希悅爾 (SEE) 2005 Q4 法說會逐字稿

Good day, and welcome to this JohnsonDiversey 2005 fourth quarter and year end earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Lori Marin, Vice President and Corporate Treasurer. Please go ahead, ma'am.

Thank you and good morning. This is Lori Marin, Vice President and Corporate Treasurer of JohnsonDiversey. I would like to thank everyone for joining our investor conference call. Today, we will discuss our results for the quarter and year ended December 30, 2005. I'm joined on this call by Joe Smorada our Executive Vice President and Chief Financial Officer; Clive Newman, our Vice President and Corporate Controller; and I would like to introduce Ed Lonergan, our new President and Chief Executive Officer.

On this call, we intend to provide an update on general status of the business and the financial results for the fourth quarter and year ended December 30, 2005; an overview of the balance sheet at December 30, 2005; an update on our restructuring program; and an update on the 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 in the JohnsonDiversey registration statement on Form S-4 that was declared effective by the SEC on November 27, 2002; in the JohnsonDiversey Holdings registration statement on Form S-4 that was declared effective by the SEC on January 8, 2004; and in our Form 10-Q and Form 10-K reports for certain risks and uncertainties we face.

The discussion today includes references to EBITDA for various periods. EBITDA is a non-GAAP measure within the meaning of the SEC's Regulation G. In accordance with Regulation G, our Form 10-K report includes a reconciliation of EBITDA for the year ended December 30, 2005 to net cash provided by operating activity, which we believe to be the GAAP financial measure most directly comparable to EBITDA.

Our Form 10-K reports for JohnsonDiversey and JohnsonDiversey Holdings were filed with the Securities and Exchange Commission on March 21, 2006. They are also posted on our website 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 asset is its shares of JohnsonDiversey. Other than differences in net income due to interest expense for the JohnsonDiversey Holding's 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 Ed Lonergan, our newly appointed President and Chief Executive Officer. Ed officially joined JohnsonDiversey on February 13, 2006 from the Gillette Company, where since April of 2002 he served as President of the European region. Ed will now provide us with a general business update.

Thank you, Lori, and good morning to all. As you all know, I joined JohnsonDiversey in February, so I wasn't the CEO during the period in which we are reporting today. So I'm going to leave the detailed financial reporting for Joe, and focus my comments on what I am seeing in my early days in this business.

I've spent considerable time in the past six weeks in our two largest regions, North America and Europe, and with our functional support teams here in Racine. I have visited a number of customers, spent time with field sales teams, and seen firsthand the breadth of innovations we're preparing for the marketplace.

Based on these six weeks of exposure to this Company, I have drawn some conclusions that I would like to share with you today. First, I remain convinced that we have great opportunities in this industry. That's the main reason why I joined the Company, and today, I believe it more strongly than ever. We are operating in a highly fragmented market where scale, innovation, and geographic reach can be powerful tools for growth. And we're beginning to see the results of those advantages.

We continue to show solid sales growth, primarily due to price increases taking hold in all business sectors and geographic areas. Adjusted for the impact of foreign currency exchange rates, acquisitions, and divestitures, our fourth-quarter net sales grew by 4.7% over the prior year.

Net sales for the full year grew by 3.4% as compared to 2004. This is clearly not the level of topline growth we envisioned, but it is a good base from which to build. Much of this growth is emanating from the developing markets in Asia-Pacific, Latin America, Central and Eastern Europe, Africa, and the Middle East. And we're investing in these growth geographies, and we are excited about their potential.

Another conclusion I have drawn from my early days in the Company is that we're well-positioned to serve our customers with innovations that we believe will change the course of our industry. We have developed some exciting new technologies to uniquely meet our customers' needs while also protecting health and the environment and reducing customer costs.

And our innovations are not limited to products. We're innovating around distributor relationship management, category management, procurement efficiency and labor savings to deliver bottom-line impact for our customers.

