高樂氏 (CLX) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Clorox Company First Quarter Fiscal Year 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to introduce your host of today's conference call, Mr. Steve Austenfeld, Vice (sic) President of Investor Relations for the Clorox Company. Mr. Austenfeld, you may begin your conference.

Great, thank you. Welcome, everyone, to 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, the Cloroxcompany.com. On today's call, Larry will start with comments on our performance by segment as well as perspective on current category, market share, and overall top line results. Dan will then follow with additional color on our first quarter financial performance, as well as our updated fiscal year 2011 outlook. Finally, Don will close with some comments on the first quarter and the remainder of the fiscal year. After that, we'll open up the call for your questions.

Let me remind you that on today's call, we will refer to certain non-GAAP financial measures, including, but not limited to, free cash flow, EBIT margin, and 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 if 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. Lastly, let me point out that we've restated segment results for fiscal 2010 by quarter excluding the auto business, which is now reflected as discontinued operations. We hope this information, which is found in the financial results area of our website, will be helpful as you update your financial models on Clorox.

With that, let me turn it over to Larry.

Thanks, Steve, and welcome to everybody on the call.

As you saw in the press release, we had mixed results this quarter. Our top line was weaker than anticipated, with a lot of that weakness coming late in the quarter. Q1 volume was down 2%, and sales were down 3%. We are winning in market share, but the difficult economy is driving decreases in our US categories. Current quarter sales also were negatively impacted by strong prior quarter retailer merchandising in charcoal and food. Further, we saw the expected negative impact from the Venezuela devaluation. On the positive side, we had a record quarter in Clorox Disinfecting Wipes, despite a very high base period due to the H1N1-related sales and some modest foreign exchange favorability in countries other than Venezuela. Overall, we were disappointed by Q1 results and we're focused on improving results for the remainder of the fiscal year.

As usual, I'm going to focus my comments on volume and sales and let Dan provide the detail on the financial side. Starting with our US business, dollar sales in our categories and track channels was down 1% in Q1 and down 2% for the past 52 weeks in all outlets. While our share was down a bit in track channels, we continue to see significant share gains on an all-outlet basis, reflected in the continued shift by consumers to value oriented retail channels, like dollar and club. In fact, we gained or held share in all but one reported category. Simply put, our brands in the US, on a market share basis, are stronger than they have been in several years. In international, market share results were more mixed. Share was up in Canada, and about flat in Latin America.

In our cleaning segment, which includes our home care, laundry, and away from home businesses, we grew volume 1%. Despite the impact of the H1N1 flu in the year-ago quarter, the segment's volume increase was primarily driven by all-time record shipments of Clorox Disinfecting Wipes. Also contributing to the higher volume was growth in our away from home business, as well as Pine-Sol cleaners. Pine-Sol had another strong quarter, delivering volume and share growth. Laundry volume was down slightly, but only due to the prior year launch of Green Works laundry detergent; despite category softness, Clorox bleach volume was up and shares in track channels increased about one point. We're also seeing improvement on our Clorox 2 business, with volume in share flat for the quarter. Sales for the cleaning segment decreased 1% versus the 1% increase in volume. The difference was driven by increases in trade spending negative mix.

In our household segment, which includes Glad, charcoal and cat litter, volume decreased 9%, primarily driven by lower shipments of Glad food storage products and Scoop Away cat litter. On Glad, we continue to see better results on the trash side of the business which represents about two-thirds of total Glad. Shipments of trash bags were up in the mid-single digits, with particularly strong results on premium, higher margin ForceFlex and Odor Shield. In August, we executed a 5% price increase on Glad trash bags, given higher resin costs. Some private label brands have followed, though the primary branded competitor has not. Our trash business remains healthy and we continue to build share behind higher margin, premium items. Our cat litter business is under pressure right now, with some significant losses on Scoop Away, as we try to get our value equation right in the face of intensified competitive activity. Also contributing to the segment's volume decrease is lower shipments of Kingsford Charcoal, resulting from strong prior quarter retailer merchandising. Sales in the household segment were down 7%, a bit less than the volume, primarily due to improved mix.

In our life-style segment, which includes food products, water filtration, and global natural personal care, we grew volume 1%. This was driven by higher shipments of Brita and Burt's Bees products. Burt's had another good quarter with volume and sales growth in the mid- to high single digits, as a natural acne solutions line, new lip balm flavors, and body lotion relaunch all continued to perform well. Growth in the natural personal care category has accelerated.

On the negative side, Hidden Valley was the other business with Q1 volume and sales negatively impacted by strong prior quarter retailer merchandising. Consumption on this business, however, remains very healthy, and we're pleased with the performance of new product offerings. Sales for this segment were up 1%, in line with volume, with improved mix offsetting the increase in trade spending. International volume decreased 2%, driven by the comparison with strong year-ago shipments of disinfecting products in response to H1N1 flu concerns, as well as lower shipments of Glad products in Australia. International sales were down 2%, in line with volume, as the impact of the Venezuelan currency devaluation was offset by other favorable foreign currencies and price increases. Excluding all of the impact of Venezuela, international sales would have been up 6%.

Let me now turn to our volume and sales outlook for the fiscal year. We are lowering our top line sales projection for the year to flat to 2% growth. There are several key assumptions in our revised forecast that I would like to highlight. First, we do remain confident that we continue to be competitive in the marketplace and at least maintain, if not grow our market shares. We have a very solid innovation plan in place, with new product launches weighted more strongly toward the second half. We continue to anticipate that we will generate about 2 points of incremental sales growth from new products, the same level we have generated behind innovation in each of the last five years. Second, we now anticipate continuing the category softness versus our previous outlook that assumed overall flattish category growth across domestic and international markets. This continues to be the single most important factor moderating our fiscal year growth projections. We are working hard to offset it by focusing on higher growth consumer segments, like Hispanic, and higher growth retail channels that focus on value. Third, during Q2, we will continue to lap very high year-over-year sales of disinfecting products, and it's too early to know how the flu season will unfold. We have a balanced sales projection that includes an assumption that we will have a normal or average flu season.

