希悅爾 (SEE) 2005 Q2 法說會逐字稿

Good day and welcome to this JohnsonDiversey second quarter 2005 earnings results conference call. Today's call is being recorded.

And this time for opening remarks, I'd like to turn the conference over to the Vice President and Corporate Treasurer, Lori Marin. Please go ahead.

Good morning. This is Lori Marin, Vice President and Corporate Treasurer of JohnsonDiversey. I'd like to thank everyone for joining our investor conference call today. Today we will discuss our summary results for the quarter and 6 months ended July 1, 2005. I am joined on this call by Greg Lawton, our President and Chief Executive Officer, Joe Smorada, our Executive Vice President and Chief Financial Officer and Clive Newman, our Vice President and Corporate Controller.

On this call, we intend to provide an update on the general status of the business and the financial results for the second quarter and first 6 months of 2005, an overview of the balance sheet at July 1, 2005 and an update of the financial results for JohnsonDiversey Holdings.

Some of the statements that will be made in this presentation are not historical facts and are forward looking. These forward-looking statements are subject to risks and uncertainties, some of which are beyond our control. Please refer to the "Risk Factors and Cautionary Statements concerning Forward-Looking Statements" section in the JohnsonDiversey registration statement on Form S4 that was declared effective by the SEC on November 27 of 2002 and in the JohnsonDiversey Holdings registration statement on Form S4 that was declared effective by the SEC on January 8, 2004, for certain risks and uncertainties we face.

The discussions today include references to EBITDA for various periods. EBITDA is a non-GAAP measure within the meaning of the SEC's registration G. In accordance with regulation G, our form 10-Q report includes a reconciliation of EBITDA for the fiscal quarter ended July 1, 2005 to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly (inaudible-audio disturbance) to EBITDA.

Our Form 10-Q reports for JohnsonDiversey and JohnsonDiversey Holdings were filed with the Security and Exchange Commission on August 11, 2005. They are also posted on our web site at JohnsonDiversey.com and can be accessed by clicking on the investor relations link and selecting the relevant company.

JohnsonDiversey Holdings is a holding company whose sole access is its share of JohnsonDiversey. Other than differences in net income due to interest expense for the JohnsonDiversey Holdings senior discount notes, provision for income taxes and dividends received, the consolidated financial results of the two companies are the same. Accordingly, we will address the results of both companies on this call.

I would now like to introduce Greg Lawton, our President and Chief Executive Officer, who will provide a general business update.

Thanks, Lori. The Company continues to see the impact of raw material cost increases and structural changes in our European businesses. While our margins remain under pressure, our margin enhancement methods are beginning to show results.

Regionally, we are seeing positive momentum in North America and in key growth geographies and essentially flat results in Japan and in Western Europe. Joe will get deeper into the numbers in a few minutes, but to summarize --

As reported, net sales for the second quarter grew 7.4% over the prior year. Adjusted for the impact of foreign currency exchange rate, acquisition and divestitures, our second quarter net sales growth was 3.8% over the prior year compared with 0.5% adjusted growth in the first quarter.

Sales increases in North America, Latin America developing countries in our polymer business offset softness in Japan and in Western Europe.

Our margin declined year-over-year in the quarter, but increased 100 basis points over the first quarter. We have implemented new pricing across the business and every indication is that pricing is sticking in most markets.

Our raw material and freight costs have remained high, but the rate of increase has slowed. We expect these high-cost levels to continue due to the high price of oil and natural gas and the tightness of supply in key chemical categories. We will continue to address the structural change in our industry through reformulations, aggressive sourcing practices and pricing.

Our second quarter EBITDA declined by 7.7% versus the prior year, primarily caused by increases in raw material prices and other costs. We have and will continue to take steps to reduce our costs, while still enhancing our topline performance.

We built momentum in North America across the entire business with net sales growth in the second quarter of 6.3% over the prior year. This strong performance includes a stiff consecutive quarter of growth in our health and hospitality business and a continued success of our RTD chemical dispensing system.

The customer inventory reduction reported in the first quarter proved to be temporary as our business among building service contractors, government, education and retail customers all showed significant improvements.

Other areas of significant growth were our Latin America and Asia Pacific regions combining for 6.3% growth during the quarter. These regions continue to build on a solid base in the food and beverage, hospitality and retail sectors.

Our polymer business delivered 12.7 % net sales growth in the quarter on the strength of its pricing actions. However, its gross profit in the quarter declined by 5.7% as compared to the prior year as result of the cost of its key raw materials.

