高樂氏 (CLX) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Clorox Company fiscal year 2008 third quarter earnings release conference call. (OPERATOR INSTRUCTIONS) I would now like to introduce today's host for today's conference call, Mr. Steve Austenfeld, Vice President of Investor Relations for the Clorox Company.

Welcome and thank you for joining Clorox's third 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 American, and Dan Heinrich our Chief Financial Officer. We are broadcasting this call over the internet and a replay of the call will be available at our website, thecloroxcompany.com Let 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 results area of our website, as well as in our filings with the SEC. In particular it may be helpful to refer to tables located at the end of this morning's earnings release. 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

Thanks, Steve. Good afternoon to those of you on the call. As you saw in the press release, Q3 was a challenging quarter, given commodity cost pressures and a troubled economy. Sales grew strongly on top of a high year ago base and (inaudible) pricing, improved mix and generated significant cost savings. Margins; however, declined given the (inaudible) increases in energy and raw materials. All in all, we feel good about the progress we are making in a very difficult environment. I'm going to focus my comments on volume and sales and provide perspective on what drove our top line. Dan will cover details with P&L as well as our fiscal '09 outlook. Finally, Don will provide a summary and wrapup before opening it up for questions.

Overall we're very pleased with the strong Q3 sales growth, giving we are lapping a 7% gain in the year ago quarter. Q3 sales are up 9%. Our base business sales growth was about 5%, the high side of our 3 to 5% target range. The other 4 points of sales growth was from the Burt's Bees acquisition and the Bleach acquisition in Latin America. Turning to volume, total company volume was up 4% with essentially all the volume gains coming from the acquisitions. Our base business was only up slightly, but was actually in line with our expectations given a year ago quarter of 8% volume growth, as well as the negative impact of pricing on volume. The negative pricing impact has generally been only a percent or two and the increased revenues more than offset the volumes softness on the sales line.

In Q3 we supported (inaudible) strong advertising programs as well as increased trade spending to address a highly competitive marketplace. Advertising for the quarter came in at 9.1% of sales, within the targeted 9 to 10% range. Our shares in U. S. (inaudible) held steady overall despite continued economic pressure on consumers. Our combined U.S. categories were a bit soft, showing about a 2% decline versus the year ago period. Private label share in our categories was up slightly, about .3 of a share point to just over a 15% share. But our brands grew share in each of the three categories that had the highest private label presence, Hydrochloric Bleach, trash bags and charcoal. Returning to the sales story, the 5 points r of base brand sales growth effects about 1.5 points from foreign exchange, benefits from pricing and mix, and a slight offset due to the exit from the private label food bag business.

Sales growth was broad based with nine of our 12 businesses showing positive results in the quarter. Our Brita business had its strongest quarter in several years, with very strong double digit bond and sales growth repelled by sustainability tail winds. The Filter for Good partnership with reusable water bottles has ben a terrific success. With visitors to the Filter for Good website pledging to save more than 56 million plastic water bottles. Our cat litter business continues to deliver very strong results with all time record shipments of Fresh Steps scoopable litter. Further results in the Fresh Expressions cat litter Introduced in January are promising. Fresh Expressions highly fragranced line of cat litter that builds on our activated carbon odor elimination platform..

Our largest business, home care, grew sales (inaudible) behind the success of Green Works. This Sierra Club logo now featured in all Green Works products to celebrate our unique alliance with this environmental advocacy group. We are significantly ahead of our expectations on this new brand launch and saw a lot of exciting activities in April in support of Earth Day. Natural cleaners have more than doubled in size and Green Works has quickly become the number one selling brand with over a 40% share. In Q3 Green Works accounted for over a point of total company sales contributing to the strong 5% increase in base sales growth. While Green Works drove our home care business we did see a bit of a decline . in Clorox Disinfecting Wipes which last (inaudible) quarter with extraordinary 40% growth. Clorox Wipes are still a growth business for us, with high single digit growth fiscal year to date. Moreover, we have successfully defended that business in a highly competitive category and have maintained strong share leadership.

Our Glad business was down in volume but grew sales behind pricing and driving premium trash bags. our continued focus on driving trade up to ForceFlex premium trash bags. In the quarter, ForceFlex volume grew more than 20% while our base trash business declined more than 20%. Most of this mix effect took place in the club channel which does not show up in track shares.. Premium trash bags now account for over 50% of our total Glad trash sales. Our seasonal businesses Kingsford Charcoal and auto care were negatively impacted by bad early season weather versus very good weather in the year ago quarter. Both were down in volume and sales although both businesses were up in share because of soft categories. It's not usual for us to see weather patterns affect a quarter, but we typically see the weather affect net after neutral over the course of a full season. We're optimistic that we'll see improved results in Q4.

With respect to our new grocery initiative, we did not see a pickup in the grocery channel in Q3. Sales in grocery declined 2% versus the year ago period compared with a 3% increase we saw in the first half of the year. However, our fiscal year to date performances of 101 index which is a five point turnaround from the last three year trend. We will continue to focus on grocery and anticipate improved results as the new resources get fully deployed. Turning to international, we delivered 14% sales growth on top of the 16% sales increase in the year ago period. Sales were generally above our core volume growth and the bleach business acquisition as well as pricing and very favorable foreign exchange rates. Categories remain healthy, growing at double digits and our shares in core categories held steady.

Latin America sales were up more than 20%. We also grew double digits in Australia and New Zealand business and saw a modest increase in sales in the smaller Asia business. On the acquisition front I already mentioned that the bleach acquisition added to our volume growth in Latin America. We've now fully anniversaried the bleach acquisition in all geographies and feel very good about our results behind this bolt-on addition. We are ahead of our financial objectives and are confident that we now have a new platform for growth in the five countries impacted. Burt's Bees has been a very exciting edition to the portfolio. The business exceeded plan with 28% sales growth and enjoyed significant share growth in several key segments, including lips, skin, face, and baby. The launch of lip balm at Wal-Mart continues on track. And we will be offering a full line of Burt's products in select Wal-Mart stores. The brand rolled out it's first national advertising support in February and executed several successful product launches including lip gloss, body wash, and a naturally ageless skin care line.