Final point I want to make on our sales outlook has to do with an expansion of existing customer pickup program to our largest retail customer. Under this program, our retailer picks up product at the dock door and assumes responsibility for delivery to warehouses and stores. The price to the retailer no longer includes the cost of delivery. The net profit and volume impact to us is neutral, but we do lose top line sales as a result of the lower sales price. Our largest retail customer elected to move to this program starting in July. We'll be ramping up to 100% of shipments to this customer on this program by the end of the fiscal year. Given the size of this retailer, it does have a material impact on our sales. The sales impact for Q1 was only 30 basis points, but we estimate almost a full point of impact in Q4, and an average 70 point basis point reduction in sales for the full year. In other words, we lose about 70 basis points of top line growth that is essentially a P&L re-classification, and not truly a reflection of sales trends. The combination of all these factors results in the flat to plus 2% updated sales growth outlook for the fiscal year. In Q2, we expect the sales could be flat, but most likely down, given weaker trends for the last quarter of material Venezuela devaluation in a tough H1N1 comparison with the year-ago quarter.

To sum up, while our Q1 results were a little weaker than we anticipated, we are winning the competitive battle, as evidenced by several consecutive quarters of share growth. The biggest challenge for us is the impact of the slow economic recovery on our categories. We are continuing to invest in the long-term health of our brands, the strong consumer communications, innovation, support for new products, and a focus on bringing value to consumers. When the economy does recover, we should benefit disproportionately.

With that, I'll turn it over to Dan.

Thank you, Larry, and hello, everyone.

As you saw on the press release, we've classified the operating results for the auto businesses as discontinued operations in our first quarter results and have adjusted prior period results to reflect this classification. The net assets of the auto businesses have now been classified in the balance sheet for the current and prior periods as held for sale. We've also updated our fiscal year 2011 financial outlook to reflect our anticipated results from both continuing and discontinued operations. My comments this morning are based on the reclassified operating results and financial outlook.

On our first quarter volume and sales results, we did see the expected impact from the Venezuela currency devaluation and modestly higher trade spending to address competitive issues. In addition, current quarter volume and sales growth was negatively impacted by strong prior quarter retailer merchandising activities in our charcoal and food businesses. Our categories were soft, particularly late in the quarter, which further contributed to the volume and sales decrease. Sales decreased, combined with a slight decline in our gross margins, was substantially offset by a more favorable effective tax rate, which resulted in our earnings from continuing operations to be essentially flat for the year-ago quarter.

Larry has addressed our first quarter sales of market share performance and our updated sales growth outlook for the second quarter and the full fiscal year. I'll focus my remarks on some key themes reflected in our financial performance for the first quarter and our updated financial outlook. First, we've increased our level of investment in building our brands, which is reflected in higher market shares and positions us well as the economic recovery takes hold. Second, while our margins did decline slightly in the first quarter, we expect to increase our margins for the fiscal year, sustaining the strong margin gains we've realized over the last several years. Third, we're making key investments in the long-term health of our IT infrastructure and our facilities, which will provide a strong platform for growth in cost savings in future years. Fourth, cash flow continues to be very strong, and we'll use that cash flow, along with the net proceeds from the sale of the auto businesses, to support dividend growth, build the business, buy back shares, and create value for our shareholders. Finally, we believe we have a fiscal year financial outlook that appropriately balances the near-term impact of soft categories with the longer term investments we're making to strengthen our brands, drive new product innovation, and build a strong foundation for future growth and cost savings.

Let me take each of these themes in turn. Our first quarter results reflect a planned increase in demand-building investment. Spending was targeted to address competitive activity in our categories, support our brands, and drive innovation. While our domestic categories were soft during the quarter, the success of these investments is reflected in our increased market shares. We believe these increases in market share and the strength of our brands position us well as the economic recovery takes hold and our domestic categories begin growing again.

Second, we've made very good progress in expanding our gross and EBIT margins in fiscal 2010 and anticipate that we'll be able to modestly expand our margins for fiscal year 2011. We did see some decline in our gross margin in the first quarter, as we compared against the year-ago period when our gross margin expanded over 400 basis points. For the first quarter, most of our gross margin assumptions proved to be accurate. While elevated versus the year-ago quarter, trade spending came in about as planned. Commodity costs increased at a manageable rate in the first quarter and our full-year commodity cost increase estimate remains in the $50 million to $60 million range. Cost savings in the quarter were about $33 million, with about $27 million of the cost savings reflected in cost of goods sold. Our fiscal year 2011 outlook continues to project total cost savings in the range of $90 million to $100 million, although we now expect to come in at the high end of that range. For the full fiscal year, we continue to anticipate that our gross and EBIT margins will increase about 25 to 50 basis points.

Third, our first quarter selling and administrative spending and EBIT margins reflect key investments we're making in our facilities and global IT infrastructure, which we believe will provide a strong foundation for growth and cost savings in future years. We anticipate elevated selling and admin. levels for the fiscal year. Our fiscal '11 outlook for selling and admin continues to include about $25 million to $30 million in incremental IT and facility spending related to these key initiatives.

Fourth, our cash flow continues to be very strong. Cash flow from operations in the first quarter, including cash provided by discontinued operations, was $148 million versus $94 million in the year-ago period. Increase was driven primarily by improved working capital and lower pension contributions in the current quarter, the end of the quarter with a debt to EBITDA ratio of 2.4 to 1, within our targeted leverage range. We plan to use the net proceeds from the sale of the auto businesses to repurchase shares to reduce EPS dilution from the sale. We also plan to repurchase shares to offset stock option dilution during the fiscal year. Combining both planned repurchases to offset stock option dilution and repurchases from the net proceeds of selling the auto businesses, we anticipate repurchasing about 12 million to 13 million shares of common stock during fiscal 2011. We anticipate about two-thirds of these purchases will occur in the second quarter with the balance of the share repurchases in the third quarter.

Before I turn to our updated financial outlook for the fiscal year, let me address a couple of other points related to the first quarter. Our effective tax rate on continuing operations was 30.9% for the first quarter of fiscal 2011 versus 35.4% for the year-ago period. The lower effective tax rate reflects the benefit of certain tax settlements that occurred during the quarter. For the full fiscal year, we anticipate our effective tax rate on continuing operations will be about 34%, with some variability in the quarter. Our first quarter results include the impact of the Venezuela currency devaluation, which reduced sales by about $29 million and free tax earnings by about $14 million. Continuing to anticipate the Venezuela currency devaluation will reduce first half sales by about 2 points and pretax earnings by an estimated $25 million to $30 million. As a reminder, during the first half of fiscal year 2010, we absorbed nearly $30 million in pretax foreign exchange transaction losses and balance sheet re-measurement charges due to Venezuela currency changes. Year-ago losses and charges were reflected in other expense on the P&L.

