fiscal 2008 with a higher anticipated impact in Q3. The second half of the fiscal year will benefit on the top line from the Burt's Bees acquisition. The remaining step-up in the Burt's Bees inventory will occur in Q3. We recorded about $5 million in Q2 and anticipate another impact of about $14 million in Q3. Finally, the second half of the Fiscal Year will benefit from the launch of our Green Works Natural Cleaning Products.

Despite the cost and competitive pressures we face in the first half, we feel very good about our operating performance. While the margins have been impacted, our business remains strong as evidenced by our first half growth in volume and sales. As you know, we focus on the company's cash flow generation ability, which has been our hallmark. We believe it's the best indicator of the long term performance of the Company. As we return cash to shareholders over the last several years through both dividends and share repurchases, our reduced share count now means that $0.01 of diluted EPS equates to just over $1 million on an after-tax basis. Clearly on that dollar basis, quarterly variances in EPS will occur. That's why we continue to focus on economic profit and cash flow generation as being the key determinants of value creation for our shareholders.

Now here is Don to provide his perspective on the business.

As Larry and Dan noted, we're in a very solid second quarter, and I think what I'm especially pleased about is the way the organization stepped up to deliver in a highly competitive and intense cost environment. I think you can see our brands are healthy across the business in benefiting from our investments and the second quarter was certainly a significant milestone for us in our centennial strategy with the acquisition of Burt's Bees and the launch of Green Works, our natural cleaning products. In particular I'm pleased with our success in leveraging the global mega trends we've talked about, health and wellness, convenience and environmental sustainability, and what we call the three D's, that is desire, decide, and delight, those central elements of our growth strategy, but what I'd like to do is just give you a little bit of color on the traction we're gaining on some of these fronts.

As you may have heard us say, desire is about pre-purchased communication in the form of advertising and other activities to generate consumer interest and create motivation. With respect to the desire and the mega trends, let's take Brita as an example. Brita delivered another quarter of solid results as we leveraged the health and wellness and sustainability mega trends. We're investing in several initiatives to educate consumers about the great health benefit of drinking water and the environmental benefit of drinking filtered water from reusable containers to help reduce the waste of disposable plastic water bottles and a great example of that is our partnership with NBC and the reality weight loss show, the Biggest Loser.

This season, The Biggest Loser: Couples has eliminated bottled water throughout its campus and production studios with the help of Brita products and reusable Nalgene bottles. We've eliminated about 30 to 40,000 plastic throw away water bottles. In addition, the program which is viewed by an average of 4 million people weekly, features Brita Pitchers, Brita Faucet Mount Systems and Brita and Nalgene filter for good reusable bottles, so the partnership is also being promoted through online sponsorships on the Biggest Loser's homepage, a public service announcement on the premier episode, through the shows, new gutters and in store promotional materials during product demonstrations with Costco for example.

Now just turning to Green Works for a minute, as Larry noted it's still obviously very early the introduction, but it is extremely well executed and we're building awareness through integrated Marketing. We kicked off our PR and Marketing strategy in early December with outreach to the business press, resulting in coverage by several major print and broadcast media outlets. More recently, coverage in national consumer magazines has kicked in with placements in publications such as Good Housekeeping, Family Circle and Parents. We're also seeing lots of coverage on daytime and afternoon TV. We got some great exposure just several weeks ago for the brand on the Ellen DeGeneres show with a donation from Green Works to Brad Pitt's organization, Make It Right, which is helping to rebuild New Orleans.

We just turned on national advertising for the brand. That started January 14th, and finally I hope you saw our announcement a few weeks ago about our alliance that we established with the Sierra Club. Which you'll see coming out of that alliance is in April, just in time for Earth Day and really an Earth Month focus from a number of our retailers, Green Works product labels will label the Sierra Club logo, reinforcing our mutual commitment to promote a greener lifestyle.

On to Decide, the second of our three D's, it's all about communication and winning at the shelf inside the store where the majority of the purchase decisions are still being made. We have now filled 25 of 30 positions that I've talked about in the past, adding to our sales team and cross functional teams to support the grocery channel. While we anticipate the benefit of increased investment will build over time, first half grocery sales for Clorox increased 3% versus year ago, so we believe we're beginning to see some real momentum stemming from this focus. Now for perspective, this 3% growth is a seven point reversal from the negative 4% declining trend we've seen over the last three years, so we're quite pleased with that trend.

Now, I would make a point to note that these grocery investments are truly incremental. We are investing just as aggressively as ever with our customers such as Wal-Mart and Target as a mass channel, with Costco, BJ's and Sam's with our club channel with dollar format customers. Across all of those channels we've seen significant growth as many of you know over the last several years and we'll continue our aggressive investment in retail customer marketing, category advisory services and consumer and shopper insights in those channels. Basically we're just going to continue to invest in channels where we see growth and we're seeing growth across all those formats.