Looking forward, we're confident that we can continue to exceed our sales objectives despite a difficult economic environment. Key for us is providing solid advertising support on our brands and driving innovation and trade up to improve our mix. For the full fiscal '08 year we anticipate eight to 9% sales growth, including the benefits of the Bleach and Burt's Bees acquisitions. Longer term we will be taking additional pricing given the current commodity and energy cost projections. As a reminder, we have already increased prices in fiscal 2008 on a number of brands and recently announced a price increase on Pinesol cleaner. Our new pricing actions will be announced shortly and will be effective during Q1 of next fiscal year. We are using our proven models to accurately predict consumer reaction and carefully execute pricing and marketing plans in a way that will minimize any negative volume impact. We are well aware of the pressure is current economic environment is putting on the consumer. But, given escalating costs we believe taking further price is both necessary and appropriate. The marketplace should support the pricing and we do not anticipate that there will be a substantial increase in consumers trading down to less expensive brands.

I'm happy to report that we are successful expanding Green Works into Canada, Mexico, Puerto Rico and the away from home market. We will further build on our Green Works success with a new Green Works launch into dish washing liquids. This is a premium niche product for consumers that want to trade up to a natural product that delivers strong performance. Shipments will begin in Q1 of next fiscal year. We will also launch a new two times concentrated version of Clorox 2 in July, following on the footsteps of detergents. With that I'll turn it over to

Thank you, Larry. I will review our third quarter financial results and our updated financial outlook for fiscal year 2008. I will also cover our initial financial outlook for fiscal year 2009. For the quarter, we delivered $0.71 in diluted EPS this $0.71 includes a $0.05 impact from Burt's Bees solution and an $0.08 impact from restructuring charges. Adjusting for those two items are base diluted EPS was $0.84. In the year ago quarter we delivered $0.84 in diluted EPS excluding a $0.06 impact from restructuring and acid impairment charges in the year ago period, we delivered $0.90 in diluted EPS. The biggest challenge we faced in the quarter was commodities and energy costs.

While I believe we are managing very well through a very volatile, commodity cost environment we did see a significant year-over-year negative impact on our gross margins from commodity and energy cost increase that were only partially offset by pricing, cost savings mix and other factors. Our gross margin was also impacted by restructuring charges in the purchase accounting step up impact on Burt's Bees inventories. While our gross margin is down significantly for the quarter, the commodity impact and our gross margins results are essentially in line with what we had anticipated. Overall gross margin for the quarter declined 350 basis points to 39.8% compared with 43.3% in the year ago quarter. Excluding the impact from restructuring charges in the (inaudible) step up in Burt's Bees inventory values included in the cost of goods sold our third quarter gross margin was 41.8% or down 150 basis points versus the year ago period.. A reconciliation of the gross margin change was provided with this morning's press release. Total cost savings for the quarter were $24 million with $19 million reflected in gross margin and $5 million in other parts of the P&L.

Selling and administrative expense increased about $20 million versus the year ago quarter. A little more than half the increase is related to the acquisition of Burt's Bees and the Bleach acquisitions and the balance is primarily due to increased commissions from higher sales, the impact of foreign exchanges and incremental investments in the grocery channel and other strategic initiatives among other factors. Third quarter restructuring charges came in at $17million which is slightly higher than what we had estimated for the quarter due to timing. Of the $17 million in total restructuring charges, $10 million are reflected in gross margin and $7 million on the restructuring line of the income statement. About $14 million of the charges are noncash. This morning, we provided our updated fiscal year 2008 financial outlook. As Larry discussed, we now anticipate eight to 9% sales growth. This range includes five to 6% base business growth and about 3 points of full year growth from acquisitions.

As we previously communicated, our financial outlook anticipates continued pressure from commodities and energy cost increases as well as normal inflationary pressures from manufacturing and logistics cost increases. For the full fiscal year we now anticipate a total year-over-year in commodities and diesel costs in the range of 125 million to $135 million an increase from our previous outlook of 120 to $130 million. Through the end of the third quarter, we have seen about $80 million in total commodity in diesel cost increases this fiscal year. The anticipated dollar impact of commodities and diesel cost increases in the fourth quarter will be in the range of 45 to $55 million which is higher than the third quarter impact. We had anticipated that we would begin to see some declines in resin costs in the back half of the fiscal year albeit starting from higher price levels than previously envisioned. With continuing rapid increases in oil prices and the further weakening in the U.S. dollar we no longer anticipate a softening of resin prices during this fiscal year.

Over time, we continue to believe that resin prices will begin to decline. However, we are not anticipating seeing that trend start until we get into fiscal year 2009. We also anticipate continuing pressure from agricultural related commodity prices. Our full year gross margins are also being impacted by restructuring related charges. Our full year outlook for restructuring related charges remains unchanged to 58 to $60 million or about $0.25 to $0.26 diluted EPS. About 22 to $23 million of the total restructuring charge will be included in gross margin. For the fourth quarter, we anticipate slightly lower restructuring charges in the range of 9 to $11 million with about 7 to $8 million reflected in gross margin. Additionally, our fiscal year gross margin outlook includes about $19 million from the purchase accounting stepup in inventory values associated with the Bert's Bees acquisition.. All the inventory adjustments have flowed through cost of goods sold by the end of the third quarter and we will not see any further impact in the fourth quarter.