With the pending sale of the auto businesses, we've recorded the first quarter operating results of auto in discontinued operations in the P&L. For the first quarter, the after-tax operating results of the auto businesses being sold is $16 million, or $0.11 per diluted share, compared with $17 million, or $0.12 per diluted share in the year-ago period. Also included in the discontinued operations section of the P&L is a $60 million tax benefit associated with the planned sale. As a result of our decision to sell the auto businesses, accounting rules require that we recognize the deferred tax asset to reflect the tax benefit we expect to realize on the sale, because the tax basis and the assets being sold is higher than the book basis and the assets. Accounting rules require that we recognize the deferred tax benefit in the period the assets are reclassified to held for sale, not when the sale actually closes, which is expected to be in early November.

Finally, I would like to provide further perspective on our updated financial outlook for the full year. As noted in today's press release, fully diluted EPS from continuing operations is anticipated to be in the range of $4.05 to $4.20. Diluted EPS from discontinued operations, excluding the net gain on sale and the deferred tax benefit I just mentioned, is estimated to be in the range of $0.15 to $0.16. Our total diluted EPS outlook range for the full fiscal year, including discontinued operations, but excluding the net gain and the deferred tax benefit, is now $4.20 to $4.35. Our updated total diluted EPS outlook range includes approximately $0.20 of EPS dilution related to the auto sale, net of the benefit of transition services revenue and using net proceeds from the sale to repurchase shares.

We lowered our fiscal year sales outlook to flat to 2% growth, primarily to reflect anticipated softer categories during the first half of the fiscal year and the increase customer pickup allowance impact on sales, partially offset by more favorable outlook for foreign currencies. Some of the top line headwinds we faced in the first half of the fiscal year includes the remaining impact of the Venezuela currency devaluation, higher trade spending levels, and a difficult comparison to the sales lift created by the H1N1 flu pandemic last fiscal year. Despite these pressures, we continue to appropriately invest in demand-building, to strengthen our brands, and grow market share. Our innovation pipeline remains strong, with a significant percentage of our new items shipping in the second half of the fiscal year.

As I said, we've made very good progress in increasing our gross and EBIT margins over the last several years, finishing fiscal year 2010 near recent historical highs for these metrics. We still anticipate modestly increasing growths in EBIT margins for the full fiscal year and believe that we're well positioned to be able to improve our margins over time. Our earnings pattern on continuing operations will be weighted more heavily to the second half of the fiscal year, as we lap the first half sales benefits stemming from the H1N1 flu pandemic, the remained impact of the Venezuela currency devaluation, and the higher first half trade spending and commodities costs.

With that, let me turn the call over to Don.

Thanks, Dan, and thanks, everyone, for being on the call today.

I think as you've heard from both Larry and Dan, we're keenly focused on maintaining the health of our brands in this pretty tough environment out there. On average, our categories are soft and we're disappointed not to have delivered stronger Q1 results, but we're staying the course. And as we highlighted in May, when we initially put out our outlook, we knew the first half of fiscal 2011 would be a challenge for the year, given the impact of the Venezuelan devaluation, and then the first half comparison to the unusually high year-ago sales of disinfecting products related to the H1N1 pandemic, as we discussed. And also, the anticipated very slow economic recovery. And I think it's clear that all those factors played out in the first quarter.

In analyzing the growth trends of our categories, it's clear that the economy is and will continue for sometime to be a substantial drag on category growth. We do believe, though, that as the economy recovers, we'll see that better category growth. In the meantime, we're aggressively managing competitive price gaps. We're continuing to invest in the health of our brands, with stronger consumer communication, innovation, as Larry and Dan highlighted, and support for our new products, with the focus on bringing value to the consumer. Our focus on brand-building activities is obviously paying off, because we do see those higher market shares, probably the best share positions we've seen our brands have in the last several years.

So we manage our business for the long-term. Our leadership and business model have proven agility and flexibility for this, and I think any kind of environment out there. Looking at the full fiscal year, I believe we're doing the right things to ensure we're in a strong position to continue winning in the marketplace and to strengthen our categories as the economy eventually returns to health.

With that, let me ask the operator to open it up for your questions.

Thank you, Mr. Knauss. (Operator Instructions).

And our first question will come from Doug Lane with Jefferies & Company. Please go ahead.

Hi, everybody.

Can you talk a little bit about Green Works, where you stand on progress there. Is the pricing now where you want it, and has there been any major changes in listings for any of the Green Works lines?

Overall, the pricing has taken hold on the detergent brands as well as the cleaning brands. I would say we still have an adjustment in our distribution across the lines, and overall, we're seeing some declines that are basically in line with the natural category, so we're seeing some decline from the natural category. We remain the number one share, in the number one share position, but we're declining pretty much along with the category.

And has there been any pickup in distribution or loss of distribution of any note in the past quarter?

I, I don't have the exact numbers, but I would suspect there's been some loss in some secondary SKUs, not the major SKUs. I think as we look at the core SKUs and the impact of the price change, we're seeing some strength, which gives us some confidence that going forward we can weather the storm, so to speak. So I think we still -- I continue to believe in the core proposition of Green Works, and I think as the economy turns, this is one category that will probably turn disproportionately to the positive.

Doug, this is Don.

The only thing I would add, in general, as Larry said, we're seeing these categories fairly flat to down slightly. I suppose the good news is on the home care side of this, which is the original five SKUs we launched a few years ago, the all-purpose cleaners in the category, the all-purpose cleaner category, which is the major part of that home care segment for us, is running at a 104 index, so we're starting to see some life back in that category. As Larry said, our pricing now is getting close to a 5% to 10% premium. So we think that bodes well as the general economy improves.

Okay, thank you.

And we'll now take our next question from Alice Longley with Buckingham Research. Please go ahead.