Now finally, Delight is about offering high quality, consumer preferred products based on some deep consumer insights, so they will keep coming back to our brands. I talked in the past about an internal measure we use for determining Delight as achieving a 60/40 consumer win in blind tests and as we've discussed, activated carbon in cat litter has been a tremendous success to date and as Larry noted, we're building on the success with the introduction of Fresh Step's Fresh Expressions. Over time, we anticipate bringing additional fragrance innovation into the Fresh Step brand, consistent with our core consumer's profile, and company-wide, we continue to have a goal of achieving an internal benchmark of 60/40 blind wins by consumers on more than half of our product sales.

As we've touched already our second quarter acquisition of Burt's Bees, the natural personal care business is strongly aligned with our strategy of growing in about beyond our core. Concentrating on faster growing, high margin consumer product categories in line with the same mega trends I've just talked about. The Burt's Bees brand is well anchored in sustainability and health and wellness and we believe it will benefit from these natural and green tail winds that are out there. We're very pleased with how things are going in all fronts. Larry noted the strong over 20% growth the brand has seen, most recently, and while we're not integrating this business into our Clorox operations, the two organizations are working effectively together where it makes sense. We remain very optimistic about the prospects for this business and we're excited about our ability to grow this business and the category.

Now another aspect of our strategy that we've discussed is our commitment to eliminating value to strong businesses , and consistent with this commitment is a decision we made to exit our custom food bag business. As we noted in May at our analyst conference, this business has a strongly negative impact on economic profit. It represents about 10% of our bags and wraps volume or about 1% of our total Company volume but we believe firmly that this is the right decision for the long term health of the business and a further step towards achieving our centennial goals.

Just to conclude before we start taking your questions, we had a very solid quarter despite the cost environment out there. Our brands are healthy. We're committed to taking the right steps to mitigate near term cost pressures as well as for the long term health of the business. We're clearly excited about the progress we're making towards our centennial strategy and we feel optimistic certainly about the launch of Green Works and the value of Burt's Bees is going to bring to our business so with that I'll ask the Operator to open the lines for your

Thank you. (OPERATOR INSTRUCTIONS). We'll take our first question from Amy Chasen at Goldman Sachs. Please go ahead.

Just, I heard your comments about the second half but I just wanted to understand, if you kind of strip out the restructuring charges and the Burt's Bees dilution and just look at the core business, it looks to us like that guidance is coming down by about $0.07 and I'm wondering whether that's because of commodities or whether that's because it was a timing shift from the third quarter into the second? What other color can you give us on that kind of underlying operating weakness relative to where people were originally?

Amy, this is Dan. Let me see if I can address that question, and I'll take you back to what we said at our analyst meeting last May, when we were there, we were talking about the base business, the earnings per diluted share for the year being in the $3.52 to $3.67 range. That was before the Burt's Bees acquisition and before restructuring. We had an estimate for restructuring for the year of about $0.21 to $0.25, which will now be about $0.25 to $0.26 for the full year. The Burt's Bees dilution will be about $0.13 to $0.15 per share, and then we benefited about $0.05 from the accelerated share repurchase program.

Now the outlook that we talked about in the press release this morning includes a few cents to the bottom line from our strong operating performance in the first half, but as you note in the second half, even though we're ahead of our expectations for the first half of the year, we do anticipate much higher commodity cost impacts in the second half of the year. We came into this year assuming that the impact from commodities was going to be about, call it, $20 million to $30 million for the full year. We're now anticipating in excess of $100 million in cost pressure from commodities and given the way we contract for it, the natural lags that we have in the contracts as well as lags in inventory accounting, we're going to see more of that in the second half of the year, particularly in the third quarter. So even though we've had a very strong first half, the reason we're not taking that up appreciably is that that we do see those commodity cost headwinds in the back half.

But on a net-net basis, if you look at it on an overall year basis, other than the restructuring charges that we're taking and the dilution from Burt's Bees, we're essentially still on the same EPS outlook for the base business, even though the amount of commodities costs that we're going to face is a lot higher than we came in at the year, and we're doing a lot of things to mitigate that, as I mentioned, we've taken our cost savings target up to $100 million for the year. We continue to widen our specifications in our products. We look to take costs out of our products through optimization. We're taking some pricing as well, so as we look at the second half, the underlying fundamentals of the business remain strong, but we are going to face a lot more cost pressure than we had thought.

We'll our next question from Ali Dibadj at Sanford Bernstein.