On prior calls, we discussed with you the various actions we're pursuing to mitigate the impact of commodity and diesel cost increases on gross margin. We are taking price increases on a number of products impacted by higher commodity costs. We continue to aggressively pursue our cost savings initiatives. We realize a margin increase from favorable product mix, new products in the Burt's Bees acquisition. And we're pursuing trade spanning efficiencies and are benefiting from appreciation foreign currencies. For the full fiscal year we anticipate a significant gross margin benefit from price increases. We also anticipate about 85 to $90 million in benefits from a cost savings initiatives. The 85 to $90 million cost savings range is somewhat lower than the stretch target of $100 million we set for ourselves during the fiscal year. But at the higher end of our original 80 to $90 million target range. The short fall of this stretch target of $100 million is primarily due to the timing of when the cost savings will be realized. Our overall pipeline for cost savings remains robust and we continue to anticipate strong margin contributions from cost savings in the future..

While we have been able to offset a significant portion of the commodity and other cost increases, we will see an overall decline in gross margin for fiscal year 2008. We now anticipate full year diluted EPS in the range of $3.20 to $3.28. This updated range includes anticipated restructuring charges in the range of $0.25 to $0.26 and lower delusion from the Burt's Bees acquisition which we now anticipate will be in the range of $0.09 to $0.11. With that updated financial outlook for fiscal year 2008 as a backdrop, I'll now discuss our initial financial outlook for fiscal year 2009 which commences on July 1st. As a reminder, this is the first time we have provided our outlook on the upcoming fiscal year. We anticipate total sales growth for the fiscal year in the range of 6 to 8%. This anticipated sales growth range includes about 4 to 6% coming from our base business which is somewhat ahead of our long term target of 3 to 5% primarily due to a greater impact from pricing actions. Price increases will likely have a near term negative impact on volume growth but will have a positive effect on total sales growth. Also included in our base business sales growth range, is the negative impact from exiting our private label food bag business, our outlook for the impact of foreign currencies and about 2 points of incremental growth from new product innovation including the incremental contribution from Green Works.

Our 6 to 8% total sales growth target range includes a little more than 2 points of growth from Burt's Bees. The Burt's Bees sales growth impact will be primarily reflected in the first half of the fiscal year as we will anniversary the acquisition in December 2008. Our outlook for gross margin anticipates higher year over year commodity and energy costs, particularly in the first half of the year. Particularly for resident and agricultural commodities. We do anticipate declines in resin prices due to anticipated softening demand in the United States and the influence of longer term resin production capacity increases in the Middle East. However, commodity and energy markets remain extremely volatile. For the fiscal year, we anticipate modest gross margin expansion. Cost pressures include our outlook for commodities, diesel, and energy costs as well as other normal cost increases and inflationary pressure related to manufacturing, logistics, wages, benefits, and other factors. We anticipate more than offsetting those cost pressures through cost savings, trade spanning efficiencies, the benefits of price increases and other factors. Gross margin and EPS are also benefiting from the impact of Burt's Bees which is anticipated to be gross margin accretive and slightly accretive to EPS.

We anticipate gross margin expansion will be weighted more heavily to the back half of the fiscal year. Our outlook anticipates about 100 to $120 million in commodity and diesel cost increases for fiscal year 2009 based on our current view of oil, resin, agricultural, and other commodities. Our outlook also assumes that we will price to recover most of the anticipated commodity cost increases for the fiscal year. Our cost savings target for fiscal 2009 is in the range of 90 to $100 million. We're always looking to do more on the cost savings front and will consider even more price increases if warranted. Our outlook for fiscal year 2009 restructuring related charges is 20 to $25 million or about $0.09 to $0.12 diluted EPS primarily related to the previously announced consolidation of our manufacturing networks and the exit of private label food bag business. We anticipate consolidation of our manufacturing networks and the other actions we're taking to generate ongoing cost savings of about 22 to $24 million when fully phased in. Our tax rate for the fiscal year is anticipated to be in the range of 34 to 35%. For the fiscal year we anticipate weighted average diluted shares outstanding of about $142 million. Net of these factors, our outlook for fiscal year 2009 diluted earnings per share is $3.75 to $3.90. With that let me now turn it over to Don.

Thank you, Dan. I'd like to give you all my perspective on our business results and of course, the outlook and progress against our centennial strategy. Starting with our third quarter within the context of commodity cost increases and the environment consumers out there are facing, I feel good about our overall results for the quarter and where we are now. We obviously had solid base growth, especially given the 7% growth we were lapping from last year, including 8% volume growth. And our investment in innovation and growth with Green Works and Burt's Bees are certainly tracking ahead of planning. We're continuing to gain traction with our focus on the consumer mega trends I've talked about over the last year. In short, I would say our strategy is working. You know, our centennial strategy's key focus has always been the acceleration of profitable top line growth. And, I think the most important proof points for our strategy are the 5 to 6% base growth in this year's outlook and also the 4 to 6% base growth outlook for fiscal year 2009.

This is the first time in years that our company has changed our long standing base growth target of 3 to 5%. And I think the 5 to 6% base growth this year and the 4 to 6% forecast for next year speak to our confidence in our innovation pipeline, our new participation in faster growing categories that are margin accretive and our growing relevance with our customers. And let me talk a little bit about that last point. As we accelerate growth, we gain more customer relevance. Obviously our customers like top brands and products that sell. As we gain relevance what we're finding is the fundamentals of our business improve at the point of purchase where a lot of the purchase decisions are made in our categories. And, what results from that is better assortment on the shelf, increased shelf space and impactful merchandising. That's the virtuous cycle we're starting to see now in our business.