In our largest region, Europe, Middle East and Africa, we continue to see pressure in the established markets of Western Europe, partially offset by double digit growth in Eastern Europe and in Africa and the Middle East. The large economies of the Western Europe remain stagnant, if not declining, and the customer and distributor channel consolidation continues to result in de-stocking of inventory.

Our Japanese business experienced a 2.26% (ph) decline in net sales in the second quarter versus the prior year. Softness in the Japanese economy is making it difficult to pass on raw material cost increases. We remain in a strong leadership position in Japan and are implementing new plans to adjust to these unique market conditions.

Now I would like to turn to an innovation update.

Clean restrooms are critical to most of our customers -- improving their customer relations, insuring the safety of employees and guests and improving their public image and brand. So we worked with our customers to design a new a complete solution for restroom care. It simplifies and dramatically improves restroom hygiene called CareFor washroom.

The program integrates hard surface, floor and skincare and odor control into one customer offering. It includes leading edge accelerated hydrogen peroxide technology as well as simplified training and procedure material to reduce the number of cleaning steps from an industry average of 20 to 5. CareFor washroom can significantly reduce the cleaning time and water use by applying microfiber technology.

In the food and beverage sector, our new rapid rinse open plank (ph) cleaning technology EnduroPower is now assuming an important role in winning processed food businesses worldwide. EnduroPower combines unique chemical and dispensing technologies to provide more cost effective and efficient cleaning in food plants. The introduction of this global platform is complete and we are in the process of adding products and line extension.

An example is EnduroArmor, a cleaning product specifically approved for use on food contact surfaces which in enjoying rapid sales growth .

In our lodging sector, we have introduced a new air care products for use in central ventilation systems to continuously attack odors primarily from smoking and food. This technology has broad applicability beyond lodgings to neutralize odors without using a fragrance unless a fragrance is desired.

We continue to see momentum building for our green cleaning products and systems. We recently announced support for actions taken by officials in New York State and New York City to implement green cleaning in public facilities.

Our innovation commitment has given us the products, systems and expertise to support the New York government as well as governments across the country that have initiated new programs to reduce the environmental impact of their facilities.

I would now like to have Joe Smorada, our Executive Vice President and Chief Financial Officer take you through the financial results for JohnsonDiversey and JohnsonDiversey Holdings.

Thanks, Greg. I would like to remind everybody on the call that a reconciliation of EBITDA to net cash providing by operating activities can be found in our Form 10-Q reports for the quarter as well as the 6 months ended July 1, 2005. These, of course, can be accessed from our web site.

On an as reported basis, net sales in the second quarter of 2005 were $870 million, an increase of $60 million or 7.4% as compared to the second quarter of 2004. Net sales for the first 6 months of 2005 were $1.7 billion, an increase of $91 million or 5.7% over the first 6 months of 2004.

Increase in sales in the second quarter were primarily due to the strengthening of the euro and other foreign currencies against the dollar from the prior year as well as price increases taking hold as well as strong sales growth in North America, Latin America and our Asia-Pacific regions.

On a constant currency basis, and after adjusting for acquisitions and divestitures, net sales for the second quarter increased 3.8% compared to the second quarter of 2004.

On the same basis, net sales for the first 6 months of 2005 increased by 2.2% versus the like period of prior year.

Our gross margins declined as compared to the same period last year but did show improvement versus the first quarter. In our professional business, we reported gross margins of 43.7%, an improvement of 120 basis points from the first quarter of this year and 230 basis points from the fourth quarter of 2004.

We see this improvement as some evidence that our previously announced price increases are being accepted by the markets particularly in North America.

Versus prior year, gross margins in the professional segment are still down for both the quarter and the 6-month period due primarily to increased raw material prices, transportation costs and an unfavorable product mix.

In our polymer business, we reported gross margins of 24.9%, an improvement of 250 (ph) basis points from the fourth quarter of '04, but a decrease of 140 dips from the first quarter of '05.

Polymer margins are also significantly below the 2004 levels. Although pricing actions have made a positive impact, they have not been able to fully offset increases in key raw material costs and a shift in sales mix to lower margin products.

We continue to implement selective price increases in both our polymer and professional businesses to recover, to the fullest extent possible, cost increases. However, price increases require time to take hold and consequently tend to lag the impact of rising raw material costs.

In addition to further pricing actions, we are now working to drive margin improvements through cost reduction initiatives.

As a percentage of net sales, SG&A expense in the second quarter of 2005 was 33.4% as compared to 34.0% in the second quarter of 2004.

Excluding the impact of foreign currency, selling general and administrative expense increased by $6.5 million with inflationary pressures partially offset by cost savings realized from our synergy integration and cost containment programs.