Hi, good afternoon. My first question is about the difference between your volume and sales, so volume was down 2, sales down 3. Could you take apart that differential and tell us how much Venezuela was a drag, pricing was a positive, and trade spending was a negative?

We got this detailed in one of the tables on the press release, but if you look at that, you can see the biggest drag on the sales line was the foreign exchange for Venezuela, which was just over 2 points. We had positive impact from FX in other countries, which was about 0.8 points, and then the incremental pickup allowance was a negative 0.3 points. So Venezuela remains the biggest drag. It was offset a bit by the foreign exchange pickup in other countries.

And how much was pricing a positive and trade mix a negative?

Alice, this is Steve.

Pricing was up about a point and a half, offsetting the net effects that Larry described.

Trade spending was up modestly, less than a point.

Right. Then you have the customer pickup allowance.

Okay, so trade spending was negative 0.5 to negative 1?

About negative 0.5.

Negative 0.5. Okay, perfect.

And then could you be more clear about how fast your categories are growing here, and, again, differential between volume and value, because I'm wondering if the categories are worse in value terms than volume terms, and will the category growth be worse in the second quarter, do you think, than the first quarter, because you saw that deterioration?

So we look at track channels in the quarter. Track channels were down 1%. Unfortunately, the all outlook perspective, we only have on a 52-week basis. That was minus 2% for the past year, past 52 weeks.

If you look within the Q1 results in track channels, you do see some acceleration for the end of the quarter, so the last month of the quarter in track channels was actually down 2%, and the biggest change in terms of category direction was in home care, which declined pretty significantly -- a lot more in the last month of the quarter than it did in the first two months of the quarter.

And do you think that the category growth all retailers included is worse than in the track channels, again, in this quarter?

So unfortunately we don't have any real viewpoint on the quarter, on the current quarter as yet. We don't even have October category information in as yet.

Based on the slowdown we saw in September and what we're seeing in our first quarter shipments, we do believe the category softness is continuing. Part of that may be driven by the H1N1 dynamic that went on in the year-ago period in a couple of our categories.

Okay. Maybe I wasn't so clear with my question.

So I guess there are two parts to it. In the second quarter maybe the track channel categories will be down 2% as opposed to 1% is what you just said, I think. But also, if I throw in the un-track channels, which you must have a feel for from your shipments, will category growth be even worse than that negative 2%, do you think maybe?

It could be accurate. This is total speculation on my part and we're only a month into the quarter. I'm guessing we'll see that similar trend to what we saw in the past year in the all-outlook database, which would be the minus 2.

Okay, good. Thank you very much.

And our next question will be from Wendy Nicholson of Citi Investments. Please go ahead.

Hi.

My first question has to do with the change in the distribution strategy or policy with Wal-Mart, and I may be out of date, but I think this is the first we've heard of it. So I guess I'm surprised, given the magnitude of the pressure on the top line, that that wasn't already baked into your guidance, or maybe it was. It just seems like a big hit, so it makes your earnings guidance, or sales guidance you gave us back in August, really aggressive for the year. But number one, is it worse than you had expected? Is it just as you had expected?

Then second question, in terms of the change in that shipment pattern, is there any other change in the business? In other words, do you now not control your shelf space or your shelf placement or anything like that since you're not actually in the stores? Anything else we have to worry about there?

So it really doesn't change any of the dynamics with respect to kind of the trends in the business. We've had a customer pickup program for many, many years, actually 20% to 30% of our volume was in customer pickup before the expansion of this program. So this is just a matter of where the logistics costs occur in the P&L and whether it's delivered by the customer or delivered by us, really no material change in the relationship or the trend of the business.

Or the merchandise or anything like that?

No, it doesn't affect volume at all, Wendy. It just -- as Larry said, it's a case of backing out that expense from the invoice. Of course, it comes out of our gross margin hit as well.

This is Dan.

In terms of the full year outlook that we previously had out there, this was not factored in. We were still in discussions on this particular change. Now that we have reached alignment with the customer, we've baked it into our full-year outlook.

And the pattern we had two businesses that shifted to the program in the first quarter and then the rest of our businesses will shift over in Q2 and Q3, and ultimately will be fully on this program with this customer by Q4.

Okay, and are there any other major customers you would anticipate making the shift towards as well?

It's going to be a customer by customer decision. They have to look at the efficiency of taking the loads and handling the logistics themselves versus what our cost of delivery is.

I would say we think we're awfully efficient on the logistics side of being able to deliver these loads, so different customers would have to look at it and decide whether it would be advantageous. I think the fact that this program has been out there for a long time and a lot of other customers have not adopted it would suggest that they probably view our shipping costs as pretty efficient.

Okay, and then just my last question, just briefly on the international business -- I know you talked about more market share issues, market share being mixed in emerging markets, but sounds like some of that was by your own choice, sounds like in Mexico. But the loss of distribution, for example, on the Glad business in Australia, is that something you hope to get back? I'm just wondering. I know you've got targets to get the international business to be a bigger piece of the business, but with the volume growth trends we've seen now, how quick is the fix there?

I think the Australian situation is really an issue with retailer consolidation and a focus on private label and some distribution losses. So I expect as we go through the snake of having that our base, we'll see better trends, but I don't know that will materially change over the long-term.

We do see an opportunity. Given our two significant customers in the grocery side of retail in Australia; we did lose some distribution in one and we do see pickup in the other, so we're obviously trying to balance off the losses in one with the trends in the other. We are seeing positive results there, but I think it's going to take us a couple of quarters to work through that.

If you look at our categories internationally, they are growing. A little bit slower than they have in the past, but most of those categories are still growing. Even in Australia, with weakness in the food bag business here, we still expect that on an ongoing basis will still grow low single digits.

Okay. Fair enough. Thank you very much.

And our next question comes from Andrew Sawyer of Goldman Sachs. Please go ahead.

I though you could give us more context around the Glad pricing situation and if Hefty doesn't follow, how would you guys think about responding or adapting to that in light of that -- volumes still holding up pretty well, but as you manage price gap, how would you guys approach that?

So if you look at the prices on shelf, actually our price increase hasn't been reflected very much. You see a little bit of an increase in the last month of the quarter, but our prices are actually down in the quarter versus year-ago because of previous price decreases that we took, so it's starting to show up now.

