The Clorox Company
Q2 2008 Earnings Call Transcript

Published: 5 Feb 2008

[Operator:]

Good day ladies and gentlemen and welcome to the Clorox Company fiscal year 2008 second quarter 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. If you would like to ask a question you may press star one on your touchtone pad at any time. If anyone should require assistance during the conference, please press the star zero on your touchtone pad at any time. As a reminder, this call is being recorded. I’d 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.

[Steve Austenfeld:]

Thanks, welcome everyone and thank you for joining Clorox’s second quarter conference call. On the call with me today are Don Knauss, Clorox 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 the company’s second quarter operating results. Dan will follow with a review of the quarter’s financial performance as well as additional details supporting our updated fiscal year 08 outlook as communicated in our press release this morning. Don will then conclude linking our year to date results with key aspects of our centennial strategy which was introduced last year. We’ll then open it up for your questions. Let me remind you that on today’s call we will refer to certain non GAAP financial measures including but not limited to free cash flow, EBIT margin and economic profit. Management believes that providing insights on these measures enables investors to better understand and analyze our ongoing results of operations. Reconciliation with the most directly comparable financial measures determined in accordance with GAAP can be found in today’s press release, this webcast, prepared remarks or supplemental information available with the financial information results area of our website as well as in our filings with the SEC. And on that note, let me also point out that we’ll be filing our quarterly 10Q today which can provide additional detail on our financial results. 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 10K filing with the SEC and our other SEC filings for a description of important factors that could cause results to differ materially from management’s expectations. With that, let me turn it over to Larry.

[Larry Peiros:]

Thanks for joining us on the call. As you saw in the press release, we had a strong second quarter across the business and a very good first half of our fiscal year. Dan will review our financial results in more detail in a few minutes. First I’ll provide the overall perspective on the business. For the quarter, sales were up 8% and volume was up 6%. Excluding the impact of the bleach acquisition and one month of Burt’s Bees volume, base business volume grew 4%. We grew volume in six of eight North American business units. Our shares in track channels held steady overall, despite economic pressure on consumers. Our renewed focus on grocer retailers continues to pay off with the much improved trend in the grocery channel behind our increased focus and increased investment. Overall we saw volume growth in both tracked and untracked channels. We’re very pleased with the performance of our recent acquisitions. Results from the bleach business as we reported in Canada and Latin American in fiscal 07 remain on track or even slightly ahead of planned. We are beginning to transition the Canadian bleach business from the [javitch] brand or Clorox brand and we are converting the product line to the compact ultra format that is standard in the US. Going forward we will be supplying Canada from our existing US manufacturing network. On November 30 we completed the Burt’s Bees acquisition and are including Burt’s Bees December results in our financial statements. The transition has been smooth and our organization has a tremendous amount of excitement around this business. For the quarter, including the two months prior to our acquisition, Burt’s Bees delivered strong 23% sales growth. Burt’s also had significant share growth across the core lip, skin, face and body natural personal care categories. As we’ve said, Burt’s Bees has opportunities for distribution expansion so we’re excited to be placing lip balm in all Wal-Mart stores as well as a broader product offering with four foot inline displays in about 500 Wal-Mart stores. The first advertising the brand starts in February with a great print campaign focusing on the benefits of the natural ingredients in Burt’s products compared to ingredients in some traditional personal care products. Burt’s Bees also is a strong pipeline of new products in the back half of the year. Moving on to results of the base business, we had strong volume growth despite a continued high level competitive activity, particularly in Clorox disinfecting wipes and Clorox 2 color safe bleach. [Unintelligible] shipments contributed significantly to overall gains, primarily driven by Clorox disinfecting wipes behind momentum from the low streak product improvement and incremental merchandising support in response to the continued intense competitive environment. We maintained a strong leadership share position in wipes despite heavy spending by several competitors in the category. We’re also seeing positive results from demand building activities behind Clorox 2 and feel good about the plans we have in place to address competition in the color safe bleach category. In late December we began shipping our new GreenWorks line of natural cleaning products in the US, Canada and Puerto Rico. This is our most exciting launch in recent history and like the Burt’s Bees acquisition is generating a lot of positive response throughout the company. Don will talk more about GreenWorks later. Moving on to our cat litter business, we delivered all time record shipments of Fresh Steps scoopable litter and the 21st consecutive quarter of year over year volume growth. In January when we began shipping exciting product extension called Fresh Expressions, which builds on the activated carbon odor elimination platform that has fueled Fresh Step’s growth over the past year. The new product features two scents, Lavender and Mountain Forest. It uses essential oils to create a more pleasant aroma than other scented litters which don’t have the benefit of odor eliminating carbon. Turning to international we saw strong volume trends with the biggest growth in Latin America. Driving the growth was increased shipments of bleach [unintelligible] in Argentina. Also contributing were higher shipments of badge and [wraps], cleaning utensils and auto care products in Australia. The last area I’ll highlight is commodities which continues to be our biggest challenge. In Q2 commodity costs remained higher than our original estimates, particularly for resin. Cost for agricultural commodities also remained very high. We continued to re-check the decline in [resu] cost later in the year as new supply comes on line in the Middle East. The starting point for the decline in resin, however, is quite a bit higher than what was reflected in our original estimates and prices are likely to be higher versus previous year for the remainder of fiscal 2008. To help offset the impacts of commodity pressure, we’ve increased prices on Hidden Valley salad dressings, Kingsford charcoal and Armor All and STP auto care products. We’ve also just announced that we plan to increase prices an average of 7% on Glad trash bags and Gladware disposable containers effective mid February. All of these pricing actions are based on recent commodity cost increases and have been successfully executed with our retail partners. We’d like to touch on the concerns about the US consumers given the current economic environment. We are closely attuned to concerns about the US economy and consumer spending, however we do not believe that our categories will be dramatically impacted as people tend to buy bleach and other household staples even in difficult economic times. To conclude, we’re very pleased with the second quarter and the first half of our fiscal year. Overall both our business and our acquisitions are driving healthy top line growth. We’re also taking the right steps to mitigate continuing commodity pressure and manage our margins. There’s a lot of excitement across the organization about the Burt’s Bees acquisition and the GreenWorks launch. As Don will discuss in a few minutes, we are successfully accelerating our growth and beginning to deliver on the promise or our centennial strategy. With that I’ll turn it over to Dan to provide a more detailed financial perspective.