Hey. Wanted to follow up on the top-line issue, or the top-line question. In your guidance, you said 6 to 7%. If you, well if we back things out, so call it foreign exchange, I don't know, 1%, 1.5%, Burt's Bees, it sounds like that's actually ahead of plan and you have a little bit more of a distribution channel that you're going to hit here with Wal-Mart. Call that 3, 3.5%, Green Works which is about 1%, if you subtract all that out it looks like the under like business, this is the main crux of the question, the underlying business is growing about 1 or 2%. Is that the case one, and two, how does that jive with the grocery channel growing about 3%? Does that mean the rest of your channels aren't growing that fast or are actually shrinking? Maybe I'm missing some odds and ends but those are my questions.

Well, let me see if I can take that and help you out with that. Our outlook right now again on the top line is 6 to 7%. The expectation for Burt's Bees is that Burt's Bees will be about two points of that growth. We have them in our numbers from December forward. For the total year, we're thinking that will be around two points of growth. The remaining piece of the bleach acquisition will be a little less than a point of growth, so if you take that off the range, you can see what we're projecting to be the underlying piece or the underlying growth in the business. Now, foreign exchange will contribute, perhaps not at the level it did in the second quarter for the full year, it will probably be I'm guessing less than a point, so when you factor those things out, as you can see, underlying answer is pretty strong fundamentals in the business and on the, I'll let Larry talk about the grocery channel.

Yes, so we're saying we do growth in the grocery channel as Don spoke to, a reversal. We're still seeing a faster growth in the untracked channels so actually if you looked at the quarter across all of the channels, we're actually seeing growth in every single channel, while grocery is growing, we're still seeing a bit faster growth on the untracked channels and we would see that kind of growth going forward as well. You talked about Green Works, I'm not sure if I tracked through all of the puts an takes in your question, but overall, we would assume one to two points, at least one to two points of the growth in the base business would come through new innovation, including Green Works and other types of innovation in the year.

And we'll take our next question from Chris Ferrara at Merrill Lynch.

Hi, guys, just wanted to go through the benefit that tax gave you in the quarter. Does that flow through to the full year? So like in other words, you're lowering the full year range by $0.13 to $0.15, which is Burt's Bees. You're absorbing an additional $0.025 cents, call it from the mid point of the range on incremental restructuring charges and you're saying it's because of a good operating performance in the first half. Is any of that because the tax rate was lower in Q2?

Last quarter, if you'll recall, we had indicated that our anticipated tax effective tax rate for the year would be 34 to 35%. That range already anticipated the settlements that we saw in the second quarter. What we were unclear on was the specific timing of those settlements, whether they hit in the second quarter or whether they would hit in the back half, so our tax rate outlook for the full year remains unchanged at 34 to 35% and that the did include the anticipated effect of the settlements that we entered in the second quarter.

Thanks.

We'll take our next question from Bill Schmitz at Deutsche Bank.

Good morning, guys.

Hi, Bill.

Can you just talk about what percentage of the portfolio will see pricing next year? In aggregate?

Next fiscal year or the current fiscal year?

Just maybe run rate the next 12 months?

I don't know if we have that readily available.

We do not have that readily available.

Hidden Valley ranch, it's our charcoal business, it's obviously Glad trash and GladWare.

Yes, the pricing actions, Bill, that we've announced, you add all of those pieces of business up it's probably in the 15 to 25% of our portfolio range in terms of the volume affected.

Okay, great. That's fair and this might sound like a won off question but the inventory step up on Burt's of $19 million over the next two quarters, I think that business has like a 70% gross margin. What's going on with that inventory? Is it just really old in the system or kind of why is that number so high?

No, it's not old stale inventory. The margins are pretty high as you note. We're required under purchase accounting to write it up to fair value, so what you're carrying it on the books for has to be written up to fair market value, less a little bit of a distribution profit so basically we had to write it up and there will be no profit in that inventory until it cycles through so I think it's just reflective of the margin structure in the business.

We'll take our next question from Nik Modi at UBS.

Good afternoon, guys.

Hi, Nik.

Just a quick question on trade spending maybe you can talk a little bit about how you view that area of your P & L , if there's any opportunity to perhaps become more efficient. I know many years ago there was a big movement in Clorox to improve that efficiency. Just wondering what you're looking at right

Overall I think we said that we are generally pretty efficient based on the benchmarking that we've done. As you know we've stepped up trade spending in a couple of different areas over the last six months or so because of competitive activity, particularly on Wipes and to some degree some other businesses. We think we've gotten good pay back on that investment so if you looked at our actual demand building investment in the quarter, so if you included both advertising and trade spending investment, we're actually up considerably on total demand building, up double digit rates year-over-year. We do see some of that competitive intensity diminishing and there is a probability that we will take back some of the trade spending investment we've experienced over the last six months or so. May not see that show up in the second half of the year, maybe more of the next fiscal year kind of phenomenon, but over time, we continue to try and create more efficiency in our trade spending either by spending less or by generating more volume behind the spending that goes out there.

