高樂氏 (CLX) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Clorox company first quarter fiscal year 2009 earnings release conference call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, you may begin your conference.

Great. Thank you. Welcome, everyone, and thank you for joining Clorox's first quarter conference call. On the call with me today are Don Knauss, Clorox' Chairman and Chief Executive Officer, Larry Peiros, Executive Vice President and Chief Operating Officer of Clorox North America, and Dan Heinrich, our Chief Financial Officer. We are broadcasting this call over the Internet and a replay of the call will be available for seven days at our Web site, www.thecloroxcompany.com. On today's call Larry will start with comments on our first quarter volume and sales performance and also provide our perspective on the current consumer and retail environment. Dan will then follow with a review of the quarter's financial performance as well as additional details supporting our updated fiscal year '09 outlook as communicated in our press release this morning. Included in Dan's discussion will be details on financing costs, commodities and the impact of foreign currencies. Finally, Don will comment on our progress against our Centennial strategy before we open it up for your questions.

Let me remind you that on today's call we will refer to certain non-GAAP financial measures including but not limited to free cash flow, EBIT margin, debt to EBITDA and economic profit. Management beliefs 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 on today's press release, this webcast prepared remarks or supplemental information available in the financial results area of our Web site. As well as in our filings with the SEC.

In particular it may be helpful to refer to tables located at the end of today'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 Larry.

Thanks, Steve, and good morning to all. We have very good first quarter as detailed in our press release. We delivered double-digit sales growth, driven largely by strength in our base business. As anticipated, margins declined due to cost increases in raw materials, manufacturing and logistics. Net earnings increased by 15% and we delivered $0.91 in diluted earnings per share. All in all we are very pleased with the progress we are making in this very challenging environment. As usual I'm going to focus my comments on volume sales and market share and provide perspective on what drove our topline results. Total company sales were up 12% for the quarter, on top of solid year ago growth. Our base business was up more than 8%, well above our long-term 3 to 5% annual target range. The other three plus points of sales growth was from the Burt's Bees acquisition. Volume for the quarter was up 4%, excluding Burt's Bees acquisition, volume was up 1%.

The difference in sales and volume growth was driven primarily by pricing and favorable mix along with about a half a point benefit from foreign exchange. Our volume performance is within expectations and consistent with our price elasticity models. Topline growth was broad-based, we grew sales in nine of 11 businesses during the first quarter, with two businesses down about 1%. Our largest business, home care, grew share and tracked channels versus the year ago quarter. Strong sales growth was driven by Green Works natural cleaners and price increases on many of our cleaning brands. Green Works continues to exceed our expectations. We have created a successful new brand that offers highly effective natural cleaning at reasonable prices. In August with extended Green Works into dishwashing liquid and early results have been very positive. This coming January we plan to further extend the brand by launching Green Works cleaning wipes.

Our Brita business continues to benefit from sustainability tail winds and consumers renewed focus on value given the significant savings versus bottled water. The brand delivered strong double-digit volume and sales growth in Q1, setting a new sales record. Burt's Bees is still performing above our valuation case with 15% sales growth. Expansions to more mainstream channels is on track and recently launched new items and baby and lip care are doing well. We anticipate year over year sales growth in Q2 to be higher than Q1, reflecting continued distribution gains. We also anticipate continued healthy growth in the second half supported by further innovation. This acquisition is meeting all of our expectations.

Our food business had strong sales growth, partly driven by a recent price increase. Hidden Valley salad dressing continues to show strong share growth due to a great tasting product and our Love Your Veggies advertising campaign. We plan to introduce several new players of Hidden Valley Salad Dressing and K.C. Masterpiece Barbecue Sauce in January. Moving on to our seasonal businesses, Kingsford Charcoal had another very strong quarter with double-digit growth in volume and sales. Our auto care business was also up in sales and share, although volume was down a bit as a result of some overall category softness due to a slow down in the auto channel.

Turning to our laundry business we saw sales decline of about 1% behind volume and share losses on Clorox liquid bleach. That said we are excited about the plans we're implementing to revitalize this business. In September, we launched a very compelling campaign highlighting the benefits of using bleach versus detergent alone. We are also launching a marketing initiative highlighting new nonlaundry uses for bleach and also addressing some misperceptions about the product. In August we relaunched Clorox 2, our product for colored clothes. The relaunch includes a two times concentrated formula, new advertising and a shift in positioning from color safe bleach to stainfighter and color booster. Shipments were up strongly for the quarter and the initial consumer take away is very encouraging.

Volume in the Glad business unit was down due to our previously announced exit from private label food bags but our Glad branded business grew volume in the quarter. Glad branded sales grew strongly due to price increases in consumer trade up to premium Force Flex trash bags although we did lose some share to private label as we had expected. In international, we delivered 14% sales growth on top of 18% growth in the year ago quarter, driven by shipments of laundry and home care products in Latin America as well as a benefit of price increases taken in the last year. Green Works is exceeding our expectations in Puerto Rico and Mexico. Currencies in many of our international markets have recently declined in value versus the U.S. dollar, some by a very significant amount. We've reflected the estimated impact of currencies in our updated topline outlook.

Before I turn it over to Dan, I'd like to talk about growth of our categories in the performance of our brands. Starting with our categories, we total up all the categories in which we compete excluding Burt's Bees, sales were flat in U.S. track channels, category pricing is having a positive impact on sales and the expected impact on volume. The net effect is stable dollar sales despite the increasing pressure on consumers. Turning to our brand performance, our total share of our combined categories is equal to year ago with share gains in five of eight tracked categories. We gained share in home care food products, charcoal and elsewhere. As expected, we lost share to private label in bleach and trash bags due to pricing. We know that even in tough economic times, most people still tend to turn to leading brands that they can trust to work well and provide a good value. A great example of this is Hidden Valley Salad Dressing. Despite a significant price premium to competition, we achieved an all time record share of the ranch segment with a great tasting product supported by high advertising levels.

