高樂氏 (CLX) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Clorox company first quarter fiscal year 2010 release conference call. At this time all participants are in listen only mode. At the conclusion of our prepared remarks we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this call is being recorded. I would 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.

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. 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, www.TheCloroxCompany.com. On today's call Larry will start with comments on business unit performance as well as perspective on the current category and competitive environment. Dan will then follow with a review of the quarter's financial performance, as well as comment on our updated fiscal year 2010 outlook as communicated in our press release this morning. Finally, Don will close with perspective on key initiatives driving overall company performance. After that, we will open it up for your questions.

Let me remind you on today's call we will refer to certain non-GAAP financial measures, including but not limited to free cash flow, EBIT margins, and debt to EBITDA. 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 on today's press release, this webcast, prepared remarks, or supplemental information available in the financial results section of our website as well as in our filings with the S.E.C. In particular, it may be helpful to refer to tables located at the end of today's earnings release.

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 10-K 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.

Thanks, Steve, and good morning to all of you on the call.

As you saw in our press release we had a very good quarter. We delivered solid sales and volume results on top of double-digit growth in the year-ago quarter and our earnings are up 23% as a result of our third consecutive quarter of gross margin expansion. Very strong results in what remains a very challenging economic environment. as usual I'm going to focus on market share, volume and sales and provide perspective on what drove our top-line results.

Starting with our US categories, consumption remains stable. Versus year-ago, consumer take-away in US-tracked channels was about flat for Q1, a similar trend to what we have seen for the last several quarters. Our sales growth in untracked channels continues to significantly outpace sales in track channels with consumers migrating toward value oriented retailers like club and dollar. In tracked channels, we grew our health share in four of the eight categories we measure in the US. Our overall US share was down slightly in the quarter, primarily due to competitive activity in a few key categories, and the growth in private label shares. For perspective, on an all outlet basis, we grew our overall market share nearly a full share point during the past 52-week period.

In our international businesses, our market share results are positive and we generally have seen stronger category growth than anticipated, driven by pricing. Our volume was up 1% for the quarter. Gains were primarily due to higher shipments of disinfecting products, due to the H1N1 flu pandemic, largely offset by lower shipments of Glad trash bags and our access to the private label food bags business. The upside related to the H1N1 flu was well above our forecast given the rapid spread of the virus.

Sales for the quarter were down about 1%. Without the negative impact of foreign exchange we would have seen sales grow. This year's results represent a very strong 12% sales growth in the year-ago quarter which was driven by healthy base business growth as well as the Burt's Bees acquisition. Most of our businesses performed well in the quarter, but as usual, we saw differences across the portfolio. Here are a few highlights by business. In our largest category, home-care, we held share or maintained or maintained our leadership share position.

Volume and sales were up due to strong growth on disinfecting products. Clorox disinfecting wipes benefited the most, with all-time record shipments. Volume was also up strongly in some of our base businesses like Pine-Sol cleaner and Clorox toilet bowl cleaners. The positives in home-care more than offset some volume losses on Green Works hard surface cleaners. The growth in the natural cleaning category has slowed as we lap our initial launch although natural cleaners are still growing faster than traditional cleaners. Overall our core five Green Works cleaning products grew share within the natural home-care segment, and we remain the number one player with a 45% share, about twice the size of the nearest competitor.

In food, we continue to win in the salad dressing category, holding share despite a very competitive marketplace. Even with a significant premium to the competition, Hidden Valley salad dressings delivered double-digit results, propelled by highly effective marketing and a great tasting product.

In international, which now includes Canada, volume was up about 3%, with growth primarily driven by disinfecting products in Latin America. Despite unfavorable foreign exchange rate, sales were up 4% due to price increases. On a constant currency basis, our sales grew 12%. Overall, our categories in international markets are healthy. We grew share in a number of markets, notably dilutable cleaners and bleach in Latin America. Overall dollar share in Latin America increased 2.5 points for the quarter.

In Glad, Q1 volume and sales were down due to a weak category and increased competitive activity. The category softness relates to significant category volume declines, as well as lost sales dollars due to price roll-backs and increased trade spending category wide. Also affecting Glad's top line was our decision to exit from private label food bags the last fiscal year. That decision alone accounted for about a third of the Glad volume decline. Glad remains our most dynamic and challenging business given the ebb and flow of resin costs, retail pricing and competitive activity. We're working to restore Glad top-line growth through innovation and demand building investment. In August, we began shaping new Glad force flex trash bags that grips the top of the trash can and stays in place. We're offering this improvement to consumers without any price increase, a great example of how we're focused on driving greater value. We're also continuing to invest heavily in Glad advertising and trade promotion spending, including strong value oriented message.

Turning to laundry, the competitive dynamics in laundry additives has greatly intensified since last quarter, both from established players as well as new entries. We are vigorously defending this business, including marketing initiatives focused on the initiative that detergent alone is not enough, and highlighting the benefits of Clorox 2 on stains. Despite the new competitive activity, both volume and sales were up in the quarter. Our share was down, however, with the overall category expanding significantly behind the heightened activity.

Also in laundry, we started shipping Green Works Natural Laundry Detergent and Stain Remover in July. The products are off to a slower start than we had anticipated. That said, it's still very early. We're working through challenges of being a premium priced offering in a highly competitive price sensitive category. We continue to support the launch through advertising and introductory marketing.