[Dan Heinrich:]

Thank you Larry. As Larry said, we’re very pleased with our Q2 results, especially given the current environment of very high oil and commodity prices. For the quarter we delivered $0.65 in diluted earnings per share reflecting our strong top line results across the business. On the top line, sales grew 8% including about 3 points combined from the bleach and Burt’s Bees acquisitions. Excluding the impact of acquisitions, organic growth was in line with our long term sales growth target of 3-5%. As anticipated and discussed in our last call, in the second quarter we made increased investments versus year ago on trade promotions spending to support our brands in a highly competitive environment. Even with these increased investments, sales growth outpaced volume growth due to favorable foreign exchange and the benefit of price increases. We continue to anticipate increased year over year investments in trade promotion spending in the second half of the fiscal year. As expected, gross margin for the quarter declined, coming in at 40.4% compared with 42% in the year ago quarter. The decline resulted in the following factors. Gross margin benefitted about 170 basis points from cost savings and about 40 basis points from price increases. These positive impacts were more than offset by about 170 basis points from commodity cost increases, primarily from resin and agricultural commodities, about 70 basis points from logistics and manufacturing which includes diesel and about 80 basis points from other costs, primarily related to increased investments behind trade and consumer spending. In addition, gross margin was negatively impacted another 50 basis points from a purchase accounting step up in inventory values associated with the Burt’s Bees acquisition. Advertising for the quarter came in at 9.2% of sales. Consistent with our prior discussions we continue to anticipate advertising at about 9-10% of sales for the year as we balance this with increased investments in trade promotion spending to support our brands in this highly competitive environment. Taken together, investments in advertising and trade promotions spending are greater than they were a year ago on both a dollar and a percent of sales basis. Despite increased commodity costs, we remain strongly committed to investing in our brands. Strong volume growth in the first half of the fiscal year in spite of competitive pressure supports our belief that this has been a good investment strategy. Interest expense increased versus year ago due to increased debt levels associated with financing the Burt’s Bees acquisition and the accelerated share repurchase agreement. As we previously indicated, we intend to use free cash flow to reduce our debt levels back to a 3.0 debt to EBITDA ratio or lower. Our tax rate for the quarter was about 28% which is lower than year ago due to settling certain tax matters. In recent periods we have benefited from some favorable tax settlements. The timing of tax settlements are difficult to predict and can create tax rate volatility in the periods they occur. That said, we anticipate the tax rate will likely be around 35% over time. As noted, diluted EPS came in at $0.65 which included about $0.02 from restructuring related charges and $0.02 of dilution from the Burt’s Bees acquisition. Our results benefitted from strong operating performance and a lower tax rate I mentioned. Turning to cash flow, cash flow from operations was $148 million or about 12% of sales compared with $122 million or about 11% of sales in the year ago quarter. Free cash flow increased 21% to $103 million or 9% of sales compared with $85 million or 8% of sales in the year ago quarter. Our cash flow increases were primarily driven by collection of receivables, partially offset by higher inventories. As a reminder, we define free cash flow as cash provided by operations less capital expenditures. Q2 capital expenditures were $45 million compared with $37 million in the year ago quarter. As you saw in the press release, we have updated our fiscal year financial outlook. For the year, including the benefits of the bleach acquisition and Burt’s Bees, we now anticipate 6-7% total sales growth. As discussed last quarter, our current outlook projects a gross margin decline compared with last year as we anticipate unfavorable year over year resin and agricultural commodity prices. We’re pursuing a number of actions to mitigate this impact. As Larry mentioned we’re taking price increases on a number of products impacted by higher commodity costs. As I discussed last quarter, we’ve also increased our full year cost savings target to $100 million. The benefits from these actions as well as better than expected results in the first half of the fiscal year are anticipated to help us offset much of the commodity cost pressures. We continue to anticipate some declines in resin pricing in the second half of the fiscal year, although resin will continue to be higher on a year over year basis. Softening resin demand in the United States, slightly lower oil and natural gas prices and the influence of longer term resin production capacity increases in the Middle East should lead to downward pressure on resin prices over time. However, commodities markets remain very volatile. As discussed in our press release, we’ve updated our fiscal year diluted EPS outlook to reflect anticipated dilution from the Burt’s Bees acquisition, additional restructuring charges and some of the benefit of our strong first half operating results. Let me walk you through each of these factors. Previously, we projected a $0.10-$0.15 earnings per share dilution range for fiscal year 2008 from the Burt’s Bees acquisition. We have now narrowed the dilution range and anticipate about $0.13-$0.15, which is at the upper end of our previous range. This range includes pre tax costs of about $4 million for amortization of intangible assets, $19 million for the purchase accounting step up in inventory values and the impact of financing the transaction. Our updated outlook for restructuring related charges is about $58-$60 million or about $0.25-$0.26, around the high end of our previous estimated range of $0.21-$0.25. The increase in anticipated fiscal 2008 charges reflects asset write offs, accelerated appreciation and amortization and other restructuring related costs associated with the decision we’ve made to exit the remaining components of our private label food bags production. As you may know, we inherited a private label food bags business when we acquired Glad in 1999. We’ve been rationalizing this business over time and are now taking the final step in exiting the business. Private label food bags currently contribute about 1% to total company volume and sales on an annual basis and do not contribute any profit. We will phase this last part of the business out over the balance of this calendar year. The actions we’re taking to restructure our manufacturing network and exit the private label food bags business are multiyear projects and fiscal year 2009 will be impacted by the remaining restructuring related charges associated with these actions. On a preliminary basis, including the carryover restructuring related charges from our fiscal year 2008 restructuring actions, we are anticipating about $20-$30 million in total restructuring related charges in fiscal year 2009 which is a more typical range for us. We will provide our initial financial outlook for fiscal year 2009, including the anticipated restructuring charges during our Q3 earnings call in May. Finally, as I mentioned, our updated outlook reflects the benefit of some of our strong first half operating results. Net of all these factors, our outlook is now for diluted earnings per share in the range of $3.20 to $3.35. With that I’d like to comment on the second half of our fiscal year. We continue to expect solid performance in the back half of the year as reflected in our financial outlook. It’s important to keep in mind the following as you think about the second half. We will be comparing against a very strong year ago third quarter. Q3 was our strongest quarter in the last fiscal year with 7% sales growth, including very strong growth in Clorox disinfecting wipes. Resin is at a higher price than we had anticipated and commodity prices remain very volatile. As I noted a moment ago, we anticipate a continued unfavorable year over year comparison throughout fiscal 2008 with a higher anticipated impact in Q3. The second half of the fiscal year will benefit on the top line from the Burt’s Bees acquisition. The remaining step up in the Burt’s Bees inventory will occur in Q3. We recorded about $5 million in Q2 and anticipate another impact of about $14 million in Q3. Finally, the second half of the fiscal year will benefit from the launch of our GreenWorks natural cleaning products. Despite the costs and competitive pressures we face in the first half, we feel very good about our operating performance. While our margins have been impacted, our business remains strong as evidenced by our first half growth in volume and sales. As you know we focus on the company’s cash flow generation ability which has been our hallmark. We believe that’s the best indicator of the long term performance of the company. As we return cash to shareholders over the last several years through both dividends and share repurchases, our reduced share count now means that $0.01 of diluted EPS equates to just over $1 million on an after tax basis. Clearly on that dollar basis, quarterly variances in EPS will occur. That’s why we continue to focus on economic profit and cash flow generation as being the key determinants of value creation for our shareholders. Now here’s Don to provide his perspective on the business.