Now despite those very positive top line trends, and obviously the near term (inaudible) for facing our reality for Clorox and obviously, many of the other companies that are out there. And I think we've done a very good job of managing the cost pressure with our focus on addressing them through cost savings, price increasing and improved mix.. By focusing on higher margin brands like Brita and Glad ForceFlex. At the same time, and as we've said before, we're committed to taking a long term view of the business and continuing to invest in our brand. We're continuing to deliver against our centennial strategy and do the things we believe will drive economic profit growth and value for our shareholders over the long term. With that as some context, what I'd like to give you a little more texture around our centennial strategy. As I talked about in previous calls with all of you, one of our key growth agendas is . focusing on the consumer mega trend of sustainability, health and wellness, convenience, and then this more multicultural marketplace we're seeing, not only in this country, but around the world. I'd like to just take a moment to touch on a couple of them.

On, sustainability, Sustainability has proven to be an especially strong consumer trend we continue to be very pleased with the results we're experiencing as we leverage it across several parts of our business, including Burt's Bees, Brita, Green Works, as well as several of our other new products. And on the health and wellness front, our Bleach acquisition has enabled us to begin. establishing five more countries a health and wellness platform like we have on our Tier One international markets as well as in the U.S. And in the away from home market which Larry touched on, we're creating . hospital grade surface disinfecting products and establishing partnerships. We just have a new partnership with McKesson, for example, to help reduce the risk of hospital acquired infection. So our strategy to relentlessly drive out waste is really all about fueling our growth initiative we just talked about. The restructuring activities,

Dan mentioned including our decision to exit the private label food bag business are examples, I think, of the progress against the strategy. As we discussed with you before, the private label food bags business had a negative impact on economic profit. And, although the withdrawal somewhat impacts the company's top line in the near term, we firmly believe that's the right decision for the long term health of the business. Turning to FY '09. While we anticipate a continuing high cost commodity environment that Dan detailed for you, we're pursuing cost savings opportunities and we're planning to take those price increases that he mentioned. The foundation we're laying in FY '08 through our restructuring initiatives is going to further align our business with the centennial strategy in the quarters ahead. So in the near term, we're using our strong cash flow to reduce debt and support dividends just as we've promised you.

What I hope you'll take away from today's call, is that we're managing effectively through this high cost environment and we feel very good about the plans we've developed for coming year. We recognize the slowdown in the economy. We recognize the pressure consumers are facing from unprecedented fuel and food prices and the fight the cost of these necessities are taking out of their disposable income. At the same time, our products in our categories are products that consumers need for their everyday lives and we believe the pricing actions we have planned are justified and will be supported by the market. As we all know, this has been a rapidly changing environment and we've had to remain flexible in our response. Despite continued intense commodity costs, and these are approaching now $110 million more than our original forecast when we met last May with many of you.

We're still on track to deliver within our original EPS range that we communicated to you a year ago, excluding the one time items. We've been able to do this for three major reasons, one, our organic rate is in the 5 to 6% growth range this year, which is above our stated target of 3 to 5%. Second, we did take in some contingencies around our anticipation of a higher cost environment last spring, and third, certainly more favorable foreign exchange than we originally planned. I think as we move out of fiscal year '08, we believe our '09 outlook also supports our view that Clorox is well positioned against major consumer and customer trends to perform well despite a pretty choppy economic environment out there. So, with that I'll ask the operator to open the lines for

Thank you Mr. Knauss. (OPERATOR INSTRUCTIONS) We'll go first to Chris Ferrara of Merrill Lynch.

Hey guys. I wanted to ask about commodities for the '09 outlook you said you're looking for resin to ease again, but then you said your looking for 100 to $120 million of pressure which isn't that much less than what you're seeing this year. Can your just give a little more detail around-- I guess, what kind of declines you need in resin and does 100 to $120 million pressure really assume a big step back in your key commodities.

Let me take that question. Again, we're anticipating about 100 to $120 million in incremental cost pressure and you're right, it's about the same size that we saw last year. We do anticipate that we will begin to see some declines in resin. But again, we're starting from a much higher point than we ever anticipated we would be. So, we believe even though we may see some declines in resin in the first half of the fiscal year, on a year-over-year basis it will still be higher than last year and we'll have that impact in gross margin.

We think the benefit from any resin price decreases are more likely to be in the second half of the year. And we have inventory effects and things like that that would lag when those come through our gross margins. So we do have a lost of cost pressure this year and while we do think resin will come down it's going to be from a much higher point and it is likely-- that benefit is more likely to be realized in the back half of the fiscal.

At the risk of trying to make you into a chemical analyst-- what does that mean if oil stays at 110 and natural gas says at 1050 does that mean you'd have to revise those raw materials assumptions upward.

Yes, what I would say, Chris, is the the outlook that we're sharing today assumes that oil will be trading around the levels it has been recently. Now, if oil goes up materially from the levels we've seen recently and remains that way over the course of fiscal '09, certainly we'll need to take some other actions and that may include more pricing. The key component for us is resin, and on the resin, again as we said, we are anticipating to see some declines. But we're starting from a very, very high level.

Chris, I would just add to Dan's point, as we've looked at our assumptions for fiscal '09, to Dan's point, we've tried not certainly to be overly optimistic about the price of oil. And I think using the recent trading range for oil is a very prudent way to look at our cost assumptions.

Okay. Just wanted to move on to CCEM real quick. I guess to get near--- I guess you've done maybe $60 million so far this year. To get to your revised target, involves a pretty big stepup in Q4. Is that because of the timing issue you were referring to. Why does Q4 step up so much? Can you give up a little detail and color on why it would stepup again into 1009. In other words, the amount of savings you can get.

We were looking last May we are going to see about 80 to $90 million in cost savings. As we got into the year and saw the spike in commodities we set a target to try to increase that to about $100 million. And as I said a little bit earlier, we're now looking at 85 to $90 million. That additional $10 million or so that we were looking for, based on the timing of when the project savings will come through, that's now anticipated to be in fiscal '09. For the quarter we did-- this quarter, we did deliver $24 million in cost savings, about $19 million of that went through cost of goods sold.

