Steve Austenfeld - Former Vice President of Investor Relations Stephen M. Robb - Chief Financial Officer and Senior Vice President Donald R. Knauss - Chairman, Chief Executive Officer and Chairman of Executive Committee.

William Schmitz - Deutsche Bank AG, Research Division Wendy Nicholson - Citigroup Inc, Research Division Olivia Tong - BofA Merrill Lynch, Research Division Michael Steib - Crédit Suisse AG, Research Division Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division Erin Swanson Lash - Morningstar Inc., Research Division Lauren R.

Lieberman - Barclays Capital, Research Division Constance Marie Maneaty - BMO Capital Markets U.S. Christopher Ferrara - Wells Fargo Securities, LLC, Research Division Jason English - Goldman Sachs Group Inc., Research Division.

Well, good day, ladies and gentlemen, and welcome to The Clorox Company First Quarter Fiscal Year 2014 Earnings Release Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. And now I will 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..

Great. Thank you. Welcome, everyone, and thank you for joining Clorox's first quarter conference call. On the call with me today are Don Knauss, Clorox's Chairman and CEO; and Steve Robb, our Chief Financial Officer. We're broadcasting this call over the Internet and a replay of the call will be available for 7 days at our website, thecloroxcompany.com.

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, debt-to-EBITDA 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 most directly comparable financial measures determined in accordance with GAAP can be found in today’s press release, this webcast's prepared remarks or supplemental information available in the Financial Results area of our website, as well as in our filings with the SEC.

In particular, it may be helpful to refer to tables located at the end of today’s earnings release. Please recognize that today’s discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans.

Please review our most recent 10-K filing with the SEC and our other SEC filings for a description of important factors that could cause results or outcomes to differ materially from management's expectations and plans. The company undertakes no obligation to publicly update or revise any forward-looking statements.

With that, I'll now cover highlights of our first quarter business performance by segment. Steve will then address our financial results and an updated outlook for fiscal year '14. Finally, Don will close with his perspective on the business, followed by Q&A.

In the first quarter, volume was up 1% versus the year-ago period, with increases in Professional Products, Charcoal, Laundry and Burt's Bees, partially offset by declines in Home Care. Sales were up 2%, with increases in 3 of our 4 reportable segments.

As we discussed with you on our last earnings call, we anticipated that sales would be -- in the first half of the year, would be lower -- at the lower end of our full-year range due to competitive activity and declining foreign currencies. And our first quarter sales were 2%, well in line with that expectation.

Importantly, excluding the impact of foreign exchange, sales increased 3.5%. Our U.S. market share results reflect a decline of 30 basis points versus the year-ago quarter, reflecting heightened competitive activity as noted last quarter. Over the same period, our categories grew about 1.2 points, with strong gains in Laundry, Charcoal and Cat Litter.

Burt's Bees, which is not included in the traditional market share data, also grew share in the quarter. Now let me turn to our first quarter segment results. Our Cleaning segment volume was flat, with sales growth of about 1%. Strong sales in Professional Products due to double-digit gains in our commercial Food, Cleaning and Healthcare businesses.

Volume in our Laundry business was also strong, as the category have seen nice growth following the concentration of bleach taking place over the last 18 months. Concentrated bleach is also continuing to deliver significant gross margin improvement from reduced raw material and transportation costs.

Although category growth has been strong, our market share remains challenged by the strong merchandising and the distribution of private label bleach at a few customers.

We believe increased in-store merchandising, continued benefits from our Bleachable Moments marketing campaign, as well as new advertising noting the significant benefits of Clorox Bleach versus the competition, would improve share trends in the second half of the fiscal year.

Partially offsetting the strong results in Professional Products and Laundry was a decline in our Home Care business due to an extremely competitive environment in the Wipes category. And in response, we then increased merchandising support, which will benefit the second half of the fiscal year.

And we're expanding Wipes to new uses with new Clorox glass wipes and bath wipes, both of which will begin shipping in January. In our Household segment, volume grew 2%, while sales increased 5%. The segment's top line results were primarily driven by our Kingsford charcoal business.

Following 2 quarters of soft consumption, largely due to poor weather, this business rebounded in the first quarter with a double-digit volume increase on a strong summer holiday merchandising and new late-season marketing launched in September, where they can tailgating at home with the fall football season.

Our Cat Litter business also contributed volume and sales gains, with the recent launch of our new Clean By Nature product, which uses both carbon and plant extracts to provide strong odor control. Our Lifestyle segment enjoyed 4% volume growth and 5% sales growth.

Burt's Bees delivered double-digit volume growth, with a strong growth in the drug channel, our new lip and face care products, supported by strong demand creation. In January, Burt's Bees began shipping new brightening products in the United States, as well as new facial towelettes.