Our business remains healthy. Quite frankly, a lot of our growth is coming behind this Febreze, Odor Shield launch, which has exceeded our expectations. Not only are we overcoming any kind of pricing issues, but we're selling the premium part of our line versus the base trash part of our line. So we're feeling very good about the business. We're seeing no signs of fall-off because of our pricing. As I've said in my script, private label generally have followed, not completely, but generally have followed. So the only odd man out at this point is the other major competitor.

Don here. I think the only other thing I would add, as you look at our FDK key shares, which has always been more challenging for us, because a lot of our business has shifted into the more value-oriented segments. In the last 13 weeks, and this is data ending September, we've seen Glad trash bag share increase 1.5 share points up to 34.3. So it's probably one of the strongest share periods we've seen on the business and the shipments are up in the single digits. We feel pretty good about where that brand sits.

I think the other factor you have to keep in mind, Andrew -- this is Dan -- in terms of resin, we are seeing reinflation in the resin market. There was a $0.05 per pound increase that was put into the market and it did stick. There's another one announced for $0.04. Unclear whether that one is going to stick, so the inflation in resin is certainly there, and I think that could lead to changes in how certain competitors are pricing.

And on the food side, would you just remind me when you start lapping, the big exits on that, on the food storage for Glad.

We pretty much have lapped the private label exit, and we do expect more positive trends in the second half because of some other things that were lapping. But the private label actually is essentially out of our numbers at this point.

And anything else we had from a programming standpoint, Andrew, with partnerships on food containers, those are done by the Q2, end of Q2. So once we get through next month, we're basically free and clear of any of these overlaps.

Okay, so the core growth would start to show up a little better then?

We should improve.

Yes.

Yes.

Okay.

And quick one for Dan. I guess you're committed to buying back stock with the proceeds to offset the share dilution. How are you guys thinking about using the ongoing cash flow now that debt's down to 2.4 times or so?

Obviously, we're within our range of 2 to 2.5 times. We'll look at whether we might want to do further share repurchases over and above the $12 million to $13 million. I think it will depend on what the M&A outlook is for us, whether we may want to use some of our free cash flow for acquisitions. Certainly, we'll not build cash on the balance sheet, so we don't need it for M&A or other aspects of the business. We'll return it, and this year that would likely be in the form of share repurchases.

Is there anything in the M&A pipeline that looks interesting at this point?

We continue to look at a number of opportunities. I wouldn't say there's anything for size that would be considered eminent, but we do continue to look.

All right, well, thanks for the time, guys.

All right, Andrew.

And our next question will come from Ali Dibadj of Bernstein. Please go ahead.

Hi, guys.

I want to get a sense of what, first off, was a big surprise on the sales growth perspective. For the year, you announced a 2% to 4% sales growth; it's now 0% to 2%, that's embedding a little bit of an improvement, 1 to 2 points of FX, so you're really taking it down 3 to 4 points. I'm just trying to figure out what was the surprise? Of course, you do have this Wal-Mart 1 point take-away issue, customer take-away issue. You have started talking about that back in May. Just want to get a sense of what exactly was the biggest surprise.

Yes, let me start and then Larry and Don can jump in.

Just to refresh everybody's memory, our outlook for the full year was 2% to 4%, but we had indicated that we were very likely to be at the low end of that range, so calling it 3% to 4% is probably not the right way to look at it. I think you need to look at it as around 2%.

We obviously have the customer pickup incremental impact, which for the full year will be about 70 basis points. Again, that program was not negotiated when we provided our earlier outlook. It's now embedded in our numbers. I would say the primary thing that's adjusted, that's taking us flat, too, would be category growth. Our previous outlook, we had expected to be flat to slightly up on categories for the full year, and just given what we're seeing, particularly late in Q1 and early in October, with the more negative trends that we've seen in category growth, we're reflecting those in our outlook.

So I would say that's the primary change. Obviously we factored in the CPU allowance impact, but the primary change is just the softness that we're seeing in the categories late in Q1 into Q2.

Yes, I would just build on that. The surprise really came in September-October, and obviously we're working aggressively trying to analyze what's going on. We don't have a full view of all the category consumption data, but we're seeing quite a bit of softness. Some of it's obviously related to the H1N1 base-period, but it appears to be driven by an overall dismal economy driving slower category growth or category decline.

And is it at least from the information I have so far, is it volume or price, price realization? Is it both? How should we think about it?

It's more volume related. Our trade spending was up, but not dramatically.

Pricing has come in where we anticipated, so it is underlying volume.

Now how do you -- (inaudible) what we're seeing across all of CPG, I would argue, is, a very acute price sensitivity among consumers, so maybe your pricing did come in, but the elasticity with us a lot worse. Is that something you're seeing, is that something you're going to do some more work on? I ask that in terms of your category, looking at it more broadly.

Yes, so we look at pricing pretty intensely, both relative to competition. There obviously is some potential pricing relationship between our pricing and the category health, but where it would show up the most is the growth of private label and lower price brands. As I think you know, private label has eventually flattened out. In fact, I think they are declining a bit in track channels for us.

Pricing is the key cause of the price issues, but we look at our price gaps pretty aggressively. We're hedging it business by business because it does vary by business, and as you know, we have some businesses that are incredibly healthy with very large price gaps like Hidden Valley, and we have some that are not as healthy like cat litter, where the price gaps are an issue.

And I think if the price gap management was a real issue, I don't think we would see the kind of share gains that we're seeing. I feel good about the health of the brands.

I think the other thing is, we can't get lost in the averages on this category decline. I mean, we have categories that are growing in mid-single digits. If you look at the natural personal care category, it's now on a trend of growing about 7%, so we feel good, that's the canary in the mine for us, in terms of that's the most discretionary thing we have. On the other hand, we have had up until the most recent four-week period, real softness in the trash bag category, where there are probably free substitutes for people if they want to use those free substitutes.

Now, we're starting to see some vitality come back there, particularly in our business with innovation like with Febreze, so I wouldn't get lost in the averages. I think we just take it category by category. Certainly from a price gap standpoint, we feel pretty good because of the share gains we're seeing.

And that's very helpful, to fabricate away from the averages.

Are you, are you expecting things to get better or worse? How should we think about it? Are you seeing anything get better or worse?