The Brita brand is fundamentally healthy and continues to benefit from the sustainability mega trend and consumers focus on value given significant savings Brita provides versus bottled water. Q1 volume and sales declined modestly, primarily due to the comparison with strong growth in the year-ago quarter. However, we grew share and water filtration remains one of our fastest growing categories. On Burt's Bees, volume and sales were down slightly compared to strong 17% shipment growth on the brand in the year-ago quarter. While Burt's Bees has been impacted by the current economic conditions, we remain confident about the fundamentals of this business and the long-term prospects. Consumption grew up in our line of natural products has stabilized at high single-digit growth over the last several quarters. While this is less than the double-digit growth we saw prior to the recession, it is much stronger growth than what we are seeing in the traditional personal care category.

We continue to anticipate solid sales growth on this business in fiscal 2010, and we are laying a strong foundation for more robust growth as the economic conditions improve. For example, when we acquired Burt's Bees the business had a significant presence in three countries. Currently Burt's is in 14 countries and we plan to be in more than 20 countries by the end of this fiscal year. In addition, the new natural acne solutions line is performing extremely well. In January 2010 we plan to introduce a full range of Burt's Bees natural toothpaste, that are clinically proven to improve oral health.

Looking forward to the outlook for the full fiscal year, we continue to anticipate total company sales growth in the range of 1 to 2%. Let me walk you through a few of the key factors that will impact our volume in sales. On the positive side, most of our businesses are performing well, and we continue to see disinfecting product growth as a result of the H1N1 flu pandemic. In addition, our outlook around the negative impact from foreign exchange has moderated. We now anticipate the FX impact will be pretty much neutral for the year.

Finally, our international categories are healthier than they had been, and we have been able to increase prices in a number of international markets. On the negative side, our Glad business is particularly challenged. Pricing is down in the category, competitive spend is up, and yet category volume is soft. We're also challenging laundry and have stepped up trade spending to address price gaps.

Wrapping up, we feel good about our Q1 results, especially given the economic environment in the market volatility. While we have some puts and takes, we're confident that we can effectively manage our businesses to make our numbers on the year as well as to maintain the investment to keep our brands healthy for the long term. With that, I will turn it over to Dan to take you through the financial picture.

Thank you, Larry. While economic conditions remain challenging, the company continues to perform very well, achieving strong first quarter results. Larry has already provided a recap of our top line and share performance so all owe sly comment on first quarter financial performance and provide an outlook for fiscal year.

I think there are three important take-aways on our first quarter results. First, we're reasonably pleased with our sales performance in the quarter. We're somewhat ahead of plan due to various factors, including very strong growth in disinfecting product sales driven by the H1N1 flu pandemic. We also saw double-digit growth in food product sales and strengthening foreign currency in our international businesses. While we continued to be pressured by foreign currency headwinds in the quarter, those pressures were less than anticipated.

Our international categories continue to show improvement, and we return to total company volume growth as we anniversary the majority of the pricing actions from last fiscal year. Our top-line momentum in the quarter was moderated somewhat by the factors Larry mentioned, including the challenges in the Glad business, an increase in trade spending to address a ramp-up in competitive activity, and somewhat lower sales for our Green Works line. On balance, we feel good about our sales performance in the quarter, as we compare with the 12% sales growth in the year-ago quarter.

Second, we're very pleased that we're continuing to see a return to historical gross margin levels in a very tough climate. Q1 gross margin increased about 450 basis points to 45.1% of sales compared with 40.6% in the year-ago quarter, driven by lower commodity costs, strong cost savings, and the continuing benefit from price increases. Our EBIT margin also continues to expand closer to historical norms, increasing to 20.3% for the quarter, benefiting from gross margin expansion and tight control of administrative spending. We're somewhat ahead of our margin expansion estimates at this point in the year, and we're increasing our full-year outlook as I will address in a moment.

Third, our EPS growth, cash flow and balance sheet remained very strong. Diluted EPS for the quarter increased 23% to $1.11 for the quarter, on top of 18% growth in the year-ago quarter. The current quarter includes about $9 million in net foreign currency transaction losses, primarily related to Venezuela, consistent with our estimate these I spoke to you about last quarter. Our outlook for the full fiscal year assumes about 28 to $30 million in foreign currency transaction losses in the other expense line of the P&L, primarily related to Venezuela. The current quarter also reflects a 35.5% effective tax rate, versus a 31.4% effective rate in the year ago quarter, which benefited from some tax audit settlement activity.

For the full fiscal year, we continue to expect that our tax rate will be in the 34 to 35% range. Cash flow from operations, before a voluntary $33 million pension contribution increased about 35% from the year-ago period. We continue to use free cash flow to pay down debt. Our debt to EBITDA ratio at the end of the quarter was 2.6 to 1. We're well positioned to be at or below our 2.5 to 1 debt to EBITDA target during the second half of the fiscal year.

Now let me address four key elements of our updated financial outlook for the fiscal year. First, while conditions remain very volatile and make forecasting a challenge, we're cautiously optimistic about the full fiscal year and are pleased that our strong Q1 performance allows us to raise our EPS outlook range for the full fiscal year. As noted in today's press release, we now anticipate fiscal year 2010 earnings per diluted share in the range of $4.05 to $4.20.

This solid increase is projected on top of 17% diluted EPS growth last fiscal year. As a reminder, this outlook range includes a reduction of $0.02 diluted EPS, as a result of adopting the new accounting standard that changes the way diluted EPS is calculated. We anticipate the strength we're seeing in foreign currencies, improving conditions in our international markets, strong growth and momentum in some of our key categories, and very strong disinfecting product sales will more than offset the impact of competitive issues and softness in a couple of our business.