We are looking-- based on that 85 to $90 million outlook, we are still looking for 20 to $25 million in the fourth quarter. So the savings right now that we're on track to deliver are about equal to what we delivered in the third quarter. As I look at fiscal '09 normally we would come into a new year and continue with an 80 to $90 million cost savings outlook. . The reason we now have a 90 to $100 million cost outlook is again on the timing of when the savings programs are scheduled to come

We'll go to Bill Schmitz of Deutsche Bank.

Good morning.

Good morning.

Can your just talk about the distribution build up (inaudible) at Green Works (inaudible). It seems you're not in the drug channel yet. and I think the last time we spoke I thought you said you were pretty close to 100% distribution there. with Green Works.

We've done exceptionally well in Green Works. both in terms of distribution and speed to shelf in distribution. We are not well developed in the drug channel for that kind of product that's typically the last channel that you see distribution in. But we're basically 100% of target and 10% of Wal-Marts and I think we're 80 something percent of grocery outlets and that is by far and away the bulk of the category sales. Very good about the distribution results on Green Works.

We'll go next to Ali Dibadj Sanford Bernstein.

Hi, guys. Wanted to plug away a little bit on the (inaudible) core volume growth. which looks like it is roughly flat despite -- sounds like great success in grocery and sounds like great success in Green Works. And in particular, it struck me that your North American description both in the release and also your description, Larry, had a real big, glaring omission which is your name sake bleach business.. What is happening in the laundry business in terms of sales growth. It's what, 13 to 14% of your sales. Is that shrinking? Do you need that to grow again in '09 to make your numbers? If so, how will you get there?

I will admit up front that's probably the weaker area of our portfolio right now. Stepping back as you mentioned, it's just over 10% of the portfolio. And many people assume it's far larger than that. And actually, about 45% of the Clorox franchise is on the home care side which is doing very well behind our health and wellness initiative. Initiatives that seem to grow share and grow volume.. So laundry is a soft spot. Quite frankly, we've put a lot of our innovation dollars and our focus and attention on the home care side because there were some bigger opportunities on that side like wipes. We've now started to refocus back on laundry.

Quite frankly, we hadn't been telling the basic laundry story. We had been telling the health and wellness story and the power of liquid bleach to kill germs. But, we've not done as good a job supporting the laundry story which is basically that we deliver a better benefit than detergent alone. So, you see recent advertising efforts over the last six or so months. This year, we returned to that laundry message. We;ve introduced some modest innovation on Clorox liquid bleach. And, as we talked before, we're doing a lot on Clorox 2 to try to turn around that business given the shear losses against the peak competitor in that area. So it's an area of focus for us. We're pretty optimistic that with some renewed focus on both the innovation side and the advertising side, particularly getting back to the base laundry message that we can resuscitate that part of the portfolio. But today it is a weaker area.

The only thing I would add to Larry's comment is that if you look at the past 13 week shares, we are still gaining share on our liquid bleach product. This is a category issue. I think it gets to the relevance issue. As Larry, said, as we get back to spending against our basic laundry message as well as the disinfection message. Half the bleach usage in this country is in cleaning. So as we get back into that message, I think we'll see some resurgence there. Having said that we have not baked in bullish assumptions at all on liquid bleach for next year to make the number. And, as Larry said, It's about 10% of our revenue at this point.

We'll go next to Filippe Goossens of Credit Suisse.

Yes, good afternoon, or good morning for you on the west coast. If I can make two housekeeping questions and one real question. In terms of housekeeping can you just clarify what the asset impairment charge was in the international business? And then for innovation, you mentioned 2% for fiscal '09. I seem to recall you had only 1% baked in. Do I have that correct or are you actually becoming a little bit more bullish on the contribution from new products?

Let me take the first question. There were some small impairments on some nonstrategic and tangible assets that we had in the international business so it was relatively small. Sort of a normal course of business type charge. On our new products, what we typically said in the past is that they would contribute about 1 to 2 points of incremental growth and what we're saying for fiscal '09-- both fiscal '08 and fiscal '09 with the contribution at Green Works and the strength of all the other new products that we've got, it's going to deliver about 2 points of growth.. We're not saying 1 to 2, we're simply saying we anticipate at least 2 points being delivered from new products.

We'll go next to -- [Loren Liberman of Lehman Brothers]

Thanks, good morning. On international, the volume was kind of flattish there. And it looks like the amount of pricing you're taking-- have taken has been steady over the last couple of quarters. If you can just kind of discuss their trends, what's going on and organic volume growth-- if and why you expect it to accelerate. And if some of what we're seeing is simply just a tradeoff on pricing.

So we actually feel good about the international volume growth. It was up about 4%. You take the Bleach acquisition out and its up 2%. Doesn't sound like a lot but the base period was up 13%. 2% on top of 13% growth feels reasonably good to us. There is some negative impact from pricing but again, overall we feel very good about the (inaudible) buying results in (inaudible) as well as prospects going forward. I talked earlier about launching Green Works into some international locations.

We've already achieved a good level of success in Mexico and Puerto Rico and feel like there may be opportunities beyond that.. We're also doing more and more (inaudible) work. Obviously the Bleach acquisition now give us a platform to build upon like we have in the U.S. of broader Clorox franchise of health and wellness type products. We're feeling good about the international business at this point.

We will go next to [Bill Piccorillo] Morgan Stanley.

Hey everybody. Question on the-- with the modest gross margin improvement for next year, you mentioned you're going to take some incremental additional pricing in the first quarter and you were going to try to largely offset this 100, 110, $120 million commodity impact in '09. With the pricing if you layer in the savings and you're also getting positive mix and mix was better than expected. You've got the Brita double digit and then Burt's Bees and Green Works helping there. Trying to figure out the-- why modest, I guess the pricing still is not offsetting all of the commodity impact in there. You've got the logistics I know that's still a drag.