Well, again, it's a category by category issue, and I think we're certainly -- I think we believe that we're through the worst of it as we get through with this quarter and we head into calendar year, FY '11. I think a lot of it depends on the pace of innovation that CPG puts out there. You'll obviously see that ramp up. We feel very good about the pipeline we've got starting in January.

So I think with increased innovation, I think from most manufacturers and the fact that we do believe the economy is getting better, not worse, I think we'll start to see it pick up and then we don't have the suppression of the H1N1 overlap. We don't have the suppression of the Venezuelan overlap. We've got more positive innovation coming, so when you factor all those things in, we clearly think the second half, we'll see more robust top line.

And one last little quick question.

You mentioned Glad, you mentioned trash, broadly, as a place where it's been tough. Is there anything you can comment in terms of rationality with your main competitor there with the chain of ownership? There hadn't been an argument that was positive saying look, when this thing goes private, (inaudible) feel a little more rational. Are you seeing any of that? Sounds like -- it's not the case.

Actually, I don't think the deal is closed as of yet. It's still -- I think it closes in November or December. We haven't seen any change in behavior, but I think our hope would be your hope.

Okay, thanks.

Okay.

And our next question comes from Nick Modey of UBS. Please go ahead.

Good morning, everyone.

Good morning, Nick.

Good afternoon.

The question, two questions, one is on trade spend. Any indication -- have we peaked here in terms of trade spending when you look out across all of your categories and look at the most recent data, after this quarter's closed? That's is the first question.

Then the second question is, just on this Wal-Mart topic with the whole pick up now and we're hearing that category management may come back in-house. Any thoughts on that and how that could affect your positioning, given that your category (inaudible) in several of your largest categories?

It's a great question (inaudible). As we said, we're expecting (inaudible) first half of the year with some moderation in the second half, so that continues to be our outlook. We're spending as planned in the first half, so we've not increased over the levels that we'd planned for, and right now while there might be a little bit of tune-up of trade in the back half, we would still expect it to come down a bit.

So I would like to think we've seen the peak in this. Obviously it's going to be based on what our competitors do in the individual categories, and we'll obviously manage our price gaps appropriately and spend appropriately, but at least from an outlook standpoint, we would say we would see the peak of it, in your words, probably in the first half, with some modest decline in the second half.

So--

Just real quick to close the loop on that -- how much -- if you think about your total trade spend pull, how much of that do you think would be locked up in the (inaudible). I'm just trying to get a sense if [Pacto] does become a little bit more rational, if that would give you some relief in the first half of the year?

Well, we have to see how it plays out. Part of our thesis in the back half of the year is that rising commodity costs, including resin, which start to mitigate some of the competitive activity that we've seen, and certainly that would apply to the trash bag category and that branded competitor. Part of what we've built for second half is assuming that we see some moderation in some of the competitive activity due to squeezed margins.

So I think the other part of your question was, the impact of the customer pickup program at Wal-Mart and maybe other things that are happening at Wal-Mart. The customer pick program is just essentially a savings opportunity for Wal-Mart. They think they can be more efficient with their logistics network, if they pick up all their product rather than having us service some of their needs. The transition has gone extremely well, so, if anything, this is a big positive for us in terms of the relationship, but it doesn't have really an impact on merchandising activity or category management or the like.

I will say that we are more encouraged by the change in attitude change in strategy at Wal-Mart these days. Our business at Wal-Mart has picked up in the first quarter. We're optimistic, more optimistic about our Wal-Mart results going forward. I'll let Don speak, because he recently had a talk with Wal-Mart and he can talk to some of the change in attitude more directly.

I think the -- I feel very positive about what's going on with our largest customer. I think their approach now is back to a -- very much a win-win philosophy. They know they can't make their numbers without us manufacturing driving and we could make our numbers without them as well, as is true of all of our customers. But I think just the change in philosophy or going back to the roots of win-win between manufacturer and retailer, is a big help.

I also think that their focus on driving virtually every category -- I think they are really now looking at categories across the range and saying we've got to win with consumers period, just like I think the manufacturing community feels. So I think all in all, it certainly bodes well for the future.

Thanks.

And we'll take our next question from Chris Ferrara from Bank of America.

Hey, guys. I was just wondering if you can help me understand the category decelerations that you are seeing. If you go by category, high-end trash is doing well, Burt's is doing well, Brita is doing well and it seems like most of your more expensive stuff is doing well. Is it fair or not fair to draw a line between where your categories skew from an economic standpoint, from an income level standpoint for consumers and think about which categories are doing well and which categories aren't doing that way? And then I would follow up on that.

It doesn't quite cut that way. It's not quite that logical. Obviously, we're doing incredibly well building the equity, great products, great new flavors, et cetera. We did have a bit of an adjustment in Q1 because of a very strong Q4, but that's a business that's been on fire, so to speak, for a number of quarters, even through the recession. One could argue that people are being more often at home and therefore that's helped build the dressing category. The dressing category has generally been a healthier category in our portfolio, but, obviously, because we have driven share gains, we've driven disproportion national growth on Hidden Valley versus the category.

Trash is a category we do think has been impacted by the economy. I think Don alluded to this earlier, where people have free alternatives, free trash bags or simply use less trash bags than they did before, if they are pressed for dollars. Cat litter is a category that's generally been healthier in our portfolio, where we have seen some slowdown, again, probably driven by the economy that people can let their cats out the door, don't want to fill their cat box with cat litter.

I think it varies by category. I wish it was as simple as saying it's the premium products or the non-premium products. It really depends on some of the consumer dynamics and the positions of our brands within those categories. I hope that helps a little bit.

Yes. Yes, it does. And I guess what it sounds like -- so is your innovation working? Are you getting more or less uptake on your innovation in the heat of the economic declines you're seeing in some of your categories? Is there an innovation problem right now or not really?

We've been very consistent in our innovation program for five years running now. We've targeted 2 to 3 points of incremental sales from innovation. That includes both base brand improvements like Kingsford Charcoal improvements, as well as brand-new products like the Green Works.

We very consistently have delivered 2 to 3 points of incremental sales growth each and every year. I would say there's probably been a bit of a switch toward more brand improvement in recent years, brand improvement, and single hits versus what we used to term game changers. Generally speaking, innovation is still helping us to drive growth even in a tepid economic environment.