It's also clear, however, that this business is not delivering to its potential. You have heard plenty of discussion on prior calls about the two main pressures we're facing as a business -- raw material cost increases and the disruptions in the indirect channel in Western Europe. These challenges to our business continue. Though we've implemented aggressive pricing in all regions, that pricing is not fully offsetting unprecedented raw material cost increases. And the indirect channel disruption requires us to develop new models to ensure effective access to end-user customers.

I'm pleased, however, with the progress we're making on the restructuring plan that we announced in Q4 of last year. We're taking the necessary steps to establish a competitive cost structure that positions us for top- and bottom-line growth in spite of rising freight and raw material costs.

Now, the recent announcement related to our U.S. health and hospitality business is a good example of how we are restructuring and reorganizing our Company for long-term profitable growth. We announced on March 7 that we're refocusing on our profitable core building care business by pursuing a new model for deliver cleaning and sanitation products in the U.S. health and hospitality sectors. The new model calls for moving JohnsonDiversey's kitchen-related offering in the health care and hospitality business from a company-provided after-sales service model to a distribution model.

Using this model to serve our customers will allow us to simplify and to pursue more aggressive growth in our core U.S. business, which we define as building service contractors and customers in the education, government, and retail sectors. We will also continue to build our U.S. business in housekeeping and infection control and health-care and in food safety and in food and beverage plant cleaning and sanitation.

Further, we continue to pursue the potential sale of other discrete, noncore, and non-strategic units, and are in active negotiations with a number of parties. These divestitures will give us more financial flexibility and allow us to dedicate our ingenuity and energy to growth in our core business.

These past six weeks have reinforced my profound belief that this industry holds great opportunity. And I am convinced we're taking the necessary steps to solidify our financial position and begin to ramp up top and bottom line growth in our business. Now I would like to turn it over to Joe to give you a financial update.

Thank you, Ed, and good morning to all, as well. I would like to begin by reminding you that a reconciliation of EBITDA to net cash provided by operating activities can of course be found in our 10-K reports for the year end December 30, 2005, which can be accessed from our website.

On a reported basis, net sales in the fourth quarter of 2005 were $803 million. Net sales for the full year of 2005 were $3.3 billion, which was an increase of $137 million or 4.3% over 2004. On a constant currency basis, and after adjusting for acquisitions and divestitures, net sales for the fourth quarter increased 4.7% as compared to the fourth quarter of 2004. On the same basis, net sales for the full year of 2005 increased by 3.4% versus 2004.

In our professional segment, sales in North America grew by 2.7% in the fourth quarter versus same period a year ago. And for the full year, net sales grew by 3.6% as compared to the prior year. This shows continued momentum in this region with growth being primarily attributable to key customer wins and the impact of our pricing actions. Price increases were introduced throughout fiscal 2005 in direct response to rising raw material costs.

In our Europe, Middle East, and Africa region, fourth-quarter net sales grew by 3% as compared to the same period a year ago, and grew by 1.4% for the full year. We continue to see double-digit growth in developing countries in Central and Eastern Europe, Africa, and the Middle East. And at the same time, we're seeing continued pressure in the established markets of Western Europe, resulting in some cases from softening economies in key countries and from consolidation in key market sectors, including distribution, building service contractors, and food and beverage customers.

Full-year growth in Europe was favorably affected by a correction in accounting treatment for certain equipment leases which increased net sales by $15.3 million or 1% compared to the prior year.

Both the Asia-Pacific and Latin America regions showed solid sales growth in the quarter. Asia-Pacific posted sales growth of 14.3% led by the growing markets of China and India. Latin America grew by 10.2% resulting from improved economic conditions and growth in distributor markets, the food and beverage business, and the lodging sector. For the full year, sales in Asia-Pacific grew by [the] 7.9%, and sales in our Latin America region grew by 9.5% versus the prior year.

