高樂氏 (CLX) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Clorox Company second quarter fiscal year 2010 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 second quarter conference call. On the call with me today are Don Knauss, Clorox's Chairman and CEO; Larry Peiros, Executive Vice President and Chief Operating Officer of Clorox North America; and Dan Heinrich, our Chief Financial Officer. We're broadcasting this call over the internet and a replay of the call will be available for seven days at our website TheCloroxCompany.com. On today's call Larry will start with comments on business unit performance as well as perspective on the current category and share results. Dan will then follow with a review of our quarter's financial performance as well as comment on our updated fiscal 2010 outlook as communicated in our press release this morning. Finally, Don will close with his perspective on key initiatives driving overall Company performance. After that we will open up the call 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 and debt to EBITDA. 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 web site, as well as in our filings with our SEC. In particular, it may be helpful to refer to tables located at the end of today's press 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 can cause results to differ materially from management's expectations.

With that, let me turn the call over to Larry.

Thanks, Steve, and good morning to all of you on the call. As you saw in our press release we had another good quarter in what remains a very challenging environment. We delivered our strongest sales and volume growth in the last five quarters. Up significantly behind higher levels of advertising and increased trade spending to address competitive price gaps. Our earnings per share were up 26% as a result of our fourth consecutive quarter of gross margin expansion. As you know, I'm going to focus my comments on top line performance highlighting sales and market share trends. Dan will follow with a review of our financial results.

Starting with the US consumer take-away in our categories remained relatively stable. Versus year ago consumption in US track channels, we have done about 1% in Q2. A similar trend of what we've seen over the last several quarters. We grew our health share in three of eight categories and our overall US share was down a bit. Private label share was up only slightly and private label growth was less of a factor than it has been in the last several quarters. More prospective, track channels now account for only about a third of our US business volume and as a result the track channel data is not the best indicator of our overall performance. Our US volume grew 6% with shipments in untracked channels significantly outpacing track channels. On an all outlet basis we grew our market share nearly a full share point during the past calendar year.

In international businesses market share results are positive and we generally have seen stronger category sales growth primarily due to pricing. International volume was up about 1% driven by shipments of disinfecting products in Latin America. Sales were up 21% due to price increases and favorable foreign exchange. Overall our categories in international markets are healthy. We grew share in a number of markets most notably dilutable cleaners and bleach in Latin America. Overall dollar share in Latin America increased 1.4 share points. Our total Company volume was up 5% for the quarter. Gains were broad-based with volume growth in three of four segments. Key drivers included higher shipments of disinfecting products due to the H1N1 flu pandemic, strong shipments of Brita water filtration products and solid results in a number of other major brands. In addition, our institutional disinfecting products business, while small, grew at very strong double-digit rates as healthcare institutions continued to purchase our products to kill germs to reduce the spread of infection.

Sales for the quarter were up 5%, in line with volume. Favorable foreign exchange rates contributed to 1.7 points to sales growth offsetting higher levels of trade spending. As usual, we saw differences of performance across the portfolio. In our largest category, home care, we grew share and maintained our number one overall share position. Volume and sales were up due to strong growth in Clorox disinfecting products, as well as strength in Pine-Sol, Liquid-Plumr and Formula 409. Clorox Disinfecting Wipes had another very strong quarter driven by the H1N1 pandemic. Wipes volume was up more than 25% with exceptionally strong consumption early in the quarter. Disinfecting Wipes consumption growth was more than 40% in October, but flattened out by December as concerns about H1N1 diminished.

We had an outstanding quarter in Brita with very robust volume in sales growth. This brand continues to benefit from the sustainability mega trend, as consumers focus on value given the significant savings Brita provides versus bottled water. Our Filter for Good web site remains one of our most successful Internet marketing programs.

In food, we continue to gain in the salad dressing category growing volume, sales and share. Despite its premium price, Hidden Valley is winning with highly effective marking and a great tasting product. In fact, in Q2 we were the number one salad dressing brand in track channels for the first time in history. We now extended the brand to flavors other than Ranch. In December we launched Hidden Valley Farmhouse Originals in four flavors, from Creamy Parmesan to Garden Tomato and Bacon.

We saw improved results in our Glad business in Q2. Volume was down only about 2% versus much larger volume decline during the previous four quarters. Trash bag shipments were up with volume growth on base trash bags and a return to volume growth on our premium ForceFlex and Odor Shield products. Glad sales remained soft, however, primarily due to price rollbacks on our trash bags which brought retail prices more in line with current resin cost. Intense promotional activity we saw in the trash bag category during the last several categories has moderated and retail pricing is becoming more rational. We are also benefiting from the Glad product improvement we began shipping in August, a ForceFlex trash bag that grips the top of the trash can and stays in place. As a result our trash shares shows steady improvement during the quarter and our December share was up slightly.

Turning to laundry, we grew sales but our results were mixed across the two key brands. Clorox Bleach volume grew and share was down only slightly. On Clorox 2, however, sales and share declined as a result of the intense competitive dynamics. We are vigorously defending this business through marketing investment and working to address price gaps. Last month we began shipping a new line extension of Clorox 2 in single-dose packs that provide consumers greater ease of use.