The only thing I would add, on this category growth issue, as I was saying to Ali, I think you've got to disaggregate this, as we're trying to do. And I do think there's a couple of trends going on. One is, if there are free substitutes available, as in trash, you're going to see more of a disproportionate hit on that category, unless you've got significant innovation, like we have with Febreze. I think that's why our trash business is up mid-single digits and gaining share.

I think the other thing is that the category's been hit by an extraordinary overlap and you're going to see it as well. The bleach category is significantly down in the second quarter because of the overlap of H1N1 last year, that's a big part of it. So, if there is a free substitute available, or if there's an extraordinary overlap going on with a material event like the H1N1 pandemic, I think you're seeing that accelerated decline. I think on both those fronts, we're going to work through that fairly well as we get into the first quarter or the first quarter of the calendar year in '11.

Great.

And you haven't seen any -- there's been no temptation internal and you haven't seen any from competitors to ratchet up the promotional spending in light of this, or frankly, is it too early in this category slowdown that you just started seeing at the end of September, early October to even make that assessment at this point?

Too early to assess whether there's been a real change in behavior in the last two months, but clearly promotional spending has increased over the last several years in our categories and across the grocery store.

Thanks, guys.

And our next question will come from Bill Schmitz with Deutsche Bank. Please go ahead.

Good morning.

Good morning, Bill.

I'm going to keep going on the same path here, but you look at the category declines in some of these big categories. How much do you think is it being self fulfilling and how much do you think is consumer?

It seems like whenever you see a big uptick in promotional spending and a lot of negative pricing actions, that's when the categories decline. You've even said your personal, natural personal care business is up 7%, or the category is. Do you think a lot of it has to do with some of the merchandise activity, not really the underlying consumer demand?

Well, there's clearly an impact, Bill, from that. As Dan said and Larry I think also, as we get into the second half of the year, we see some moderation in trade spending. I think, clearly, that will help because obviously as you know, there are dollars being sucked out of these categories as deep discounting goes on, and I think everybody's trade spending. Most of the manufacturers' trade spending over the last 6 to 12 months has been up in the 10 to 20% range. I think that does tend -- it will start to mitigate, but clearly those dollars are being taken out of the category.

If you look at private label trends in our categories, they are fairly flat, if not declining. You look at the last 52 weeks on private label in the track channels, they were down a percent. If you look at the last four weeks, they were down 2.5%. Those declines are accelerating. Any opening price point focus the retailers are putting on their own brands and clearly what the manufacturers are spending is sucking some dollars out of the categories. We do see that, hopefully, starting to mitigate as we get into Q1.

Got you.

And this might sound like seditious language on the Clorox call, would you start doing game changes again? It seems like it's been a while and, I think Larry talked about this a little bit, but there really hasn't been any category redefining innovation in probably the last three or four years.

I think we have swung the pendulum a little bit more towards face brand improvements and what you might term singles versus triples and homeruns. But, we've had an incredible amount of success with that, particularly the improvements that have come with the cost component like we've done on charcoal.

We feel great about what we've done, both from a top line standpoint and even more importantly from a bottom line standpoint. We continue to have a pretty interesting top line, and we do have some pretty big hits, what you might term game changers, in the pipeline, so don't be totally surprised if you see more of that.

Okay. I just won't call it that.

Yes, well, you can call it whatever you want. I think the other thing is, as we said, this focus on 60/40 blind winds where we've gotten almost half of our product portfolio with that kind of blind wind, given that we still believe the most effective way to reach consumers is word of mouth, I think that's had a material impact on our ability to gain share in this environment. So we're, we're not going to take our focus off product superiority, but to Larry's point, the pipeline's pretty robust, and we think we've got some ideas in there that could be under your definition, game changers.

All right, thanks. Could I just ask Dan a couple housekeeping items, if I have a second?

Sure.

The other line, its 1.7 negative gross margin points in the exhibits and you have a footnote there. Is that mostly promotional spending and product mix, or is Venezuela a big chunk of that?

Well, there's a number of items in there. There's a little bit of restructuring, trade fits in there, the FX fits in there. Probably, one of the bigger items in there is negative mix, a little bit of business mix, and then product mix.

Okay, and imagine a lot of that is salad dressing, is that fair?

We had some of our businesses in Q1 that were softer tend to be our higher margin businesses, so you get a little bit of business mix, but you also have some product mix issues, particularly as consumers increasingly go to the value channel.

Okay.

And then lastly, on the working capital side, I think you said sales are really soft at the end of the quarter, but then if you look at the cash flow statement, looks like inventories were actually up and -- sorry, inventories were down slightly and receivables were up, so why is it trending like that?

Embedded in our working capital is a term change in our auto business, so we have changed our auto terms to go to more standard terms in that category. The build you see in receivables was really related to that change. Now, with the sale of that business, that impact in working capital goes away.

Okay.

Now, when does that deal close and I promise I'll hang up?

It's early November.

Okay, thank you so much.

Thanks, Bill.

And our next question will be from Joe Altobello with Oppenheimer.

Good morning.

Good morning, Joe.

First question, for Don, on the promo side. If you're right and promo spending does ease, how much of that falls to the bottom line, or does some of that get caught up in higher advertising? It is an inventive, if you do get that "savings" to advertise more to try grow other categories more?

Well, let me start and I'll turn it to Larry. I think it really depends on the category dynamics, Joe, of what category we're seeing and what the share trends look like in that category. As we've said, we're going to at least maintain, if not continue to grow share in our categories, so I think it depends on what the competition's doing and what we see as share trends in that category.

I'd build on that. Our key metric in terms of building our brands is really the share. As long as we're building share, we feel pretty good. Obviously, we don't build share everywhere, but in the aggregate, we're building share.

We've hung with that 90% advertising rate for quite a long time. That seemed to be about appropriate in terms of the total portfolio, but it's highly variable by business unit and some businesses we spend literally twice as much and some we spend half as much, so it's really business-dependent. I think the key metric for us is if we're growing share, we're spending sufficiently on advertising. If we're not, we may want to invest further.

And from an outlook standpoint our spend on advertising, on percent of sales is about equal, fiscal '11, fiscal 2010.