Kingsford charcoal is another example. Despite a price increase earlier in the year we delivered double-digit volume and sales growth in the quarter behind particularly strong in-store marketing execution. Looking forward, we will likely see some reduced consumer demand in trade down but we do not believe our categories will be dramatically impacted. We also believe this is an environment in which strong leading brands can end up winning with retail customers and consumers. Some have asked whether declining input cost may lead to pressure from retailers to roll back prices. Recognizing that we have only recovered about 60% of cumulative cost increases through pricing, we do not believe there are likely to be broad price roll backs across our categories. With that said, Glad Trash is one business we are continuing to monitor closely given the high level of private label shares in that category.

In summary we are extremely pleased with our Q1 results. We believe we are taking the right steps to mitigate continuing commodity pressure and manage our margins. On the whole, our brands are healthy and the fundamentals of our business are strong. With that I'll turn it over to Dan.

Thank you, Larry. Let me walk you through our first quarter financial results. For the quarter we delivered diluted earnings per share of $0.91, reflecting very strong topline performance and improved business mix. Our earnings results include restructuring related charges of about $0.03 diluted EPS. In the year ago quarter we delivered $0.76 diluted EPS which included restructuring related charges of about $0.12. First quarter gross margin declined by about 200 basis points to 40.6% of sales compared with 42.6% in the year ago quarter. Excluding charges, gross margin for the quarter was 41% versus 42.7% in the year ago quarter, in line with our expectations. We again saw a significant year over year negative impact from commodities and energy costs that we were not able to fully offset through price increases, cost savings and improved business mix.

While energy prices have recently begun to decline, the benefit is just now beginning to impact our commodity purchases. We continue to anticipate higher commodity costs in the second quarter, reflecting increased input costs we've seen over the last four to five months. That said, with the recent retreat in energy prices and decline in overall market demand for many of the raw materials we use, we anticipate lower commodity costs will provide a higher net benefit in the second half of our fiscal year than we previously anticipated. Cost savings for the quarter were $28 million with $25 million on the gross margin line. We have identified additional fiscal year 2009 cost savings opportunities and are now increasing our fiscal year cost savings target to a range of 100 to $105 million. First quarter selling and administrative expense increased versus the year ago quarter. The increase is primarily related to the acquisition of Burt's Bees and incremental investments to support our centennial strategy including additional resources in the grocery channel, from incremental spending on cost savings projects as well as higher commissions resulting from our strong sales growth.

Advertising for the quarter was 8.6% of sales, a bit lower than our annual target range of 9 to 10% of sales, partially due to our very strong topline. On the dollar basis, ad spending came in about as-planned and was about flat to the year ago quarter. Advertising expenses reflect our ongoing efforts to shift a greater percentage of spending from production development and support costs to direct media spending to drive efficiency and increase our return on investment. We corporate to anticipate overall fiscal year advertising spending in the range of 9 to 10% of sales, but likely closer to 9%. First quarter restructuring related charges came in at $6 million or $0.03 diluted EPS. Of the $6 million in total restructuring charges $5 million are reflected in gross margin and $1 million on the restructuring line of the income statement. This compares with $27 million or about $0.12 diluted EPS, in restructuring related charges in the year ago quarter. As a reminder, the current year charges are primarily related to the consolidation of our home care manufacturing network and exiting our private label food bags business.

For fiscal year 2009, our focus remains on using free cash flow to pay down debt. We decreased our debt to EBITDA ratio from 3.3 to one at June 30 to 3.17 to 1 at September 30. Despite significant volatility in the credit markets, we have not had any difficult issuing commercial paper. However, commercial paper interest costs have increased, resulting in about $500,000 of incremental pretax interest expense in Q1. I'll talk more about our outlook for interest costs when I discuss our updated outlook. Our effective tax rate for the quarter was about 31% compared with 36% in the year ago quarter. The lower Q1 tax rate was principally due to favorable tax settlements in the quarter.

Turning to cash flow, cash flow from operations was $93 million compared with $163 million in the year ago quarter. The lower cash flow versus the year ago quarter was primarily due to higher net working capital and higher incentive compensation and interest payments. Working capital reflected the impact of the Burt's Bees acquisition and an increase in accounts receivable due to higher sales. Higher inventory levels result from the impact of increased raw and packaging material costs and inventory builds to support new product launchings and temporarily increased inventory levels to support the consolidation of our home care manufacturing network. Inventories are expected to decline as commodity costs decline, new products begin shipping to retailers, and we complete the manufacturing network consolidation. Our first quarter capital expenditures were $39 million, compared with $26 million in the year ago quarter. Our capital expenditures were due primarily to the timing of expenditures associated with the home care manufacturing network consolidation into our Atlanta plant. We continue to anticipate that our fiscal year 2009 capital expenditures will be about equal to the depreciation and amortization for the year or about $200 million.

With that I'll turn to our fiscal year 2009 outlook which we updated in today's press release. As Larry mentioned, we've seen recent significant declines in the foreign currencies of some of the countries we operate in, including Canada, New Zealand, Australia, Mexico and Chile. In Q1 we saw a positive net effect on sales and profits from foreign currencies. As much of the currency declines did not occur until late in the quarter. However currency declines accelerated in October and we now anticipate a more significant impact on sales and pretax profit in our second quarter and for the full fiscal year. As a result of declining foreign currencies, we are reducing our anticipated sales growth range for the fiscal year from six to 8% to four to 6%. This updated sales growth range continues to include about three to four percentage points in the first half from Burt's Bees averaging to about two percentage points of total company sales growth for the year. We anticipate the balance of sales growth primarily to be achieved through price increases with some benefit from mix.