Positive momentum does continue in our synergy and integration programs. Incremental cost savings resulting from synergies achieved during the second quarter of 2005 are estimated at $11.3 million which was in line with our plan for the quarter.

Cash spending excluding capital expenditures related to restructuring and integration related activities was $10.8 million. This compares to $20.8 million for the same period in the prior year.

For the second quarter of 2005, EBITDA was $99 million compared to $107 million in the second quarter of 2004. EBITDA for the first 6 very months of 2005 was $171 million compared to $192 million for the same period last year. .

The decrease in EBITDA in the second quarter was primarily due to lower gross profits resulting from increased raw material costs in both of our professional and polymer segments, partially offset by the impact of our cost savings initiatives and the net effect of the strengthening of euros and certain other currencies against the US dollar as compared to last year.

The Company reported net income of $5.1 million in the second quarter of 2005. This compares to net income $18.8 million in the second quarter of 2004. But the first 6 months of 2005, the Company reported a net loss of $2.7 million compared to net income of $22.9 million in the same period last year.

The decrease in net income in the second quarter was primarily due to the previously discussed increase in raw material costs and an increase in interest expense.

During the second quarter, we re-paid the euro portion of our term B loan with the proceeds from additional borrowings in the US. As a result of this transaction, we reported a $3.6 million charge to interest expense to write off unamortized debt issuance cost. it took a $9.4 million charge related to our Euro or based interest rates SWAP agreements that were determined to be ineffective for accounting purposes.

JohnsonDiversey Holdings reported a net loss of a $1 million in the second quarter of 2005. As previously mentioned the main difference between the net income of JohnsonDiversey Holdings and JohnsonDiversey are interest expense and related taxes on the senior discount notes as well as dividend income.

Capital expenditures in the second quarter of 2005 were $22 million compared to $28 million in the second quarter of 2004.

With that I will turn the call back over to Lori Marin, our Vice President, Corporate Treasurer who will discuss the Company's cash and debt decision.

Thank you, Joe.

During the second quarter of 2005, debt balances decreased by $10 million to $1.33 billion. This decrease reflects $23 million of favorable currency impact resulting from the strengthening of the US dollar against the Euro and Japanese yen during the quarter. And $29 million of cash generated from increased utilization of our account receivables securitization facility. These factors were partially offset by an increase in short-term debt used to fund operations.

In addition, we repaid $7.8 million of term debt during the quarter including the remaining balance of the term C loan in Canada.

JohnsonDiversey Holding debt balance at the end of the second quarter of 2005 was $1.63 billion, which includes $300 million of senior discount notes. Of this amount, $656 million was outstanding under our senior secured credit facility.

Our ability to borrow under credit facility is dependent on our continued compliance with the financial covenant including the leverage ratio described in our Form 10-Q recently filed. Certain of these covenants step down as of September 30th, 2005 and again on December 31st, 2005.

Our ability to comply with these more restrictive ratios will be dependent on our results of operations and whether we can generate sufficient levels of EBITDA in future quarters to meet these more stringent requirements.

We are, of course, monitoring the situation and exploring various alternatives in light of recent softness in our business.

As of July 1st, 2005, the Company had total credit availability of $285 million under our senior secured credit facility. Of the total credit available at the end of the quarter, we could borrow $105 million and still be in compliance with our financial covenants.

This concludes our presentation. I would like to remind you that our Investor Relations website can be accessed at JohnsonDiversey.com. We consider this website to be a key communication tool with the investment community and we encourage you to periodically access this site.

Documents related to the the JohnsonDiversey senior subordinated notes and the JohnsonDiversey Holdings senior discount note as well as both Companies financial results can also be found on the investor relations site. A recording of this conference call will be available for replay for the next two weeks by dialing into the numbers listed on the press release announcing this call.

Please direct questions related to our financial results to Cathy Powers or to me. John Matthews will continue to be the contact for all non-financial matters. Our contact information can be found on our website.

Our next conference call to discuss the results for the third quarter of 2005 will be scheduled in mid-November of 2005.

We will now move on to the question and answer session.

Thank you.

(Operator Instructions)

Our first question will come from Thomas Olto (ph) from Jefferies & Co.

Good afternoon. I am Thomas Olto with Jefferies in London. 2, 4 questions just to start with -- on working capital -- I am not too familiar with the working capital syncs of your business, could you just take us through working capitals cycles through the year.

