13510cloD1R1.qxd 09/10/2005 6:56 PM Page 1 The Clorox Company 2005 Annual Report to Shareholders and Employees Making Life Easier, Healthier and Better 13510cloD1R2.qxd 9/20/05 8:17 PM Page ifc Net Sales Operating Profit 1 Net Cash Provided by Operations (in millions) (as percent of net sales, on a rounded basis) (in millions) $4,388 $4,162 $876 $899 $3,986 19% 19% 19% $803 $3,859 18% $747 $765 $3,697 16% 01 02 03 04 05 01 02 03 04 05 01 02 03 04 05 $6.11 2 3 Net Earnings $1,096 Diluted Net Earnings Return on Invested Capital (in millions) Per Share2 13.9% 13.9% 13.5% 12.5% 10.3% $2.56 $549 $2.23 $2.88 $493 $2.28 $490 $517 $2.08 $323 $322 $461 $1.35 $1.37 $304 $1.29 $277 $1.16 01 02 03 04 05 01 02 03 04 05 01 02 03 04 05 1. Operating Profit — Gross profit less selling and administrative expenses, advertising costs, and research and development costs. 2. The shaded area represents continuing operations. 3. Return on invested capital is a non-GAAP measure based on after-tax operating profit (excluding restructuring and intangible amortization in cost of goods sold) divided by aver- age total invested capital. See reconciliation of the earnings used in this calculation as set forth in Exhibit 99-3 to the company's annual report on Form 10-K for the fiscal year ended June 30, 2005. 13510cloD1R2.qxd 9/23/05 1:48 PM Page 1 Fellow Shareholders and Employees Our company had another good year in fiscal 2005. The biggest challenge we faced in fiscal 2005 was the sharp increase in energy-related costs such as > Sales grew more than 5 percent to $4.4 billion, oil and natural gas. This drove our raw-material ahead of our annual goal of 3 percent to 5 per- and packaging costs up substantially, along with cent growth. other operating costs such as transportation. While we executed our cost-savings program effectively > We grew all-outlet market share with our brands and took selective price increases throughout the in each of our eight categories in the U.S. year, those actions were not enough to overcome > We grew sales and gross profit by double-digit our cost pressures. As a result, we fell short of our percentages in our International business. gross margin and operating margin improvement goals for the year. Nonetheless, I am very proud of > We generated more than $100 million in cost the results that Clorox people around the world savings. achieved during the year. > Earnings per diluted share from continuing operations grew 26 percent to $2.88 Clorox people also made great progress in imple- > Return on invested capital increased approxi- menting the 2008 strategy that I outlined for you in mately 40 basis points. last year’s letter. > Total shareholder return grew 6 percent in fiscal Let me give you a brief review of that strategy. 2005 on top of 29 percent growth last year. There are four key elements: We also completed the largest transaction in > Our purpose and mission Clorox history with the acquisition of $2.8 billion > Our portfolio — “Creating the Right to Win” of our stock from Henkel KGaA at a cost of $46.25 > Winning with corporate capabilities — “the per share in a tax-free exchange. The successful 3Cs and 3Ps” execution of this transaction resulted in a recapital- ization of the company, lowering our cost of capi- > Delivering top-third shareholder return tal, increasing earnings per share and, importantly, generating substantial value for our shareholders. 13510cloD1R2.qxd 9/15/05 4:56 PM Page 2 02 The Clorox Company Fiscal 2005 Key Results by Operating Segment Percent of Company Pretax Net Sales Net Sales Net Sales Earnings Household Group — North America $2.0 billion 46% + 3% +0% Specialty Group $1.8 billion 41% + 7% +4% International $0.6 billion 13% +13% +3% Note: Intersegment sales are insignificant. All comparisons are with fiscal year 2004, and pretax earnings exclude the results of discontinued operations. Our Purpose and Mission Through these efforts we concluded that Clorox Our strategy work brought clarity to the central has an advantaged portfolio in both the U.S. and reason for our success over the long term. That is, our international markets. We believe we can “Clorox begins and ends with the consumer.” That effectively compete and grow with our brands well is our purpose, and nothing is more important. into the future. We also reaffirmed our position in the market- Winning With Corporate Capabilities — the 3Cs place. It’s about having No. 1 and No. 2 leader- and 3Ps ship brands in our categories. In fact, we believe, For many people at Clorox, the key elements of “We are the best at building big-share brands in our strategy are what we call the 3Cs and the 3Ps. midsized categories.” Ultimately, this guides our These are the critical choices we have made to portfolio and investment choices. continue building