We believe we have reasonable foreign currency assumptions in our outlook but currencies remain very volatile and could have a greater or lever effect on our fiscal year top line and pretax profit than we presently anticipate. In the recent past, we've tried to use the price per barrel of oil as a simple external benchmark that would reasonably correlate with the impact changing raw material and commodity prices have had on our margins; however the price per barrel of oil has recently proved to be an incomplete benchmark. We use a wide array of raw materials and commodities in our products. Many of these inputs are not directly tied to oil, natural gas or other energy prices. We are also use various contracting techniques when available to manage the cost of our inputs including price caps, price collars and price lag mechanisms. Our hedging practices also added the impact of price movements, as these instruments generally result in certain input costs lagging market price increases. Similarly, these instruments will result in certain input costs lagging the price declines now being seen in the marketplace. Given all these factors, we will no longer attempt to correlate our cost movements to the price per barrel of oil. We will however continue to provide a dollar range for the estimated impact of the change in raw material and commodity input costs on our margins.

Due to the softening commodity cost environment which is anticipated to benefit us in the second half of the fiscal year, our updated outlook for total commodity and diesel cost increases in fiscal year 2009 is now in the range of 150 to $170 million versus our prior outlook of 180 to $200 million. We saw about $60 million in commodity and diesel cost increases in the first quarter and anticipate about 60 to $70 million in the second quarter. Given our updated view of commodity costs, improved business mix and an increased full year cost savings target, we now anticipate gross margin will increase about 25 to 75 basis points for the full fiscal year versus our previous outlook for flat margins. We continue to anticipate that our gross margins will decline in the second quarter driven primarily by commodity cost increases in foreign currency declines but will increase more in the second half of the fiscal year than previously anticipated.

Let me now provide you with our updated view on interest costs. We have $2.7 billion in fixed rate term debt and approximately $750 million in commercial paper. Financing costs on our commercial paper have risen with the volatility in the credit markets. While commercial paper interest rates are down from recent peaks, our outlook anticipates that we will be incurring somewhat higher commercial paper rates over the next two quarters. This translates into an anticipated range of interest expense for the year of 160 to $170 million which is higher than previously anticipated with most of the impact expected in our fiscal second and third quarters. The impact of interest rate volatile on earnings will continue to decline as we use our strong cash flow to pay down commercial paper in the second half of the fiscal year. Despite the reduction in our full fiscal year sales growth outlook our estimated earnings per diluted share range remains unchanged. We continue to anticipate diluted EPS in the range of $3.60 to $3.75. We believe the negative pretax profit impact from higher commercial paper rates and declining foreign currencies will be offset by positive business mix, more favorable commodity costs and a higher level of anticipated cost savings.

Before turning the call over to Don, I want to comment on our second fiscal quarter which ends in December. Again the estimated decline in our full full year sales growth rate due to foreign currencies is anticipated to be about 2 points. However the negative impact from foreign currencies on second quarter sales growth is anticipated to be much more significant than the full year impact. As a result, we do not anticipate being able to offset the pretax profit impacts from higher interest costs and declining foreign currencies in the second quarter. On a positive note, as I just discussed, we anticipate the benefits from lower commodity costs and higher cost savings in the second half of the fiscal year will offset declining currencies and higher interest costs for the full FY. Therefore we are maintaining our full fiscal year diluted EPS outlook. With that here's Don to wrap up.

Okay, thank you, Dan, and welcome everyone.

As Larry and Dan noted, we had a very good first quarter. I certainly think the Clorox organization has simply done a great job with managing the cost and the economic head winds we faced through cost savings, the price increases we've taken and our focus on key consumer trends to deliver I think some very strong results in a pretty volatile environment. We are continually assessing the potential impacts on our business from the financial markets and the pressure on consumers. Having said that, we remain optimistic about our ability to weather this volatile environment and let me tell you why. First, energy costs have come down and we are starting to see lower input costs as Dan noted. We anticipate benefiting from lower input costs in the second half of the fiscal year, resulting in that margin expansion he talked about. Second, certainly consumers are under pressure and will likely be so for several quarters and while we haven't seen any material impact to date, our outlook already reflects that view. Third, while we are seeing currency devaluation in some markets, we've used our judgment to also reflect that in our outlook. Fourth, we have good liquidity and access to credit that we believe is more sufficient to immediate our near term funding needs and then, fifth, given our strong cash flow we are confident we are continue to reduce debt levels as we have talked about and support dividends for our shareholders. While managing our business in the current environment we've certainly remain committed to and focused on the long-term. Importantly, our long-term strategies are just as appropriate for the current market conditions if not more so. Now more than ever we need to support our brands, partner effectively with retailers to bring excitement to stores and grow our categories.

We continue to deliver against our centennial strategy and I feel real good about the progress we are making and let me give you a point of view examples. First of all I continue to be really pleased with our focus on the 3Ds, desire, decide and delight, the pre purchase, point of purchase and post purchase we have to create profitable demand. In the area of desire, we recently introduced a number of new ad campaigns. We are particularly pleased with the new copy we have running for Clorox liquid bleach that Larry mentioned, and Clorox 2 stain fighter and color booster that more strongly communicates the message that detergent alone isn't enough. We also have great copy for charcoal behind our tailgate at home and slow down and grill campaign that highlights the distinctive Kingsford barbecue experience and extend the barbecueuing season.