In Japan, net sales increased by 3% of the fourth quarter despite significant economic pressures. For the full year, sales in Japan increased by 1.3% versus 2004, due primarily to growth from facility solutions in retail chain customers. Our polymer business delivered 14.1% net sales growth in the quarter and 11.3% for the full year. This growth is principally due to price increases in response to the significant rise in raw material costs experienced over the past year.

Our profit margins declined as compared to the prior year. On a consolidated basis, our 2005 gross margin was nearly 41% as compared to a gross margin of 42.6% in 2004. As we have been discussing in considerable detail for the past year, this was a result of raw material and freight cost increases that were not fully offset by our price increases. And we continue to be confronted with raw material cost increases and freight cost increases. In response, we continue to implement price increases to recover these costs to the fullest extent possible while we are aggressively pursuing other cost reduction initiatives.

SG&A expenses as a percentage of net sales were 34.6% for both 2005 and 2004. The impact of cost containment programs has largely been offset by general inflationary pressures and onetime compensation-related expenses of $8.7 million.

EBITDA reported for 2005 was $304 million compared to 348 million in 2004. This decrease was primarily due to lower gross margins on sales resulting from raw material freight cost increases in both our polymer and professional segments.

The Company reported a net loss of $166 million in 2005 compared to net income of 13.7 million in 2004. This difference was primarily due to an increase in the income tax provision that I will discuss in further detail in a minute, lower EBITDA, and a non-cash increase in interest expense resulting from the write-off of accumulated losses related to ineffective interest rate swap agreements and the write-off of unamortized debt issuance cost both triggered by the amendments to our credit agreement.

JohnsonDiversey Holdings reported a net loss of $220 million in 2005 as compared to a net loss of $8 million in 2004. As previously mentioned, the main differences between the results of JohnsonDiversey Holdings and JohnsonDiversey are interest expense and related taxes on the senior discount notes as well as dividend income.

During the fourth quarter, the Company recorded a full valuation allowance for its U.S. deferred tax asset. These assets are generally made up of tax loss and credit carryforwards, none of which expire before 2012. Recording this valuation allowance resulted in an additional non-cash charge to income tax expense of $140 million for JDI and 170 million for JohnsonDiversey Holdings.

The combination of historical U.S. tax losses and the anticipated additional expenses to be [incurred] in the U.S. as part of our restructuring program led us to reassess the book carrying value of our U.S. deferred tax assets.

Applying strict U.S. GAAP accounting rules, we determined that a valuation allowance against these assets was required. Future U.S. taxable income, including gains from divestitures, may result in the utilization of these deferred tax assets, which would result in the reversal of all or part of this valuation allowance in future periods.

Capital expenditures in 2005 were over $90 million compared to nearly $130 million in 2004. The significant decline over the prior year is due to tight controls over spending, particularly in North America and Europe, and lower spending on capitalized software. Cash spent during the year related to restructuring and integration-related activities, including capital expenditures, was $63 million, $4 million less than in 2004 -- I'm sorry, excluding capital expenditures was 63 million.

With respect to restructuring, but as we discussed on our last call, we're facing significant challenges in our business resulting from structural shifts in materials markets, supply and demand imbalances, and the impact of hurricanes on reclining capacity. We're also facing increased costs related to medical benefits, pensions, and transportation.

In response to these factors, we announced the restructuring program that we believe will revitalize the [financial] performance of the Company, eliminate complexities, and provide a platform for growth. Specifically, and as we had previously stated, our restructuring program is designed to address the challenges our business is facing. The plan includes a redesign of our structure to create a lower-cost, leaner, more efficient organization; the closure of a number of manufacturing and other facilities in order to optimize our supply chain and improve our market competitiveness; a workforce reduction of approximately 10% excluding divestitures; and lastly, the divestiture of or exit from certain noncore or underperforming business units.

The businesses being considered for divestiture contributed in the aggregate in excess of $500 million in net sales. To this end, and as Ed mentioned earlier, we recently announced our exiting the health care and hospitality business in the United States.