Our Food business had its fifth consecutive quarter of higher volume, driven by increased shipments in dry dips and dressings, as well as the sandwich spreads and pasta salad kits launched late last fiscal year. In aggregate, our 3 U.S.

segments delivered volume growth of 2% and sales growth of 3% in the face of a sluggish economy and a heightened competitive environment. Turning to our International segment, Q1 volume was flat and sales declined 3%, with strong currency neutral sales, more than offset by foreign currency declines in Argentina, Australia and Canada.

Excluding more than 7 percentage points of negative foreign currency impact, International sales growth was more than 4%. Volume in Venezuela and Argentina was down in the quarter, as expected. In other markets, we're investing behind information, such as with our new Cleaning utensils and thick bleach products.

And as discussed at our recent Analyst Meeting, we'll continue to invest behind faster growing markets, while prudently managing through the more challenged markets of Venezuela and Argentina.

Looking at the full fiscal year, we narrowed our sales growth range to 2% to 3%, factoring in an updated outlook for the impact of foreign currency declines, which are now expected to reduce sales by up to 2 points.

Volume is expected to improve in the second half of the fiscal year behind increased merchandising and innovation, as well as an easier prior year shipment comparison, particularly, in our Charcoal business. With that, I'll turn it over to Steve Robb..

Thanks, Steve, and welcome, everyone. We're off to a strong start in the fiscal year. Excluding foreign currency headwinds of nearly 2%, we delivered 3.5% sales growth. We also delivered 7% pretax profit growth, as well as free cash flow of $152 million or 11% of net sales, which is about flat versus the year-ago quarter.

With that, I'll take you through the details of our Q1 financial results and then discuss our outlook for fiscal '14. In our first quarter, sales increased 2%, reflecting more than 1 point of shipment growth, about 2 points of pricing benefit and nearly 1 point of favorable mix.

These factors were partially offset by nearly 2 points of foreign currency declines. Gross margin for the current quarter was essentially flat, which was slightly better than we had anticipated. Importantly, our U.S. gross margin was up versus a year ago, while International margin was down but better than expected.

We're pleased that we're starting to see the results from our efforts to cut costs and improve operational efficiencies in our International business, which helped moderate the margin decline. For the quarter, we delivered cost savings of $25 million or 180 basis points and about 80 basis points from pricing.

These benefits were offset by higher manufacturing and logistics costs, largely from continued inflation in Latin America and higher commodity costs. Selling and administrative expense for the first quarter was 14.5% of sales, a slight improvement versus the year-ago quarter, primarily driven by lapping prior infrastructure-related investments.

These results were partially offset by investments in systems to support the long-term growth of our Burt's Bees business. Advertising spending for the current quarter was nearly 9% of sales. Our U.S. Retail spending was about 10% of sales, reflecting continued support for our domestic brands and categories.

We continue to spend prudently in our International business, where we significantly reduced investments in markets with challenging economic environments, while supporting other fast-growing markets, particularly behind innovation.

Our tax rate of roughly 34% on earnings from continuing operations was nearly 3 percentage points higher versus the year-ago quarter, reducing diluted earnings per share by about $0.04.

As I mentioned, free cash flow for the first quarter was $152 million or 11% of sales, about flat versus the year-ago period, reflecting higher tax payments and an increase in inventory, offset by lower capital expenditures. For the full fiscal year, we continue to anticipate free cash flow to be about 10% of sales.

As a reminder, we define free cash flow as cash provided by continuing operations, less capital expenditures. Consistent with our commitment to return excess cash to shareholders, we repurchased about 1.6 million shares for $130 million in the first quarter.

We ended the quarter with a debt-to-EBITDA ratio of 2.1x, at the low end of our targeted range of 2x to 2.5x. Net of all of the factors I've discussed today, in the first quarter, we delivered diluted net earnings per share from continuing operations of $1.04, an increase of 3% versus the first quarter of fiscal '13.

Now I'll turn to our fiscal 2014 outlook. As we discussed on our last earnings call, we've been closely monitoring foreign currencies and commodities. Coming into the fiscal year, we faced unfavorable foreign exchange headwinds in multiple countries and oil prices that were above our targeted range of $90 to $100 per barrel.

Despite the recent fall-off in oil prices, resin prices continued to increase. Given these elevated pressures on sales and earnings, we've updated our full year outlook.

As Steve mentioned, we now anticipate sales growth in the range of 2% to 3%, which reflects up to 2 points of impact from foreign currency declines versus a previous assumption of 1 point. In particular, we're facing weaker currencies in Argentina, Australia and Canada. Turning to gross margin.