In the area of decide, we are gaining traction behind our incremental investment in the grocery channel which is a significant contributor to our economic profit. In fact in the first quarter our grocery channel volume increased at a faster rate than our overall base business volume growth of 1% and we anticipate the benefit that the increased investment will build over time. Also in the area we continue to invest in retail consumer marketing, category advisory services and consumer and shopper insights. I think many of you have seen earlier today that with the Cannondale release that Clorox was again named among the top ten retail suppliers out of the 85 manufacturers ranked in Cannondale's power ranging survey. I think what's interesting is our ranging improved in all 18 metrics compared to last year, and that's a feat that was really matched by only three other companies out of the 85 in the survey. So we believe this achievement reflects our commitment to providing services our retail partners value and our ability to drive growth, create instore excitement and drive out waste particularly in the supply chain. All of these capabilities we believe are a real source of competitive advantage especially during difficult times.

Finally with respect to delight, we remain focused on our internal goal of achieving 60/40 wins in blind testing with consumers in particular, we are using this as an important benchmark for new products. As Larry noted, we are introducing a number of new items next quarter and we certainly anticipate strong consumer response to those launches. Driving the 3D is a core element of our strategy and we expect this focus to help our brands grow. We also recognize consumers are under pressure and that we have taken a number of pricing actions over the last couple of years but we believe our focus on the 3Ds will help us educate consumers to the inherent value in our brands.

To wrap up before your questions, we had a great quarter particularly in light of the challenging environment out there. Our fundamentals are strong. We are taking appropriate steps to manage our business in this current choppy environment as well as for the long-term health of the business. So thank you again for joining us today and with that I'll askoperator to open the lines for your questions.

(OPERATOR INSTRUCTIONS). First question is from Chris Ferrara with Merrill Lynch.

Hey guys, I just wanted to ask you about the outlook changes, it looks like if you take the benefits that you're getting from your change in commodities outlook getting $30 million more favorable, CCEM gets $7.5 million more favorable offset by interest expense, it looks like it's a bigger number than what would be implied by say a 2% negative FX hit. Is that right, or is FX hitting profits harder than sales? I just want to get a feel for just what these puts and takes are.

Chris, I think you're doing the math essentially the right way. What we would say is we are anticipating that we would see about $30 million more favorability in commodities. We will see more cost savings, again the cost savings are probably offset by the interest impact. And by staying with the existing EPS outlook, we are reflecting the impact that the currency declines will have not only on the top line but also through the profit statements. So we are expecting those to be about a wash.

So is it fair that currency hits bottom line more than top line on a percentage basis?

Probably a little bit.

Okay. Okay. Also is there any, did you guys see any buy-in ahead of the price increases that you guys ran through in August?

Very minimal. We have very good controls in place around that so we always see a little bit of an uptick but pretty minor and obviously it washes out over the course of the quarter.

Great. Then just finally on the S&A line it was a little higher than I was looking for. How do you think about that? I mean obviously you are making incremental investment behind the business there but was this quarter a particularly high quarter compared to what you'd expect as a percentage of sales or I should say the year over year trends as we go along, or is this kind of what you'd expect as the year goes on?

For the quarter it's probably a touch high. We still haven't fully anniversaried the incremental resources we put into the grocery channel and we are still making some incremental investments in some of the other strategy work that we are doing. As I look out over the balance of the year we would anticipate that our SG&A is probably going to grow this year about in line with sales growth. That's probably the best way to model it for the year. So call it in the low 13% range is probably good for the year.

Chris, you should probably expect that there will still be a relatively material increase as we move through Q2 because there's also a component of Burt's Bees in there that's incremental versus the year-ago number, so at least through the second quarter that will cause selling and admin to be a little higher.

We anniversary Burt's Bees as you know on November 30 so we will have an outsized impact from Burt in the second quarter.

Thanks a lot, guys.

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

A couple of questions. One is both in the release and Larry you mentioned earlier, something looking tough times consumers trust brands. We are starting to, we have been starting to hear something very different from the retailers. And obviously they don't specifically talk about your brands but those types of things, household care, for example, some of your very core brands are the ones they do talk about a little bit. I'm trying to understand are you seeing something particularly about your brands that's different? Are you seeing something different this time outside other cyclical times where we certainly have seen private label encroachment or more value brand encroachment? Trying to get an understanding of how confident you are about that statement going forward.

So to be clear we have seen some pick up in private label shares across our categories and we noted the fact that we saw private label gains in laundry bleach as well as trash bags. Part of that's due to our pricing actions. When we take pricing we tends to lead categories and private labels typically take some time to follow so that's part of the story there. The encouraging thing for us is if you look overall we seem to be the only branded player at least within our category set that's actually holding share.

All the other branded players are declining in share. And I would only say that the brand value equation is far more than pricing and there's lots of things that we do across the 3Ds that help us either maintain or improve our price value relationship that's either good advertising, good instore execution, innovation plays a huge role in terms of advantage and obvious when will you have innovation like Green Works that's truly satisfying a need and is a relatively great value versus what was out there before in the form of natural products, you get a lot of great consumer demands.

Do you see any threats of those, take Green Works for example, given some competitive pushes in that area and or consumers potentially want to look for a lower priced substitute for a green product? Are you seeing any of that resistance yet or do you anticipate any?

I would have anticipated more competition within the Green Works cleaning space than we've seen to date. We expect more to come on, but the overall natural category is growing at a very rapid rate. It's more than doubled. If you look at natural cleaners that category has more than doubled year over year and we remain the leading brand in that new growth segment. So haven't seen anything as yet that would indicate we have a pricing or price value kind of issue.

Okay. In terms of you mentioned that you've offset 60% roughly of your commodity costs right now across the businesses. At what level do you mean when you say that? At what kind of, I know you said you are not going to use oil any more but can you help me figure out what level, levels of three months, six months that have peaked levels, what does the 60% refer to?