Second, continuing strong cost savings, more favorable business mix in foreign currencies and very disciplined spending should allow us to deliver higher margins for the fiscal year. We now project gross margin to increase in the range of 100 to 150 basis points on top of the 180-basis-point improvement we fiscal 2009. As discussed during our last call, we anticipate that commodity and energy costs will be favorable for the full fiscal year, but you have all seen the recent rise in oil prices to around $80 per barrel. We now anticipate commodities costs to rise more than previously project in the second half of the year. And the net benefit from lower year-over-year commodity costs for the full fiscal year will now likely be lower than the $90 million to $110 million net benefit we previously anticipated.

Third, top line sales growth will continue to be challenging, but we do expect growth, even in this environment. As Larry discussed, we're maintaining the our sales growth for the fiscal year in the range of 1 to 2%. While we anticipate continued high demand for disinfecting products in the second quarter, during the height of the flu season, it's much too early to know how this will play out across the full fiscal year. We're mindful of the possibility of reduced consumption as consumers work through their inventory of disinfecting product purchased in the first half. Our updated outlook assumes some drop-off in demand in the second half of the fiscal year. Our bags and wraps business is particularly challenged at present. Category pricing is down, competitive spending is up significantly, yet the category is quite soft. As Larry discussed, we have plans in place to restore the health of our business. However, we anticipate the category dynamics will remain challenging for the near term.

We continue to closely monitor our market share and price gaps versus competition. We're maintaining our healthy levels of brand building support, and we're spending to defend our businesses, especially in the laundry and bags and wraps categories. We anticipate increased levels of fiscal year trade merchandising versus our previous projections. Although we still anticipate our full-year advertising to increase on a dollar basis, it will likely come in a little lower than previously anticipated as we shift some of our investments to trade spending to manage price gaps and address the other competitive factors Larry discussed.

Finally, as you think about our EPS results across the fiscal year, we now anticipate a more balanced pattern. As we've noted in the past, typically about 40% of our earnings tend to fall in the first half, and 60% in the second half, primarily due to strong seasonal charcoal sales in the spring and early summer months. This fiscal year, however, with consumers stocking up on disinfecting product in response to the H1N1 flu, it is likely we'll see a somewhat higher percentage of our earnings achieved in the first half. While we don't believe that our fiscal 2010 earnings pattern will be a 50/50 split between the first and second halves of the fiscal year, it's likely that the first half will exceed the 40% we've historically seen.

To sum up, we had a very strong quarter. While the economy and competitive environment remain challenging, we're managing through it effectively, remaining disciplined with our investment spending, tightly controlling selling and administrative expenses, and driving our cost savings initiatives. We're pleased to be raising our EPS and gross margin outlook ranges this early in the fiscal year, and feel good about the plans we have in place for the balance sister year.

Let me now turn it over to Don to wrap up.

Thanks, Dan, and good afternoon, everyone. As Larry and Dan both noted, we had a very good first quarter. I think what I want to reflect on is the meeting we had in June with all of you when we met in New York at the analyst day. And I talked about how our strong leaders and business model have proven agility and flexibility to respond in any economic environment, and we've continued to remain agile to adapt our plans and tactics to really address the rapidly changing environment, while staying focused on the long-term and true to our strategies.

In Q1, our people clearly demonstrated the ability to course-correct after the volatility of the past year to execute and take action in a pretty dynamic marketplace. I think our response to the H1N1 pandemic is a great example of that capability. For several months now, teams companywide have been working to anticipate demand and take steps to ensure our disinfecting and sanitizing products are really available not only where consumers shop but also for our institutional customers as well. Certainly as this primary flu season will continue to hit the southern hemisphere and now takes hold up here in the north, in the recent weeks, we've significantly increased manufacturing capacity for Clorox disinfecting wipes to really help us stay ahead of the strong demand we're seeing.

Now, knowing that disinfecting product are critical in fighting the spread of viruses that can cause the flu, we're working closely with a number of public health agencies and others, supporting efforts to educate people on how to protect themselves, including a few key things I want to highlight for you. First of all, we worked with the National Education Association to distribute canisters of Clorox Disinfecting Wipes to US-based teachers and received 100,000 requests from teachers for product within four days. Secondly, partnering with the Visiting Nurse Association of America and families fighting to encourage families to get vaccinated, third, partnering with the American Red Cross to develop public service announcements about flu preparedness and then creating educational materials for retailers to distribute to shoppers. And lastly, we've just created some new advertising to demonstrate how our disinfecting products can help spread protection, if youl during the flu season.

I think another example of our agility is our new operating model, which is designed to help us move quickly to anticipate, initiate, and benefit from change. I think, as most of you know, we streamlined our structure and certainly clarified our decision rights and roles within the organization, which is helping drive lower year-over-year selling and administration costs that Dan highlighted. Agility is also a factor in how well the organization is balancing our near-term response to the competitive environment without losing sight of the long-term health of our business.

One thing I want to reiterate is that we are absolutely committed to profitable share growth. I want to be clear on one point. That is we're going to be spending more in advertising and trade promotion this fiscal year than we did last fiscal year. We're being more aggressive in communicating the value of our brands to consumers and to managing price gaps at the point of decide where many of the purchase decisions are made. While we certainly focused on delivering good results each quarter, we're also committed to ensuring we have a healthy company for the long term. We're continuing to strongly support our brands with advertising and meaningful innovation, which has manifested itself in a gain of almost a full share point on an all-outlet basis.