On Burt's Bees volume grew in the mid-single-digits. While Burt's continues to be negatively impacted by economic conditions, we remain confident about the long-term prospects of this business. Our new Natural Acne Solutions line performs very well and last month we introduced a full range of Burt's Bees Natural Toothpaste clinically proven to improve oral health. Burt's consumption growth remains in line with the natural personal care category and natural personal care continues to outpace mainstream personal care products. We expect consumption to further strengthen and along with international expansion fuel future volume growth.

Wrapping up, we feel good about our Q2 and first half results, especially given the economic environment. We believe we will continue to grow volume in the second half. Given that concerns about H1N1 flu appear to be waning, we are anticipating a bit of a trough in our disinfecting products during the second half. Net-net, however, we are confident that we can effectively manage our businesses to deliver on our plans and maintain the investment needed to keep our brands healthy for the long term.

With that I'll turn it over to Dan.

Thank you, Larry. I'd like to provide some perspective on our second quarter and first half financial performance and discuss our updated financial outlook for the fiscal year. As I look at our Q2 and first half performance there are three key messages that you should take away from our results. First, we're very pleased to see good progress in expanding our margin and we're a bit above our estimates at this point in the fiscal year. While we're not back to historical gross margins, we strongly rebounded from the recent low quarterly gross margin in the year ago second quarter as commodity prices peaked. Our Q2 gross margin increased almost 400 basis points and benefited from lower commodity costs, strong cost savings and continuing benefit of price increases. Partially offset by increased trade spending and other costs.

Our EBIT margins increased about 130 basis points versus the year ago quarter. Our EBIT margin expansion during the second quarter was not quite as large as our gross margin expansion due primarily to the impact of Venezuela, which I'll talk about in a minute.

Second, we increased our investments in the long term health of our brands. In times when consumers are looking for increased value in the brands they trust, and retailers are reducing assortment on the shelf, having strong leading brands is a key to success. Our success in these conditions is due in large measure to the strength and value of our brands to consumers. We're dedicated to making sure that they remain strong through new product innovation, increased marketing and sales efforts to create demand, and enhancing the value of our products to consumers. Our advertising investment was up 19% in the second quarter and up 12% for the first half of the fiscal year. We have increased the level of our research and development and in source support is also up for both the quarter and first half of the year. We also invested to close price gaps at the shelf versus competition to maintain or increase our products' value to consumers.

Third, while we're not happy with the financial impacts we suffered in Venezuela, we're effectively managing the situation and we've worked to contain the impact. As we reported in this morning's press release, we incurred a $19 million pretax loss due to currencies in Venezuela. There were two components to the Venezuela currency related pretax loss. First, we incurred a $7 million pretax foreign currency transaction loss of about $0.03 per diluted share as we converted local currency to US dollars through the parallel currency exchange market to pay for certain inventory purchases in Venezuela during the quarter. Second, we incurred a $12 million pretax loss, or about $0.06 diluted EPS, resulting from the remeasurement of certain assets and liabilities in Venezuela as we decided to begin converting Venezuela results at the parallel currency exchange rate effective December 31, 2009. Our previous financial outlook for the second quarter anticipated the $0.03 diluted EPS loss from currency conversions but did not include the $0.06 diluted EPS impact from the remeasurement loss.

For the past two years it has been increasingly difficult to convert Venezuela currency to US dollars through the official currency exchange rate. A substantial portion of our currency conversions to US dollars to pay for raw materials and finished goods inventory is currently being done through the parallel currency exchange market. The Venezuela government devalued its currency in January and introduced a two tier official currency exchange rate system. We anticipate having little access to the official currency exchange rates. We've concluded that substantially all of our future Venezuela currency conversions will likely occur through the parallel currency exchange market making that the appropriate currency rate to convert our Venezuela results to US dollars. As a result of this decision, we'll translate our Venezuela second half financial results at the parallel currency exchange rate. We anticipate this action will reduce reported second half total Company sales by just under two percentage points and reduce second half pretax earnings by approximately $20 million. The anticipated profit impact, which we have substantially accounted for in our prior outlook, is included in our updated financial outlook which I'll cover in a moment. While conditions in Venezuela remain highly unstable, we're taking appropriate actions to enhance the safety of our personnel, protect our facilities, ensure supply and limit the financial impacts.

Let me turn to earnings per share. For the second quarter we delivered $0.77 in diluted EPS, a 26% increase from the year ago quarter which saw the biggest impact from increased commodities cost. Our Q2 diluted EPS results include the $0.09 impact from Venezuela, that I just discussed. The current quarter also reflects an effective tax rate of about 33% versus a 34% effective rate in the year ago quarter. The lower tax rate in the current quarter was primarily due to more favorable foreign taxes. For the full fiscal year we continued to anticipate that our tax rate will be in the 34% to 35% range, although likely near the lower end of that range. Our strong net earnings and improved working capital during the second quarter generated a 55% increase in cash flow from operations versus the year ago quarter. For the first half of the fiscal year cash flow from operations increased 29% from the year ago period. We're using that cash flow to support dividends and pay down debt. At December 31, 2009, our debt to EBITDA ratio was 2.45 to 1, which is now inside our targeted leverage range. Our balance sheet is very healthy and our cash flow generation gives us significant flexibility and investment funding capacity.