The 60%, Ali, is looking at the commodity and input cost pressure we've seen over roughly the last three years. So it's a cumulative look at the total pressure we faced and what we have passed through in the form of pricing of the so for this year as you know as we've talked about in the past we are actually pricing to recover, at the current estimate what have we are pricing this year we are probably pricing to recover about equal to the commodity cost pressure that we have. But when look out at it on a cumulative basis that's what we've referred to that we've seen a lot of cost pressure run up, we haven't priced to the peak and as we look at this going forward while we are certainly pleased that commodities costs are finally coming down, in terms of impact on our pricing they need to come back quite a bit before I think we would be faced broadly with having to consider what to do on the pricing front. Having said that with the decline in commodities costs and the anticipated commodity costs the back half of the year, there were two price increases in our outlook that we've decided now that we are not going to move forward with.

And as Larry mentioned earlier, we are under pressure in the trash bags business. That's an area that we continue to look at and we will monitor that situation closely. But on a broad stroke basis, we haven't priced anywhere near to the peak and we haven't seen the benefit yet of these lower commodity costs, and won't see it well into the second half of the year. So again our thesis is our pricing is going to hold.

I recollect that's helpful. How far down, you mentioned they have to go down a ways. How far down would they have to go?

It's a category by category look. Again I guess probably in the trash bag category it's going to be tied primarily to resin. So we'll have to look at that one in particular. We did see the market prices come off about $0.10 to $0.11 which is very encouraging this past month. So we'll have to watch that one closely. And on the rest of them, again, we are not anticipating frankly in a lot of these, unless there really is a recession on commodities, which we are not anticipating at this point, we would anticipate that most of our pricing will hold at these levels even with some normal return to or normal declines to commodity costs.

And last quick question, it seems like you systematically over the years or the past few years at least have taken down advertising as a percent of sales. It looked a little bit odd this quarter for sure, and some of that you mentioned may be because your top line came in a little bit stronger. How should we think about that going forward? I know you mentioned kind of nine to ten but more towards nine just that overall strategy in the consumer world in general but certainly in this type of environment where you are taking so much pricing seems to me to be a little bit risky. I just want to get a sense of how you're thinking about that.

So we are a little bit down versus our target range in the quarter and as we said a lot of that's because of the great growth we got and obviously we are still getting great growth despite the fact that we are a little bit below our range. We anticipate being within that nine to 10% range in the year. And we tried to stick to a plan to basically solidly support our brands despite the pressure in the commodity area over the last several years. So we've spent at a pretty good rate and what we think is a very good competitive rate and I think as you know within that rate, we have very different spend rates by brand based on a lot of work we do in term of ROI. So very big difference in brands in terms of level spending and we change that on a routine basis based on we are learning in the marketplace and return on investment.

The thing I would add on that we also know that investing in our brands is not just what we spend on consumer communications. It's also what we spend on product quality. One of the things we've learned from some basic research is that the most effective way to communicate with consumers is word of mouth and that's why we're putting so much emphasis on 60/40 wins, so when you look at the innovation we are putting out there like Green Works, Force Flex, et cetera, the product performance of our brands continues to go up and we think that's another key reason that our brand strength will continue to build. It's not just about the investment purely behind traditional marketing or advertising. It's the investment we are putting behind product quality as well.

And the last thing I'll mention and I mentioned in my remarks is this fact that for several years we've been really focused on trying to shift as much of our spending out of what we call the non-working area which is preparing print ads, preparing media and putting it into what we call working media which is actually getting it out there in front of the consumer and we've had good success over the last couple of years of being able to shift the mix inside ad spending so that there's less on the back office production cost and more out in front of the consumers. And that's been one of our cost efficiency programs that we've been running. So we do feel good about the returns we are getting.

Thank you very much for the help.

Next, Joe Altobello with Oppenheimer.

Thanks, good morning guys. First question is on commodity costs. It sound like if you kind of do the math and progress it out for the next few quarters that commodities could actual will be positive for you in the fourth quarter. Is that the case?

Yes, we saw a big run up, if you recall in the year ago fiscal year. Most of the commodity costs impact hit in the January to June time frame. This year it's hitting us most in the first half of the year so it should be a positive.

Perfect. Then secondly in terms of your categories, looking at past recessions, has the private label gains you've seen in your categories been consistent with the pattern in 91, 92, for example, 81, 82.

I don't have all the data but based on my memory I would say it's pretty much in line with what we saw back then.

So it's no worse.

No.

And then last until term of the margin differentials between the categories you are losing share and the categories you are gaining share it sounds like given the positive mix, that the margin is actually better in the categories you are gaining share than the once you're losing?

Yes, that's part of it. I mean we feel very good about the business mix impact that we've seen in margins. It's throughout all of our businesses. So our food business, our charcoal business is doing well. We've obviously added Burt's Bees, which has given us margin accretion. We've been pursuing the trade-up strategy in Force Flex which is adding to our margins. We've driven efficiency and trade spending in our categories. So overall we feel very good about the contribution of business mix is having on our margins.

The only point I would have on Force Flex as Dan mentioned Joe is we saw strong double-digit growth on Force Flex this quarter. In fact it's now approaching a 50/50 mix split between the premium side of our trash business and our base trash.

And we also exited as you know the private label food bag business which had been a drag on our margins for some time.

Any impact on channel mix? I imagine club is picking up a little bit?

Actually didn't see a big difference across untracked and tracked channels this quarter. That may be just some merchandising effect that's going on quarter by quarter stuff but didn't see a big swing to what you might term the value channels this quarter.