Yes, Thomas, it's Clive Newman, the controller. Thomas, what you tend to see in our business is as we begin to move into the vacation season particularly in Europe in the summer months, you tend to see a sort of ramp up in working capital as we move through the second quarter. That predominantly comes out then in the third quarter and a little bit in the fourth. To give you an idea you can expect, I don't know - on historic trends normally about $20 million would come across about that - across the third quarter.

Right, and for the year -- your expectation for the full year -- you know, are your -- is it approximately working capital flat?

Yes, some small improvement potentially but yeah we will be seeing a flat year assumption.

OK. And on to a different point, This -- some comments about this agency service agreement where you have some terminations and you are being paid by Unilever for those terminations. I think there was an inflow of $6 million as a result. Maybe you can explain how that works you know, so, how much potentially you have outstanding to come in from Unilever as a result of those terminations?

Let me answer that - let me answer, Thomas, that first part of the question for you. The - if you want to find more details, you look back in the registration statement, I think there is a summary of the master sales agency agreement we have with Unilever for the sale, (inaudible) expressed as a sales agent for Unilever consumer brands. That in each territory in which we sell consumer brands there is a base year sales, that base year being the 12 months to June 2001. If in a certain territory, the sales were to drop below 95% of that base we are able to call on a, effectively termination compensation.

Now sales can drop below that base for a number of reasons not least of which is Unilever goes through its path to growth program and disposes off the tail brands. Those tail brands, if they were a part of sale, they of course would cause the level of sales to drop below that 95% benchmark.

And in those scenarios we can call a prorata, a percentage of a termination compensation amount that is also highlighted for each territory. What that respectively is for, is compensation for loss of sales growth, which can be used, should we decide to do so, to restructure some of the fixed cost attendant with that agency.

OK, that sounds terribly minor.

Yes

OK, let's take it up to a bit higher level. I'm interested in understanding a little bit more about Europe. From what I can see, there is two large players -- that's yourself and Ecolab. And Ecolab is aggressively targeting market share growth and you know not only targeting you but also, you know, regional or local players.

How - what are the dynamics and why are they for example making it difficult for you to increase prices when really there should be space in this market for both of you to increase prices at least vis-a-vis these smaller players.

This is Greg Lawton, CEO. I am not sure that the information you are sharing is correct. What we did indicate is that we had two dynamics going on in Europe and the competitive climate is obviously with our largest competitor Ecolab and many smaller competitors as well in a highly fragmented market. The dynamics are that in the western European countries, we are essentially seeing softening in the economies and that is influencing our business and we also have in the distributor channel consolidation that is going on, it is impacting short-term dynamics with destocking that we have referenced.

But on a longer term basis, we do not see that to be interrupting the progress we intend to be making in Europe. And our experience with pricing as it relates to increases that we have offered to the market, we do not see anything that has interrupted our ability to see some level of sticking in the market with pricing that we have offered.

That's actually very encouraging. Is it possible to just give maybe an indication of this size of these price increases, whether we are talking couple of percentage points or maybe even 5, 6 % -- in Europe?

Yeah. I mean, Thomas, this is Clive Neumann again. There is no such thing, there's really not a such thing as a uniform price increase. That will tend to vary by application area, price increases will then vary within by territory. It would be dependent on when contracted businesses will grow overall. I think we have said before across the whole businesses and I am not just talking about Europe specifically here -- you know, effective price increase in 2005 is expected in the range of 2.5 - 3 %.

OK, that very helpful and finally Greg, just to go back to your comment on Ecolab. On an earnings call that they had previously, the management that Ecolab made comments about how they are aggressively targeting JohnsonDiversey as a competitor they are going after, citing, you know, the more limited capital structure that you are operating under. You know, can you just comment on that and how you intend to make sure you hold on to your customers, when Ecolab are pitching against your existing base.

If you think of Ecolab and ourselves, the combination of the two of us make up about a third of the market. So we view a large competitor like Ecolab as an important competitor to be dealing with among many competitors that we compete within the market place. Whether they are targeting us or not, we are basically moving forward with our own programs to build our business, we have not seen any material losses of customers in the market place to-date, and we will continue with our programs moving forward.

All right thanks very much.

We'll now here form David Andrews with Pimco.

Yes. Good morning, gentlemen. It sounds like in terms of the possibility for an eventual year-over-year stabilization of EBITDA, the pricing remains as sort of a key factor. What are sort of the talk through that seems to be the three key areas -- one, the lag affect, how long it takes for these price increases to go through to sales and earnings and then, two, are the price increases in the US enough and then three, it sounds like if I'm reading it correctly, there's fairly minimal pricing power today in Europe, given the softness in the market and what other things you think could do in the mean time until that situation reverses itself so you can get to a point where we are seeing some year-over-year stabilization in EBITDA.