Yes, and it's also the timing and pricing on when it's going to get layered in over the year and how quickly we can ramp that up. And we are cautious right now and we need to think about what commodities will do over the course of year. I think modest is-- it feels right to us at this point in time. What we said in your centennial strategy is we're looking to deliver about 50 to 75 basis points of margin improvement on an annual basis and we think we'll be a little bit above that for fiscal '09.

We'll go next to Connie Maneaty of BMO Capital Markets.

Let's see. I'd like to go over the commodities impact. I think for the third quarter it was 40 or 45 million or whatever it was.

43.

43 and in the fourth quarter it's going to be about the same rate. So if we assume that commodities stay where they are, then we should be looking for that kind of quarterly hit, I believe then through the first half of fiscal '09. So I guess the question is will your gross margins decline as much in the fourth quarter of '08 as it did in the third quarter and should we be anticipating this magnitude of decline for the first half of next year before things get a little better.

I think, Connie, the way to think about the fourth quarter is we will see obviously year-over-year decline. Likely to be a little less than what we saw in the third quarter. We have lower restructuring charges and we don't have the Burt's Bees inventory impact comes through. It's going to be less than the impact that you saw but it will be down. In terms of margins in first half versus second half of next fiscal year, we're still timing when the pricing is all going into place.

But I think -- the expansion that we're anticipating in our margins is more likely to be in the back half of the year. We still had a pretty recent runup in oil and resin prices that will still impact us in the first half. That are going to be only partially offset by cost savings and our pricing and then we expect some moderation in the back half which is where we'll see more of our margin expansion.

We go next to [Virginia Chambliss] J.P. Morgan.

Thanks. My question is on debt reduction, Don you mentioned in the prepared comments that reducing debt does remain a priority for cash flow. I guess-- saw about $80 million of debt reduction in this last quarter, and just wondering if you can confirm that all free cash after dividends will go to debt reduction in the fourth quarter and how much you expect that to be?

Our plan is still to use the majority of our free cash flow to reduce debt. And we're on track to have our debt to ebitda down to about 3.2 to 1 at the end of June, fiscal fourth quarter.. We believe we're still on track, also, to be at or below 3.0 debt to EBITDA by the end of December 2008. And then again assuming no acquisitions or anything like that in the back half of the fiscal year, we anticipate we'd be down around 2.5 debt to EBITDA. We'll continue to support dividends, but most of our free cash will be used for debt reduction..

Just a comment, Virginia, on the dividends. We'll still committed to our payout ratio approaching 50%. You'll see news on that coming shortly after our mid-May board meeting. We'll continue to be pressing on that as well.

We'll go next to [Andrew Sawyer] of Goldman Sachs.

Yes, sure, I just had a couple of quick questions on Green Works and Bert's. I was wondering if you could talk a little bit about how you've seen early interaction with Green Works versus the cleaning brands both in terms of cannibalization and shifts in your own internal marketing support. Also, if you have any early read on any sort of repeat rates or if we're too early on that. . Similar with Burts, how are you thinking about promotional support funding for Burt's and Green Works versus the base of the

So could not feel much better about Green Works at this point. We had an increase in our home care share in the quarter. A lot of the incrementally that Green Works brought to the table is reflected in total home care. So we expected some modest cannibalization. Something like 15%. which is kind of our fair share.

I expect that to be the ongoing result although cannibalization is really something you read after a long period of time. So we are seeing incrementally. We're feeling very good about where we are. And really no, at least at this point in time, it's pretty much all positive on Green Works. And we're getting some benefit in some of our other businesses because of the sustainability angle. So we've seen a lot of drug promotions with Brita for example. With both Green Works and Brita representing Earth Day events.

Andrew, if I could add to Larry's comment, another interesting point is we just looked at card data, loyalty card data from one of our larger retailers and one of the interesting pieces in that data, in the first 60 days that Green Works was out, and this is . January, February, card data, 50% of the people in this particular chain who brought Green Works had not bought a home care product the previous six months in that store. So what that says to us is that there is a lot of mainstreaming of natural cleaners with Green Works that were bringing new people into the category which is pretty exciting. I think that Larry's point, we picked up $0.09 of the share point in the 13 week period ending in March and most of that was incremental.

We saw a little dip down on Tilex and 409. But it looks like we're in the 75 to 80% incremental range, which, as you know for any new product is a pretty neat place to be. As far as Burt's Bees, the 28% growth really starting to see great results across channels hanging in very tightly on the established channels like chain drug. But obviously seeing some dramatic growth in mass and grocery as well. So, we're not seeing any material stepup at all in customer spending or trade spending in that area. We did see the first print advertising go out. So we will continue with the current pricing and trade spending policies so we don't anticipate any uptick

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

Hi, good afternoon. I'm back on this gross margin issue for fiscal '09. I'm having trouble understanding why you expect it to be up next year when the increment in raw material cost pressures is about the same as this last year. Maybe the pricing is going to be higher? What kind of pricing do you think you'll get? Explain why gross margins are up next year versus being down this year.

Part of the answer is obviously we took a lot more charges this year through gross margin than we will next year. So you have that year-over-year benefit. We have a $19 million upcharge on Burt's Bees inventory and gross margin this year that will not repeat last year. So you have year-over-year affects. We are looking-- we're looking for 90 to $100 million of cost savings. We are anticipating 100 to $120 million of commodities. And as we've said, we will price to try to recover as much of that cost pressure as we can. So that is what's leading us to believe we can see modest expansion in our margins..

I think the only thing I'd add to that is you're also seeing mixed benefit on the gross margin line with some of the higher margin items that are growing at faster rates.

and we're also getting some margin increase from Burt's Bees. Which is why it's in the portfolio.

We'll go next to Wendy Nicholson of Citi Investments.

Hi. My question was on advertising. I feel like I've seen a ton of Green Works ads and a ton of Burt's Bees ads but advertising is still down year-over-year. So, I'm wondering, Number 1, is there a timing issue here? Do you think advertising is going to trend back up? And can you tell us sort of proportionally how much of you advertising budget in the quarter was in Green Works and Burt's Bees?