Got it. Okay. Thank you.

Next, Lauren Lieberman with Barclays Capital.

Great, thanks, that was actually a perfect lead in. So I was actually curious because earlier in the prepared remarks I think it was that you're growing faster in grocery than in untracked. So I'm guessing based on what you just said that that's more of a longer term comment rather than necessarily in the quarter?

No, grocery grew at a greater clip than the total business did in the quarter.

That's the base volume Lauren of 1%. So excluding Burt's Bees.

Excluding Burt's Bees. And this is U.S. numbers only.

Sure, okay, so then your comments are in category growth are you losing share or relatively more share, I guess losing share in the untracked channels at this point?

Unfortunately we don't have the category data in the untracked channels which is why they are untracked. Our growth rate in the untracked in total is about even to what we are seeing in the track channels. Recall the track channels include other things than grocery.

Right. Okay.

Other channels like target.

Okay. The international business, I was just, the decline in operating profit, can you explain kind of what happened there this quarter?

On the international business, the impact of commodities and other costs had typically lagged what we've seen in the U.S. So what you are seeing in the quarter is a bit of an outside lagging impact particularly on commodity and some other costs. We are anticipating though that the international margins will return to the normal trends that you've seen over time. Obviously we have the impact of currencies that we will need to deal with and one of the issues we have in the international business is that a portion of our cost of goods sold are U.S. dollar denominated so although we see declines in the currencies on the topline and other parts of the P&L, the U.S. dollar amounts won't change. That will put near term a little bit more pressure on the international margins but we would, we are also taking a fair bit of pricing this year. We had already planned to do that, because of our view of commodities and other cost increases and we will continue to do that over the course of the year. So again we would expect international to return to more normal trends after we get through this lag period but there will be a little bit of an impact from currencies because of the U.S. dollar denominated portion of costs of goods sold.

Okay.

Lauren, the only thing I would add to that is we've got a pretty strong pipeline of products going into international as well during the balance of the fiscal year, so I think to Dan's point you will see more a return to more normal growth rates if you will on the top and the bottom line as we go forward excluding the currency impacts.

Okay. And then on just on new product activity, so the Green Works dish soap, that launched in August, right.

Correct, dish washing liquid.

So what you guys have said before about the size of that category, could that launch have added as much of a point to volume growth in the quarter?

No.

Okay.

It's a big category. It's over $1 billion in sales. We just basically kind of started to get it on the shelf in the quarter. We are doing well. We are looking good but this is kind of a niche premium play so we are not going to over take leading brands in that category but we are going to have hopefully a very profitable niche.

Okay. Great. And just my final question, was on inventory levels. I know you definitely on the call and in the press release commented a bit on why inventory levels were up faster than sales but a further question I had was Wal-Mart and actually a lot of other retailers we are hearing are trying to push back a bit on their suppliers in terms of inventory levels yet again, I know it's an ongoing saga but has there been any increase in that that impacts the quarter or that you are sort of already planning for looking forward?

So nothing dramatic. We are very efficient on the logistics side and I think that's absolutely reflected in the Cannondale survey that Don alluded to earlier. So we have very good systems. We have very low inventories. We have high turn on most of our products. So we see some minor blips but nothing that we would regard as significant.

And as I look at inventory, Lauren, the one new aspect that we have obviously is Burt's Bees coming in to the portfolio. They have a little different dynamic in that they have some seasonality in their sales particularly in the second quarter because of gift packs. So there is some prebuild associated with that. Obviously as we are taking Burt's and launching the distribution increase in the distribution, we need to support that pipeline build and so that has had an impact on it. but nothing that I would say is a longer range trends.

I don't think we've seen anything material at all. There has been some drawn down in Wal-Mart, Kroger, some of the key customers of ours but as Larry said, we are pretty efficient at managing inventory and it has had no material affect.

Thanks so much. Okay.

Next, Jason Gere with Wachovia.

Great. Good afternoon. Just a couple of questions. I know you are talking about the advertising being I guess the low end of the nine to ten, could you just talk about maybe total marketing spending including the instore communication which is more of a gross to net? Do you expect that and the advertising to be greater than your sales growth for this year?

So the instore advertising that we would regard as kind of advertising communications, would be included in that overall advertising number. What is not included in the advertised number is trade spending. And that's, it's up a tick but pretty flat versus the year ago period.

Okay. So at this point there is no plan for any step up with trade spending or anything of that nature?

No.

Okay. Could you and then just another question, I mean could you just kind of disaggregate between I guess what we call some of your staple products versus more discretionary? I think this quarter you saw Clorox 2 obviously did pretty well and then bleach was a little bit softer but can you kind of disaggregate the two buckets because I know you have some products that are a little bit more trade up that you would call a little bit more discretionary and just get a little color around that.

I would say most of the our categories are pretty much staples. We see some interesting impact from soft economy on places like food where people tend to eat more home, we are actually seeing very robust growth in our both our hidden valley range business as well our charcoal business. I think probably as a result of that. The one category that I would say is probably a bit on the discretionary side is our auto care category and we have been seeing some softness in that category. We are tending to grow share, we've been growing share pretty consistently over the last year or two but we are definitely seeing a softening category. And that probably is because that's a bit more of a discretionary item versus our other categories.

Okay. Great. And then just the last question, and thanks for the commentary on the cost, the commodity costs and how that flows through the gross margin. Just wonder if you could talk about the manufacturing logistics? Should we anticipate that that could even turn a little bit sooner than what you are expecting for raw materials on the P&L? Thank you.