[Don Knauss:]

As Larry and Dan noted we had a very solid second quarter and I think what I’m especially pleased about is the way the organization stepped up to deliver in a highly competitive and intense cost environment. I think you can see our brands are healthy across the business and benefitting from our investments. In the second quarter it was certainly a significant milestone for us in our centennial strategy with the acquisition of Burt’s Bees and the launch of GreenWorks, our natural cleaning products. In particular I’m pleased with our success in leveraging the global megatrends that we talked about, health and wellness, convenience, environmental sustainability and what we call the three D’s. That is desire, decide, delight, those central elements of our growth strategy. What I’d like to do is just give you a little bit of color on the traction we’re gaining on some of these fronts. As you may have noticed, say desire is about pre-purchase communication in the form of advertising and other activities to generate consumer interest and create motivation. With respect to desire and the megatrends, let’s take Brita as an example. Brita has delivered another quarter of solid results as we leveraged the health and wellness and sustainability megatrends. We’re investing in several initiatives to educate consumers about the great health benefits of drinking water and the environmental benefit of drinking filtered water from reusable containers that help reduce the waste of disposable plastic water bottles. I think a great example of that is our partnership with NBC and the reality weight loss show, The Biggest Loser. This season the biggest lower couples has eliminated bottled water throughout its campus and production studios with the help of Brita products and the reusable [now gene] bottles. We’ve eliminated about 30-40,000 plastic throw away water bottles. In addition, the program, which is viewed by an average of 4 million people weekly features Brita pitchers, Brita faucet mount systems and Brita and [now gene] filter for good reusable bottles. The partnership is also being promoted through online sponsorships on the Biggest Loser’s homepage, a public service announcement on the premier episode, through the show’s newsletters and in store promotional materials [drawing] product demonstrations in Costco for example. Now, just turning to GreenWorks for a minute, as Larry noted it’s still obviously very early in the introduction but it is extremely well executed who are building awareness through integrated marketing. We kicked off our PR and marketing strategy in early December with outreach to the business press resulting in coverage by several major print and broadcast media outlets. More recently, coverage in national consumer magazines has kicked in with placements in publications such as Good Housekeeping, Family Circle and Parent. We’re also seeing lots of coverage on daytime and afternoon TV. We got some great exposure just several weeks ago for the brand on the Ellen DeGeneres Show with a donation from GreenWorks to Brad Pitt’s organization, Make It Right, which is helping to rebuild New Orleans. We just turned on national advertising for the brand, that started January 14 and finally I hope you saw our announcement a few weeks ago about our alliance that we’ve established with the Sierra Club. What you’ll see coming out of that alliance is in April, just in time for Earth Day and really and earth month focus from a number of our retailers, GreenWorks product labels will feature the Sierra Club logo, reinforcing our mutual commitment to promoting a greener lifestyle. On to decide, the second of our three D’s, it’s all about communication and winning at the shelf inside the store where the majority of the purchase decisions are still being made. We have now filled 25 of 30 positions that I’ve talked about in the past, adding to our sales team and cross functional teams to support the grocery channel. While we anticipate the benefit of increasing investment will build over time, first half grocery sales for Clorox increased 3% versus year ago, so we believe we’re beginning to see some real momentum stemming from this focus. Now for perspective, this 3% in growth is a 7 point reversal from the negative 4% declining trend we’ve seen over the last three years, so we’re quite pleased with that trend. I would make a point to note that these grocery investments are truly incremental. We are investing just as aggressively as ever with our customers such as Wal-Mart and Target in the mass channel, with Costco, BJ’s and SAM’s in the club channel and with our Dollar format customers. Across all of those channels, we’ve seen significant growth as I’m sure you know and over the last several years and we’re continuing our aggressive investment in retail customer marketing, category advisory services and consumer shopper insights in those channels. Basically we’re just going to continue to invest in channels where we see growth and we’re seeing growth across all those formats. Finally, delight, is about offering high quality consumer preferred products based on some deep consumer insights. So they’ll keep coming back to our brand. I talked in the past about an internal measure we use for determining if delight is achieving its 60/40 consumer win and blind test and as we’ve discussed, activated carbon in cat litter has been a tremendous success to date as Larry noted, we’re building on the success with the introduction of Fresh Steps Fresh Expressions. Now over time we anticipate bringing additional fragrance innovation to the Fresh Step brand consistent with our core consumer’s profile. And companywide we continue to have a goal of achieving an internal benchmark of 60/40 blind wins by consumers on more than half of our product sales. As we’ve touched already, our second quarter acquisition of Burt’s Bees, the natural personal care business is strongly aligned certainly with our strategy of growing in and beyond our core. Concentrating on faster growing, high margin consumer product categories in line with the same megatrends I just talked about. The Burt’s Bees brand is well anchored in sustainability in health and wellness and we believe it will benefit from these natural and green tailwinds that are out there. We’re very pleased with how things are going on all fronts, as Larry noted the strong over 20% growth the brand has seen, most recently. And while we’re not integrating this business into our Clorox operations, the two organizations are working effectively together where it makes sense. We remain very optimistic about the prospects for this business and we’re excited about our ability to grow this business and the category. Now another aspect of our strategy that we’ve discussed is our commitment to eliminating value destroying businesses and consistent with this commitment is the decision we made to exit our custom food bag business. As we noted in May at our analyst conference, this business has a strongly negative impact on economic profit. It represents about 10% of our bags and wraps volume or about 1% of our total company volume. We believe firmly that this is the right decision for the long term health of the business and a further step towards achieving our centennial goals. Now just to conclude before we start taking your questions, we had a very solid quarter despite the cost environment that is out there. Our brands are healthy, we’re committed to taking the right steps to mitigate near term cost pressures as well as for the long term health of the business. We’re clearly excited about the progress we’re making towards our centennial strategy and we feel optimistic certainly about the launch of GreenWorks and the value Burt’s Bees is going to bring to our business. So with that I’ll ask the operator to open the lines for your questions.

[Operator:]

Thank you Mr. Knauss, ladies and gentlemen if you have a question please press star one on your touchtone telephone at this time. We do ask that you please limit yourself to one question per signal. If you have follow up questions you may re-signal at that time. Once again that’s star one for questions. We’ll take our first question from Amy Chasen at Goldman Sachs, please go ahead.