Yes, I think one of the things we're really working on right now just to build off Larry's comment is getting even clearer and sharper guidelines by brand across channels as to what is the most effective lever to pull for that brand. For example, does that brand respond mostly to feature and display? Does it respond only to feature, which brands do you co-promote, which brands do you go singly? So I think we're getting a lot sharper. Larry said we've been very efficient over time but there's even more we can do in materials of I think driving volume of the current dollars that are out there or reducing the dollars.

We'll take our next question from Lauren Lieberman at Lehman Brothers.

Thanks. First thing was just on the international business. It actually looks like volume growth has decelerated, organic volume growth has decelerated pretty significantly from sort of a 10 to 12% range over the last couple of quarters, four quarters, now six. So, can you talk a little bit about what's going on there?

Yeah, let me start and Larry can jump in. We have obviously as you know a strong category volume growth particularly in a lot of the key Latin American countries in the last 12 months but certainly slowing down in the last half of the year. Our expectation, Lauren, is that those categories will continue to grow but at lower rates as we go forward, with low single digit growth in volume and low double digit growth in dollar sales as we go forward so there is some slowing in the categories but not dramatically down.

Can you explain why though? Like why those categories are starting to slow because that does seem like a significant deceleration or is it part of it maybe you were enjoying outside growth kind of getting up to a rightful market share , so we're seeing two impacts? But going to low single digit units seems pretty significant to

Lauren, we have enjoy the over the last two years very strong category growth, particularly in Latin America and so what we're seeing there is some deceleration in the category growth rates. We're doing fine on share, in fact our shares have held in a couple cases, they've actually grown, so it is more a category issue in specific countries that we're seeing some slowing so they're still growing but not at the levels that we've seen over the last two years or so. We would still anticipate, however, our international business consistent with its performance over the last three to four years would continue to grow above the Company average and we would still anticipate that the growth in the international business will be in the high single digits.

We'll take our next question from John Faucher at JPMorgan.

Yes, thank you very much. Can you talk a little bit about the pricing and you said it's gone through retail already, wondering how you position that to the retailers in regards to the fact that you're still talking about resin going down later on in the year, so how they respond to that and what that means for the ability to keep this pricing going forward over the next couple of quarters, if resin prices go down, do you think you'll still be able to hold on to the pricing, thanks?

To put it briefly, I think we're playing catch up, so you will recall when we take pricing, we always talk to our retailers about pricing to what we think the long term average is going to be versus pricing to short-term spikes, so we are catching up the long term average so the pricing or resin costs may be coming down over the longer term, we're really playing catch up in terms of pricing, so again we're trying to price that long term average, but long term average is quite a bit higher than we had anticipated previously, so it's fully justified based on the numbers, quite frankly our customers have been very reasonable about our pricing initiatives. I think we generally have thought we have been very responsible in the Glad business given the spikes in resin cost so we feel pretty good about the execution part of the equation.

And as you know, John, we don't price to the peak, and we do expect this decline to be somewhat gradual over time.

And based on what we've learned today, it looks like all the competitors are copying our pricing.

We'll take our next question from Connie Maneaty at BMO Capital Markets.

Good morning, I guess morning for you. As we think about the commodity pressure on the gross margin in the second half of the year, is it your expectation that the third quarter gross margin declines more than it did in the second quarter? And then also relative to your comment that you expected to see the start of some relief later in the year, that must mean the fourth quarter, if you're expecting the gross margin to increase in the fourth quarter , how would it do that from a pretty significant decline in the third quarter I guess I just don't understand the logistics

Connie let me see if I can try to answer the question. We are expecting a greater decline in our gross margin in the third quarter. Again, we have lags in our contracts and we also have the inventory effect. We saw some of the peak resin pricing in our second quarter and so that will flow through and impact us primarily in the third quarter, and on a year-over-year basis, we are expecting to be down on margins in the second half and again , a lot of that is the resin pressure that we're going to see. We are as we said, we still are anticipating declines in resin in the back half but we are starting from much higher points than we ever thought we would see, and while those declines in the market, the spot market, we believe will start to show up here in the third quarter, from a financial impact standpoint, it will probably be fourth quarter before we will start to see some of that flow

Connie, just one other thing to keep in mind as relates to our gross margin in Q3 is we will have the final impact from the inventory step up related to Burt's Bees and that will have something north of 100 basis point impact, so you should certainly factor that in even though it's not related necessarily to commodities.

We'll take our next question from Filippe Goossens at Credit Suisse.

Yes, good afternoon, gentlemen. Just a housekeeping question, before my real question. This one for Dan. Dan? You're still planning on terming out the Burt's Bee acquisition correct in terms of the financing?