Overall advertising as we said was about 9.1%. I think we talked before about looking at total investment in building our brands, which includes the trade component. We're up year-over-year because we have allocated some additional spending on the trade side and particularly to address some competitive issues. The 9.1% is within our target range of 9 to 10%.. Having said that, it is on the lower end of the range in part because quite frankly, our sales were higher this quarter than we initially anticipated and Bert's is spending at a bit lower rate. Small part of the equation but Bert's is spending at a bit lower rate, than average Clorox product.

So we think we are supporting our brands very well. I think some of the grocery seeing is a testimony to that. Obviously it is both a quality issue as well as a quantity issue. I can't give you the specific breakout of Green Works or Burt's Maybe we can get back to you with that one. It's not like we're spending half our advertising on those two brands. or anything like that.

The only thing I'd add for folks. As we look at the FY '09 outlook, and you look at our range of 9 to 10% which has the historical commitment of supporting brands, our assumption going into FY '09 that we would be at the high end of that 9 to 10% range to support the brands.

We'll go next to John Faucher JP Morgan.

In terms of looking at Green Works, sounds like you're going to be now moving into categories where historically you haven't played. I think you mentioned dish washing detergent. Can you talk about,-- are those ideas that are coming up incrementally internally, is that something retailers are asking for and how comfortable do you guys feel going into categories where traditionally you haven't played and you're going up against more branded competition. Thanks

I think we talked about Green Works being a platform-- a natural platform that potentially can expand into other cleaning categories, and potentially even outside cleaning, similar to what you've seen from other environmentally oriented brands. I think we're looking at trying to increase the size of the natural cleaning category and grow our share within it, similar to what we're doing on Burt's. In this case, we're taking a swath of a category across all cleaning categories. I don't intend to go head to head versus the leading brands in dish washing liquids or other big cleaning categories. What I do intend to do is grow the natural cleaning category as big as I can and grow my share within that category as big as I can. I that makes sense.

Yes, John, the thing I would add to it is your question about is this coming internally or consumer reaction? Frankly the consumer reaction to the five core items on Green Works has been pretty amazing to us. There have been a number of consumer requests for getting into to additional spaces like light duty liquids. We're also hearing it from our customer base as well. There is not really a natural -- and I would define natural as over 99% natural product offering. So, while we think it's a niche opportunity at a premium price, clearly the consumers are asking for an option and a choice in the customers are backing them up.

We'll go next to Chris Ferrara Merrill Lynch.

Just a point of clarity. I thought you said -- (inaudible) goal is 50 to 75% of operating margin (inaudible) ongoing.. But, I thought you said that a '09 is bigger than that? Did I hear that right or is that wrong. And if I did hear it right, what does that mean for your A&P plans or you SG&A plans for that matter?

Chris, what we said is 50 to 75 basis points is what we try to target and I did say, yes that we think we'll be a little bit ahead of that and again part of that is obviously the year-over-year comp issue of the items that won't repeat. Some of that is of course just the year-over-year comparison. On the other components of the P&L we target 9 to 10% on the advertising line and on the SG&A line., this year it's growing about equal to the growth rate of sales and that's obviously due to the fact that we have acquisitions in there and we also have some investments in our strategies. As we look out next year for the SG&A line we're anticipating that SG&A will grow half the growth rate of sales.

Just let me reaffirm as Dan mentioned on the 9 to 10% support for the brand, our assumption going in and what is in our forecast for a '09 is at the very high end of that range. So we feel good about the fact that we've been prudent about allocating enough dollars in there to support the brands.

We'll go to Jason Gere Wachovia Capital Markets.

Good morning. Just adding on that point with advertising against next year you're anticipating it will be closer to the high end of the 9 to 10%. This year obviously there's been higher trade spending behind selective categories that I think are a little bit more competitive right now. Can you talk about the mix between the two for next year especially in light of softer economy?

So I would not say there's a dramatic change in the approach at this point in terms of our trade versus advertising. We use advertising periodically to address specific competitive issues. Some of those are predictable, some of those are unpredictable or unknown to us at this point. I would not say we're going to see a dramatic difference in the the mix we're seeing this year. Not a dramatic increase or decrease versus what we're seeing this year, at least in the current plans.

We'll go to Filippe Goossens Credit Suisse.

Good afternoon. I might finally to get to answer my question for Don. Some light housekeeping item. Don, it clearly looks like based on the initial read that you've identified a good opportunity here with these natural cleaning products. (inaudible) conversations with one of your largest, if not largest competitor, they don't seem interested in this category at this point. If you could refresh our mind in terms of how you look at the natural category. Do you see it as a niche or do you think that with the passage of time and the economy improving, it may go mainstream the same way that natural foods appear to be going mainstream.

First of all, I hope they retain that point of view. I think we're very bullish on the category and this is why. As we look at all the dollars that are spent out there in this country and in the developed world but let's take the United States of around 14 to $15 billion.spent in home cleaning, which includes laundry, about 1%, as we've said, is natural cleaning or about 140 to 150 million in measured channels. Now, what was interesting to us when we went out and talked to consumers about Burt's Bees and did the initial research, is that over 40% of consumers said if you give me a natural cleaning product that works and convince me it works as well as conventional products and you don't price gouge me, that charge me only a 10 to 20% premium, we're very interested in that.

And given the early success of Green Works in the original 5SKU and what we're gaining in terms of value and share,. we think what we're doing is starting to mainstream the natural cleaning space. We think this is the category that is now growing at huge rates, it's over 100% up as Larry mentioned and we think that as we continue to go over the next two, three, four years, and get into adjacencies, that we'll continue to mainstream this national cleaning space. We don't see this trend on sustainability ebbing any time soon. We think it's a cultural shift and we feel well positioned to take advantage of it.