[Amy Chasen:]

You know I heard your comments about the second half but I just wanted to understand, if you kind of strip out the restructuring charges and the Burt’s Bees dilution and just look at the core business, it looks to us like that guidance is coming down by about $0.07 and I’m wondering whether that’s because of commodities or whether that’s because there was a timing shift from the third quarter into the second. Whatever color you can give us on that kind of underlying operating weakness relative to what people were originally…

[Dan Heinrich:]

Amy this is Dan, let me see if I can address that question and I’ll take you back to what we said at our analyst meeting last May. When we were there we were talking about the base business. The earnings per diluted share for the year being in the $3.52-$3.67 range. That was before the Burt’s Bees acquisition, before restructuring. We had an estimate for restructuring for the year at about $0.21-$0.25 that will now be about $0.25-$0.26 for the full year. The Burt’s Bees dilution will be about $0.13-$0.15 per share. And then we’ve benefitted about $0.05 from the accelerated share repurchase program. Now the outlook that we talked about in the press release this morning includes a few cents to the bottom line from our strong operating performance in the first half. But as you note in the second half, even though we’re ahead of our expectations for the first half of the year, we do anticipate much higher commodity cost impacts in the second half of the year. We came into this year assuming that the impact from commodities was going to be about call it $20-$30 million for the full year. We’re now anticipating in excess of $100 million in cost pressure from commodities and given the way we contract for it, the natural lags that we have in the contracts as well as lags in inventory accounting, we’re going to see more of that in the second half of the year, particularly in the third quarter. So even though we’ve had a very strong first half, the reason we’re not taking that up appreciably is that we do see those commodity cost headwinds in the back half. But on a net net basis, if you look at it on an overall year basis, other than the restructuring charges that we’re taking and the dilution from Burt’s Bees, we’re essentially still on the same EPS outlook for the base business, even though the amount of commodities cost that we’re going to face is a lot higher than we came into the year. And we’re doing a lot of things to mitigate that, as I mentioned we’ve taken our cost savings target up to $100 million for year, we continue to widen our specifications in our products. We look to take cost out of our products through optimization. We’re taking some pricing as well. So as we look at the second half, you know the underlying fundamentals of the business remain strong but we are going to face a lot more cost pressure than we had thought.

[Operator:]

And we’ll take our next question from Ali Dibadj at Sanford Bernstein.

[Ali Dibadj:]

Hey, wanted to just follow up on the top line issue or question here, in terms of your guidance you said 6-7%. If we back things out, so call it foreign exchange, I don’t know percent, percent and a half, Burt’s Bees, it sounds like actually is ahead of plan and you have a little bit more of a distribution channel that you’re going to hit with Wal-Mart, call that 3-3.5%. You have GreenWorks which is about a percent. If you subtract all that out, it looks like the underlying business, this is the main crux of the question, the underlying business is growing about a percent or two. Is that the case, one and two, how does that jive with the grocery channel growing at about 3%? Does that mean the rest of your channels aren’t growing, [unintelligible] actually shrinking? Maybe I’m missing some odds and ends but those are my questions.

[Dan Heinrich:]

Let me see if I can take that, help you out with that, our outlook right now again on the top line is 6-7%. The expectation for Burt’s Bees is that Burt’s Bees will be about two points of that growth. We have them in our numbers from December forward. For the total year we’re thinking that’ll be around two points of growth. The remaining piece of the bleach acquisition will be a little less than a point of growth. So if you take that off the range you can see what we’re projecting to be the underlying piece or the underlying growth in the business. Now, foreign exchange will contribute, perhaps not at the level it did in the second quarter, for the full year it will probably be, I’m guessing, less than a point. So when you factor those things out, as you can see, underlying answer, it’s pretty strong fundamentals in the business. And on the, I’ll let Larry talk about the grocery channel.

[Larry Peiros:]

Yes, we’re seeing renewed growth in the grocery channel as Don spoke to or referred to. We are still seeing faster growth in the untracked channels. So actually if you look at the quarter across all the channels, we’re actually seeing growth in every single channel and while grocery is growing we’re still seeing a bit faster growth on the untracked channels. We would see that kind of growth going forward as well. You know you talk about GreenWorks, I’m not sure if I tracked through all the puts and takes in your question, but overall we assume one to two points, at least one to two points of the growth in the base business would come through new innovation, including GreenWorks and other types of innovation in the year.

[Operator:]

And we’ll take our next question from Chris Ferrara at Merrill Lynch.

[Chris Ferrara:]

Hey guys, just wanted to go through the benefit that tax gave you in the quarter. Does that flow through to the full year, so like in other words, you know you’re lowering the full year range by $0.13-$0.15 which is Burt’s Bees, you’re absorbing an additional $0.025 call it you know for the midpoint of the range on incremental restructuring charges. And you’re saying it’s because of the good operating performance in the first half. Is any of that because the tax rate was lower in Q2?

[Dan Heinrich:]

Last quarter if you recall we had indicated that our anticipated effective tax rate for the year would be 34-35%. That range already anticipated settlements that we saw in the second quarter. What we were unclear on was the specific timing of those settlements, whether they’d hit in the second quarter or whether they would hit in the back half. So our tax rate outlook for the full year remains unchanged at 34-35% and that did include the anticipated effect of the settlements that we entered into in the second quarter.

[Operator:]

And we’ll take our next question from Bill Schmitz at Deutsche Bank.

[Bill Schmitz:]

Morning guys, can you just talk about what percentage of the portfolio will see pricing next year in aggregate?

[Don Knauss:]

Are you talking about next fiscal year or the current fiscal year?

[Bill Schmitz:]

Just maybe a run rate the next 12 months.

[Don Knauss:]

We do not have that readily available.

[Dan Heinrich:]

You know its Hidden Valley Ranch, it’s our charcoal business, it is obviously Glad trash and Gladware. But I don’t…

[Don Knauss:]

Yeah the pricing actions, Bill that we’ve announced, you add all those pieces of business up, it’s probably about 15-25% of our portfolio range in terms of the volume effected.

[Bill Schmitz:]

Okay great that’s fair and this might sound like a little bit of a one off question, but the inventory step up on Burt’s of $19 million I guess over the next two quarters, I think that business has like a 70% gross margin. What’s going on with that inventory? Is it just really old in the system or kind of why is that number so high?

[Dan Heinrich:]

No, it’s not old sale inventory. The margins are pretty high as you know, we’re required under purchase account to write it up to fair value. So what you’re carrying it on the books for has to be written up to fair market value, less a little bit of a distribution profit, so basically we had to write it up and there would be no profit in that inventory until it cycles through. So I think it’s just reflective of the margin structure in the business.

[Operator:]

We’ll take our next question from Nik Modi at UBS.

[Nik Modi:]

Good afternoon guys, just a quick question on trade spending, if you could talk a little bit about how you view that area of your P&L, if there’s any opportunity to perhaps become more efficient. I know many years ago there was a big movement in Clorox to improve that efficiency, just wondering what you’re looking at right now.