Let me now turn to our full-year financial outlook which we updated in today's press release. For the full fiscal year we continue to anticipate sales growth in the range of 1% to 2%, although likely to be in the lower end of this range due to the impact of accounting for our Venezuela business at the parallel currency exchange rate. This sales growth range includes the benefit of our strong first half results and continued volume growth anticipated in the second half. With these positive impacts offset by three factors. Increased trade promotion spending in response to competitive activity, an anticipated third quarter slow-down in disinfecting product sales as previously discussed, and a second half negative impact of just under two percentage points related to Venezuela. We continue to believe that foreign currencies excluding Venezuela will be about neutral to sales for the full year but slightly accretive in the second half.

We now anticipate the gross margin will improve in the range of 150 to 175 basis points, which reflects our strong first half margin performance, the benefit from continued cost reduction initiatives and updated assumptions for commodity costs. As you may recall, at the start of the fiscal year we were anticipating a $90 million to $110 million net pretax benefit from favorable commodity de costs. We continue to believe commodity costs will be favorable for the full fiscal year. However, due to recent increases in energy, resin and wood input costs we now anticipate the cost favorability for the year will more likely be in the range of $50 million to $60 million, most of which we realize in the first half of the fiscal year. This outlook continues to assume modest gross margin declines in the second half of the year, as we're lapping extraordinarily strong margin improvement in the year ago period as commodity prices collapsed. In addition, we've increased the level of trade promotion spending in our plan which we expect will decline over time as the commodity cost reinflation we're beginning to see moderates the level of competitive promotional spending. There will also be a small negative impact on gross margin due to Venezuela because the contribution from this higher margin business will be reduced as a result of the devaluation.

Based on these assumptions and our strong first half performance we now anticipate fiscal year 2010 earnings per diluted share in the range of $4.10 to $4.25. This diluted EPS outlook includes the anticipated additional $0.09 negative impact in the second half of the fiscal year from Venezuela. Our increase diluted EPS outlook for fiscal 2010 is on top of 17% diluted EPS growth last fiscal year.

So to sum up, our brands continue to be strong, our first half performance has been better than our expectations and we continue to deliver strong cost savings across all elements of P&L. Despite some second half volatility we're likely to see, we're optimistic for the full year and increase in our outlook for diluted EPS and margins. While we anticipate the economic and competitive environments will remain challenging we feel good about our plans for the remainder of the fiscal year.

Let me now turn it over to Don.

Thanks, Dan, and hello, everyone. As Dan already discussed we had a great second quarter and first half. I'm obviously very pleased with how the organization is responding to this environment, to address competitive challenges, as well. Certainly I believe remaining vigilant about the long term health of the business. As we wrap up the call I would like to provide my perspective on the quarter's results and outlook.

I think there are four key take aways I'd like you to consider. First, we're very committed to keeping our brands healthy and driving profitable volume and share growth. We're supporting our brands aggressively as evidenced by this quarter's increase in advertising. Additionally we continue to invest in trade spending to keep our on shelf pricing competitive. On an all outlet basis, as Larry noted, we grew our overall share nearly a full share point in calendar year 2009. I think it's really important to note that track channels now only account for about a third of our volumes, so I think forming conclusions about our brand strength based only on track channel data can really be misleading. We're committed to meaningful innovation and have a number of new products shipping right now, such as the Hidden Valley Ranch salad dressings that Larry noted, Burt's Bees toothpaste, and Clorox 2 single-dose packs. And although the Glad business is not performing as we would like, I think based on what Larry told you, you can see the trends are improving and we're cautiously optimistic this trajectory is going to continue as we move through the second half of the year.

Second thing, we're pleased that second quarter sales grew in pace with our volume growth. I think even with our significant investment in trade promotion spending, I think it says a lot about the strength of our brands and our business mix.

Third, private label is slowing. We believe the retail marketplace is returning to a more balanced approach to growing categories and generating traffic. In track channels, where private label is the most developed, we've seen private label share growth rates drop as those categories have gone from 6.6% growth over the last 52 weeks -- and these are in Clorox categories -- to less than 1% in the past 13 weeks. And in fact to a decline of 1% in the past four weeks. So with respect to our business, I believe, frankly, there's been too much focus by the investment community on private label. Private label has a meaningful presence across only about a third of our categories, where we compete. It is really only in the last year that we have been challenged, primarily in bags and wraps which represent only 15% of sales, and the trends on that business, as we noted, are improving. To grow categories effectively and efficiently, I believe all our retail partners understand they need to offer both opening price points and differentiated national brands that invest in innovation and consumer communication to drive traffic. I think the point is both have a role to play.

And, fourth, as we discussed on prior calls, one element of our strategy is making targeted smaller acquisitions to drive growth. Our $23 million purchase of Caltech Industries is an example of that kind of tuck-in acquisition. This is an expansion of our away from home business It increases our ability to serve the healthcare industry where the use of disinfecting products is growing rapidly in response to the increased attention on killing germs to help prevent hospital-acquired infections. For those of you who are not familiar, Caltech Dispatch, is the number one brand of disinfecting bleach in the healthcare industry and their cleaners and wipes are also used in nearly 1,000 hospitals. This increases our penetration from 600 to almost 1,600 hospitals. The company is based in Midland, Michigan, and has a 30 year history devoted solely to surface disinfectants for healthcare customers. To date, the use of disinfecting bleach has been a relatively small portion of this market but now is growing more rapidly because bleach has been proven effective at eliminating some of the toughest pathogens, including CDIP spores which can cause a wide variety of symptoms including life-threatening intestinal disease and which is a key disinfecting challenge for hospitals. As Dan noted, with our debt to EBITDA level with our targeted leverage range the Caltech acquisition, I think, is a really good example of using our cash flow to expand our portfolio of leading brands where there is some strong tailwinds to drive growth.