Sorry, you're pretty soft. Could you say it a little louder?

Absolutely, Dan. My housekeeping question for you was you're still planning on terming out the Burt's Bees financing; correct?

We currently have plans to issue up to about $500 million of term debt, some time here during the third quarter to pay down some of the CP that we used to acquire Burt's Bees, so yes, we do have plans for up to about $500 million.

But it will be lower than the actual purchase amount in order to allow you to use free cash flow to pay down that correct?

That's exactly correct.

And then my real question for Larry. Larry? Based on some of the other household companies that have reported so far, nobody seems to have noticed any down trading occurring, yet while you listen to some of the packaged food companies out there, they're starting to see it. What sets the household companies apart from the packaged food companies? Is it a timing issue or is it because at the end of the day, companies like Clorox have a better ability to provide better price value to the consumers and therefore kind of prevent or largely forestall people from trading down ?

I guess we're just really good. I think it really is an innovation, a differentiation story, right? So every day, the consumer is looking at our products on the shelf versus private label or cheaper brands and they're buying our products because we offer a better value equation in total and it's based on the quality of the product and the innovation we brought over the course of time. I think folks in the household industry do a pretty good job of driving innovation. If you actually look at private label across the industry over the last several years there hasn't been a lot of growth. We often get concerned a lot but there really hasn't been a lot of growth. If you look at our total business, private labels are relatively small across the portfolio and the U.S. Maybe about a 15% share in track channels, and if you look at the most recent quarter, their performance is basically flat, so we haven't seen consumers going to private labels because of the economic pressure out there and we haven't seen much change in the consumption of our categories because of the economic environment.

If I could just add to that, what I've noticed is I've been out with a lot of customers recently talking about these kinds of issues so I think there are three things that insulate anybody from any kind of slowdown, and it just depends on how well you do against those three elements. The first is innovation as Larry spoke of and I think it may be easier for household companies to demonstrate product performance advantages in products than some of the food companies, for example, and clearly, if you look at brands like Kingsford where we're gaining significant share, we have superior product performance attributes in those brands and the second element is value, getting your value proposition right. I think our total demand spending while people focus on the 9.2 on advertising, it's not the a fair and complete picture. You need to look at the total demand spending.

Our demand spending in the second quarter was up about 10% versus year ago, and that reflects really the need to get your value equation right and before you start worrying about more advertising. I think in these kinds of cautious times you got to make really sure you're right on the shelf from a pricing standpoint and a value communication standpoint. And then the third is execution. I think we're seeing with our retail customer marketing programs and what we've got going on, the Biggest Loser program, what we're doing around NASCAR, all of those different types of things that we're bringing value-added, differentiating retailers from one another is really starting to make an impact so if you can focus on innovation , your value proposition and your execution you tend to get somewhat insulated from those

We'll take our next question from Kathleen Reed at Stanford Financial.

Oh, hi, there. Can you talk a little bit about if you have any other price increases that you're contemplating in any of the other categories and just what the actual trade spending slash price if you can break them out hit was on the sales line and then also just if you can quantify the volume impact for the Green Works launch in the December quarter? Thanks.

We don't talk a lot about pricing for obvious reasons, but I would say there's not a lot of big plans in the current year for additional pricing. We're obviously still working out the details of our next year forecast and depending on assumptions around commodities there may be some additional pricing across a number of brands, but that still is to be determined at this point. Did I get all of your questions? Green Works, there was only about a weeks worth of shipments so a very very small piece of the overall volume equation in the second quarter, really less than 0.5%.

Kathleen, I think in your last question maybe your second question you were asking about the impact of pricing in the quarter and trade spending. The difference between unit growth for us and sales growth of about 8%, about a 1.5 points of that, really the primary difference was foreign exchange. We did get about a point worth of benefit from pricing but that was offset, actually a little more than offset by the incremental trade promotion spending we talk about today.

So in the prior quarter, I think trade spending was 100 basis points, a negative hit to your top line and just in your prepared remarks I think you said that it had increased sequentially, so is it somewhere in the 200 basis point level and is it just expected to remain at that level in your Q3 and Q4?

It wouldn't be quite as strong as 200 basis points, a little less than that, but again, greater than 100 basis points. I think this is really what you're seeing continuation of the investment we've been making over the last year. You would have seen the same sort of trends when we talked about the same level of spending in the last half of last fiscal year as we were facing increased competitive pressure and I think as was mentioned in Dan's comments earlier this morning, you're going to see continue the relatively heavy levels of trade spending through the back half of the year as well.

We'll take our next question from Wendy Nicholson at Citigroup.