We now anticipate gross margin for the full fiscal year to be flat to slightly down, reflecting higher commodity costs, primarily from resin.

All other assumptions about gross margin are generally the same, including the anticipated benefit of 150 basis points from cost savings, some modest pricing and about 100 basis points of negative impact from inflation impacting manufacturing and logistics costs.

As we've faced -- done in the past, when we faced elevated commodity costs, we'll consider taking pricing, particularly on products impacted by higher resin costs to support the long-term health of our margins.

Our updated EBIT margin range is now flat to up 25 basis points, reflecting more than 100 basis points of negative impact from higher commodity costs. Our previous assumption for commodities was an impact of 100 basis points or less.

This range continues to reflect lower selling and administrative expense as a percentage of sales, consistent with our long-term goal of reducing this line item to 14% or less of sales. Now due to the timing of spending, we continue to anticipate expenses, as a percentage of sales, to be higher in the first half of the fiscal year.

We anticipate total company advertising spending for the full year to be about 9% of sales, or somewhat below, driven largely by our decision to reduce investments in Venezuela and Argentina.

The company's outlook continues to reflect $0.05 to $0.10 of diluted earnings per share impact related to the anticipated effects of continued price controls and high inflation in Argentina and Venezuela. As a reminder, our outlook does not assume further devaluation of Venezuela's currency in fiscal '14.

Net of all these factors, we now anticipate diluted earnings per share to be in the range of $4.45 to $4.60 for fiscal '14. Of this $0.10 reduction versus our previous range, about half reflects unfavorable foreign exchange and the balance reflects higher commodity costs net of the mitigating actions we're taking.

In closing, we had a strong start to the fiscal year, delivering solid sales and profit growth in the first quarter, masked a bit by a higher tax rate and foreign currency declines.

As I mentioned in the press release, we feel good about the plans we have in place to impact the headwinds we're facing and support the long-term health of our business, including a robust product innovation pipeline and strong cost savings. And with that, I'll turn it over to Don..

first, selling more volume. We achieved volume growth in our U.S. business, as well as flat volume in International despite issues in Venezuela and Argentina. Second, getting more price realization for our products. We achieved 80 basis points of positive pricing impact for the quarter in gross margin. And third, delivering strong cost savings.

And again, we exceeded that 150 basis target and delivered 180 basis points of cost savings in the quarter, which helped keep our gross margins flat. And in fact, in the U.S., as Steve said, our gross margins were up modestly despite the fact that we did absorb higher commodity costs versus the year-ago quarter.

And as we've reiterated, the pipeline of cost savings looks solid for the rest of the year. So the fundamentals are strong and we're taking the needed actions I mentioned earlier to offset the issues we're facing with foreign currencies and commodities.

We're also committed to regaining market share and I feel very good about our marketing plans and the product innovation across our portfolio as we move into the second half of the year to drive improved share results in the second half of the year.

So with that, why don't we open it up to your questions?.

[Operator Instructions] We'll go first to Bill Schmitz with Deutsche Bank..

Can you just talk a little bit about, first, Cat Litter and then on the Wipes business? Because it seems like Cat Litter is starting to turn. I'm wondering what you guys did to get the market share stabilizing again? Because I guess, it was competitive from that, say, in that category.

And then, obviously, as you kind of entered the new year, it was a really elevated cold and flu season and you had a lot of Wipes volume.

So what's the plan to offset that?.

Yes. Let me start, Bill. On Litter, I think it's a combination of things. It's clearly getting new innovation out there. Steve referenced some of that earlier, getting new points of distribution has certainly helped. But we're also getting more aggressive on the merchandising.

And thirdly, I think you're going to see -- before the end of the year, you'll see new value-focused, product performance-focused advertising. So I think it's -- clearly, right now, it's the distribution gains and the innovation that's driving. And I think we'll combine that, as I said, with this new advertising starting soon.

On Wipes, clearly, as we head into the second half of the year, as you noted, we've got significant overlaps in this quarter, given the strong flu season that was prevalent last year. So far, we're seeing good start off, but we've got increased merchandising coming in the next half of the fiscal year. We've got new innovation.

I think you -- most of you saw it out in Pleasanton, the glass wipes and the tub and shower wipes, as we've pushed the product into more usage occasions. You're also going to see more value packs, extended value packs, from us as we move into the new year, grouping more canisters, if you will, into multipacks.

So we feel pretty good about it as we move into the second half on Wipes as well. And of course, the value advertising, you started to see that kicked off already in this quarter with the guillotine execution, if you will, where we disinfect twice as much as some of our competitors do. So that's a combination of all those elements..