[Larry Peiros:]

You know overall I think we can tell you that we are generally pretty efficient [base] of the benchmark that we’ve done. As you know we’ve stepped up trade spending in a couple of different areas over the last six months or so because of competitive activity, particularly on wipes and to some degree on some other businesses. We think we’ve gotten good payback on that investment so if you looked at our actual demand building investment in the quarter, so if you included both advertising and trade spending investment, we’re actually up considerably on total demand building, up double digit rates year over year. We do see some of that competitive intensity diminishing and there is a probability they will take back some of the trade spending investment we’ve experienced over the last six months or so. You may not see that show up in the second half of the year, that may be more of a next fiscal year kind of phenomenon. But over time we continue to try and create more efficiency in trade spending either by spending less or by generating more volume behind the spending that goes out there.

[Don Knauss:]

Yeah, I think one of the thins Nik, we’re really working on right now is to build off Larry’s comment is getting even clearer and sharper guidelines by brand across channels as to what is the most effective lever to pull for that brand. For example, does that brand respond mostly to feature and display? Does it respond only to feature? Which brands do you co-promote, which brands do you go singly? So I think we’re getting a lot sharper about that, as Larry said, we’ve been very efficient over time but there’s even more we can do in terms of I think driving volume of the current dollars that are out there or reducing the dollars.

[Operator:]

We’ll take our next question from Lauren Lieberman at Lehman Brothers.

[Lauren Lieberman:]

Thanks, first thing was just on the international business, it actually looks like volume growth has decelerated, organic volume growth has decelerated pretty significantly from sort of a 10-12% range over the last couple of quarters, four quarters to now six, so can you talk a little bit about what’s going on there?

[Don Knauss:]

Let me start then Larry can jump in. We have obviously as you know seen strong category volume growth particularly in a lot of the key Latin American countries in the last 12 months but certainly slowing down in the last half of the year. Our expectation Lauren is that those categories will continue to grow but at lower rates as we go forward with low single digit growth and volume, low double digit growth in dollar sales as we go forward. So there is some slowing in the categories but not dramatically down.

[Lauren Lieberman:]

Can you explain why though, like why those categories are starting to slow because that does seem like a significant deceleration, so is part of maybe that you were enjoying outsized growth kind of getting up to a more quote unquote rightful market share? So we’re seeing two impacts? I just but going to low single digit units seems pretty significant to me.

[Dan Heinrich:]

You know Lauren, we have enjoyed over the last two years very strong category growth particularly in Latin America and so what we’re seeing there is some deceleration in the category growth rates. We’re doing fine on share, in fact our shares have held and in a couple cases, they’ve actually grown. So it is more a category issue in specific countries that we’re seeing some slowly. So they’re still growing but not at the levels that we’ve seen over the last two years or so. We would still anticipate, however, that our international business, consistent with its performance over the last three to four years would continue to grow above the company average and we would still anticipate that the growth in the international business will be in the high single digits.

[Operator:]

We’ll take our next question from John Faucher at J.P. Morgan.

[John Faucher:]

Yes, thank you very much. Can you talk a little bit about the pricing, you said its gone through retail already. Wondering how you position that to the retailers in regards to the fact that you’re still talking about resin going down later on in the year, so how do they respond to that and what that means for the ability to keep this pricing going forward over the next couple of quarters? If resin prices go down do you think you’ll still be able to hold onto the pricing? Thanks.

[Larry Peiros:]

To put it briefly, I think we’re playing catch up. So you will recall when we take pricing, we always talk to our retailers about pricing to what we think the long term average is going to be versus pricing to short term spikes. So essentially we are catching up with the long term average even though pricing may be, or resin cost may be coming down over the longer term, we’re really playing catch up in terms of pricing so again we’re trying to price it at long term average. The long term average is quite a bit higher than we had anticipated previously so it’s fully justified based on the numbers, quite frankly our customers have been very reasonable about our pricing initiatives. I think we certainly have though we’ve been very responsible on the Glad business given the spikes in resin costs, so we feel pretty good about the execution part of the equation.

[Don Knauss:]

Yeah and as you know John we don’t price to the peak and we do expect this decline to be somewhat gradual over time. And based on what we’ve [unintelligible] it looks like all the competitors are copying our pricing.

[Operator:]

And we’ll take our next question from Connie Maneaty at BMO Capital Markets.

[Connie Maneaty:]

Good morning, I guess morning for you, as we think about the commodity pressure on the gross margin in the second half of the year, is it your expectation that the third quarter gross margin declines more than it did in the second quarter? And then also relative to your comment that you expected to see the start of some relief later in the year, that must mean the fourth quarter, if you’re expecting the gross margin to increase in the fourth quarter, how would it do that from a pretty significant decline in the third quarter? I guess I just don’t understand the logistics here.

[Dan Heinrich:]

Connie let me see if I can try to answer the question, we are expecting a greater decline in our gross margin in the third quarter. Again we have lags in our contracts and we also have the inventory effect. We saw some of the peak resin pricing in our second quarter and so that will flow through and impact us primarily in the third quarter. And on a year over year basis we are expecting to be down on margins in the second half and again a lot of that is the resin pressure that we’re going to see. We are as we said, we still are anticipating declines in resin in the back half but we are starting from much higher points than we ever thought we would see. And while those declines in the spot market, we believe will start to show up here in the third quarter from a financial impact standpoint, it will probably be fourth quarter before we’ll start to see some of that flow through.

[Steve Austenfeld:]

Connie, just one other thing to keep in mind relates to our gross margin in Q3 is we will have the final impact from the inventory step up related to Burt’s Bees and that will have something north of 100 basis point impact. So you should certainly factor that in even though it’s not related necessarily to commodities.

[Operator:]

And we’ll take our next question from Filippe Goossens from Credit Suisse

[Filippe Goossens:]

Yes, good afternoon gentlemen, just a housekeeping question before my real question, this one for Dan, Dan you’re still planning on turning out the Burt’s Bee acquisition, correct, in terms of the financing?

[Dan Heinrich:]

Sorry Filippe you’re awfully soft, could you say it a little louder?

[Filippe Goossens:]

[Repeating question].

[Dan Heinrich:]

We currently have plans to issue about $500 million of term debt sometime here during the third quarter to pay down some of the CP that we used to acquire Burt’s Bees, so yes we do have plans for up to about $500 million.

[Filippe Goossens:]

But it will be lower than the actual purchase amount in order to allow you to use free cash flow to pay down that correct?

[Dan Heinrich:]

That’s exactly correct.

[Filippe Goossens:]

Yup and then my real question for Larry, Larry, based on some of the other household companies that have reported so far, nobody seems to have noticed any down trading occurring, yet when we listen to some of the packaged food companies out there, they’re starting to see it. What sets the household companies apart from the packaged food companies? Is it a timing issue or is because at the end of the day, companies like Clorox have a better ability to provide better price value to the consumers and therefore kind of prevent or largely forestall people from trading down?