We're also investing in our infrastructure, such as the bleach plant modifications we also announced today. We're beginning to transition our plants from chlorine to high-strength bleach as a raw material for making Clorox bleach. That decision was really driven by a commitment to not only strengthen our operations, but also to add another layer of security. At the same time, it's obviously a very dynamic environment out there. I don't want to minimize the challenges we're facing, primarily in two areas. Commodity remain unpredictable, and of course, the consumers continue to remain under pressure. Having said all that, let me echo what Dan and Larry said. We're still optimistic about our ability to deliver in this environment, as evidenced by the first quarter results, and to execute our plans and drive long-term shareholder value throughout the year.

In summary, I would certainly describe this as a great quarter, particularly in light of the consumer environment and continued weak economic conditions out there. As Dan noted, we're projecting that our fiscal 2010 results will be better than previously anticipated. It's obviously quite early in our fiscal year. We've only got one quarter under our belt, and I believe we're being prudent in our updated assumptions while taking appropriate steps to manage our business in this environment as well as for the long-term health of the company. So with that I will ask the operator to open the lines for your questions.

Thank you, Mr. Knauss. (Operator Instructions). Our first question comes from the line of Nik Modi with UBS. Your line is open.

Good afternoon, guys. Just a couple questions. Can you provide any context on the upside from H1N1, relative to what you were looking for, how the business played out during the quarter?

So we think H1N1 accounted for two points of growth in the quarter, and obviously, that came across several business units including home-care in the US, a lot of international volume, particularly in Latin America, as well as our away-from-home business.

And then just another quick question. Outside of trash bags and laundry, where else do you see you see the most heightened competitive activity during the quarter?

Those are probably the biggies. There's some scrimmages in some parts of different categories, there's some aggressive pricing or trade spending in cat litter, but I would say the two biggies are really laundry and Glad.

And our next question comes from the line of Wendy Nicholson with Citigroup. Your line is open.

Hi. My first question is with regard to the pricing, I think you said in the international market you're benefiting from higher pricing, but are you planning, now that the dollar has weakened, to have to roll back some of that pricing?

Wendy, at this point, no, we're not anticipating any price roll-backs. In fact, right now, we're staying with the original plan we had in terms of price increases in the international market. So even though foreign exchange has improved versus our expectations, we're still planning to move forward with the pricing actions that we had planned for the year.

And our next question comes from the line of Bill Schmitz with Deutsche Bank. Your line is open.

Hey guys. Good morning. Can you give context on how you see the volume versus pricing play out in the back half of the -- or the remaining thee quarters of the year?

We expect the volume will be stronger than the sales line, probably by a point or two would be our best guess. So talking the about sales in the 1 to 2% range and probably volume in the 3 to 4% range. That's a guess at this point.

And our next question --

Excuse me, one question for the operator. One comment. There's no need to limit ourselves to just one question going forward.

I do apologize. Our next question is Chris Ferrara with Banc of America. Your line is open.

Great timing on that.

I'll answer all nine of your questions, Chris.

Okay. So you basically, on Glad, it sounds like you guys are saying promotion has kicked up a lot. Just trying to understand this in the broader context of what's going on there, have there been a lot of tests going in the market, not just in Wal-Mart but lots of other places. Is this kind of a battleground for who is going to win some of those tests? Could you just give a little color around that?

I would say it definitely is a bit of a battleground. Obviously you've got the impact of pricing coming down and people trying to reflect the new pricing on shelf. We do have some assortment tests going on in the marketplace that people are probably reacting to. We're obviously in the best position to survive the onslaught over the long term, given our share position and the portfolio that we have, but I would say we are in a unique situation in which category spending is up, both advertising and trade dollars and yet buying is going down. And sales dollars are going down even more as a result of the price declines.

I think the only thing I would add, Chris, we've seen this movie before. We know how to react in this category. Where we take a little bit of heartened response is the fact that on an all outlet basis, Glad trash is gaining share. So while the category is really soft, we think the brand is healthy.

Given what's at stake, which seems like a more permanent issue of shelf space within the larger retailers, is that why you are seeing such heavy competitive spending as commodities are going up, if that's true, is that something would you expect to continue because of how much is at stake here?

So your speculation is probably as good as ours. I'm sure some of the competition is reacting to some of the assortment tests going on. One would expect that over time it gets more normalized range of activity.

And I have got to think, Chris that these tests that are going on, they're not going to go on forever. So I think somewhere in the next three to six-month window, people are going to make a determination of what they want to do with this category.

Thanks, guys.

And our next question comes from Ali Dibadj. Your line is open.

I guess I want to push a little on the pricing point. As far as I can tell, if you strip out private label, foreign exchange, investor private label, foreign exchange, pricing was already down, at least price mix, including trade spend was already down this quarter. It sounds that it's going to get a little worse. We had heard from you guys at the analyst day, it's only Glad where we're going to have issues. It feels like it's becoming more pervasive. How far do you anticipate it going as it's gone beyond what you the originally thought of only being a Glad issue. How should we think about that pervasiveness in terms of price pressure on other categories, including maybe cat litter, et et cetera.

I would say we place the button up or down depending on what's going on with our total value equation as well as the competitive front. So beyond the Glad category and the laundry category and a few small places, maybe cat litter included, I would not call this movement pervasive. Overall, though, our trade spending go up significantly in the second half of the year, primarily the result of those businesses.

But if you take laundry, plus cat litter, plus the Glad business, I guess depending on how you --

Good chunk.

So maybe I've got my definition of pervasive wrong, but it looks like it's a pretty big issue.

Remember, coming into this year we had planned for an increase in trade spending. What we're saying is we're increasing off a base that was already increased. We also had the Glad price roll-back that went into place May 1st, which is still bleeding into the marketplace. So we came into the year anticipating a higher level of spend, and now based on what we're seeing in laundry and Glad, we're increasing that spend.