Great. And then, maybe you don't want to venture to guess, but what are your thoughts on the Venezuelan devaluation in January? Because our guys think it's like a 40% chance, so I'm just -- you guys are obviously in the market. So what's your current take in there? I know it's not in the guidance..

Yes, Bill. This is Steve. I think the truth is nobody knows. I mean, what we do know is the official rate is sitting right around 6.3, obviously. If you look at CCEM [ph], which is the mechanism that they've put in place when they've had periodic auctions there, I mean, that's sitting at 11.

And by the way, the parallel rate, as of this morning, I think was like 55. So pretty big spread. I think there's no doubt that there's going to be a devaluation. Everything we've heard from the experts is they think it's going to happen sometime next calendar year, probably, in the first of the calendar year. But beyond that, it's really hard to say.

I think the government is trying to slow down in terms of how fast they do that for a variety of reasons. But when you've got a parallel rate that's sitting in almost 55 relative to the official rate, it's not whether there's going to be a devaluation it's just how much and when. And I think that's what we're all monitoring closely..

The intelligence we have, Bill, is not fundamentally different from what you said..

Our next question will come from Wendy Nicholson with Citi Research..

Just a follow-up on that. I know your $0.05 to $0.10 full year EPS impact from Venezuela and Argentina.

Is that kind of pro rata? So the impact of those 2 countries in this quarter is kind of $0.02 to $0.03?.

Yes, that's pretty close. And I think what we've said is the $0.05 to $0.10 still feels right to us to pick up the operating challenges we have. A little more of that's likely to fall in first half than the second half, but your estimate for the first quarter is pretty close..

Okay. And then my bigger picture question. Two things. First of all, can you comment on sort of the innovation pipeline? I know Wipes launched in January, on just the timing of other sort of new product activity.

Because my question really is, you've got a really tough volume comp in the December quarter and I'm thinking, in Wipes in particular, maybe you've got destocking before the new launch.

So do you think volumes are going to be up or down on -- in the second quarter?.

Yes, Wendy, I think the second quarter will be the toughest one from a volume overlap. Obviously, we had 8.5% revenue growth in that quarter, as you pointed out, and 5% volume growth. So that will be the most challenging. The new product cadence is, obviously, these launches and you saw a number of them when you were out.

These launches will begin in January. So if you look at Home Care, for example, in addition to the Wipes we talked about, you've got Pine-Sol innovation with the floor Wipes, the Squirt & Mop Pine-Sol. We've got new bleach items coming out, King Size Scents. We've got the Fraganzia line of bleach. We've got Smart seeking bleach, which you all saw.

So -- and we've got new flavors on Hidden Valley, et cetera. So if you go down the major brand list, all of that is hitting in the January, early February timing. So we're going to see some load of that as we get into the December time frame, as people load up on that.

So that should help mitigate a little bit, but clearly, the second quarter will be the challenge on the volume cycle..

And is there a generalization that you could make about the innovations? I mean, I know, most of the companies in the group, when they launch new products, they like to make them premium-priced because they're more innovated and they offer value-added benefits.

It sounds like, on the one hand, you should be up-charging for them because they're new and special and the commodity environment is difficult. On the other hand, you got all this competitive activity.

So can you generalize and say is this stuff premium-priced? Or is it coming out at the same prices as the stuff that it's replacing?.

By and large, if it's Wipes, for example, the glass and tub and shower wipes, it's more aligned with the standard wipe pricing.

If you look at things like Pine-Sol floor wipes and Squirt & Mop and some of the new executions or new products on Brita, for example, and on Glad, with the new Hawaiian Aloha Scent, it's more of a premium price and more of a trade-up.

What you're also going to see, though, in that quarter is a step-up in merchandising to support those new items, so that -- so we get off to a fast start. But by and large, I would say over half of the innovation we're doing is a margin enhancement to the company average..

Moving on to Olivia Tong with Bank of America Merrill Lynch..

I just want to -- two questions. First, what's your updated expectation on crude versus the $90 to $100 that you had before? And then on cost cutting, clearly, it looks like you saw a little bit more of an improvement than you had expected.

So was there just an overage across the board? Or is there a specific project that came in better than you expected?.

Yes, so this is Steve, let me lead off. So from a crude oil standpoint, our latest assumption is that oil will trade in the range of $95 to $105.

Although, as I say that, the one thing I always want to remind folks, that a lot of the markets that we're buying commodities, things like resin, they trade as much on supply and demand as they do crude oil and nat gas and these other things. But $95 to $105 is what we're assuming. As far as cost savings, we got off to a pretty quick start.