It is important to put this event into perspective, as our decision to exit the service-oriented ware washing business in United States. In 2005, that business represented less than $70 million of sales. That is less than 10% of our North America business, and less than 3% of our global business. It was not an easy decision, but it also does not result in a fundamental change to our business or to the marketplace.

At this time, I would now like to ask Clive Newman, our Vice President and Corporate Controller to provide you with some additional detail about our restructuring plan.

Thanks, Joe. The implementation of the restructuring plan is expected to result in cumulative pretax restructuring and other nonrecurring period cash charges totaling between 345 and $370 million, including $20 million recorded in the fourth quarter of fiscal year 2005, and between 170 to $190 million expected to be recorded in fiscal year 2006.

Over the duration of the program, we expect to incur on a pretax basis approximately 195 to $210 million in employee-related costs including severance, pension and other termination benefits; 150 to $160 million in other associated costs, including facility closures and contract termination fees; and between 60 and $75 million in non-cash asset write-downs. We expect the restructuring program to require capital expenditures of approximately 50 to $65 million, primarily for new manufacturing facilities to support our supply chain optimization and for expansion in developing markets, and in addition, for strategic IT investments.

Total annual savings associated with this restructuring program are expected to be approximately 150 to $175 million by the end of fiscal year 2008. We expect the implementation and execution of our restructuring program to take two to three years, and therefore, expect to incur the majority of the associated costs by the end of fiscal year 2008. We have substantially completed our planning for this significant undertaking, and we're now transitioning towards execution.

Ed and Joe have already discussed our recent decision related to the service-oriented laundry and ware-washing business in the US. In connection with this decision, we also announced the closure of our manufacturing facilities in East Stroudsburg, Pennsylvania, and Cambridge, Maryland. When completed, we expect these activities to result in headcount reduction of approximately 500 in the U.S. We will continue to provide to you updates on our major restructuring activities as they occur.

I will now turn the call back over to Lori Marin, who will discuss the Company's cash and debt positions.

Thank you, Clive. During the fourth quarter, the Company successfully amended its senior secured credit facilities. The amendment increased liquidity by upsizing the term B loan to $775 million, and by adding a $100 million delayed draw term loan facility, increased operating flexibility by adjusting our financial covenants to allow for the implementation of the restructuring program and extended the maturity of the revolving credit facility and of the term B loan to 2010 and 2011, respectively.

During the fourth quarter of 2005, our debt balance increased by $225 million to [100 and point two] -- sorry, $1.41 billion primarily, as a result of $193 million of new borrowings under the term loan B facility, and a $29 million decrease in the utilization of our accounts receivable securitization program.

We held cash and cash equivalents of $162 million as compared to $24 million at the end of third quarter. This increase in cash represents the cash proceeds of the new debt that will be used during 2006 to fund restructuring expenditures.

JohnsonDiversey Holding [step] balance at the end of the fourth quarter of 2005 was $1.73 billion, which included $318 million of senior discount notes. As of December 30, 2005, the Company had total credit availability of $175 million under our senior secured credit facility. Of the total credit available at the end of the quarter, we could borrow this full amount 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 JohnsonDiversey.com. We consider this website to be a key communications tool with the investment community, and we encourage you to periodically access this site. Documents related to the JohnsonDiversey senior subordinated notes and the JohnsonDiversey holding senior discount notes, 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 Kathy Powers or to me. John Matthews will continue to be the contact for all non-financial matters. Our contact information can be found on the website.

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

(OPERATOR INSTRUCTIONS) [Tom Wong], [Oakhill Advisors].

Ed, welcome aboard. First of all, I wanted to get a couple of the numbers questions out of the way. Looking at fourth quarter, it seems like topline is doing pretty well. Gross margin seems to be in line with what you mentioned from last quarter.

But if we look at the SG&A, stripping out the restructuring expenses and the period costs as you outlined in your 10-K, it seems like SG&A is up about 15 million year-over-year for the fourth quarter. Given the Company is in a cost restructuring mode, can you give us a little bit of color why SG&A seems to be up year over year, and whether perhaps that includes some other severance expenses in that as well.