[Larry Peiros:]

I guess we’re just really good. I think it really is an innovation and a differentiation story. Right, so every day the consumer is looking at our products on the shelf versus private label or cheaper brands and they’re buying our products because we offer a better value equation in total and it’s based on quality of the product and the innovation we’ve brought over the course of time. I think folks in the household industry do a pretty good job about driving innovation. If you actually look at private labels across the last several years, there hasn’t been a lot of growth. You know we often get [unintelligible] but there hasn’t been a lot of growth. If you look at our total business, private labels are relatively small across the portfolio. In the US it may be about 15% share in tracked channels. If you look at the most recent quarter, their performance has been basically flat, so we haven’t seen consumers going to private labels because of the economic pressure out there and we haven’t seen much change in the consumption of our categories because of the economic environment.

[Don Knauss:]

Yeah, if I could just add to that what I’ve noticed and I’ve been out with a lot of customers recently talking about these kind of issues is I think there are three things that insulate anybody from any kind of slowdown and it just depends on how well you do against those three elements. First is innovation as Larry spoke of and I think it may be easier for household companies to demonstrate product performance advantages in products than some of the food companies for example. And clearly, if you look at brands like Kingsford where we’re gaining significant share, we have superior product performance attributes in those brands. The second element is value, getting your value proposition right. I think our total demand spending while people focus on the 9.2 on advertising, it’s not a fair and complete picture, you need to look at the total demand spending. Our demand spending in the second quarter was up about 10% versus year ago. And that reflects really the need to get your value equation right and before you start worrying about more advertising. I think in these kinds of cautious times you’ve got to make really sure you’re right on the shelf from a pricing standpoint and a value communication standpoint. And then the third is execution, I think we’re seeing with our retail customer marketing programs and what we’ve got going on, the Biggest Loser program, what we’re doing around Nascar, all those different types of things that we’re bringing value added to try and differentiate retailers from one another is really starting to make an impact. So if you can really focus on innovation, your value proposition and then your execution, you tend to get somewhat insulated from those trends.

[Operator:]

And we’ll take our next question from Kathleen Reed at Stanford Financial.

[Kathleen Reed:]

Hi there, can you talk a little bit about if you have any other price increases that you’re contemplating in any of the other categories and just what the actual trade spending slash price if you can break them out, hit was on the sales line? And then also if you can just quantify the volume impact for the GreenWorks launch in the December quarter? Thanks.

[Don Knauss:]

We don’t talk a lot about pricing for obvious reasons. But I would say there’s not a lot of big plans in the current year for additional pricing. We’re obviously still working out the details of our next year forecast and depending on assumptions around commodities, there may be some additional pricing across a number of brands, but that still is to be determined at this point. Have I tracked all your questions? GreenWorks, there’s only about a week’s worth of shipments, so a very, very small piece of the overall volume equation in the second quarter, truly less than half a percent.

[Dan Heinrich:]

And Kathy I think on your last question or maybe it was your second question you were asking about the impact of pricing in the quarter in trade spending. The only difference between unit growth for us and the sales growth of about 8%, about a point and a half of that, really the primary difference was foreign exchange. We did get about a point worth of benefit from pricing. But that was offset, a little more than offset by the incremental trade promotion spending we talked about today.

[Kathleen Reed:]

So in the prior quarter I think trade spending was 100 basis points, a negative hit to your top line and just in your prepared remarks I think you said that it had an increased sequentially. So is it somewhere in the 200 basis point level and is it just expected to remain at that level in your 3Q and 4Q?

[Steve Austenfeld:]

It wouldn’t be quite as strong as 200 basis points, a little less than that, but again greater than 100 basis points. I think this is really what you’re seeing a continuation of the investment we’ve been making over the last year. You would have seen the same sort of trends when we talked about the same level of spending in the last half of last fiscal year as we were facing increased competitive pressure. I think as was mentioned in Dan’s comments earlier this morning, you’re going to see continued, relatively heavy level of trade spending through the back half of the year as well.

[Operator:]

And we’ll take our next question from Wendy Nicholson at Citi.

[Wendy Nicholson:]

Hi, my question had to do on Burt’s Bees. I think back in October you said that you were forecasting the business to grow like low double digits or teens, but what you said today was I think there was 23% growth in the first two months prior to the acquisition and then with the incremental distribution, that sounds like there ought to be a lot of incremental revenues coming in the back half of 08, so I’m surprised that Burt’s Bees is only expected to be two points of the benefit to the top line as opposed to not more.

[Dan Heinrich:]

Wendy, the 23% growth rate you saw in Q2 which does include some of the two months prior to our acquisition, from a seasonality standpoint, Burt’s tends to be seasonally heavy in our fiscal second quarter. They use a lot of gift packs, sampling for the brand and typically you see a spike in those around the holidays. So that tends to be their highest quarter. And when we talked to you last quarter about Burt’s and our anticipated growth from Burt’s, those outlooks already included the expansion of distribution into Wal-Mart and so that mid teens growth rate is still consistent with our outlook and certainly we’re going to be working to try to beat that, but that did contemplate the expansion into Wal-Mart. And again, a lot of their growth this year is coming from areas other than Wal-Mart, certainly Wal-Mart will help them and was factored in, but they’re seeing strong growth in a lot of different channels.

[Steve Austenfeld:]

Wendy, the one other thing you might want to consider as you think about the two points from Burt’s Bees is that’s an annual number or it’s really an impact to our next two fiscal years, this fiscal year 08 and fiscal year 09 that begins in July. If you look at the actual quarters, so over the next four quarters worth of volume, it’s going to be closer to about 3-4% or points of incremental top line depending on the quarters. Just that when you cut that across fiscal years it’ll be about two points, the benefit.

[Operator:]

And we’ll take our next question from Jason Gere at Wachovia Capital Markets.

[Jason Gere:]

I have no further questions, thank you.

[Operator:]

We’ll go next to Alice Longley at Buckingham Research.

[Alice Longley:]

Hi, good afternoon. Could you give us an update on what you’re now seeing as Burt Bee’s sales and operating margins in 09 and do you think the acquisitions will be neutral to slightly positive to EPS that year?

[Dan Heinrich:]

Let me deal with the last part of the question first. Right now we would anticipate net of all the costs associated with it, we were anticipating that Burt’s Bees will be flat to slightly accretive from an EPS standpoint. I’m not going to get into specifics on expectation for margins and contributions, things like that, again on the top line we’re anticipating mid teens in terms of growth and what we have said in the past is that Burt’s Bees does enjoy margins in the natural personal care margins are higher than even the margins that you see in regular personal care. So we would expect Burt’s to be accretive to our margins.