We hit 180 basis points of cost savings, as I mentioned, in the first quarter. A lot of that was being driven by the new bleach, the concentrated bleach, and that has really been delivering pretty significant results for us in the P&L and we're certainly seeing that come through cost savings.

In fact, we remain -- we're still targeting the 150 basis points of margin expansion from the cost savings programs. But this is one of the things we'll be leaning into to try to mitigate some of the higher commodity costs that, obviously, we're seeing in the form of resin.

So we feel good about the pipeline and the programs and our ability to help mitigate at least some of the higher commodity costs this year and, certainly, over the longer term..

Got it.

But still too early to update the cost savings target at this point?.

We're going to hold with the 150 basis points. That's our long-term target. And again, our goal is always to try to hit that and try to beat it when we can.

But we'd also say that when you have a 3-year pipeline of ideas that constantly pursuing, we're focused on steady, solid execution of the projects we have as opposed to trying to spike it in one quarter or another, which is very hard to do, given how we run the programs..

Got it. And then just a follow-up on Professional Products. You guys talked a little bit about that at the Analyst Day and maybe if you can give us an update on how the acquisition environment looks there.

Because you've talked about how you want to grow both organically and inorganically in that market, but haven't heard much in terms of acquisitions more recently..

Yes. And again, we had done 3 acquisitions in the space over a couple of years. What I would say is we've got a robust pipeline of companies that we're always looking at and that we're interested in.

It's really hard to do call the timing of these but I feel good about the pipeline, I feel good about our ability over the next 3 to 5 years to get some additional bolt-on acquisitions in that space. But you have to kind of work these 3 over time and it does take a little time. So very hard to predict. But again, good, healthy pipeline.

Feel good about our prospects for the future..

The one thing I would add, Olivia, on that, is that when we put our algorithm together to get the Healthcare business from the $130 million it is today roughly to $300 million, we thought we needed about $100 million of additional bolt-ons over the next 3 years.

That's come down to $60 million because of the strength in the organic growth of what we have acquired and integrated. So it takes some of the pressure off us, but as Steve said, we've got a pretty robust pipeline there..

Our next question will come from Michael Steib with Crédit Suisse..

I have 2 questions, please. Do you know when you're likely to be back on the normal merchandising cycle for bleach? Is that still expected for early the third quarter? That's my first question.

And then secondly, could you give us a bit more detail on why the margins in the Lifestyle segment were down 250 basis points? Is that all related to the investments behind the Burt's Bees launches?.

Yes, let me start, Michael, on the bleach. And I'll turn it to Steve and he can talk on the second part -- the second question you had. We're already starting to see the bleach improving. We're starting to see improved consumption trends as we move into this quarter.

I think, to your point, the bulk of the merchandising improvements we'll see as we move into the second half of the fiscal year, particularly as we get some of the new items moving out, like the new King Lavender Scent or the new King Scents we're putting out, the Fraganzia bleach we're putting out and then Smart seeking bleach.

So we're going to align more of that merchandising support behind those new items as we move into January, February. But we're already starting to see some modest improvement right now..

And regarding your question about Lifestyle margins and profitability, it is all due to the investments we're making in systems. Essentially, Burt's Bees, as we've talked before, this is business is growing double digits, fast-growing. It's expected to continue to grow pretty fast.

We've simply outgrown the systems that we have in the business when we acquired it. So we're in the process of investing to move them onto our U.S. SAP platform. Good news is, we turned the system on in October, it's going extremely well. And we think that you're going to continue to see costs come through that segment for another quarter or 2.

But after that, we should start to anniversary that and you'll see the profitability come right back..

Ali Dibadj with Bernstein has the next question..

Just, first off, a quick clarification on the $0.10 you've guided down for the year.

What would have that -- what would have that have been without the tax improvement? And also, are you -- is there a different amount of contingency for Venezuela in the number going forward versus what you've said before?.

Okay. Let me start with the tax piece. There's been no fundamental shift. I mean, we're seeing tax rates of about 34%, okay? So I really wouldn't attribute it to any of that. It really is what I said in my opening comments, which is, about $0.05 is related to the foreign currencies.

The previous estimate we had for foreign currencies was down about 6 months ago, so things have obviously shifted. And then, the other $0.05, really, is this higher commodity costs, net of all of the mitigating actions that we're taking to offset it.

As far as Venezuela, again, as I said, that we're continuing to use the official exchange rate like everyone else, of 6.3. And we really haven't made any changes in our outlook for Venezuela either in terms of devaluation or the operating climate, notwithstanding that we did a little bit better in the first quarter than we had expected there..

Okay.