Hi, my question had to do on Burt's Bees. I think back in October, you said that you were forecasting the business to grow like low double digits or teens but what you said today was that there was, I think 23% growth in the first two months prior to the acquisition and then with the incremental distribution, that sounds like there should be a lot of incremental revenues coming in the back half of '08 so I'm surprised that Burt's Bees is only expected to be two points of the benefit to the top line, if not more.

Wendy, the 23% growth rate you saw in Q2 which does include some of the two months prior to our acquisition, from a seasonality standpoint, Burt's tends to be seasonally heavy in our fiscal Second quarter. They use a lot of gift packs, sampling for the brand and typically you see a spike in those around the holidays, so that tends to be their highest quarter. And when we talked to you last quarter about Burt's and our anticipated growth from Burt's, those outlooks already included the expansion of distribution into Wal-Mart, and so that mid-teens growth rate is still consistent with our outlook and certainly we're going to be working to try to beat that but that did contemplate the expansion into Wal-Mart and again, a lot of their growth this year is coming from areas other than Wal-Mart. Certainly Wal-Mart will help and was factored in, but they are seeing strong growth in a lot of different channels.

Wendy, one other thing you might want to consider as you think about the two points from Burt's Bees is that's an annual number or it's really the impact to our next two fiscal years, this fiscal year '08 and fiscal year '09 that begins in July. If you look at the actual quarters, so over the next four quarters worth of volume, it's going to be closer to about 3 to 4% or points of incremental top line, depending on the quarters, just that when you cut that across fiscal years it's about two points of benefit.

We'll take our next question from Jason Gere at Wachovia Capital Markets.

I have no further questions, thank you.

We'll go next to Alice Longley at Buckingham Research.

Hi, good afternoon. Could you give us an update on what you're now seeing as Burt's Bees sales and operating margins in '09 and do you think the acquisition still will be neutral to slightly positive to EPS that year?

Let me deal with the last part of the question first. Right now, we would anticipate net of all the costs associated with it, we were anticipating Burt's Bees will be flat to slightly accretive from an EPS standpoint. I'm not going to get into specifics on expectation for margins and contributions, things like that. Again on the top line, we're anticipating mid-teens in terms of growth and what we have said in the past is that Burt's Bees does enjoy margins that are in the -- natural personal care margins are higher than the margins you see in regular natural or excuse me, regular personal care so we would expect Burt's to be accretive to our margins.

The only thing I'd add is that if you look at Burt's Bees as Dan said, when we put together the valuation to buy that business, we modeled that on the low growth rates compounded out, and clearly, with the trends we're seeing in the business we'll work hard and continue to beat that but we feel good about where that brand sits.

(OPERATOR INSTRUCTIONS). Our next question is a follow-up from Ali Dibadj from Sanford Bernstein.

Hi, guys. Just want to keep plugging away on this top line 6 to 7% here. You actually confused me more and I apologize but if Burt's Bees is 2%, bleach acquisition is about 1%, foreign exchange is call it 1%, innovation is about 1% at Green Works, that means the rest of your business is about 1 to 2% on doing this very simple math correctly, and that would include pricing, volume, international, so either you're being really conservative or you're anticipating something more dramatic in a slowdown and I'm just trying to get a sense of which it is.

Let me talk to that a bit. I think if you go to the top line or the top end of the range, the 7%, if you strip out Burt's and as we said that's when you get down to the 5, and then you look at first of all, we consider Green Works as part of our core business. It's not an acquisition. It's part of the innovation that you referenced. So when you strip all of that out, we're looking for 3 to 3.5% volume growth, sales growth on the base business in that estimation and I do think we're being conservative as we go forward. It's cautious time out there, and but I think we're still comfortably and in the range of the 3 to 5 that we've articulated for a number of years, I think we're still inside that range on the base business.

The only other clarification is you mentioned the bleach acquisition, we essentially anniversaried that at the end of this calendar year. We closed on the Canadian piece of the business at the very end of last calendar year about we closed on the Latin America pieces at the end of February, so most of that essentially is in the base at this point.

So let me just summarize, Ali, the way I think about it. We're talking 6 to 7% top line growth. There's about two points from Burt's Bees, there's call it a little less than 1% from the bleach, as Larry noted we anniversary that this year, and call it a little less than 1% or 1% on foreign exchange. If you net those out, you're basically back to kind of that call it 3 to 3.5, 4% base growth that we always talk about and our previous range was 3 to 5% and we're looking for 1 to 2 points to come from new products so it is reasonably consistent that those would be the base growth rates for the business. Does that answer the question, Ali, or are you still confused?

I'm sorry, you cut out.

Let me ask this a different way, because my math just doesn't quite add up. What do you expect the bleach business to be growing for the next quarter or so roughly speaking?

You're talking about the bleach business that is part of the Colgate acquisition?