In summary, we had a great first half. Our folks are managing the business in this environment while looking out for the long term health of the Company. I think we're executing our 3D demonstration model we talked a lot about as well as anyone, as evidenced by our share gains. We've raised our outlook for the second consecutive quarter, as we anticipate continued volume growth in the second half driven by our focus on our core businesses and brands. Which we believe are really enjoying some tail wind trends out there around health and wellness and sustainability and affordability. We're very pleased that our fiscal 2010 result are anticipated to be better than previously projected.

With that, why don't we ask the Operator to open the lines to questions.

(Operator Instructions) Our first question comes Doug Lane with Jefferies, please go ahead.

Yes, hi, good morning. You have a lot of new product activity happening around now. Can you quantify how much of that 5% volume growth might have been some sell-in of the new products.

I'd say overall in the year, we typically target two to three points from new product incremental, sales from new product. I don't think there was extensive activity in the second quarter. So I don't think that accounted for a big portion of that 5% growth.

Okay. And, secondly, can you talk about two or three categories that are perhaps most competitive? I imagine Clorox 2 would be one of them, but maybe if you could go beyond that to the next one or two and what you're seeing on the competitive front?

Clorox 2 category definitely tops the list, as you said. The trash category has been competitive but as we pointed out, I think things are getting a little bit more rational at this point and some of the intense trade promotion has dissipated a bit. So I think we're feeling better about that category. Cat litter has also been a bit of a competitive category with quite a bit of trade spending going on. Again, it's getting a bit more rational at this point. Those are the top ones probably I would mention.

Okay. And just lastly can you comment on trading conditions in Mexico?

I really have nothing to report. We would view, in our categories anyhow, as relatively normal competitive activity.

Is there something you're considering there?

Yes, the political unrest overall in Mexico coupled with the recession that they're in. Just some people found it to be an increasingly difficult market, and I'm wondering if you're starting to see similar patterns there.

The only thing I would add on Mexico, Mexico for us is one of our smaller Latin American markets when you compare it to Argentina, Chile, and Venezuela. We haven't seen any material change in our business in Mexico. With the advent of H1N1 in Mexico when it started, we saw really strong pick up in our sales because most of our business in Mexico, a lot of our business in Mexico is in the disinfectant space. For us it hasn't had a material impact.

Okay, fair enough, thanks. Thank you . Our next question comes from Ali Dibadj with Bernstein, please go

Hi, guys, how are you. Two quick questions. I wonder if you could please talk a little bit more about the sustainability of volume growth, particularly in areas where you had good volume, so in cleaning and lifestyle. You mentioned a little bit of the slowdown certainly given H1N1. I want to get an understanding, if we can, of quantifying that a little bit. And similarly on Brita in Lifestyle.

Brita in particular, has been on fire for quite a long time, so we've seen basically strong double-digit gains going on for two years now behind this phenomenon about people being concerned about bottled water waste. Coupled with the tough economic times, the value of Brita is immense versus buying individual bottled water. We haven't seen that dissipating whatsoever. In fact, we had exceptionally strong quarter in Q2 and would expect that to continue. And obviously we're also spending behind that. So we've taken advantage of additional volume to invest more behind the brand, particularly in the Internet space and social media space, we've gotten a lot of good PR value out of that. So we are forecasting continued strong growth on the Brita business.

And H1N1.

H1N1, there was a phenomenon and it really started Q4 of last year where we saw fairly dramatic pickup on brands like Wipes. But brands not just in the home care US business but also in our international business, and our away from home business. We are seeing, obviously, H1N1 concern dissipate. Although that could change. We obviously have no control over that. But based on what we're seeing in the market today and the slow-down we saw in consumption in the second quarter, we expect a bit of a trough, particularly in Q3 on our disinfecting products, and then as we go into Q4 we will start indexing off of that higher base. So obviously this is a bit of a boom for us in the first half and then will dissipate in the second half, but we still have an immensely successful Wipes in generally disinfecting business, so we feel good about it.

This is Don. The only thing I would add to Larry's comments on your question around categories. It is interesting when you look at the all outlet data and look at cat litter, for example, we're seeing over the last 52 weeks strong single-digit growth in that category. We're seeing the same thing, low single-digit growth in food but solid growth there. And I think this gets to the fact that people are staying home more. We're seeing the same kind of phenomenon with mid-single-digit growth in charcoal. So I would think as long as the economy remains challenged, which we don't see that changing in the next 12 months for sure, this trend towards people staying home more bodes pretty well for some of our categories.

That's helpful. And just to recap a little bit, so Lifestyle still roughly double-digit is what we should think about. And cleaning still positive growth, but low single-digits is how we should think about it. Is that fair?