And then from a mitigating perspective on commodities, can you give us a sense of how much of the commodity costs, what percentage you expect to be able to offset? And whether you think that's different today given some of the share pressures and competition and retailer pressures that are out there right now?.

I think long term, we feel very good about being able to mitigate this and protect our margins. Again, we took a pretty sharp increase in resin in September. So within any given fiscal year, it can be a challenge to offset 100% of this. But certainly, over the long term, we feel very good.

And the actions, as I mentioned earlier, that we're taking, we're going to take a hard look at pricing, primarily, international pricing, where we think we have some opportunity. Cost savings certainly came in strong for the first quarter and that's an area that we're going to continue to lean into. And then, of course, SG&A.

So I think we're going to do what we do well, which is focus on the fundamentals and take the right actions. Understand the share challenges, but we fundamentally believe that these brands have pricing power.

We've seen that over the long term and remain fairly confident that we can recover any margin pressures from commodities over the long-term, doing the things that we do well..

Okay. And my last one, I just want to dig in a little bit into innovation. From a pricing power perspective, certainly, some of the ways you do that is through innovation.

And just trying to get a better understanding of really how you think about the ROI on innovation, not much in your R&D process in terms of how you think about it philosophically going forward.

Because we keep hearing it drives about 3% of incremental top line growth, which is great, but it feels like that then drops off, right? So you're only growing 3%. So you get 1%, you're out of it and it drops off. You have to start from scratch again.

And I'm trying to understand from a longer-term perspective, how to square that, how to understand that.

And whether from a pricing perspective, it's a necessity or are you gaining more shelf space? Do you get a sense of shelf space changes around, I think, from these innovations in the short-term? I'm trying to kind of put it all together to understand -- you're investing, you've got 3%. It disappears. You have to invest again to get another 3%..

Let me take a shot at this, Ali, and then we can certainly have an off-line conversation about this. It might take longer to get into it. But I think you and I talked about this a little bit at the Analyst Day. If you take the innovation that drives the 3 points of growth, let's take the SMART TUBE technology on spray cleaners.

It's not like the 3 points of growth is coming from completely new products. It's coming across a broad range of our existing products. So for example, that SMART TUBE technology on our spray cleaners is an innovation that's counted in that 3% growth. Obviously, it's manifested on Tilex, on 409, et cetera.

We're not counting those brands as new, if you will. So a lot of this investment and, certainly, the 9.9% advertising and consumer promotion we're spending in the U.S., is dedicated to reinforcing those innovations. So it's not like we start over every year, I guess. I guess that's where I'm struggling a bit.

Because we -- the innovation, a lot of times, is across the base legacy brands..

Ali, this is Steve. I'd make a couple of other points. Number one, just for clarity, the 3 percentage points that we talked about from incremental sales, that's net of cannibalization, okay? Second, in our internal financial hurdles, we're always focused on long-term, incremental sales associated with consumer-meaningful innovations.

So it's not like this stuff is launching and disappearing. I mean, we try to focus on consumer-meaningful innovation that has staying power. And ideally, it's margin accretive.

As a minimum, we like it to be net neutral to an SBU, but we really do target to make it margin accretive, because that creates a fuel for growth to be able to invest more behind the brand. So the stuff does have staying power. It's certainly what we've been seeing in all the work that we've been doing..

And I think to pile on -- with his comment, as he said, once you launch and you get to 3 points of growth, use the words, that it drops off in a year or 2. It actually is built into our base at that point. So we're still typically getting incremental growth out of the items we launched the prior year or the year before that.

It's just we're no longer counting them as part of the 3 points..

And what about....

So they're dropping off..

That's helpful.

And what about shelf space? Do you incrementally get shelf space every time?.

Yes, we've seen -- yes, obviously, it depends on the category, Ali. But we've seen no real loss on shelf space at all, but net gains on assortment.

I think one of the issues we've had, for example, on Bleach is -- the issue on Bleach, for example, in terms of our share loss, hasn't been that we've been getting less distribution gains than private label, but that the productivity of their gains was better.

So for example, if you look at the Bleach share we've lost -- and we think that's why we're more confident and the second half we'll start to reverse this -- if you look at where private label has really driven growth in Bleach, it's through scented kings, where they really had no innovation and no presence. And we had that.

And so the -- those are more mainstream items. We rolled out things like Gentle Bleach. And while we've got distribution gains and assortment gains, if you will, from shelf space for that, it didn't have the productivity or velocity that a Lavender King Size private label bleach had.

So it's not just are you getting the assortment gain in the shelf space. It is, is the productivity of that SKU what you thought it was. And so if you look at the Bleach innovation coming out, for example, the kings, we're starting to plus out the scents because that's where the growth is really being driven. So it's -- we tend to get shelf space.