Well, the diesel known meant that sits in manufacturing logistics certainly would expect to start seeing some declines later in the back half of the year. The way we report our manufacturing and logistics is we report that as a gross number but we are doing a lot of thing like world class manufacturing and other cost savings thing and we actually count those savings to the extent that they are structural we count those as our cost savings. So embedded in those cost savings numbers that we report are a fair bit of savings that would go against that manufacturing and logistics line. So you kind of have to consider them more on a net basis then a gross. So we would expect to see in the back half of the year some improvement on diesel and some other things and we are certainly driving hard on a cost savings and in fact part of the increase in the target cost savings range has to do with some further opportunities that we've identified in the manufacturing and logistics areas.

Thank you.

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

Hi, on which two products have you thought you would raise prices and now you've decided not to?

I think for competitive reasons we would rather not talk about that.

So were they already announced to the trade,.

No, no.

No, they were not.

Okay. What did the lower tax rate, I'm sorry, I haven't had a chance to calculate this, what did the lower tax rate ad to earning in the first quarter before.

About $0.04.

Okay. And.

It was $0.04 to $0.05 Connie.

Okay. The increase in SG&A in the first quarter of 19 percent, how much of that was due to one time start up types of investment and how much will continue for the rest of the year?

Again as I mentioned before, Connie, probably the right way to think about our SG&A this year is its going to grow about in line with the growth rate in sales so that would probably put it in the low 13% of sales range. The once we anniversary grocery which will anniversary most of that in second quarter that will level off and it will be in the run rate. The biggest impact that we've had obviously is the Burt's Bees impact coming in and that was probably in the ten to $11 million range for the quarter. So once we hit the anniversary that, we won't see that kind of increase. But I think about our SG&A on the run rate basis of growing about in line with sales.

And then just to be clear on the short term impact in the second quarter of both sale high commodity costs and the translation and transaction impact of these currencies, it makes sense that earnings ought to decline year over year for this one quarter. Is that about right?

I think you're understanding it Connie correct in terms of us not getting the benefit of lower commodity costs in the back half of the year but the currency devaluation is impacting us right now so I think that is taking into consideration with what you are saying.

A quarter or two ago, you talked about the roll-out of what Burt's Bees into Wal-Mart.

Yes.

How is that going and especially about what was it the highs that were going in around 350 stores? What were the results of that?

We feel great about the Wal-Mart distribution gains and that's driving a lot of the growth on the business. We continue to expand distribution within Wal-Mart and in particular they tends to be setting natural category sets so they are expanding the entire natural personal care category not just Burt's Bees and we are obviously benefiting in a disproportionate way. So that's all green from our standpoint.

And Connie, it looks like another four to 500 stores in September is what we added to the mix. So again to Larry's point they are tending to gravitate to more 8-foot natural personal care sections than two to 4 feet. All those ranges were tested earlier in the year. But we feel very good where it's going.

So the eight feet of natural products isn't all Burt's Bees, it's eight --

No.

And you have a portion of it?

Correct.

And so the extra four to 500, are they getting more of the inline --

Yes.

The inline?

Yes.

What does that bring the total inline shelf space dedicated.

We are in the 800 to 1,000 range.

That's great. Many thanks.

Next, Bill Schmitz with Deutsche Bank.

Hi, guys, most of my questions have been asked but can you just talk about how consumer usage patterns might change in the economic slow down especially if unemployment keeps going up? So like will people use bleach to clean or other household cleaners instead of wipes, will people get rid of their ready mop and start using a mop bucket?

I think you will see all different kinds of dynamics. So generally people do hang with tried and true brands but we do expect to see some trade down as we've already seen and we will see some tick up in private label. As I said earlier, some of the our categories will benefit because people do tend to stay home more so salad dressing and charcoal business in benefit in a softer economy as a result. I would expect more pressure on the premium trade up products in cleaning in particular so we did see kind of basically flat wipes growth or growth share in wipes but the overall segment was flat which is a bit of a slow down so that's the kind of thing you might expect in the cleaning category. Bleach is an incredible value from a product standpoint.

It does incredible value from a product standpoint. It does incredible things, not just in laundry but across nonlaundry uses. I talked about our effort to communicate more about nonlaundry uses. It's an incredible disinfectant, relatively cheap compared to alternatives so we are trying to pump up our activity in that area. You have kind of a wide range of consumer responses in economic uncertainty. But overall again we've been holding share for the last quarter and pretty much for the last several quarters. And we probably expect that to continue.

Okay. I would add two things, Bill, one on the food side of the business and that's Kingsford and obviously hidden valley and KC Masterpiece. Obviously we are seeing the trends of people staying home more consequently the double digit growth on volume in Kingsford in the quarter which is a pretty sporty number as people stay home. Internationally I think we are seeing people making shorter trips if you will to and grocery and mom and pop are down the trade trends accelerating and people buying smaller sizes which we'll react to as well. So that just adds a couple of other points to what Larry already talked.

The only other thing I'd build on is I probably sound like a broken record on this but I talk about the value equation. Don mentioned earlier that Force Flex grew a lot in the quarter, it actually grew more than 30% in the quarter. A lot of that was in untracked channels not reflected in the track universe, but that's a trash bags that has a 15, 20% premium versus regular trash bags but it has a value equation that's obviously generating that kind of growth.

Okay. Great. And then we've heard from Wal-Mart and some others actually what Wal-Mart is doing but we heard they are getting a lot of customers in the store because of the value proposition but they are also trying to remodel the stores and keep those customers when the economy turns and it sounds like they are trying to extract a little bit of toll from the suppliers so as they ratchet up the stores put in Universal structures, it's going to come out of the gross to net and also asking for people to take a harder look at their cost savings as well. How does that impact you guys and the industry as that gets rolled out more aggressively?

We haven't paid for any store remodeling that I know about.