Tom, it's Joe. As you might expect, some numbers I'm not going to be overly specific on. But indeed, it does include a material increase year over year with respect to certain severance and other -- shall we say departure arrangements? We also had some particular SG&A costs that were non-restructuring per se, but having to do with our -- consultants or what have you to make an ,assessment if you will, around some of our plans. Both restructuring and financing outside of anything that were capitalizable. There were some unusual type of situations in the fourth quarter of [by] vis-a-vis the fourth.

I understand. And those expenses -- are they classified under period costs in your disclosure and the 10-K, or are they incremental?

Yes, they are not incremental. They're classified as you originally stated.

As period costs?

Yes, sir.

And I guess my question then is if I look at SG&A, and stripping out the period costs as classified in SG&A, the SG&A number, the core SG&A number still seems to have gone up rather than coming down. What is leading to that?

Tom, there's no base increase in that quarter that is a trend. As I said a few minutes ago, it is a plethora of severance-related costs, outplacement costs, consultative expenses that are one-offs, and just a series of settlements. And in addition, something I had not mentioned before -- in the fourth quarter, there were expenses around -- accruals around inventories and certain other non-cost-of-sales-related items that we took. But we can get you all this detail if you want a lot more.

We always want details.

Tom, we know you to.

And I guess regarding the pricing, you mentioned last quarter that pricing -- if you looked at an increase in pricing again in the fourth quarter into '06, your competitor [EquiLab] has publicly announced price increases, I think starting in November, of around 2%. Can you comment on -- A, whether everyone in the industry is following, and B, in terms of the magnitude of the price increases, how it differs by region?

Firstly, we too are raising prices. I don't know of anybody of any size, if you will, that is not. Even the smaller players are clearly raising prices. Sometimes in some of the smaller sectors and what have you and some of the lesser-known competitors, they tend to be more aggressive; i.e., they price up less. But we are today and will continue to be quite aggressive as appropriate in terms of implementing pricing.

There's not a consistent answer, Tom, in terms of the various sectors, if you will, that our price increases have been announced in. And I'm not comfortable as I'm looking at counsel, frankly, to get overly specific from there. But our increases are in the same magnitude as those of our competitors, and some of which you have read in some of the analyst reports, etc., I would say are generally correct, and we're generally in the same area.

Products. On the raw material side, [styrene] costs have come down in the first quarter of '06. When you and the industry have put it together, the price increase, are you looking at a cost base -- based on third quarter or second quarter or projected '06? How should we think about the amount of price increase that you are expecting versus where styrene costs are today?

We're not looking optimistically. We're taking a view that increase -- that all the raw material costs will continue to escalate. And we're planning our pricing around perspective, not just historical.

But is it fair to say, I think, that the price increase is based on again kind of net increase in costs?

Absolutely.

Okay, great. And then on the cash flow front, or [slash] balance sheet, quarter over quarter, the accrued expenses dropped by 55 million from the third quarter. I wondered what that movement is, since the working capital change was [a use] this quarter, which I think is quite atypical for fourth quarter.

I'm going to run that to our controller.

Hi, Tom. A large piece of that, Tom, was volume-related accounts payable and other accruals.

Right. Would that be the pension contribution for fourth quarter, or -- it's a pretty big number if I look back, and fourth quarter '03, fourth quarter '04 -- the seasonality should be kind of flattish for working capital.

Historically, we would have seen that. I think this year, Tom, we did see a change in that seasonality slightly between third and fourth quarter -- so more cash in the third quarter, slightly less cash in the fourth quarter. And that really -- a significant driver of that was AP balances.

There are a couple of other things to take into account. You're right -- $20 million of that movement was related to pensions. The other thing I think you need to take a look at is exchange rate movements between end of the third quarter and the fourth. I think you take AP volume related -- a little bit of a change timing over what we have seen historically, pension and exchange will give you most of it.