And then thinking forward, I'm concerned about an inflection point for two of your big drivers going the opposite direction. One is pricing getting tougher, and perhaps more trade spend, it sounds like, having to be taken. On the flip side, commodities going up. It feels like deja vu back to a year ago or so, where you're getting commodities going up, pricing going down. Have you thought through that? Is that what you're anticipating in terms of unfortunately being forced to take pricing down at a time when commodities are going up, and that could be a very difficult situation, even more difficult than we had seen last year perhaps, given the economics -- the consumer economic situation that's out there.

I would say the pricing actions that we're taking, the trade spending reductions, it's still pretty surgical. It's focused on certain brands, and you lump laundry, for example, really the focus is on the Clorox 2 side of the equation. Doesn't really affect very much of the Clorox liquid bleach side of the equation. It's pretty surgical. It's pretty focused on activity that's going on in those categories. Overall, we still expect to have a commodity benefit this year. It may be a bit less than what we anticipated a few months ago, but we still see a significant commodity benefit for the full year.

I think the other thing to keep in mind, Ali, if our outlook is correct and we see increases in commodities in the second half of the year, it's going to -- we believe it will, over time, dampen some of these competitive actions that we're seeing. Because the margin structure just won't support long periods of time with some of the competitive spending that we've seen. Assuming that goes up a bit, we would assume over time that our trade spending will come back to more normal levels.

My last question, and I will get back in the queue. Can you give us a sense, given FX is a little better, what your organic sales guidance is going forward?

On the organic side?

Yes, sorry.

Let's see. If I think about the components on the year, so we came into the year assuming foreign exchange would be a two-point head wind for the full year. We're now saying that's about flat. We came into the year saying we had about an extra point of trade spending. Now that's likely to be in the two to three-point range there. And as Larry said, on the volume side, we're still anticipating the three to four percent range on the volume side. Does that help?

It does. Thank you.

And our next question comes from the line of Alice Longley with Buckingham Research. Your line is open.

Hi. For the second half of the fiscal year, if I back out the fact that currency actually should help you a little bit there, and look at what you are are saying for volume, it looks like the combination of price and promotion should be down 3 to 4% in North America. Is that accurate?

I don't have --

Pricing is going to be up offshore.

Alice is your question around what's going to happen to margins in the second half or are you trying to focus on the top line?

The impact on top line of price plus promotion. It looks like it's a 3 to 4% hit for North America.

Pricing actually is a small positive for us for the full year.

Right.

So while it's down a little from what we originally expected, price in and of itself will be positive for the year.

I'm asking about the second half of the year.

I'm referring to the second half as well. We will have some continuing benefit on pricing in the second half of the year and a lot of that will be in the international markets. We will have higher trade spending levels, though, in the back half than what we previously projected. But I would not add it up to be three to four points in the second half of the year.

But if you just look at North America alone without international, wouldn't it be about that much of a hit?

Alice, I think to a great did he green, if you're looking at our sales equation, as we've noted, we're going to see favorable currency versus earlier expectations, but to a great degree that's going to be offset by the higher trade spending that we've indicated. We're only one quarter into the fiscal year. It's difficult to predict with precision what those are going to be, but I think directionally, that's the right way to think about it. A more favorable currency environment offset by higher trade spending.

my other question, would the ad ratio still be up for the year?

Say that again.

Ad percentage? We'll still be in the 9 to 10% range. We are shifting a little bit of our ad dollars so that the total spending will, on the advertising, will be about the same, we're shifting a little bit of the spend into trade spending, but we'll still be solidly in the 9 to 10% range. Perhaps not as high as we talked about last quarter.

Okay, thank you.

And our next question comes from the line of Doug Lane with Jefferies. Your line is open.

Hi, everybody. Can you refresh our memory on the four new products that you're introducing in the second half of this year what the impact will be on the various quarters, December quarter, March quarter, and June quarter, and maybe I misunderstood something you said earlier, but it seems to me with the new products hitting the shelves in the second half of the year, coupled with the easy comparisons, your actual base business growth should be better in the second half than the first half. Is that correct?

Well, let me walk you through the new price we've got going on. We started the launch of the natural detergent stain remover under the Green Works name. That started in July. Obviously that will carry over to the second half. We talked about that particular launch not meeting expectations. We also have the new improved Force Flex bags which has that stay in place feature which started in August. That's a base brand improvement so we'll expect some improvement in our base brand growth but it's not technically a brand-new product.

We have a couple of conversions on our litter line where we're converting from one type of packaging to another packaging, again our base brand improvements that we expect to add some health to our base brands. We have a fairly major conversion on our charcoal business to an improved product, faster lighting that's actually a lighter weight charcoal, but performs better than the current charcoal. And then on the Burt's line we have the acne launch which we started in July, then in January 2010 we'll be starting with our toothpaste launch.

Just to follow up, also with easier comparisons on last year, shouldn't that have a better base business growth in the second half than the first half, that's basically organic growth excluding foreign exchange?

We have the impact of the H1N1 flu, so we're up quite a bit in the first half on volume and project we'll have a strong second quarter as well. Our outlook does assume that there's probably some consumption trough in the second half. Consumers are loading up their inventory, and they'll need to bleed that off so you've got that factor impacting first half versus second half.

I got it. So that's the offset. Thank you.

And our next question comes from the line of Joe Altobello from Oppenheimer. Your line is open.

Thanks, good morning, guys. First question, I guess is on the trade spend situation. Sounds like most of the spending is to combat branded competition, but I think earlier when you talked about the overall market shares dipping modestly, you also cited a shift to private label. I had thought the trade-down to private label, at least the impact was starting to wane. Is that not the case?