We tend to get more distribution points. What we're trying to do is make sure the efficacy of those distribution points is as solid as it can be..

And Erin Lash with Morningstar has the next question..

I just wanted to ask about the Hidden Valley business. Obviously, you cited that, that business continues to do well. Kraft's noted last night that their salad dressing business continues to be ultra competitive. And so I kind of wanted to get your thoughts on the overall category..

Erin, you cut out. I couldn't quite hear. Erin, did you say -- I couldn't quite hear it, Erin..

Erin did you say that the dressing category has been ultra competitive?.

Yes, Kraft has noted that the salad dressing business has been ultra competitive..

Yes, if you look at the category trends on salad dressing, the last 13 weeks, the category has been down about 0.5. We've ticked up our share about 0.1. If you look at the last 4 weeks, the category has rebounded a little bit. You never put much into a 4-week number. But the category has been fairly solid over the last year or 18 months.

And I think our -- the constant flow of innovation we've had on at Hidden Valley, like with Farm fresh, has really helped drive our share position in that category and helped drive the category growth. So I think a lot of it has been due to our innovation.

The interesting thing about Hidden Valley is, as we expand that franchise into adjacencies like pasta salads, sandwich spreads, et cetera, I think it actually helps drive our salad dressing businesses well. It just gets the brand out there front and center into more occasions.

And I think that's one of the things that's helped us really gain fairly significant share over the last 3 years..

That's very helpful.

And I apologize if I missed this, but if you could just speak to the consumer spending environment and what you're seeing with regards to consumer attitude with spending?.

Yes, the interesting thing is we, obviously, have all talked about the fragile consumer for the last few years. If you look the last 13 weeks in our total categories, they're up 1.2%. If you look at the last month, categories are up about 1.4%. If you go back to fiscal -- calendar year '12, our categories were up about 1.5%.

So we're getting back to the historical range of growth in these categories, which is about 1% to 2%. We did have a dip in the first 6 months of this calendar year, in '13, where we kind of went flattish, but we're starting to see the categories come back a little bit north of 1%.

So that -- we think that bodes well, that we're at least getting back into the historical range..

We'll now hear from Lauren Lieberman with Barclays..

Two things. So first, this is on Brita. So I think the business has probably slowed down this quarter. If you could talk a little bit about that. I apologize, I don't remember if the hard-sided bottle, has it formally launched yet or if that was still to come.

And then, the second thing was just anything you could offer in terms of the retail inventory environment. We've kind of heard a -- I think a very mixed bag of perspectives on what's going on in terms of how closely you're managing your inventory. So just to get a sense of what you guys are seeing..

Yes, let me start, Lauren, and then maybe Steve will want to jump in. I think on Brita, we saw a little bit of a volume loss, not much in the quarter, but we did see some sales growth again. And we're starting to see some share gain again. If you look at the last 4 weeks, we've seen a little bit of share gain as the category rebounds a bit.

This is a category, if you look at the last 13 weeks, where Filtration has been down almost 3%. If you look at the last month, it's actually been up a little bit, about almost 1%. It's a category for the last year or 18 months that's been under a lot of pressure from bottled water as these guys really go deep on pricing.

I think we're fairly pleased with the innovation. The kids' bottles have done okay, not -- they haven't blown the doors off, but they've certainly done okay. If you look at what's coming in January with -- we've got more prints coming out. We've got the universal filter coming out. We've got a hard-sided 34-ounce Brita on-the-go bottle, if you will.

And we've also got the Hello Kitty bottle for kids coming out. So there's a lot of news coming on that business. So we feel fairly bullish coming into the second half of the fiscal year. It's probably the strongest innovation pipeline we've had on Brita for a while..

And Lauren, I'd just add on the bottle segment of Water Filtration, which is the fastest-growing segment, we have a market share that's even higher than our broader business, which, as you know, is pretty healthy. So we feel pretty good about that..

Yes, that share is approaching 70 or north thereof, so we do feel pretty good about that. That's one of those things. So that business, Lauren, to us, is more of an image business than, obviously, what you'd put in your refrigerator. So it's going to -- it takes constant innovation around design.

And that's what we're focused on, is having a cadence of innovation on the bottle business that keeps it on the forefront of people's mind from an image standpoint, design standpoint..

And is the hard-sided bottle just launching in that, let's say, the adult size, but not yet kids? Is that right?.

No. Kids was launched, basically, with the back-to-school season this year. So in the last few months..

Is it the hard-sided bottle or the soft one?.