No, I'm sorry, as I call it the core bleach business or bleach business you have running right now.

I think we typically see the core business as being 3 to 5% growth rate including the impact of innovation which typically represents about one to two points.

Okay, maybe I'll follow-up because my math just isn't the way you're describing it.

All right

We'll take our next question is a follow-up from Chris Ferrara at Merrill Lynch.

Hi, guys. I just want to get back to restructuring. Dan, the way you position the restructuring charges on an ongoing basis is 20 to $30 million and I think not just on this call but in previous events, when I think about the 20 to 30 next year, or in fiscal '09, is that in comparison to the 58, 59 this year or just to be clear, does this year include other restructuring besides just what you've called out that normally goes unnoticed through the P & L and could you talk about that dynamic and how that works?

Let me talk about the 58 to $60 million that we're taking this year. A large chunk of that is the actions we're taking in our manufacturing network to go to our Atlanta hub and our home care manufacturing, also some restructuring internationally. We also took some charges if you'll recall included in that range for some investments that we made in certain businesses that we decided not the to pursue assay result of our centennial strategy. So, those are embedded in the 58 to 60 and now we're at the high end of the range because we decided to exit the private label food bags business, so the 58 to 60 is the total that we're taking this year. Our estimate is a non-cash portion of that is in the 42 to $44 million range. As we look right now in a very preliminary basis for fiscal '09, the total restructuring charges or restructuring related charges we're anticipating in '09 are in the 20 to $30 million range and that does include any carryover or additional charges associated with the actions that we've taken, so again, right now, and we'll update again when we provide our initial outlook in May but right now we're thinking it's going to be about 20 to $30 million in total which is a more normal range for us, and that would include any carryover of any additional restructuring coming from the actions we've taken this year.

So as you relate it just to sum up with Dan's comments, as you relate it to the 58 60, let's just use $60, then what we're forecasting or projecting for next year is 30 to $40 million less in restructuring getting us back to a more typical rate.

And our next question is a follow-up from Lauren Lieberman at Lehman Brothers.

Thanks. Two follow-ups. One was on Green Works and advertising. I'm assuming there was no advertising related to Green Works in the P & L for this quarter, right?

Right.

Okay, and then the other piece was just going back to the international question. Just is there anything specific on which countries are slowing? Because is anything going on sequentially because of course in the context of the broader kind of macroeconomic questions everyone has I just wonder if there's anything going on in Latin America that's indicative of broader trends rather than anything specific to your business.

Well I think the northern cone is weaker than the Southern cone of South America, so clearly, there's a little bit more slowdown in Mexico. We're certainly seeing a little bit in Venezuela but it's not really related to consumer demand as much as it is raw material supply and some of the lack of transportation that's available given some of the issues going on in the economy in Venezuela so it's not really a consumer issue there and then the Southern cone, Argentina, Chile, we still see pretty robust trends.

Okay, thanks.

Our next question is a follow-up from Connie Maneaty at BMO Capital Markets.

Hi. So just some questions on the way charges will fall in the next couple of quarters. Do all the Burt's Bees charges fall in the third quarter and what's the split of restructuring between Q3 and Q4 and then finally, was there any one-time expense, one-time item in the increase in interest expense in the second quarter? Because it seemed awfully high.

Let me take the last piece first. On the interest expense, it's up for two reasons and it's the debt associated with the accelerated share repurchase agreement as well as the Burt's Bees acquisition, so that did hit in the second quarter and that drove the increase in the interest expense. On restructuring charges, as we look at the second half of the year, we would anticipate that it be fairly ratable in terms of Q3 and Q4 impact that might be a little bit more in the third quarter but it should be fairly even in the back half of the year and then as it relates to Burt's, the primary impact we'll see in the third quarter is the additional $14 million of inventory step up. The amortization of intangibles will be over the back half of the year as will the financing costs so the primary impact will be in third quarter, the recognition of the $14 million step up in inventory.

Our next question is from Nik Modi at UBS.

Hi, guys. Just Don, real high level question about share opportunities. Can you just talk about your major competitors are really private and kind of non-large cap HBC players. How do you think about share gains over the next couple years and I understand some of your private competitors are struggling now internally. Can you just give some perspective on do you believe you're in a better position today to really gain share than you were a couple years ago?

Yeah, I think we are in a better position and the reason I think we are, if you look at our capabilities across the three D's, Desire, Decide and Delight, let me focus particularly on the last two because I think we've always done a pretty good job on brand building in the conventional sense of good advertising, et cetera, But on Decide, with the investments we're making in grocery and the continued investments we're making in Wal-Mart, Target, the Club Channel and dollar format channels around retail customer marketing, and category system services I think that was going to enable us to continue to build share. When you got 11 number 1 brands in 15 categories, retailers tend to gravitate to who has those services and who has those number one brands to build on so I feel better than ever about our ability to really connect at the retail level.