We'll go to Lauren Lieberman Lehman Brothers. Great, thank you. I just wanted to ask a little bit more about pricing. As I recall over the last couple of years, your strategy and granted much less cost inflation has been to price to about half the cost inflation or what you saw the ongoing run rate of inflation would be. So wanted to know how that thought process has or hasn't changed in the more recent inflationary environment and also where you think you are versus the competition or where you'd like to be in terms of pricing. Are you a little bit behind, are you ahead, are you right on track with your competition?

Lauren, you state correctly what we've attempted to do in the past is try to target what we think the long term cost structure will be in these categories and price to that. Obviously with this rapidly evolving energy market, oil, resin, and everything else, it's well ahead of any expectations we had. And we are now adopting the stance that we're gong to price recover more of this cost pressure. However, if you look at it over the last three to four years and the total cost pressure that's been out there, even with this more aggressive stance this year, everyone with the more aggressive stance this year, our price to recover is still less than the total cost pressure that we've seen in the categories. The other thing we always have to keep in mind is the consumer value equation, in the category that is we're in. So we take that into mind. But, just given the shear impact on our margins of all this cost pressure and how much they've been year-over-year, we are changing our stance on how aggressive we're going to be on pricing.

With respect to competitors, I think if you look back over the last four or five years, we've taken probably all told, maybe 100 price increases across the portfolio. And I think there have been maybe two or three instances where we haven't seen the competition follow. I almost can't believe the competition won't follow given the environment we're all facing. All the cost pressure we're facing, including private labels, so I'm not overly concerned about the competitive response. We've talked many times about the modeling we do behind pricing to try and optimize what price points we try and achieve and diminish the negative volume impact of pricing. Fortunately or unfortunately, we've gotten a lot of practice now, over the last four or five years. What used to be a lost art in our industry around taking pricing has now become a good skill for Clorox. So our models have proven to be very, very predictive.

And potentially, we can totally offset the negative volume impact we have on many brands by driving innovation or other kinds of marketing programs to provide positive volume and totally offset the negative volume. So, it's not in all brands and all cases that we have negative volume because we are to offset it in other ways. We feel pretty confident that given the quality of our brands, our number 1 positions, the way we execute pricing, that we can get through a pretty tough nut.

We'll go to Bill Piccorillo of Morgan Stanley

Thanks, I just wanted to follow up when you had mentioned some of the factors on upping your organic sales outlook for '08 without the FX. You took it from 3 to 4 (inaudible) from 4 to 5%. And there's a number of factors you've been talking about. How much of this in the '08 looking at the balance of the year was higher pricing versus the Green Works being better than expected and some items on the core like Brita. And it might be all of those. Just wanted to get a feel or the contribution of those items. Thanks.

There's a handful of items contributing. Burt's is a little bit ahead of our expectations. I think also in our outlook, we're seeing a little bit more favorability from foreign exchange than we had in our outlook. Also the timing of exiting our private label food bag business. We had thought it would be a little bit more of a drag in '08 and due to the timing of when we get out of those contracts, that was a little bit less and as Don said organic growth is a little bit ahead for all the reasons that we talked about. You talked about Brita. You talk about new products and everything else and that's all contributing. So, all of that is in the mix.

Bill, I would just add that Green Works, we have taken that forecast up a few times because of the success that we're seeing across channels. I would also say we're seeing some vitality in our other brands. Hidden Valley Ranch brand and w're seeing some share gains there as well. It really is a combination of a number of businesses across the portfolio.

We'll go next to Connie Maneaty BMO Capital Markets.

Just two follow up questions. I think you said Burt's Bees grew 28% in the quarter.

Correct.

Could you let us know what the growth of Burt's was excluding the pipeline sale of Wal-Mart and whether or not that is on trend with its growth before you acquired it? And secondly, you also mention that had sales in the grocery channel didn't decline in the second quarter -- third quarter versus being up three the first half. Could your just go into that a little. What are the dynamics there.

Let me take the first part on Burt's. I'll let Larry take the second one, Connie. On Burt's. Wal-Mart is really just at this point the lip balm at the cash register. We don't have a full line of SKU in any of the Wal-Mart stores. That's really not a material impact over all on that 28%. As Larry noted in his prepared remarks, there are about slightly over 500 Wal-Marts that we will be going into this month with a full line of SKU predicated on the demographics around those WalMart stores. As this quarter unfolds, we'll tend to see more growth obviously coming from there. In the mass channel in general and the grocery channel in general we're seeing significant growth across the board in Burt's Bees. That's really where that's coming from. I'll let Larry talk about grocery.

So, the effect of grocery we've talked many times about the initiative to focus on grocery given the EP opportunity last three years we've been down 4% on average in grocery. First half of the year we saw 3% gain and in the latest quarter be saw 2% decline. But, fiscal year to date we're up about 1%. So about a five point swing. I should say these numbers exclude Burt's Bees. This is just the rest of the portfolio which we're focused on at this point. If you dig down, we don't feel great about being down 2%. If you dig down to those numbers and you take out the seasonal brands which we talked about as a kind of weather related issue more of a category issue. If you take those out, we're basically flat in grocery in the quarter and obviously up more than the 1% fiscal year to date.

Grocery, a (inaudible) area that we want to focus on. We still feel good about the results we're achieving. Actually most of the resources we agree to redeploy diversory are just getting on board. And getting used to new jobs. We really haven't fully benefited from the value they will add to our grocery channel activity. But we're feeling pretty good about the results we have to date. Why don't we take one more question.

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if there's nothing further, we can wrap up.

We'll just wrap it at that point. Thanks everyone for your attendance and thanks for your interest in the company. We'll look forward to talking with you either on the road or at the next call in a few months. Thanks for your interest.

That concludes today's conference call. We thank you for your participation.