The hard-sided. That was the one, when you were out for our Analyst Day, you may have seen. We had a number of different Nickelodeon-type characters on it. Yes, that was Dora the Explorer. And the Hello Kitty version is coming in January..

Okay. Got it. And then just the Retail inventory trends would be great, too..

I think as we said in the last Analyst Day from a retailer inventory, there's always going to be adjustments in the retail environment. But our categories tend to be very fast-moving off-shelf. We tend to tightly control the inventories in partnership with our retailers.

So it can have a little bit of a noise in the quarter but it hasn't been meaningful for us, I would say..

Yes, that one has, certainly, not been meaningful to us..

Moving on to Connie Maneaty with BMO Capital Markets..

My question has been answered..

In that case, we'll move on to Chris Ferrara with Wells Fargo..

I wanted bring it back to Venezuela for a second. Can you just talk about your view on price controls, right? So -- and in the event of another devaluation.

So do you have any idea how that's going to go if you're going to get more flexibility around the ability to price, if you do see a substantial devaluation there?.

It's really hard to know.

Historically, if you look at countries with price controls, including Venezuela, usually following a devaluation -- although this can lag some time, generally, there's this some kind of relaxation on the price controls because ultimately, what they're trying to do is get more product on-shelf that's both domestically produced, as well as important products.

It's the scarcity on-shelf that they're trying to fix by making some of these changes. So I think it's a fairly decent presumption that if there's a devaluation at some point, price controls will be relaxed at least somewhat and you'll be able to get some pricing through. But that's a pretty unusual market there and we'll just have to wait and see..

Chris, I was down in Colombia, Peru and Argentina about 3 weeks ago. And I think, certainly, one of the things we're doing in Argentina, is innovating, being fully aware of where the price controls are and how we innovate to get around some of those price controls with different products that the government says is okay.

I think having said that, we are getting more positive signs from the government post the congressional elections of this month, that they may be more open to pricing. We'll see how that plays out..

Got it.

And just totally unrelated, can you just remind me again of, like, the latest and greatest on how you're buying resin? Like, what's your exposure to spot price movements as opposed to forward buys? And also, is Glad still all right -- right where you just kind of feel it right away? I'm just trying to get a sense for the lag on raw materials..

It's a little complicated, but I would say is, we don't do any formal hedging, I'll say that. What we do is, because of just the flow of resin through the cycle, we'll -- we can sometimes lag anywhere between 30 and 90 days depending on the form of resin. Resin blends that we use depends on the product that we're making. We buy HDPE.

We buy linear load density polyethylene. So we're buying all the various grades, typically. But the trash bag business, which is the biggest one, uses linear load..

Our next question will come from Jason English with Goldman Sachs..

I wanted to talk about cash flow. This is the second quarter where you've seen a pretty large share repurchase number flow into the cash flow statement. And for the first time in a while, your net debt is actually creeping up. It looks like you leaned on some short-term notes payable to fund some of this.

So in that context, can you help us with kind of your current thinking in terms of buyback activity, willingness to take on leverage and what we should expect from you going forward?.

Yes. So to your point, we did enter the market and we picked up about 1.6 million shares, spend about $130 million. First, I would just point out that our debt-to-EBITDA ratio was about 2.1x. So we're certainly at the low end of our leverage range.

The outlook that we provided today does anticipate that we'll continue to do some level of share repurchases, but probably more to just offset stock option dilution than anything else.

I think going forward, what we have committed to, and I think we've got a pretty good track record of doing, is if we're building up excess cash, we look for ways to get that back to shareholders. At this point, the idea of doing a major share repurchase by leveraging up, that is not something that we're contemplating at this point.

I think we're comfortable with our leverage ratio, feel very good about the strength of our cash flows. And I think it's safe to say, as we build up cash flow, we'll look for ways to get that back to our shareholders, consistent with past practice..

And Jason, just for clarity, you mentioned, I think your words were, we leaned on leverage a little bit. As Steve noted, we're at 2.1x, prior quarter 2.2x, the quarter before. So a little unclear in terms of what you're referring to. I just wanted to be certain of that..

Sure. I'm seeing the exact same ratios. I was looking at absolute debt load..

Okay. But we all know is, within our leverage range on the debt-to-EBITDA basis, we've been pretty consistent or flat over the last couple of quarters..

Yes, yes. It looks clean. I'm not trying to imply anything different than that. Just trying to get a sense of use of cash..

Well, this concludes the question-and-answer session. Mr. Knauss, I will turn the conference back to you..

Okay. Well, we certainly appreciate everyone's participation. Happy Halloween to all and have a safe one. And we'll speak to you next quarter. Take care..

And again, ladies and gentlemen, that does conclude our conference for today. We thank you, all, for your participation..