Private labels are still growing but definitely growing at a lower rate than previously. Private labels are really a threat for us in three major categories, and that would be hydrochloric beach, the trash bag business and the charcoal business. In the Glad business, we are dealing with competitive activity on both the private label as well as the branded end. Within the laundry category more specifically in the stain remover aspect of that category, it's more around branded competition. Both new entries as well as the reaction to those new entries by branded competition. I think you're right, when we look at the FDKT data, about half of our business, if you look at that time 13 weeks ending March of this year, private label grew in our categories 1.8 points. If you look at the last 13 weeks ending in September, they grew 0.9. If you look at the last four to five weeks they grew 0.6. So clearly, sequentially, the impact is going down fairly significantly.

Got it. In terms of H1N1, you mentioned the impact in the quarter. In October, did you guys still see elevated levels of shipments, or is that slow as well?

We're still seeing elevated shipments. As Dan alluded to, it's hard to call this one. It's difficult to call the impact of the virus, but what we're assuming is that some of the inventories we're building in both retail customers as well as consumers' homes may, over time, cause a bit of a trough, once the flu season winds down. That's our best guess at this point.

Then just lastly, the Green Works laundry launch you mentioned was not up to your expectations, and I think part of that had to do with Wal-Mart not taking it. It sounded like you guys were at least somewhat optimistic that there was a chance, maybe later in calendar 2009 or early calendar 2010 that that might be reversed. Are you hearing anything from Wal-Mart on that?

Don't expect to get distribution at Wal-Mart any time soon would be my bottom line answer. An awful lot of activity going on in detergent these days in terms of store simplification and pricing, so probably not the best time in the world to be launching a premium priced detergent given what's going in to category as well as what's going on with the economy. Obviously our discussions with Wal-Mart are private, but it's not in our expectations at this point.

I think the good news about it, if there's some good news in this, while the trial -- consumer trial is off to a slower start, where we are getting the trial what we've seen from some retailer data is that our repeat is significantly higher than we anticipated. So we know we've got a great product. It's just getting trial in this pricing environment that's most difficult. That's what tactically we're trying to address is trying to get some trial.

Thank you.

Our next question comes from the line of Andrew Sawyer with Goldman Sachs. Your line is open.

Thanks, guys. Don, I was wondering if you could speak about some of the natural or green-derived businesses. Not just Green Works but Burt's Bees, but also Brita. Felt like at that time margin some of these things have slowed. Are you guys in your consumer studies picking up any less interest in that theme, or do you think it's just that the economic situation outweighs in the how should we think about the path to recovery and how that jives with the consumer economic situation or consumer retail spending power?

Let me start off, Andrew, then I'll turn it over to Larry. I think in general it is more the economic situation out there. Let's take the hard surface cleaning category, those that add up to the core five segments we launched Green Works in. And I think Larry noted this. While that category has come down obviously in growth rates, it's still growing the at quite a faster clip than the conventional cleaners. We're still gaining slightly in share at a 45 share level. But I think consumers are look for more value brands, and that category has slowed. But where we take heart is that it's still growing at a faster clip than conventional players. We feel good about that.

As far as Burt's Bees, for the last 24 weeks, and this has maintained over the last 12 weeks as well we're seeing consumption in the high single digits on Burt's returning. It isn't the double digits we saw before the recession but it's far outpacing the conventional personal care categories, which are flattish. So we feel very good about where Burt's is competing. We are gaining significant international presence with Burt's as well. As far as laundry itself goes, as Larry said, there's so much pricing activity going on around value brands in that segment, it is a difficult time to be launching a brand with significant absolute price points in the -- on the larger size, in the $12 to $14 range and get trial for that. But those categories -- or that category, natural in general is still outpacing the conventional cleaning segment.

As far as Brita goes, we're gaining share in Brita. A bit of an anomaly. We had some merchandising shifts from the first quarter into the second quarter on Brita, and that slowed down some of the shipments, but we were lapping double-digit growth in year ago, gaining share. In the second quarter we're off to a good start on Brita. So that continues to gain momentum. I think that's one of those things where it's not just a sustainability story but the value story is almost overtaking now the sustainability benefits of water filtration. It's just people don't want to spend that kind of money to drink bottled water at home.

Just kind of a question on -- thanks a lot for that, Don. Separate question for Dan. Could you talk about getting down towards your leverage targets? Are we thinking about potentially buying stock again as we get into the latter parts of this fiscal year.

Andrew, we'll certainly take a look at that. We anticipate probably in the third quarter we'll be at or below our two and a half to one, and we'll balance our view on how to use that cash based on what the M&A agenda might look like and other needs for the cash. But certainly we bought back shares in the past, and I think we have a long track record if we don't need it in the business we will return it to shareholders. So we'll consider that in the second half of the year. No change right now but we'll consider in that the second half of the year.

Are you seeing more decent quality M&A books come across your desk at this point?

It's -- we're seeing a little bit of an up tick in the activity. As to quality, it's still a pretty mixed bag right now. As you know, we're focused really on a couple of key areas that we've talked to you in the past about. Natural personal care. So the opportunities there tend to be pretty small. We're also focused on the away from home business, the institutional business. Again, some of the opportunities there are relatively small, and then the third area is obviously looking to us US, and that's always question of whether you can action any of those ideas. But we are seeing a little bit of an up tick in terms of properties on the market.

Thank you very much, guys.

And our next question comes from the line of Victoria Collin with Atlantic Equities. Your line is open.