OK David, this is Clive Newman. Let me try and answer that, I think three questions there. In terms of (inaudible) you know it's difficult to say, we have got a record performance that is about a quarter. In terms of time, we need to start -- let me see within two things between when you start a new -- the drivers of raw material cost increases coming through and you first not seeing that in the raw material cost that you buy, it takes some time to work its way through fuel feed stocks and so forth is about a quarter. In terms of our ability to implement a price increase, that also takes again varies by business but not - up to a quarter is not unusual.

So for the second quarter, most of that benefit 6% growth in domestically where price increase is put into effect, either in the fourth quarter or the first quarter. Would that be correct?

Price decisions taken in the fourth quarter implemented through out the first and predominantly second quarters.

OK and then -- so how much more price increases do we have that were decided in the first and second quarter that are being implemented and we might see in the third and fourth.

That's a little bit specific. If I had to give you something general, you would expect - we would expect to see more in the second half year, than in the first half year if these things take hold, but that is as specific as I'd like to get. Not -- this is not exact times predicting how much we'll stake and when.

OK and then anyway you can cough up the price increases that you have put in place and that are coming through? How much that's going to offset the actual oil price or raw material price increase that you have experienced?

We clearly set out to price to recover the costs we expected, but you know as you would have seen over the last few days, we are clearly entering unchartered territory in terms of oil prices. It's best a difficult question for me to answer, David and I wouldn't want to lead you one way or another.

Could we say as of you know whatever the price was at the end of the second quarter or at least whenever you last implemented a price increase you were targeting you know at least to recover 80% of the cost that you incurred.

Yeah. When we set out to -- when we set up a price increase plan, we were aiming to recover at least all of the more -- the material costs, we were experiencing.

Understood. And then on the last part of that question -- on the international side -- it sounds like there is really not a lot of pricing power right now. Am I reading that right and what other things you think you can do in the mean time to try and offset the impact there.

First thing, the price we have set out to get -- we, by and large have been guessing -- so I would caution a little bit against we're lacking a little bit pricing power. I think there is pricing ability there and we see competition moving and getting pricing too, with probably Japan being the only exception. But we are not -- as you say, we are not just resting and relying on that.

There are a number of cost reduction initiatives that have been ongoing in this business for a while now, I think we have spoken about before, particularly in the supply chain area. There is more work we can do in our supply chain but particularly in the logistics area in the short-term, we are looking at low cost alternative sources for non-chemicals, these are tools and spare parts and utensils that are currently sourced predominantly Western Europe, but there are a lower cost options we can plan for those.

And I think in keeping with many players in the industry are looking at reformulation of some of, some of our formulations trying to get some of those costly ingredients and components out.

So as I understand -- as I interpret I guess, Greg's comment earlier and your comments just now, you are suggesting that you are getting some price increases in Europe but the volumes are what really hurting you bringing sales from moving forward -- would that be correct?

I think that would be a correct statement.

OK. And I guess second question would be -- it looked like, a fairly large use of cash as a working capital in the second quarter, particularly in receivables at least in the cash flow statement which I couldn't quiet reconcile with the balance sheet, but putting that aside, what's going on there and, particularly looks like receivables were down by about $16 million and yet you borrowed and the receivables was only like 28 or 29. So -- I'm sure that's not a 50% advance rate, right? I'm not quiet sure what's going on there.

David, I think that's a complex question, but let me give you an idea of what, we Thomas, I think on the earlier - on an earlier question asked about the seasonality effect of working capital and I think I did mention that we see a seasonal spike in working capital in the second quarter as we move towards the European season in lodging and food services and so forth and I think that's what you are seeing and that tends to be most marked in the receivables rather than the inventory - and that's what you are seeing in the picture in the balance sheet and cash flow statement.

Receivables - the securitization program is not uniform, so you can get a mixed effect within that. I think the difference, if you look at the balance sheet and the cash flow, it's a about 95 cash but it tends to strip out, it does strip out with the foreign currency effect and that's why you know, is actually getting you know like particularly in the math in the balance sheet and seeing what you get in the cash flow statement.

I see. And then last question, the comments that were made about the step down from the covenants, the bank covenants and the exploring alternatives -- that were suggest to me that at the current run rate, you may be very tight on those covenants as they step down or potentially not mediated, am I not reading that right?

The covenants do indeed step down, David, and, you know, we talk about pursuing various alternatives, I mean there is, we're not talking about pursuing alternatives to the recognition of the covenant compliance we are just talking about -- that we are always looking for ways to make sure that we've just remain in compliance.