[Don Knauss:]

The only thing I’d add to it Alice is that if you look at Burt’s Bees as Dan said, when we put together the valuation to buy that business, we modeled that on low P growth rates compounded out and clearly with the trends we’re seeing in the business, we’re going to work hard to continue to beat that, but we feel good about where that brand sits.

[Operator:]

Once again, ladies and gentlemen, as a reminder that’s star one at this time if you would like to ask a question, star one. Our next question is a follow up from Ali Dibadj from Sanford Bernstein.

[Ali Dibadj:]

Hey guys, just want to keep plugging away at this top line 6-7% here. You actually confused me more, I apologize, but if Burt’s Bees is 2%, bleach acquisition is about 1%, foreign exchange is let’s call it 1%, innovation, let’s call that GreenWorks at about 1%, that means the rest of your business is about 1-2% if I’m doing this very simple math correctly and that would include pricing, volume, international. So either you’re being really conservative or you’re anticipating something more dramatic in a slowdown and I’m just trying to get a sense of which it is.

[Don Knauss:]

Let me talk to that Ali a bit, I think if you go to the top line or the top end of the range, 7%, if you strip out Burt’s and as we said that’s about two, you get down to the five. And then you look at, first of all we consider GreenWorks as part of our core business, it’s not an acquisition, it’s part of the innovation that you referenced. So when you strip all that out, we’re looking for 3-3.5% volume growth, sales growth on the base business in that estimation. And I do think we’re being conservative as we go forward. I mean it’s a cautious time out there. But I think we’re still comfortably in the range, the 3-5 that we’ve articulated for a number of years, I think we’re still inside that range on the base business.

[Larry Peiros:]

The only other clarification as you mentioned the bleach acquisition, we essentially anniversaried that at the end of this calendar year, we closed on the Canadian piece of the business at the very end of last calendar year and we closed on the Latin America pieces at the end of February. So most of that essentially is in the base at this point.

[Dan Heinrich:]

So and let me just summarize Ali, the way I think about it, we’re talking 6-7% top line growth. There’s about two points from Burt’s Bees, there’s call it a little less than 1% from the bleach, as Larry noted we anniversaried that this year. And call it a little less than 1% or 1% on foreign exchange. If you net those out, you’re basically back to kind of that three, call it 3-3.5%, 4% base growth that we always talk about and you know our previous range was 3-5% and we’re looking for one to two points to come from new products. So it is reasonably consistent that those would be the base growth rates for the business.

[Don Knauss:]

Does that answer the question Ali or are you still confused?

[Ali Dibadj:]

[Inaudible] next quarter or so.

[Don Knauss:]

You cut out on us.

[Ali Dibadj:]

I’m sorry, let me ask this a different way, because my math just doesn’t quite add up, what do you expect the bleach business to be growing for the next quarter or so roughly speaking?

[Don Knauss:]

Are you talking about the bleach business that is part of the Colgate acquisition?

[Ali Dibadj:]

No, I’m sorry, the as I called it the core bleach business, the bleach business you have running right now.

[Don Knauss:]

You know I think we typically see the core business as being a 3-5% growth rate, including the impact of innovation which typically represents about one to two points.

[Ali Dibadj:]

Okay, maybe I’ll follow up because my math just isn’t that even the way you’re describing it.

[Operator:]

And we’ll take our next question is a follow up from Chris Ferrara at Merrill Lynch.

[Chris Ferrara:]

Hey guys, I just wanted to get to restructuring, I think Dan I guess the way you had positioned restructuring charges on an ongoing basis earlier is $20-$30 million and I think not just on this call but in previous events. When I think about the $20-$30 next year in fiscal 09, is that in comparison to the $58-$59 this year or just to be clear, I mean is this year include other restructuring besides just what you’ve called out that just normally goes unnoticed through the P&L. Could you just talk about that dynamic and how that works?

[Dan Heinrich:]

Yeah let me talk about the $58-$60 million that we’re taking this year. As you know a large chunk of that is the actions we’re taking in our manufacturing network to go to our Atlanta and our homecare manufacturing, also some restructuring internationally. We also took some charges if you recall, included in that range, for some investments that we made in certain businesses that we decided not to pursue as a result of our centennial strategy. So those are imbedded in the $58-$60 and now we’re at the high end of the range because we decided to exit the private label food bags business. So the $58-$60 is the total that we’re taking this year, our estimate of the non cash portion of that is in the $42-$44 million range. As we look, right now a very preliminary basis for fiscal 09, the total restructuring related charges that we’re anticipating in 09 are in the $20-$30 million and that doesn’t include any carry over or additional charges associated with the actions that we’ve taken. So again right now and we’ll update again when we provide our initial outlook in May, but for right now we’re thinking it’s going to be about $20-$30 million in total which is a more normal range for us and that would include any carryover of any additional restructuring coming from the actions that we’ve taken this year.

[Don Knauss:]

So as you related to just sum up with Dan’s comments, as you related to the $58-$60 this year, let’s just use $60, then what we’re forecasting or projecting for next year is $30-$40 million less in restructuring, getting us back to a more typical rate.

[Operator:]

And our next question is a follow up from Lauren Lieberman at Lehman Brothers.

[Lauren Lieberman:]

Thanks, two follow ups. One was on GreenWorks and advertising, I’m assuming there was no advertising related to GreenWorks in the P&L for this quarter, right?

[Don Knauss:]

Right.

[Lauren Lieberman:]

Okay and then, the other piece was just going back to the international question, just is anything specific on which countries are slowing? Because if anything’s going on sequentially because of course in the context of the broader kind of macroeconomic questions everyone has, I just wanted to know if there’s anything kind of going on in Latin America that’s indicative of broader trends rather than something specific to your business?

[Don Knauss:]

Well I think the Northern cone is weaker than the Southern cone of South America. So clearly there’s a little bit more slowdown in Mexico. We’re certainly seeing a little bit in Venezuela, but that, Venezuela is not really related to consumer demand as much as it is raw materials supply and some of the lack of transportation that’s available given some of the issues that are going on in the economy of Venezuela. So it’s not really a consumer issue there. And then the Southern cone, Argentina, Chile, we see still pretty robust trend.

[Lauren Lieberman:]

Okay, thanks.

[Operator:]

And our next question is a follow up from Connie Maneaty at BMO Capital Markets.

[Connie Maneaty:]

Hi, just some questions on the way charges will fall in the next couple of quarters. Do all the Burt’s Bees charges fall in the third quarter and what’s the split of restructuring between Q3 and Q4. And then finally, was there any onetime expense, onetime item in the increase in interest expense in the second quarter because it seemed awfully high.