I think in cleaning, I think the real spike-up in the category of cleaning has obviously been around the stain-fighting category, color-safe bleach category where we've seen low teen growth in the category. We'll see that spending is probably going to continue to play out for the balance of this fiscal, anyway. But I think, as Larry said, will continue to drop down as we get past that spending.

Obviously the different pieces of those segments are performing differently but I think overall we would expect single-digit growth in cleaning and closer to double-digit or above in Lifestyle based on current trends and forecasts.

Okay. And then part of the reason I ask that question, and trying to lay out that context, I'm just trying to understand a little bit about the pricing elasticities you're seeing. Is it that the price sensitivity is just as you would have expected? Clearly in the North American market, pricing, including trade spend or portion, down in cleaning, down in household, down in lifestyle. Really internationally, the only place that's growing. We'll set international aside for a moment. Are you seeing the elasticity you would have expected or is it less than you would have expected, if you pull out the H1N1 and perhaps some of the Brita broader themes here?

I don't think the elasticities have changed very dramatically. I think you know over the history we have taken 40-plus price increases, did a lot of price modeling and those models were exceptionally predictive. I think what's going on today is we have competitors that are either launching new products or, in most cases, just infusing more trade spending and being more competitive. So I think we're playing little mini battles on the trade spending on the pricing front versus seeing some fundamental change in consumer dynamics around elasticities.

The scary thing potentially going forward, if that pedal to the metal from competitors and yourselves doesn't, release a little bit, and you have to put in more pricing to get these volumes, but commodities start to peak up as you look forward between the back half of this calendar year. So the expectations, it sounds like, is that people are going to let go a little bit of being aggressive on pricing as commodities peak up, and are not willing to take the hits folks used to take a year ago or year and a half ago on gross margins. Is that how we should think about it?

I think the likelihood is if commodities go up again, we will probably see reductions in trade spending first, and then ultimately if those are substantial changes in commodities we'll probably see pricing actions. So that's how you think about it.

Thanks very much.

Thank you. Our next question will be from Andrew Sawyer with Goldman-Sachs, please go ahead.

Yes, sure, thanks guys. I was hoping to get a little more color around your thoughts on uses of cash, as leverage levels get down. I know you alluded a bit to some tuck-in deals but the magnitude of the one you did is obviously relatively small. How are you balancing buy-backs versus deals, and what kind of opportunities are you seeing in the deal pipeline?

On use of cash, obviously, Andrew, we've been using our free cash flow to pay down debt. That was our goal to get back to this 2 to 2.5 times debt to EBITDA. We are really pleased to get back inside that leverage range in the second quarter. So I think we have flexibility going forward. Our historical profile has been to buy back share stocks at dilution. I think you can assume that we will begin that again, more likely in fourth quarter than in third quarter. But we will reassume that posture. As we've always done, we'll look at what our investment needs are and if we don't have the use of the cash in the business we'll certainly look at share repurchases to return that cash to shareholders.

In terms of the deals, I think the Caltech acquisition is a great example of little tuck-ins that we'll do but again is not meaningful to cash flow. We can do a fair bit of those. In term of deal flow and other things we're looking at, there is nothing on the horizon right now that I would speak to. So I think our posture in the second half of the year will be looking to resume at a minimum share repurchases to offset dilution and continue to support the dividend.

And then just a second one. I think you guys alluded a little bit to an expectation that the promotional environment will back off going forward as commodity declines start to moderate. Have you seen any early inklings of that in some of the categories where that's been more of an issue?

I think we talked specifically to the trash bag category and that's where we're definitely seeing things moderate as resin prices kick up a little bit.

On the trash bag side, any quick comment on (inaudible) taking over the private label supply contract at Walmart? Does that mean anything to you guys or is that something we shouldn't worry about.

I don't think that really has much of an impact on us. Obviously there is a role for private label in the trash category as well as branded products. We like private label as a competitor. It shouldn't have any affect on our ability to build our brand at Walmart or elsewhere.

Thanks a lot.

The next question is from Bill Schmitz from Deutsche Bank.

Good morning. The first question has to do with what happened in the downturn. A big part of the business is health and wellness and convenience and my guess is that that stuff probably slowed a little bit. I think this is the first call. We haven't really talked about Green Works. When we talk about volume growth going forward, is there assumptions that that stuff probably comes back, because I know it is more discretionary but it's also more value added. So is there anything in the plan along those lines?

Green Works and obviously Burt's have definitely taken a hit from the current economic situation. We still absolutely believe in those two businesses and we think over the long term they'll obviously return to more substantial health. Green Works has taken probably more of a hit of late. The categories have definitely softened. We have taken some pricing moves across the Green Works line to reduce our premiums versus traditional products. A lot of that is based on cost savings that we have been able to develop on some of those key products. And going forward we will continue to take a very targeted approach to talk to the consumers that are more open to those messages. So I would say certainly we have taken a hit on those brands, or reduced growth in those brands today. But we still see those as opportunities over the long term.