But, I mean, so, you know, not exactly certain what you're -- any thing else to say, other than the fact that, that's what we are doing.

I'm just trying to understand if you kind of say that given the current run rate of EBITDA -- have us -- we have more pricing comes to, or more actions taken to improve the run rate, it sounds like you are not going to make those covenants. Right? Am I reading too much into that?

I think you are reading too much into it. I mean we're not prepared to get that definitive about prospective information, but I don't think it would be appropriate to draw ironclad conclusions.

OK. Thank You.

(Operator Instructions)

Now we will hear from Ellen Iskowitch (ph) with Lord Abbot.

Just two quick questions. One question further on working capital. When you compare the working capital, you said this year to last year, it looks like it was much greater this year in the second quarter than it was last year in the second quarter. Was there anything different going on this year than there was last year?

No - nothing to my knowledge apart from a mix -- of any mix affect that might be in there, I can't think of anything on the top of my head.

OK. If I look at last years second quarter, it was approximately $5.2 million used and this year's second quarter was $57.3 million used. And so that would really take out the seasonality.

I'm sorry I don't have the answer to that in front of me.

OK. I'll -- let me just dig a little bit further on. Where it looks like it is in the accounts receivable and accounts payable - in both accounts receivable and accounts payable and other assets -- anything going on specifically there, quarter-over-quarter.

There's nothing out of the ordinary going on.

OK. Then one another real quick question. And this is more of a general question. When you are looking at your capital expenditure spend, what type of a pay back are you looking for right now? In terms of a time pay back and does it differ in different parts of the business?

It does differ in different parts of the business and you know we try to get a discounted cash flow pay back certainly in less than a five year time frame and a simple pay back in about a two and a half max.

And then what areas of the business does it tend to be, where you are looking for a shorter pay back and what areas of the business are you looking, are you more satisfied with a longer pay back.

The investments that we are dealing with with growing the economies in the Far East for example, we would be able to be a bit more tolerant because it is a longer term horizon that that we are building for. By putting in shorter fixes into existing facilities or making modifications like to our production line on what have you, we want those to be quick.

OK. Thank you very much.

You are welcome.

We will now hear from Will Farr with Gulf Stream Asset Management.

Yes. Thank you. When you were talking about synergies, you mentioned I think a number of a $3.11 million. Is that realized for the quarter or is that an annualized number or something you've done, I wasn't clear on that.

That's the realized for the quarter, Will, year-over-year.

OK. And, so that's what you (inaudible) of course is the annual impact of that you know four times that roughly. you are -- you still have spending for restructuring cost and think it looked like it was about between what you'd line on this restructuring plus the SG&A that $10.9 million and then the other 6.7 to $6.8 million in restructuring related capex. That spending during the quarter -- can you quantify what you expect to achieve going forward from those expenditures or is it hard to pin it down currently.

It's difficult to pin down, I mean the timing of these -- where any restructuring remaining integration initiative tends to be a little difficult to control and we do these things when it's appropriate and right timing. But you know that run - you shouldn't -- that run rate is been there for a while and you should, I don't see any reason why it would change dramatically, either way going forward.

OK. In terms of the restructuring expenditure?

Yeah.

OK. So we will continue to see restructuring expenditure going forward in future quarters.

Yeah.

All right. Thanks very much.

Anything further, Mr. Farr?

No that's it.

Thank you. Now we will hear from Tom Long (ph) from Oak Hill Advisors.

Good morning.

Good Morning

Hi Tom

Well, First of all I have to say actually congratulations on a topline good job there, given how tough the environment is out there.

On the polymer business, I am trying to understand a little bit better the raw material impact. I presume styrene is the major feedstocks there and if I look at the spot price year-over-year, it seems that you know at a current spot rate for styrene, the year-over-year comparisons, comparisons should ease in third quarter and definitely in fourth quarter given the run up last year in the third quarter and fourth quarter. Wondering if you've seen that as the case as well so could understand that contract market and the spot market is slightly different.

We are seeing it but I mean would caution you to see what the - a major fuel feedstock is clearly very important here, particularly benzene, I mean it's dangerous looking at any crystal ball at that stage.

OK. Do you have any forward purchase agreements or hedges in place that could be either in the money or out of the money.

We don't have any (inaudible) previous conversations. We really have not been able to find any kind of wonderful vehicle to use as a direct hedge on these -- the answer to that is generally no.

OK.

And secondarily in the past 15 to 18 months or even a little longer there hasn't been any effort done on the part of suppliers to get themselves committed to prolonged agreements because they saw the increases coming.