Great. And maybe a question for Ed -- certainly, it's welcome news for you -- to have you on board. I guess you mentioned a little bit of your observations since February, you know -- I guess to EquiLab is certainly an interesting competitor, and it seems like they have made a bit of noise in the U.S. about you guys exiting from the health and hospitality service business and moving to a distribution model. Do you mind kind of discussing your early thoughts on how you are focusing the distribution versus the service model in the U.S. versus Europe?

Yes, I want to clarify one thing, because we're not exiting the health and hospitality segment in North America. We're simply changing the business model. And I think that's a core piece. We have very strong relationships with distributors, and our distributors have very strong capabilities in serving clients. And relative to our scale in the United States, we have a strong opportunity through distributors to better service those end-user customers. So that drove the business. And I have clarified that we're not exiting North America.

I want to also clarify that we're making no changes outside of -- in fact, we're not exiting United States. I need to get more specific. We're not doing anything different from where we have been in Canada, as an example. And in the balance of the world, our service model remains as it is. It's quite effective.

So we have some technology, and we have some business partners that we believe enable us to drive business in that marketplace in a different way than we have been. What I like about it is we have made choices that we needed to make. And now we're moving on with a process that we believe is more attuned to our capabilities and our chance to drive profitable business in the channel.

[Caroline Brown], [Blue Bay].

Just a further clarification from the last question. I think you mentioned earlier in the call that there were 20 million of restructuring charges in the fourth quarter relating to the new plan. And if I look at the nine-month numbers and compare them to full-year numbers, it looks like there was only 5.3 million incremental restructuring charges in the fourth quarter. Is it correct to assume, then, that the rest of those restructuring charges are somewhere else -- like, for example, in the SG&A line?

That's correct. There are costs that are associated with the restructuring; as Joe mentioned, consultancy; contract [brake laws], fees, etc., that don't meet the definition of restructuring under U.S. GAAP. So in the face of the financials, you won't see them in the restructuring line. They are --

Okay, you classify them as -- in broad terms, they are restructuring costs, but they're not GAAP restructuring costs, so therefore they are just in the body of the P&L --

That's absolutely correct; and they're taken to SG&A. And in the MD&A, we put a little table in there that tries to get at those -- what we call period costs. So if you take a look at the MD&A, I think you'll get some help there.

Okay. And another question -- sort of following off of that, and again, these are kind of boring financial questions. But it looks like you restated somewhat fiscal year '04 numbers just a little bit versus what they were when you published them last year. And so therefore, I'm finding it hard to compare fourth quarter '04 to fourth quarter '05 below the gross profit line. So I was just wondering if, for example, fourth quarter '05 EBITDA is 40.7, then what the like-for-like number would have been fourth quarter '04 -- do know what I mean?

There was a little -- some reclassification of prior periods to reflect current period presentation format. None of that should have affected EBITDA, though. It was essentially in the sandwich between net sales and EBITDA, where it won't have effected EBITDA.

And then also on the gross margin line, it looks as if there was some improvement in the fourth quarter versus where it was in the nine-months year-to-date numbers through September. And I think I may have missed exactly what you said, but if I calculated it, I get 39.2% gross margin in the fourth quarter '05 versus 39.6, which means that it seems that gross margin is moving in the right direction. Is that a fair assumption, or what would you comment on that?

Clearly, gross margins in many instances are moving in the right direction because we have been getting a number of the price increases to stick. So as a generalization, your premise is correct.

Okay. And then just on the cash flow, it looks like there was a pretty significant increase in dividends paid in 2005 -- you know, if my numbers are correct, it's sort of an increase of about 25 million from 15 million to 40 million. I wondered if you could just elucidate on that?

That is not what I would refer to as a conventional dividends. It is true that we had to upstream, if you will, [more] dividends monies from the operating company into the ultimate holding company. That dividend upstreaming, if you will, was required to fund the buyout of our stock option program at certain restricted shares.