Not even fixtures though? Because I thought the fixtures were a gross to net especially on the cosmetic side.

We've been pretty consistent in our trade promotion practices and we will invest in incremental marketing programs with Wal-Mart and other retailers if there's a good return on investment. We have a great relationship with Wal-Mart. We add a lot of value. We focus on building not just our brands but building their categories with our brands. And they look to us to drive that growth. And obviously drive the efficiency in their supply chain as well.

So is this stuff just over blown that they are trying to extract additional toll or is it happening you guys just aren't,.

I would say it's over blown. I'm not sure about other folks. I would say this, too , I would say given the enact we have 11 number one brands in the 15 sections we compete in this country and Wal-Mart using national brands to promote their price leadership we are playing right into their strategy I think and they are executing it very well. I think other retailers are starting to do it as

And it's only scan channel so it's obviously just directional but if I take out the dish wash this quarter in the Green Works data it looks like the business was flat sequentially. So did it grow faster in unscanned channels or is the data just wrong or kind of what's going on there?

Year over year growth?

Sequential growth so from 2Q to 3Q in Green Works, if you take out the dish launch and look at the dollar sales in Green Works, it looks like it's flat in scan channels quarter to quarter.

We are going to have to get back to you because I don't have the sequential numbers. That would surprise me but I just don't have the data so I don't want to give you an inaccurate response.

I think, Bill, we will check the data but I think it's more around merchandising shifts from quarter to quarter particularly around earth month we had tremendous support behind that so you are going to see some shifts there but we can get back to you and clarify it.

Okay, great, thank you very much.

Next, Linda Bolton Weiser with Caris.

Hi, I was just curious about your increased cost reduction goal. You said you had $28 million in the quarter if you kind of multi-lie that by four you get more than I think the upper ends of your range you get more than $100 million. Can you just talk about the timing as it flows, should we expect more in the second quarter?

So as we look at our cost savings for the full year, it can be lumpy by quarter depending on when those projects come online or are delivered. So we had $28 million in the first quarter. We are probably looking at another 28 to $30 million in the second quarter with the balance pretty equally in Q3 and Q4. So again the lumpiness is just based on when these things deliver but we have taken it up and those are kind of how we expect the dollars to fall in the quarters.

And we did take the range up to 105 from the 90 to 100.

Okay. . And then Don in our early meetings with you when you first became Chief Executive Officer you really seemed fairly urgent about the need to get bigger internationally in order to sustain three to 5% topline growth. Has your view changed on that given the situation in the credit crunch and really quite frankly the strength in your core business? I mean you've been growing very well without additional acquisitions internationally. Can you just comment on

Yes, I think the focus is still there for the long term. It certain is what pivotal point of our centennial strategy to have international to be in the range of 25% of our mix by the time we get to 2013. One of the first things we did when I got here was complete the Colgate bleach acquisition which added about $70 million of revenue to the international side, so it was about a 9% increase to international. As we look out, and we pay down our debt to EBITDA as Dan noted, and we expect to be down in the 2.5 to 2.75 range by the end of the fiscal, the priorities for investing in growth initiatives clearly still fall with international as one of those key components for additional bolt on acquisitions. So we'll continue to press it. Right now we are obviously digesting the Burt's Bees acquisition which we think has big international opportunities as well. And take paying down the debt. But we are focused there and will continue to be so.

Is there any thought, can you remind us how much Burt's Bees has internationally now and what would be the timing for expanding that?

Well, about 10% of the overall revenue at Burt's Bees today is international. And it's really a handful of markets. So we have tremendous opportunities there and we are going through an updating the international components of that strategy and we'll have that update done in the first quarter of the calendar year in '09. But we think it's a key component. The other one is Green Works which we've expands nude a host of countries almost simultaneously with the U.S. launch and we will continue to build it out as well. So we think the combination of Green Works and Burt's Bees gets us into some very high growth categories international where we don't have really embedded competition in either one of those categories.

Okay. Great. Thank you very much.

Thank you.

And we will take our final question from Andrew Sawyer with Goldman Sachs.

I just have a quick one on trade spend. You guys commented it was flat in the quarter. Is that the 120 basis points of gross margin in the other, in the reconciliation?

Andrew, it's Steve. No, the majority of that 120 basis points benefit in gross margin really came from mix.

Okay.

And I think you heard earlier from Dan, Larry in particular areas we are seeing positive mix benefits across the portfolio. And just kind of following up on the you said trade spend was flat versus year ago. Is that.

It's up slightly.

Up slightly.

Is that where if commodities did do pull back is that where you would probably see the money go first rather than any pull back in list pricing?

Typically we go with temporary reductions before we go with price declines but it just depends.

It could be, it's going to be based Andrew on the dynamic of the brands and the category. But as I said earlier I think one of the things I would ask you to take away from is we will not give consumers a reason to choose another brands. We are going to he defends our brand so as things come down we will certainly look at the price value relationship of our brands first.

And if we use temporary funding increases to manage that, that's the typically what we've done in the past before as Larry said we go with the list price decline.

Shifting gears a really quick one is Green Works still in the VPI program at Wal-Mart and what are the prospects for keeping that in that, Green Works.

I don't think it's currently technically in the VPI program but it's very well supported by Wal-Mart and they have particularly done a great job behind our dish washing launch.

Thank you very much guys.

Thanks.

Mr. Knauss I would now like to turn the program back over to you.

Just thanks everyone for joining us today on Halloween. Happy Halloween to you. We feel very good about the quarter and the progress you are making. You can clearly take away solid plans in place to remain on track for the balance of the year. We are going to remain focused on delivering the year and on the long-term and driving our strategy and look forward to speaking to you next quarter. Thanks, everyone.

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