OK. On the working capital front. The launch you used in the second quarter -- it seems like, if I compare to the first quarter, it seems like the first quarter was a lesser used than historic seasonality, should I read into the second quarter use as kind of just more normalized for first half plus raw material rise, (inaudible) to a better use that seasonality or than that historic norms.

Yes, the seasonality aspect hasn't really changed. I think what we are seeing is --. you are, as you said, getting top line implications simply because of the diversion of higher sales, but we don't have anything intrinsically going on in the Company that is substantively changed, how our seasonal use of the working capital and how it would, from an earlier question the expectation as to where it might get realized going forward. You don't want to get into the guidance, really Tom, as you can appreciate, but in terms of -- is there is a normalcy, if you will, with respect to it -- other than the price drivers, yes, i.e. the inflation aspect on receivables.

I see, I see. Plus, on the sales agency agreement -- do you mind going to a little bit more detailed, you know what's going on in the Unilever side. What are they doing with their brands and what should we be expecting, you know, going forward, just understand (inaudible).

Though I am not sure Unilever would find me good discussing that strategy (inaudible) I'll have to pass on on that one.

I also don't think we would (inaudible) to be (inaudible) in complete detail..

But I guess the event that drove to the early termination in the second quarter -- is that because of Unilever disposing some brands. Is it an action that you have initiated or is it from Unilever side?

No. We are a sales agent for Unilever. So if and what , in certain territories for what reasons they decide to exit brands or migrate to others, we are selling those brands under sales agency agreements, then effectively our sales are impacted. But it's not our call.

Oh, OK, I understand. Thank you very much. And maybe, kind of last question, if I may. You know, in the last two quarters, you have been very generous in giving us some comfort that despite the step down in the leverage covenant that, you know -- I guess based on I guess ramp up in pricing, that the company should still be in compliance with the leverage covenant. Is it so the case here?

Tom, again, as I said earlier, with respect to -- you can appreciate that we can't tell you unequivocally one way or the other. You heard my dialog before. I mean we are on top of these things. I mean we evaluate, we monitor, we understand the components and that attention to detail, I can give you that much comfort, has not been lost.

Without you know going to the bank group for an amendment.

Tom, I just can't tell you -- I cant give you anything it seems like a perspective or guidance on either EBITDA or covenants.

OK. I understand. Thank you.

But I appreciate your try.

At least I tried.

Thank you though.

We'll now move to Juliet Howard (ph) of Morley Fund Management (ph).

Yes, hello. I hate to bring up this touchy subject and I won't ask for anything definitive with respect to the step down in the covenants. I just wanted to clarify what either you meant or Lori meant by the use of the word alternative. Whether that means alternative with respect to the existing bank agreement and covenants or does that mean also looking at alternative financing agreements.

The alternative ways to just continue improved results. It could manifest itself in the form of travel reduction. It could manifest itself in the form of certain things we've imposed in the corporation relative to hiring.

OK.

And we have done a number of really -- some things that are really helping.

So does it -- alternative doesn't mean alternative financing agreements? It means alternatives within the operating operations of your company.

It means, it clearly means the latter that we will never stop looking for viable ways to better capitalize our Company.

Very good. OK. Thank you.

You're welcome.

We now move to Caroline Brown with Bluebay Asset Management (ph).

Good morning. I was wondering if you could just talk a little bit about your CAPEX program and what you are expecting to spend on CAPEX over the next year, and the next couple of years, because I think that your CAPEX limits were amended recently. I just wanted to get a little bit more color on that, given that you've come to the end of year restructuring program.

This is Joe and then Clive will, we'll kind of split it a little bit. A goodly piece of our CAPEX as you probably know is involved with our dispensing, dosing and dilution equipment and that's actually by far the largest component of our CAPEX and that's - it's a direct correlation with respect to much of our business and - but there's a big fixed component of that which would clearly continue and quite frankly, we are looking forward to be higher.

So we clearly expect to, you know, fill up all of the strategic comparative bits of our CAPEX program and we -- what we can't give, we can't give definitive guidance as you know, but in terms of going forward, it is clearly the objective of the corporation to grow into -- to kind of grow it faster and therefore, we would be looking forward to utilizing, in my opinion, as much as we can above the revised covenants.

OK. And how much sort of restructuring CAPEX is there still to go would you estimate?

Caroline, we send I think about 6 to $7 million and that's in the second quarter from memory. We -- the bulk of the integration CAPEX still remaining really relates to ERP platform rollout and integrations.