Hi, guys. A couple of my questions have been answered, but if I could just ask you, would you mind splitting out the percentage of sales international versus the US? us also, just a question on the price points of Green Works. Obviously they're on a little bit of a premium due to the natural element of the business, but would you consider doing trade promotions in this area or are you prepared to keep the prices warmer and to maintain the sort of more prestige, higher priced element despite the softness in the market at the moment?

Let me start with Green Works. On the base cleaning products, we're at a 15 to 20% premium. And I would not say that's an area that we're heavily focusing trade dollars, so we're comfortable with that premium. We still have growth that in segment. So that's not an area where we are dealing more heavily than we did previously.

And international sales, Victoria, 20% are outside the US.

So 20% is international.

Pretty much mirrors the company on average.

That's great. Just to clarify, your increased trade spend is going to be targeted mainly at the laundry and the trash business is what is perhaps some of the cat litter.

Correct.

Great, thank you very much.

And our next question comes from the line of Connie Maneaty of BMO Capital Markets.

Good morning. Could you talk a little bit about the Burt's Bees toothpaste launch. What kind of distribution you're going to get with that. Is it going to go into natural type outlets to compete with Tom's of Maine, or are you thinking it is going to be placed in the regular toothpaste aisle?

So I think it's going to go along with the rest of the Burt's Bees line so we'd look for a similar distribution pattern to what we have in the rest of our Burt's Bees product. I think there are six items in the line. Two are focused on multicare, two on whitening, two focused on kids, which is obviously important within natural toothpaste.

One of the things that really appeals about that segment, Connie, the size of that segment is over $150 million, just on the natural side. So it's obviously a white space that we think Burt's has some real credibility for.

Who is making this for you? I mean, are you contracting this?

We're self-manufacturing.

It's self-manufactured.

Okay. If I could also ask you about the bleach plant and the new process that you are going to go through.

Yes.

Could you describe what you mean by it's going to provide with you more security? What is -- what did you call it? High impact bleach?

It's high-strength bleach. What we mean by higher security, it's more reliability in the supply chain if you will. Obviously as we look out in the future, we could see, or we would forecast that the cost of transporting chlorine gas around the United States is going to go up. I think it's a higher risk proposition for railroads, et cetera. As we look at it, when we talk about security, it's really about continuity of supply, and making sure that we can have both capabilities if you will. Retaining still the capability of converting but transition over time to where we manufacture high strength bleach. So that's what it really means. It's around continuity of supply and making sure we can continue that.

Does high-strength bleach mean you're buying something that's further along in the process?

That's exactly what it means. You're buying something, then we dilute it down a little further, but we're not converting chlorine gas into sodium hypochloride bleach.

Are the economics of this favorable to you, are there patents, and do you have some advantage over your private label competitor with it?

So, given the increase in costs in terms of rail transportation of chlorine, given the risk involved, insurance rates, et cetera, this would probably be a break-even proposition for us by the time we -- all is said and done.

I'd view it as a cost avoidance in the future on the increasing cost structure that we see with chlorine.

Okay. Thank you.

And our next question comes from the line of John Faucher with JPMorgan. Your line is open.

Yes, thank you very much. Just want to follow up on the heightened competitive activity in trash. Can you talk about the form that you're seeing it? I think you guys had talked about higher levels of couponing, maybe as opposed to just straight price discounting. Is that still the case? And when look at that, I guess why isn't it driving better category consumption at this point? It seems as though -- is this something that is in the recent economic environment people have pulled back on their use of trash bags?

I think there is definitely an economic impact. We took up the cost of trash bags pretty high as a result of resin costs going up. So I think there may have been a shelf shock, when you went to the shelf to see how much it cost to buy 40 trash bags. So I think part of is it economic. We are seeing that competitive activity from the branded competition I would say across the spectrum. So there's a lot of pricing activity so that our value equation, our price value relative to them has gone down versus a year ago. We're also seeing some increase in advertising as well couponing. On the private label side, most of this is in the form of pricing, more aggressive pricing or more promotion activity by individual retailers.

Thanks.

And our next question comes from the line of Lauren Lieberman with Barclays Capital. Your line is open.

Thanks. One quick question remaining. On the hard conversions, can you just remind us which of the new products you're launching? I think it's maybe just cat litter and charcoal, where there's going to be a concerted drawdown of retail inventory and what quarter that is going in to, if it's still second quarter?

Charcoal begins in the second quarter, and that is a hard pull down of inventories and replacement. So it starts in the second quarter, and will continue into the third quarter, and then on the litter side, the packaging change that Larry referenced is more of a roll in of the SKUs starting in the third quarter.

Is that the only two where this is an issue to think about?

Yes.

For this year.

We had a third hard conversion that we had talked about before. That was intended to be a late fiscal year conversion. That likely now will be in fiscal 2011.

Great, thanks so much.

And our next question comes from the line of Jason Gere with RBC Capital Markets. Your line is open.

Thanks, good afternoon. Hey, just two questions. One just on volumes, I guess following up kind of with Lauren's question. If we strip out H1N1, then we look at the conversions, I think this quarter, your volume sequentially improved from negative 2 to negative 1. How should we -- with the spending that's beyond, should we be assuming that you will see volume sequentially improve once you strip out H1N1 and factoring in all the conversions, that timing plays through of bleeding down the inventories?

I'm not exactly sure how to strip out H1N1. I think that we are concerned about some drawdown in H1N1 inventories in consumers' homes and in retailers' warehouses in the second half as a result of the buildup we're seeing in the first half. So that's part of our outlook for volume in the second half of the year.