Those were compensatory types of plans. And as a consequence of our having the restructuring to deal with and certain other events that we foresee coming forward, it just doesn't render a conventional stock option plan to be the least bit functional. So we have elected to retire and terminate those plans. And in order to do so, the decision was taken to buy out effectively the open options and shares. And so it was necessary to get that funding up to the hold co. level. And the way we did that is by virtue of the dividends.

Okay, fine. And then on CapEx, you mentioned that there was 63 million of restructuring CapEx in 2005, which was slightly down in 2004. Could you just refresh whether or not that is included in the gross CapEx numbers, or if that's additional?

It's included.

Okay, so the 90 million 2005 CapEx includes 63 million of restructuring CapEx. Is that right?

It includes restructuring CapEx. Let me just check my number for you, because that sounds like a significant number. The capital expenditure spent on restructuring activities is 20 million. What I think you're picking up there is the entire cash spend on restructuring activity. So the other 92 million -- there's 22 million of restructuring-related CapEx. Again, there's a footnote in the -- there's a section in MD&A on restructuring integration I think you'll find quite helpful for what you're trying to do.

Jonathan Goble, Pall Mall Partners.

Three questions, please. The first one is to ask you to go a bit further on the pricing discussion. I think you mentioned you do see raw material costs escalating, and that you will be quite aggressive on pricing. The question is whether you think overall, the pricing environment has improved as we go into '06, or whether it is as difficult as it was in '05?

The second question is whether there were any material shifts in business between Q3 and Q4 -- i.e., was any business booked in Q3 that might normally in a comparable year have been in Q4? And I will leave the third one for the moment.

This is Joe Smorada. I don't think there's any question that the pricing environment has improved. I mean, the industry realistically could not continue to take the hits that it was taking without having taken out in the marketplace the reality of the material price increases. And as a consequence, we and others of course have been working with our customers to understand the background and the need for the particular adjustments. And whereas nobody particularly likes them, it is an understood situation, and one that is radically different from a year ago as people just are cognizant of the changes in the commodity environment.

Jonathan, this is Ed. I would add just a couple of quick points. You can see -- we obviously took pricing during 2005 that came into the business during the course of 2005. You can see that in our second-half results. And we clearly expect to see those benefits continue into 2006.

To your second question, there is to my knowledge to material movement of business from Q4 to Q3 in 2005.

Okay. My final point was a boring clarification -- page 32 of your 10-K, you have a helpful table which looks at your restructuring costs. I just wanted to confirm that the third bullet point beneath that, where you talk about restructuring as per the November '05 program. Are those costs included in the table above, or are they additional to? I am assuming they're included within, but if you could confirm, that would help.

That's correct -- they're included in the data above.

Richard Phelan, Credit Suisse.

Three questions, if I might. The disruption in the indirect channels in Western Europe I guess continues, and that's a fundamental issue. I'm just wondering -- what are the types of actions that you believe you can take? I mean, if you haven't decided on them already, as far as restructuring that business?

The second question is, you mentioned you're in active negotiations with certain parties as far as (technical difficulty). Is there any more detail you can combine with respect to (technical difficulty)? And I guess (technical difficulty) if you could (technical difficulty) specifically.

And finally, now at the end of March, you've made several comments about selling price increases. You just [mentioned] (technical difficulty) those continue to lag raw material costs the aggregate, or whether those selling prices increases in your view will reflect a quarter one increase in margin?

This is Ed. Let me handle the disruption of indirect customers in Europe piece, and then I'll ask Joe to take the next two. I have had a chance to spend some time with our customer base in Europe in the early weeks of my time in the role. Some of the actions that we're taking are related to the collaboration we have developed -- the key indirect or distributors in the European marketplace, and collaborating to create joint value in how we go to market. And so that is clearly one piece. The second is improving our capability to reach the end user customer and communicate directly with them about the benefits of our products and how they can create value for them.