And as we particularly as we look at Burt, we saw some nice growth in the second quarter. As we go into the second half in particular Burt's will be beginning to index in lower numbers in the year ago period. So the positives there, as we see in that category, return to the mid to higher single digit growth rates so the overall category is returning to growth again. That growth rate is well above conventional, personal care. So it looks like the category is returning to health. Consumers are coming into that category. And I think the combination of that category expansion as well as Burt's efforts to expand internationally, along with some of the new products that they're launching, I think we feel pretty good about Burt's performance in the second half of the year.

Can I ask a quick follow-up on Glad? I think Procter talked about pricing and I don't think there was any mention from you guys. You talked about the promotional environment being intense. But they're pretty quick to point out, and I think it was probably for your benefit, that they were taking pricing for bags and wraps at the end of the year. I was wondering if you could react to that?

My best guess is you will see reduction in trade, I don't see any pricing moves. We're not announcing any pricing moves. We're not anticipating any pricing moves but I can't predict the cost of resin, unfortunately, so things can change over time. Right now it would probably be more of a move on the trade spending side versus the price side.

As we look at the resin markets right now, there was a $0.04 price increase in resin that went in in January and stuck. There is another probably $0.14 of announced price increases in the market. Pretty unclear whether any of those stick. But if you look at where oil and everything is trading right now, oil has been in the $75 to $80 trading range. My guess is, if it doesn't move materially outside of that range for an extended period of time, I'm not sure that would lead to support for pricing actions.

Okay, great. Thanks very much.

Thank you. Our next question is from John Faucher with JPMorgan, please go ahead.

Yes, thank you very much. In terms of looking at your earnings guidance it seems as though you're looking for a nice increase in ad spend in the back half of the year, most likely to support the new product activity. Is the order of magnitude in that increase as a percentage of sales similar to what we saw in the first half or maybe a little bit less? Can you give us a little bit of color there?

Again, our target is 9% to 10%. We had a strong increase, obviously, in the second quarter, and that was planned all the way along. As we look at the second half of the year, we're still likely to be in the middle to the higher end of that range, and I think that's a pretty good increase. I forget exactly what we had in the year ago period, but I think you should plan for in the higher end of the 9% to 10% range in the second half.

For the second half or for the year? I guess it will end up being both.

It will end up being both given what we did in the first half of the year.

Good, thanks, guys.

Thank you. Our next question comes from Connie Maneaty with BMO Capital Markets, please go ahead.

Can you talk about Green Works and the pricing actions you have taken. Was it reduction of list price or increased trade promotion to narrow the price gap? And, secondly, what is the status of Green Works detergent right now?

The biggest pricing move has been on the detergent product. I think we've already talked that's been below expectations although it has stabilized. And that is the product where we're able to reduce the cost of the formula without reducing the performance of the formula. We essentially translated that into a fairly substantial price decline. That's currently being executed in the form of trade spending, but will ultimately be a permanent roll back, so more of a truckload roll-back. So that is the place where we're readjusting the pricing on Green Works most dramatically. We anticipated we were going out with something like a 20% to 25% premium while we launched and given all the activity in detergents, it turned out to be a much more substantial premium. We're looking at a premium that's probably going to be pretty close to zero versus the premium products, at least on an everyday basis. So unpromoted value versus the leading brand will probably be about parity.

Are you getting placement for Green Works detergent?

We do have distribution and obviously we're looking for additional distribution opportunities with these new pricing moves. I wouldn't say we've seen any dramatic movement of late.

The only thing I would add, Connie, on Green Works, is basically think of Green Works as three different businesses. You've got the home care, the original five SKUs we launched, then the light-duty liquid dishwashing soap, and then detergent. I think the pricing on the home care items and light-duty liquid are in this 10% to 20% premium. When we initially launched detergent it got into the 30% to 50% premium depending upon the retailer. So what we're really doing now is adjusting back to the original strategy we had for pricing on the, first, home-care launch and then the light duty liquid launch. The good news for us in this brand, or in this franchise, is that the latest repeat data we have on our home care line is it is stabilizing. In fact it has been growing but it's in the low 40s for repeat so it has the best repeat of anything we've seen in the natural space. And repeat is building on the detergent, as well. So the issue is trial and we think getting these price points down closer to conventional leading brands is the key to the trial.

That's helpful. Thank you.

Thank you . Our next question comes from Lauren Lieberman with Barclays Capital, please go

Thanks, good morning. I have a quick question on the level of volume growth in household business particularly around Glad. It sounds like trash is obviously getting better. Is there, in fact, a drag from food bags having fewer facings going forward? And if so does that impact the volume numbers for a couple of quarters that would maybe keep a little bit of a lid on volume growth in that division to the rest of the year?

So we definitely are seeing weak trends on our food bag business for quite some time. The only good news there it has gotten quite a bit smaller so it doesn't have as much impact on the overall business. But we don't foresee that changing in the near term.

I'm sorry, just particular to this quarter and then thinking about the next two, is that a drag we should be thinking about? Because it just looks like in this quarter with the big step-up in promotion in the household business, volume stabilized which is good but we didn't get gross year. As I look over the next two quarters, is there still a drag in there from food bags having fewer facings or is it so small I shouldn't even think about it?

There is a drag.

Trash has started to improve and is growing and is expected to grow the rest of the year, and then a little bit of an overhang. But really the biggest overhang in that division at this point is the food bag business because everything else is stabilized and is starting to grow?

Correct.