important capabilities at the cor- porate level that will help ensure the “right to win” Finally, we articulated our mission: “We build with our brands over the long term. brands that make people’s lives easier, healthier and better.” This is the theme of this year’s annual The 3Cs — Consumer, Customer and Cost — are report. I believe Clorox people are making great our core business strategies: progress in pursuing our mission. > Consumer: This strategy choice is about build- ing world-class consumer insights capability and Our Portfolio — “Creating the Right to Win” applying it to our innovation work and to our Through the work we completed on our portfolio, integrated brand-building activities. we’ve identified the “right to win” with our many leading brands. The identification of our unique > Customer: Our customer strategy choice is to strengths and capabilities has helped us focus our deliver to our retail customers high-impact, efforts to grow our categories, build market share value-creating services, based on mutual growth and improve the profitability of our brands. and profit potential. > Cost: This strategy choice focuses specific We also differentiated our investment levels efforts on improving productivity and enhancing across our product portfolio to seek to maximize margins through systemic improvements across the potential of our businesses overall. businesses and geographies. 13510cloD1R1.qxd 09/10/2005 6:58 PM Page 5 The Clorox Company 03 +54% +38% Cumulative Total Shareholder Return July 1, 2000, through June 30, 2005 (assumes reinvestment of quarterly dividends) Peer companies — An average of 20 consumer packaged goods -11% companies used for benchmarking purposes. Clorox Peer Companies S&P 500 2000 2001 2002 2003 2004 2005 The 3Ps — People, Process and Partnerships — > We leveraged our Clorox® bleach and home- are the strategic capabilities that enable us to cleaning brand equity under a successful health achieve our core business and portfolio goals: and wellness platform. By working with our retail customers to communicate the benefits of disin- > People: This strategy choice is about fecting to their shoppers, we helped build their building leadership capability, diversity and business with our brands and increase overall bench strength. category sales. Ultimately, this is all about mak- > Process: Our process strategy choice is aimed ing people’s lives healthier. at creating a seamless organization by improving > We received our best scores ever on a well- key business processes that make work easier, respected study of consumer packaged goods enable better-informed and faster decision- manufacturers that asks a broad range of making and deliver greater consistency and retailers to identify their best suppliers. We predictability. were the smallest company recognized; we > Partnerships: This strategy choice continues our were among the top 10 in five of the eight focus on leveraging partnerships to drive growth categories measured; and we were one of only and create virtual scale. three personal-care and household-products companies recognized. Our “right to win” portfolio work along with our > We continued our progress toward improving corporate capability efforts (3Cs and 3Ps) gener- working capital management with U.S. days ated some very positive results this past year. sales outstanding improving from 34 to 27. It’s a Here are just a few examples: great example of our process-improvement > We introduced 19 new products in the efforts delivering real business results. U.S., including two new “game changers”: > Execution against our global lean-manufacturing Glad® ForceFlex™ trash bags and the Clorox® initiative, aimed at reducing defects and down- BathWand system. times, was outstanding and delivered cost > We increased total market share across all savings and efficiencies greater than planned. categories, and became the leader in the > We successfully executed internal control require- bathroom-cleaning category. ments of Section 404 of the Sarbanes-Oxley Act. 13510cloD1R2.qxd 9/20/05 8:18 PM Page 4 04 The Clorox Company We remain committed to ensuring corporate end with the consumer… building brands that governance process excellence. make people’s lives easier, healthier and better. > On the partnership front, Procter & Gamble We made good progress over the past year, both increased its stake in our Glad joint venture in our performance and in the implementation of to the maximum 20 percent allowed under the our strategy. We believe the choices we’ve made terms of the venture agreement. We continue to will lead to delivering our longer-term financial have confidence in the success of the Glad busi- goals — and we are committed to achieving ness well into the future. We are also expanding those goals.