Again, you know, the timing of those is not something you can guarantee - I mean if we are not ready to roll something out, we won't and we need to spend more money to do something, we will. The guidance I have always given on this is that the run rate from this historical perspective on integration CAPEX has been pretty constant and we'd expect that. And I don't see any reason why that would change.

OK. Can I just clarify one thing? From the earlier asked question about cost saving in the second quarter -- you mentioned a second set of numbers 10.8 versus 20 point something in the prior year. Was that your - is that the restructuring cost incurred or is that something else?

I think that was the total cash costs in the quarter of the integration work. So that would include restructuring costs on the US GAAP, these costs associated within integration that we call period costs and call out in the end (inaudible) and the CAPEX associated with integration is those 3 things put together.

OK. And that was approximately 10.8 versus.

20, a year ago.

20, a year ago. OK. Thank you very much.

OK.

Thomas Olto from Jefferies & Co.

Hello.

Hello.

Yes, Thomas.

OK. You know, just a couple of follow ups. I am sorry to take it back to the bank covenant question. I just wanted -- why the banks only give you 1 month of release, so to speak. I mean typically in these situations, you see release for potentially the rest of the year before you have to step down.

I am not exactly certain with respect to 1 month. When we did our modification back in the March-April timeframe.

So I meant 1 quarter.

OK. Thank you. It's not a -- what did the bank give - it's the question of, you know, what we proposed collectively as a viable modification and, you know, we had obtained from the bank group at that time a seasonal adjustments on the leverage covenant 25 dips in each of the quarter which will continue to repeat themselves every year as we go forward. So in reality there was not a request made to alter the leverage depth in the second half.

All right. And if this request was not made - is that - you know we coming back to then whether that is because you were confident that you can make the 3.5 September 3rd or whether that is because you knew the answer would be no from the bank.

Again you know as you would expect I am going to suggest - I'm going to beg off a perspective but it would -- I can only speculate by saying why would one say no in the context of saying yes to everything else but that's pure speculation.

OK, I appreciate that. And actually Lori mentioned that under the current leverage ratio 4 times you can take on another $140 million.

A $105

A $105 million is it?

Yeah, $105 million

Can you just take us through that calculation because that will indicate where you need to be in terms of EBITDA to hit?

No, I am sorry but we do not have our covenant calculations available for the public. It is between ourselves and the bankers.

But do you have the definition of the maximum leverage ratio

It's in the 10-Q.

I'm not sure there is definition of exactly the

No, no...

... how you calculate the debt, I think it is pretty vague in the 10-Q

You can actually pull down the senior subordinated credit facility from the website and you can go right through all the calculations there in the public document.

OK, excellent. I'll take a look at that. Thanks.

You're welcome.

And then just -- sorry -- one another question, if I may, and that is on the cost of goods sold. You know, looking at the numbers year-on-year that $448.8 million Q2 2004 and 505.7 in this second quarter -- can you just explain or maybe split up cost of sales into you know raw material, cost of sales and non raw material, just to give us an indication of how much you spent per year on raw material?

I don't have that information in front of me Thomas. I would be, I'm lowest at -- I don't want to guess, that wouldn't be professional. It's not numbers, we of course ever disclose.

Sure. You know, you can appreciate it's up to -- try to get an understanding of what the impact is and maybe I don't know -- have you done any scenario analysis on how your raw material cost changes per dollar increase in oil price.

Interestingly, we have asked that question as you would expect and unfortunately it's not a simple answer, I mean let me just give you one very simple example -- if we were to look at the polymer business and I think someone earlier on in the call talked about styrene and a key fuel feedstock for that is benzene and that is affected by both a) oil price and b) demand , which is primarily coming out of demand out of China. That tends to be volatile at the moment. So there isn't a linear relationship I guess is the answer to this. It's more complex than that.

OK. Based on what you are seeing now do you have expectation that raw material cost will be higher for the second half -- I guess you would.

Again we wouldn't like to look into a crystal ball at this time.

The market that -- I mean the market is speaking with respect at least to the general prices of crude natural gas. So others will manifest themselves from suppliers to customers is yet to be seen.

Thanks very much, then.

Thank you. You're welcome.

I belief we're past our hour time and we have time just for one more question but only one question not a multiple part.

Actually Ms. Marin, we have no questions.

OK, well then my timing's pretty good.

So that's great. On behalf of everyone at JohnsonDiversey and JohnsonDiversey Holdings, I would like to thank you for attending this conference call and for your continued support of our company.

Have a terrific day.

That does conclude today's conference. We thank you for your participation and have a great day.