Okay. And then in cleaning do you have any sense yet, you talked about a trough. That means you actually expect shipments for disinfecting products to decline in Q3?

Correct.

Is that correct? Okay. And then you think, though, it is probably like a one-quarter thing because it is really just a matter of adjustment and things can stabilize by the end of the year?

We don't have a credibly accurate estimate but obviously retailers built inventories as they saw demand increase. We also think consumers built their pantry inventory as a result of the H1N1 concerns. Based on the slow down we're seeing in consumption even in Q2, we anticipate there will be a bit of a trough in Q3. Again, we talk about Wipes a lot but this accrues to all of our disinfecting products, US and international. In Q4 we actually started indexing it against the front end of the H1N1 pandemic. So we had a fairly high base period in Q4 of a year ago and so we'll start indexing off of that so we may look less robust in terms of growth just because of the base period.

I think the interesting thing, Lauren, for that particular sub segment of that cleaning division, Wipes in particular, is going to be this is a product line -- we've talked about this for a long time -- that has about 35% household penetration as a category. With the advent of H1N1, obviously we saw huge swings up in consumption. What's going to be interesting in the second half of the year is to watch what happens to household penetration if we retain some of those users going forward.

Okay. One thing on the acquisition because it is obviously you said small but it is great news because you've been looking to I think do something in this area for a while. Are these businesses, does it tend to be regional? Like these guys are based in Michigan so it services a certain geographic region, it is a little bit of a consolidation play that way?

It is not really a regional business. As I said, their Dispatch brand which is the number one brand in bleach based products for the healthcare industry. It is not really a regional business. It is pretty widely distributed. To your point, the interesting thing for us in this is our region to 600 of the 6,000 hospitals that are out there and they're 1,000 hospitals. It is almost totally unduplicated reach. That was one of the big attractive features of Caltech and their sales organizations for us, is they virtually have these relationships in a totally different footprint of hospitals than we do.

Okay. Great. Thanks so much .

Our next question comes from Christopher Ferrara with Banc of America/Merrill Lynch, please go ahead.

You mentioned private label slowing. I just want to get an understanding of the nature of that. Can you talk about what categories in particular you're seeing it, if it's disproportionately large in any of them? And then also is that really just the lapping of big moves, or is it related to anything specific that you or maybe other brands have been doing? Just trying to get a sense of whether it is a lap or whether it's some kind of change?

It is probably a combination of factors, obviously, but it has slowed down considerably and I think private labels in our collective categories, track channels US, were up about 1%. So quite a bit different than the trends we've been seeing which are high single-digits or even double-digits some past quarters. The three categories that we talk about a lot that have a fairly high level of private-label presence would be hypochlorite bleach, where our share this last quarter was about flat. The Glad trash category where again our share is about flat. Charcoal, there was a bit of pickup in private label in the quarter, although obviously O&D is not a big quarter for charcoal. So we are seeing a pretty dramatic difference in terms of private label performance in the last quarter versus what we saw in the last, say, four to six, or four to eight quarters.

Just for perspective, if you take bleach as one of the three gat categories where we really interface with private label, I talked about the last 13 weeks private label in all our categories combined being up about 1%. They're down 26% in measured channels in bleach, so there is a huge swing down in bleach, as we certainly got more focused on that category by managing our price gaps. So you can see that there is some real dramatic swings down in certain categories where we're the primary brand.

Right. So in your view it is not just a lapping, in bleach specifically, Don, it is not a lapping, it is a response to some of the competitive actions you have taken to mitigate their growth?

It is interesting because that almost 26% decline in the last four weeks, it is 25% decline in the last year. As we continue to advertise in that space and we also, not only with our "Detergent alone is not enough" campaign but also the alternate uses of bleach. And we're managing our price gaps down and we have some innovation, I think it is clearly paying off in that category. We see other categories like in wash stain removers, as well, where there is real pressure on private label because of all the branded spending that is going on in those categories. On the other hand, we're seeing some robustness in private label in the charcoal category although that is starting to wane as well. I think where you see the branded people really spending and innovating, you're seeing private label react as it has done historically.

That's helpful, I appreciate it. On a totally other note, have you seen in the natural cleaning lines, have you seen retailers to any extent lose their nerve? I understand consumption trends are down in things like Green Works. But what about the space allocated to these higher priced cleaning products? Has that remained constant through this?

No, there definitely have been some distribution losses going along with the category slowdowns. So I think there is a lot of customers, retailers, that are still very committed to this space but obviously they're responding to the opportunities. Quite frankly, there are also a lot of A2 products introduced that created a lot of extra SKUs in the categories that didn't deserve to be on shelf. There has been some winnowing down of those, as well.

Finally, one last one. The hard conversions, I thought you were going to see some impact this quarter from it and I don't know if I missed it and you guys talked about it a little bit. Did you guys see pressure from increased promo related to hard conversions that are happening? And what is the scheduling of the product pipeline relative to what it was, say, three months ago or six months ago.

I don't think we've seen anything dramatically different on the conversions. Probably charcoal is the biggest conversion for us where we're going to a hardened version on a new product that actually weighs less than the previous product which is why it is a hard conversion. We've also got some changes in packaging on our cat litter business. I think those are all going as anticipated. Nothing out of the ordinary on those conversions.