So those are the things we're focused on at this point. We're focused within this restructuring program on improving our selling structure in the European marketplace, better aligning the structure to what we need to get done in terms of both growing the business and maintaining the business. And those are the actions that we have got in place. And if this restructuring program didn't exist when I got here, it would now. It's quite well done, and my job is to make sure that we deliver it as we promised.

You are correct; we did state earlier that we are absolutely in active negotiations with prospective buyers around all the properties we discussed here before. As you can appreciate, it would be incredibly inappropriate to get into much detail, other than to say we are working with professionals on our side. We've got professional buyers. And at this point, we have, like I said, a process that -- we are pleased with where we are to date. We believe we are, as a generalization, on plan in terms of timing of what have you, and hope to have more definitive data to report soon.

And with respect to prices, as I said earlier, we're going to price to the fullest extent possible. Of course, that would mean that we are going to try to price realistically at a level that would certainly be helpful to margins, but in this environment, there's no guarantee, nor can we suggest that every single (technical difficulty) that's going to be the case.

Okay, but just based on earlier comments you've made in this conference call, the selling price increases from your sales in [EquiLab] and others. And we've noted that some raw material costs have declined. We've got a Q4 stabilization in gross margins in certain businesses (technical difficulty).

You're breaking up terribly, but I think if I have got the gist of it, there are certainly pockets of the business where margins will clearly be helped. And then there are other sectors of ours, as well as our competition's, business that will be severely challenged by getting all of the costs passed through. That's a generalization, as I said earlier -- the pricing market has improved -- the pricing environment, rather.

We'll take the next question.

[Bob Franklin], Prudential.

A couple of balance sheet questions if I could. One is -- I'll ask them all at once. The class B common that's subject to put and call options -- the value in the balance sheet went from roughly 5 97 down to 4 76. So I want to ask that. And then you have an item that appeared on the balance sheet called capital in excess of par value, at least at the Holding's 10-K. And then finally, if I were to do a simple leverage calculation myself, I get to something that'greater than your covenant. Can you give us some guidance as to how you're calculating that?

Bob, let me deal with the first question. That's class B subject to put and call is the valuation of the Unilever's holding that we pull out of equity and put up onto a mezzanine. We have an independent valuation done of that on an annual basis. And what you're seeing there is the movement in that annual valuation year-over-year. I suspect you know all that.

Essentially, what's changed -- so you have to ask yourself, what has changed from December '04 to December '05? Well, clearly, the deterioration in results of the business in 2005, which prompted the November 2005 announced restructuring program. And it's really those two changes working through the independent valuation model that is driving that changed valuation.

(multiple speakers) I'm sorry, go ahead --

I was just looking at your other question -- capital in excess of par value. Yes, I think that is essentially a fallout in the change in valuation of the -- independent valuation of the class B common stock subject to put and call options. Obviously, total capital didn't change. So to the extent we reduce that value, you will then see a capital in excess of par pop up. It's a byproduct of that movement.

Okay.

And your question on the leverage ratio. The difference is -- first, our credit agreement is posted. You can grab it by going to JohnsonDiversey.com. But in there, there's a formula of how we look at our covenants. And some of them main differences is as we [drive] from EBITDA, we look at EBITDA before onetime costs. And also, we're looking at our [Op. Co.] debt -- in our securitization, we get to reduce part of that as well. But you can get the entire calculation off of our website.

Thank you.

You're very welcome. We have time for one more question at this point.

[Eugene Feditas], Longbow Research.

I just have a couple of questions -- if you can provide more color on the health and hospitality business. You said that service was worth 70 million in 2005, is that correct?

Yes.

Okay, and how much is the distribution segment then worth?

We're not going to comment on that portion of the business.

Are you expecting to lose any of the distribution business when you are exiting a service?

No.

You're not expecting to lose --

In fact, we expect to improve it.

We would like to thank you for joining us today on this call. On behalf of everyone at JohnsonDiversey and JohnsonDiversey Holdings, we would like to thank you for your continued support of our Company.

That does conclude today's conference call. We appreciate your participation. You may now disconnect.