And in terms of Delight, actually our R & D investment went up in the second quarter versus the first quarter of the year. You'll continue to see strong investment from us in R & D and continue to buildout this product performance advantage. I think Green Works is testimony to that. We're trying to put products out in the marketplace that really perform and I think the share gains we've seen on things like Kingsford, on Glad ForceFlex, you'll continue to see that build from us, so our capabilities I think across those three Ds are continuing to build and really connecting with retailers.

Our next question is from Fred Speece at Speece Thorson Capital Group.

Yes, I know you're excited about Bees, but can I ask a basic question? When you first became the CEO, you established some financial criteria and discipline for acquisitions and this one you broke. Should we anticipate that you'll go back to adhering to those disciplines on future acquisitions?

Yes, I think that we use economic profit as clearly the governing metric for this Company and while Burt's Bees in the short-term may seem inconsistent with that, we don't think it is in the longer term, and if you look at how we're running the base business, one of the key group points is the exit of the private label food bags business, we're going to continue to manage the base business with economic profit as the governing objective, so we know that 70 to 80% of our growth will come from the organic side of this business and you'll see us continue to manage the business that way. As we look at further acquisitions, clearly, we'll adhere to those standards. I think Burt's Bees was a real aberration in the sense that as we talked on the last call, this is a brand with extremely high growth rates in the category, extremely favorable brand equity scores with consumers, and with the high growth rate and the factor it can be EPS accretive very much in the short-term, we felt it was a real investment in the long term growth of the Company and from an economic profit standpoint, if we beat the valuation, which we're going to strive very hard to do, this will not even be in violation of that governing objective.

And our next question is a follow-up from Bill Schmitz at Deutsche Bank.

Sorry to keep jumping back on. Can you just tell me the $3 million in restructuring related costs are those in cost of goods sold or SG&A?

You're talking about for the quarter, Bill?

Yes.

Let's see, we had I think about $2 million in restructuring and $3 million, most of that would be sitting in cost of goods sold.

Got you, and then for your guidance for the year, is that all restructuring or under GAAP or is it restructuring and restructuring related?

It's all in. It's restructuring and restructuring-related, and probably we'll see somewhere in the call it $35 million range in the restructuring line and the rest, most of it will be sitting in cost of goods sold.

And then when I look at the Burt's Bees costs, the $19 million is really the only kind of non-recurring because the amortization should happen as long as you own the business and I think the interest costs should be however long the debt is, right? So if it's a five year term it will be five year in the financing amortization. Is that right?

You're correct, goodwill intangible amortization will be ongoing, $19 million is the biggest impact from inventory but there's also some costs associated, I'll call it Human Resources related costs, retention and some other benefit program adjustments that are more one-time in nature that should cycle through this calendar year.

And then did I miss the interest expense guidance for the third and fourth quarters? Did you guys mention that already ?

No, we haven't provided one yet so you didn't miss it. We're probably in the rough range of being 160 to $170 million range for interest expense for the year.

Okay, great. Thanks so much.

We'll take one more question.

Our final question will come from Alice Longley at Buckingham Research.

I have another question on Burt's Bees. It seems to me the line has a whole lot of SKUs. Are you happy with all of that variety or is there any thought of focusing it and reducing SKUs somewhat?

I'd say, Alice, we're happy with the variety. It's interesting, in those retailers where you see significant growth in Burt's Bees, it's where those retailer s have moved beyond lip balm basically at the check out to more of a high position, inside, in line on the shelf, whether it's 2 foot high or 4 foot section such as Target has and some of the chain drug customers have. So I think we're very happy with it. We'll focus our innovation continually on higher margin items as we continue to build it. There's a lot of give and take on SKUs, a lot come out and a lot go in, so we'll be disciplined in how we manage that, but this is one of those categories that responds very nicely to news and we want to continue that the flow of news.

And the typical retailer who is really driving it, a two foot or four foot in line section has typically 40 to 60 SKUs so they vary quite a bit so the 150 that are available are certainly not being executed in any given retailer. There's a lot of based on the regional trends out there, but we'll continue to be discipline the on taking some out as we put new ones in. But that range is important, I think to the health of the business.

This concludes the question and answer session. Mr. Knauss, I'd like to turn the program back over to you.

Well thanks, everyone for joining us today. As I set we feel very good about the quarter. We're really starting to accelerate the top line of the business. We believe we're on track for the balance of the year. We're making progress I think significant progress against the Centennial strategy so we look forward to speaking with all of you again in three months when we discuss our Q3 results and talk more about FY '09. Thanks, everyone.

This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at any time.