But there was a rag this quarter related to extra promoting, to move product from older product, stuff like that?

No, we already had it in our plans to move that product. And as Larry said, particularly in charcoal, we're on track with that plan.

All right. Thanks, guys.

Thank you . Our next question comes from Nik Modi with UBS, please go

Good morning. Just two quick questions. On the planograms, as they're all getting set right now at retail, if you can just give us any perspective on how you feel about your shelf allocation and if you have seen any more incremental wins on that front. The second question is, you have been seeing for the past two quarters a couple of incremental headwinds to the P&L, whether it be Venezuela or some of the input cost inflation yet, your guidance has been held or raised. I'm just curious where you're finding that flexibility or where the upside is to allow you to continue to raise your targets. Thanks.

On the assortment front, we feel good about some testings that we have in place. And, generally speaking, as you know, it's generally to our advantage to reduce the number of SKUs in any category because we tend to be the leader in the category, so we tend to be the winner. And while we still see that as an opportunity, I think we would tell you that to date we haven't seen dramatic movement. If you did some simple arithmetic on (inaudible) or Nielsen data on the number of items in our categories, you wouldn't see dramatic movement. We're seeing some puts and takes, some things that are benefiting us. And we have some tests in the marketplace that we feel good about. But I wouldn't say we've seen the dramatic movement we might have thought we would have seen.

And, Nik, in terms of our margins, we feel really good about our progress in the first half of the year. We're a little bit ahead of our own expectations and it's really across the board cost savings, continued cost savings, some of the other actions we've taken. So we feel good about where we are. We will be comping some pretty high margin increases in the year ago period, because as you recall that's when commodity prices collapsed. In our model, it tends to be somewhat flexible. We try to drive a high-level of cost savings and we're certainly on track. We're on track for $115 million to $120 million of cost savings this year, the bulk of which will be in cost of goods sold but we have other cost savings in other parts of our operating model. Efficiency of our ad spending and our ROIs on that are improving. We try to drive efficiency throughout the P&L and we're awfully disciplined on the SG&A side, as well. So as these things pop up, Venezuela is unfortunate but I think we're managing through it effectively. And our outlook also had a range of possible outcomes so we had some flex already sitting in the outlook range that we had. We're able to respond to it to a certain extent to help absorb and drive performance. We're not quite back to our historical margins, but we're certainly working to get there.

Let me just comment on commodity reinflation. Most of the favorability we expected to see in commodities did appear in the first half of the fiscal. As we look out in the second half of the fiscal year, while we are seeing some commodity reinflation it's pretty modest. Even though we'll be comping against some big improvement numbers of a year ago, the actual inflation we're seeing is relatively modest. So as we look out, our margin expansion model is predicated on doing $80 million to $90 million of cost savings a year and hopefully commodity inflation is in the $40 million to $50 million range a year. And if we can stay inside those parameters, we would anticipate continued margin expansion.

And, Dan, just to clarify trade spending is two to three points in your P&L, correct? Is that what you're budgeting for the year?

You mean the net increase?

Yes.

Yes, you can call it in that range and that's baked into our second half and that will impact our margins. As we've said, though, as commodities are continue to increase, we are seeing that start to impact the trade promotional environment. And, particularly as we look forward, assuming we even just stay in the range we are at today, we would expect some of that trade spending to subside and we should be able to bleed that expense out of our P&L.

Okay. Thanks, guys.

Thank you. And our last question will come from Karen Lamark with Federated Investors, please go ahead.

With Caltech you expanded your distribution and effectively the store base or the customer base, but what kind of penetration opportunities might you have particularly with your own products? I'm just curious if you can leverage your own portfolio more aggressively.

Let me give you an example. With bleach based products, just some background. About $1 billion is being spent by the healthcare industry on hard surface disinfecting, primarily in hospitals but other acute care facilities, as well, like nursing home. Of that $1 billion, only $30 million is bleach based. As the advent of hospital acquired infections has really taken off where basically one out of ten people acquires an inspection in the hospital, bleach is the only thing certified by the EPA to kill CDIP, for example, which is one of the leading causes of those infections. What we're seeing from healthcare professionals is a much bigger interest now in bleach-based products.

We think the combination of our germicidal wipes and other products that are Clorox branded, along with Dispatch from Caltech, we have an opportunity to really develop protocols. For example, in New York Presbyterian, one of the more significant hospital chains in the country, we're selling hundreds of thousands of dollars worth of bleach-based disinfecting products and we're trying to take that best practice and model that across the country now. It doesn't take much arithmetic to figure out if a small percentage of the 6,000 hospitals are on the same protocol as New York Presbyterian which is having big success managing these infections, it opens up a significant growth opportunity and we could do something good for the consumers out there. So we'll continue to look at those best practice cases like New York Presbyterian and try to drive that with expanded sales force now across the country.

Great, good luck.

Thank you. This concludes the question-and-answer session. Mr. Knauss, I would now like to turn the program back to you.

Thanks, everyone, for joining us today. As you all noted, we had a terrific second quarter and first half of the year and we look forward to discussing our third quarter with you in the next few months. Thanks again and we'll look forward to speaking with you on the next call. Take care.

This concludes today's conference. Thank you for your participation.