[Dan Heinrich:]

Let me take the last piece first. On the interest expense, it’s up for two reasons and it’s the debt associated with the accelerated share repurchase agreement as well as the Burt’s Bees acquisition. So that did hit in the second quarter and that [grows] the increase in the interest expense. On restructuring charges, as we look at the second half of the year, we would anticipate that it be fairly ratable in terms of Q3 and Q4 impact that might a little bit more in the third quarter but it should be fairly even in the back half of the year. And then as it relates to Burt’s, the primary impact we’ll see in the third quarter is going to be the additional $14 million of inventory step up. The amortization of intangibles will be over the back half of the year as will the financing costs. So the primary impact will be in third quarter, the recognition of the $14 million step up in inventory.

[Operator:]

And our next question is from Nik Modi at UBS.

[Nik Modi:]

Hey guys, just Don, real high level question about share opportunities. Can you just talk about your major competitors are really private and kind of non large cap HBC players. How do you think about share gains over the next couple of years and I understand some of your private players competitors are struggling right now internally. Can you just give some perspective on, do you believe you are in a better position today to really gain some share than you were maybe a couple of years ago?

[Don Knauss:]

Yeah, I think we are in a better position and the reason I think we are, if you look at our capabilities Nik across the three D’s, desire, decide, delight. Let me focus particularly on the last two, because I think we’ve always done a pretty good job on brand building in the conventional sense of good advertising et cetera. But on decide, I think with the investments we’re making in grocery and the continued investments we’re making in Wal-Mart, Target, the club channel and the dollar format channels around retail customer marketing and category system services, I think that is going to enable us to continue to build share. You know when you’ve got 11 number one brands in 15 categories, retailers tend to gravitate to who has those services and who has those number one brands to build on. So I feel better than ever about our ability to really connect at the retail level. And in terms of delight, actually our R&D investment went up in the second quarter versus the first quarter of the year. You’ll continue to see strong investment from us in R&D and continue to build out this product performance advantage. I think GreenWorks is testimony to that. We’re trying to put products out in the marketplace that really perform and I think the share gains we’ve seen on things like Kingsford, on Glad Forceflex, you’ll continue to see that build from us. So our capabilities I think across those three D’s are continuing to build and really connecting with retailers.

[Operator:]

And our next question is from Fred Speece at Speece Thorson Capital Group.

[Fred Speece:]

Yes, I know you’re exited about B, but can I ask a basic question. When you first became the CEO you established some financial criteria and discipline for acquisitions and this one you broke. Should we anticipate that you’ll go back to adhering to those disciplines on future acquisitions?

[Don Knauss:]

Yeah I think that we use economic profit as clearly the governing metric for this company and while Burt’s Bees in the short term may seem inconsistent with that, we don’t think it is in the longer term and if you look at how we’re running the base business, I guess one of the key proof points today is the exit of the private label food bags business. We’re going to continue to manage the base business with economic profit as the governing objective. So we know that 70-80% of our growth is going to come from the organic side of the business and you’ll see us continue to manage the business that way. As we look at further acquisitions, clearly we’ll adhere to those standards. I think Burt’s Bees was a real aberration in the sense that as we talked on the last call, this is a brand with extremely high growth rates in the category, extremely favorable brand equity scores with consumers and with the high growth rates and the fact that it can be EPS accretive very much in the short term, we felt that it was a real investment for the long term growth of the company. And from an economic profits standpoint, if we beat the valuation which we’re going to strive very hard to do, this will not even be in violation of that governing objective.

[Operator:]

And our next question is a follow up from Bill Schmitz at Deutsche Bank.

[Bill Schmitz:]

Sorry to keep jumping back on. Can you just tell me the $3 million restructuring related costs. Are those in cost of goods sold or in SG&A?

[Dan Heinrich:]

You’re talking about for the quarter Bill?

[Bill Schmitz:]

Yeah.

[Dan Heinrich:]

Let’s see, we had I think about $2 million in restructuring and $3 million, most of that would be sitting in cost of goods sold.

[Bill Schmitz:]

Okay, gotcha and then for your guidance for the year, is that all restructuring under GAAP or is it restructuring and restructuring related?

[Dan Heinrich:]

It’s all in, it’s restructuring and restructuring related and we’ll probably see somewhere in the call it $35 million range in the restructuring line and the rest, most of it will be sitting in costs of goods sold.

[Bill Schmitz:]

Okay and am I right when I look at the Burt’s Bees costs. The $19 million is really the only kind of non recurring, because the amortization should have happened for as long as you own the business and I think the interest cost should be however long the debt is right, took the five year term, it’d be five year on the financing amortization, is that right?

[Dan Heinrich:]

You’re correct in the, goodwill [unintelligible] amortization will be ongoing, 19 is the biggest impact from inventory but there’s also some costs associated, I’ll call it human resources related costs, retention and some other benefit program adjustments that are more one time in nature that should cycle through this calendar year.

[Bill Schmitz:]

Okay and did I miss the interest expense guidance for the third and fourth quarters? Did you mention that already?

[Dan Heinrich:]

No, we haven’t provided one yet so you didn’t miss it. You know we’re probably in the rough range $160-$170 million range for interest expense for the year.

[Bill Schmitz:]

Okay great, thanks so much.

[Steve Austenfeld:]

Why don’t we take one more question.

[Operator:]

And our final question will come from Alice Longley at Buckingham Research.

[Alice Longley:]

Hi, I have another question on Bird’s Bees. It seems to me the line has a whole lot of SKUs, are you happy with all that variety or is there any thought of focusing it and reducing SKUs [inaudible].

[Don Knauss:]

I’d say Alice we’re happy with the variety. It’s interesting, in those retailers where you see significant growth in Burt’s Bees, it’s where those retailers have moved beyond lip balm basically at the checkout to a more or a high position inside inline on the shelf whether it’s a 2 foot high or a 4 foot section such as Target has and some of the chain drug customers have. So I think we’re very happy with it. We’ll focus our innovation continually on higher margin items as we continue to build it. There’s a lot of give and take on SKUs. A lot come out and a lot go in. So we’re going to be disciplined on how we manage that, but this is one of those categories that responds very nicely to news and we want to continue that flow of new. And the typical retailer who’s really driving it, 2 foot or a 4 foot inline section has typically 40-60 SKUs. So they vary quite a bit, so the 150 that are available are certainly not being executed in any given retailer. Based on the regional trends that are out there, we’ll continue to be disciplined on taking some out as we put new ones in. But that range is important I think to the health of the business.

[Operator:]

This concludes the question and answer session. Mr. Knauss I’d like to turn the program back over to you.

[Don Knauss:]

Well thanks everyone for joining us today. As I’ve said we feel very good about the quarter. We’re really starting to accelerate the top line of the business. We believe we’re on track for the balance of the year. We’re making progress, I think significant progress against the centennial strategy so we look forward to speaking with all of you again in three months when we discuss our Q3 results and talk some more about FY09. Thanks everyone.

[Operator:]

This does conclude today’s presentation, we thank everyone for their participation. You may disconnect your lines at any time.