I would just go back and reiterate what Larry said earlier, Jason. On volume for the year we're still seeing 3 to 4% volume growth. We had 1% volume growth in the first quarter so you can project out. We see fairly strong volume growth in the out three-quarters.

Okay. Fair enough. If we could just talk maybe about the household margins, clearly over the last year, and with the new segment reporting, the margins have been kind of all over the place given all the puts and takes. So as we look to the rest of the year with commodities starting to go less favorable, and competitive activities stepping up, would you anticipate that the margin structure, at least the near term is going to be back down to the single-digit range? I guess at what point do you want to not sacrifice as much margin in order to maintain your market share? I was just wondering if could you add a little color to that and the dynamics of that segment.

So the Glad business, if you look at the last half of last fiscal year obviously we saw some pretty nice expansion in margins as commodity costs began to come down. We're still actually seeing decent margins in the Glad business, although the ramp-up in trade spending and now the softness in the category definitely will squeeze the margins, particular as we get into the second half of the year. I guess the question on margin is sort of the mid-term and longer range perspective. The competitive activity that we're seeing today, how long will that continue as we're ramping up our trade spending to address some of the competitive activity, how long will that competitive activity sustain itself. So as we look at the second half of the fiscal year we've already said we are forecasting some increase in resin in the back half of the year, and we think that should have a dampening effect on some of this competitive activity, assuming that does occur.

So while we're certainly spending to make sure we have the value equation right and to address some of the price gaps, we're not currently anticipating that that's going to -- we're going to have to have that level of spending for an extended period of time. But obviously, this is a volatile category. Resin can move around. We've seen is it move incredibly in the last 12 months, but based on what we see today near term we believe the increase in trade spending is the right thing to do. It will pinch our margins a little bit. Longer range, if our outlook is correct and resin has kind of a slow rise to it, we think that will probably dampen some of the competitive activity.

And I think you've got to take those margin comments on Glad into the context of the entire company as we're taking guidance up overall on our margin we still see healthy margin expansion back to historical levels. So I wouldn't read too much into what's going on, on Glad, which that particular part of our business that trash part of our business is about 12 to 13% of our revenue.

Okay. If I can just add one housekeeping, just as we look at other expense and the Venezuela piece that's in there, I think there's $0.04 FX what should we anticipate for the full year in terms of other expense flowing through to the P&L? Thank you.

Jason, as Dan noted in his comments, I believe, the Venezuelan impact at this point, we're projecting somewhere between a $28 million and $30 million impact. Then there's a few other relatively smaller expense items that tend to flow through other expense on an annual basis. So it's always been a difficult line to predict, but you ought to be thinking about $30 million plus or take would be our best projection right now for that line item.

Okay, great, thanks.

And our next question comes from the line of Bill Schmitz with Deutsche Bank. Your line is open.

Sorry to come back on. Can you just talk about gross margin guidance for the second quarter? Is it going to be down considerably sequentially? Is it going to up? What's the outlook there?

It should be up in the second quarter, but we won't see that kind of expansion we saw in the first quarter, so --

Okay. How about just from the first quarter levels, the sequential margin trends? Sequential? On a year over-year-growth or on an absolute basis quarter-to-quarter?

I'm not sure if I have that in front of me.

It will be down, Bill, versus the roughly 45% number for Q1, we'll anniversary a good portion of the pricing that we took last year in August. That will no longer be an incremental benefit this year. The higher trade promotion spending that we spoke to as well, Some of that will begin to factor into Q2 as well, so as Dan said, we'd still expect a pretty healthy increase, but probably not the level of increase in Q2, nor would you see the absolutely gross margin be quite as high in Q2 as it was in Q1.

Great. We all kind of know how this game is played. The promotional spending levels is that kind of what you could spend, or what you will spend?

Well, I think, Bill that we're trying to -- put in the way. We're committed to share growth. It needs to be profitable share growth. I think given how we had such a solid first quarter, I would say we're being conservative about what we're going to spend. But we're going to keep some dry powder available so we don't let this brand share erode.

Okay, that makes sense. Lastly, I promise, did you give a number for your sort of restructuring, restructuring related charms for the year? Is there going to be anything related to this high-strength bleach change over in the year, and what the absolute number is for restructuring both what you reported and the restructuring related?

Bill, our outlook still has the $20 million to $30 million range and it's not impacted by the shift over to high-strength bleach. In fact, that shift over shouldn't have any significant impact on fiscal 2010.

How about CapEx?

CapEx, we're still right around our $200 million to $210 million for the year. Over the next three years, there will be a little bit of capital involved with the shift over to high-strength bleach, but our forecast for CapEx is unchanged relative for the next couple years even including that project.

Great, thanks. Sorry for jumping back on.

No problem.

And our next question comes from the line of Chris Ferrara with Bank of America.

Hey guys. Sorry. I promise I'll be quick. Just the timing of restructuring. Q1 was smaller than we had thought. I think you guys said first half loaded so how do you think that $20 million to $30 million is going to flow for the year?

If I think about from the a quarter standpoint, I think we had, my guess is, Chris, the second quarter, we'll see about the same level of charges as we saw in the first quarter, then it will be down a little bit in Q3 and Q4 of next year. We'll be in that $20 million to $30 million range.

Great, thanks a lot.

And this concludes the question and answer session. Mr. Knauss, I would now like to turn the program back to you.

I just want to thank everybody for joining us today. Obviously we feel very good about this quarter and feel very good about the balance of the year. So we'll look forward to talking with you on the next quarter. Take care, everyone.

This concludes today's conference call. Thank you for your participation.