Got it.

And one for Dan as well. The $25 million to $30 million of incremental IT facility spending this year, first, how does that flow throughout the year from quarter to quarter? And is there incremental spending as well for next year, or does that go away?

It's a little choppy on how it flows through. It's probably roughly $4 million to $5 million of that spend in the first quarter. It will start ramping up, particularly on the IT project, spending will ramp up in Q2 and Q3. On the facilities side, on the Pleasanton campus, more of that spend will be in the back half of the year, less in the front half.

There will be a little bit of spill-over into next fiscal year, primarily in the first half, where we start going live with our IT conversions on a phase basis. So as we start to phase in, the burn rate will go down, but we'll move into the new campus facility in the first half of next fiscal year. You see a little bit more elevated spend in the early part of fiscal '12, but that runs off pretty quickly.

Got it, okay. Thank you.

And our next question will come from Connie Maneaty with BMO Capital.

Good morning.

Would you talk a little bit about the new products that are coming in the second half, what you've already shown retailers, and what we should expect in terms of slotting allowances?

We're not public with the second half new products as yet. As we said, we do have more new products in the second half than we had in the first half. And the first half launches, were the (inaudible) Febreze and some of the new items on the lip balm from Burt's and the Restage that are moisturizing body lotions.

We also have the Hidden Valley salad kit that's currently in one major retailer that will be expanded in the second half, and without being very specific on second half launches, I would say we have several new items in the home care lineup. We have new flavors on Hidden Valley Ranch and our KC Masterpiece barbecue sauce. We had some upgrades on the Brita today line. We have at least one line extension on our cat litter business and some other new items on the Burt's line.

Okay.

Will there be noticeable slotting allowances? Or will these slip right into existing space?

There won't be any extraordinary trade spending support behind these in terms of slotting.

Okay, great.

About Venezuela, could you talk about the tenor of business down there, and of your Venezuelan results? What percent do you attribute just to FX and the other to demand?

There's two components there. Obviously, we've talked about the impact from the currency devaluation. On base results, Venezuela's a challenging operating environment. The government essentially seized control of the currency markets and they are metering out the amount of US dollars that they allow anybody to convert Bolivars into. We from an operating posture have had to get pretty selective in terms of which SKUs we'll continue to produce and sell.

We have to look at the prioritization of those SKUs. And also any SKU that has a big US dollar commodity input component, we're having to scale those back. Certainly there is further declines in volume and sales in Venezuela related to this restriction. Now, we're still profitable in Venezuela, which I think is the key issue and I think the team is doing a nice job of managing through what's really an impossible situation, but the business will continue to be soft over the balance of this year.

I guess the other silver lining is that we still have leading shares in this market. Historically, it's been a very good market for us. The brands are strong, but we're having to make some pretty difficult operating choices, given the restriction of US dollars.

I think the other thing, Connie, to keep in mind is now with the devaluations and everything we've gone through in that business, it's about 1% of our revenue.

And what exchange rate are you using? Is it -- I mean, are you getting? Is it the floating right, like the 5.4?

We're the official rate, the (inaudible) rate as they call it. Yes, it's in the mid 5's.

Okay, great. That's helpful. Thank you.

And our next question will be from Ed Kelly with Credit Suisse.

Hi, how are you?

Is there any difference by retail channel in terms of what you saw in category weakness towards the end of the quarter? Was it broad across sectors, supermarkets, drug stores, mass? Or is it more selective?

Actually in the quarter, we saw a little bit less of a shift towards the value channels. But, I would say in a fairly dramatic shift over the long-term. I expect the shift to value channels and therefore category growth in value channels to continue.

Okay.

And then how are you feeling about inventory level at retail currently, especially in an area like disinfectant products, because it seems like your Q1 sales were good, but the flu season has certainly been light, which might suggest that may be there is some inventory floating around there at retail. Is that a fair assessment?

The place where this is hardest to predict is probably in wipes. We do a strong story to our retailers and they believe in it, that if the flu season is intense, you're going to need lots of wipes. We had a very strong sell-in in July, very good August, and we fell off a bit in September, which I think, in part, was inventory adjustment.

So that's the line where you see some ups and downs based on people trying to predict the strength of the flu season and trying to predict if there's going to be an H2N2 or some other event that's going to cause incredible demand in the wipes category. Other than that, I think we're seeing the normal ebbs and flows that we always see.

Okay.

And last question for you. The retailers were fairly promotional, over -- call it the last year and a half or so -- and it feels like there's this recognition amongst them that that was a race to the bottom; there was a very low return on the investment they were making. It actually looks at this point that the vendors have started to pick up over he past couple of quarters. Are we getting closer to the same type of recognition that the return is maybe not so great on this end either? What does that mean going forward? Are we sort of stagnant volume type environment until the consumer improves?

I'm not sure exactly how to answer your question, but let me give it a try. I think that retailers in particular were very focused on the lower end of the value chain, given the economy, particularly private labels that were, obviously, priced quite a bit less. I think that found that was further weakening their category results as they were trading people down to entry price points. I think there's been some pushback from that strategy and less of a focus on private label.

I think the promotions have been a mixed bag for retailers, depending on how they have executed, but we have seen some extreme pricing reduction in some retailers not be as successful as what they thought it might have been. Again, it has not led to the incremental sales or incremental category growth that they thought it would. I think there's been some reconsideration of those strategies and more of a focus on everyday value or lesser discounts when you do promote rather than the extreme discounts that never really led to a lot of success. Does that help your question?

Yes, it does. From a vendor standpoint, though, it does seem like the vendors are now ramping up trade support. How is the vendor community feeling about the return they are getting on that and how does that change going forward now?

I think some of that ramp-up is tied to the fact that the innovation pipelines are ramping up, so people are going to support new product entries, and I think a lot of that's what's going on. You'll probably see more robust innovation pipelines from most of the branded guys. You're going to see it, certainly, have seen it already, but I think you'll see even more as we get into the back half, the first half of the calendar year.

As a company, our focus has never been on extreme discounting, buy one get one frees and 50% offs have never been a part of our trade promotion strategy. What you see is from us is more of a focus on either everyday value and EDLP retailer or frequent promoting at lesser discounts; or tie-ins with other kinds of marketing activity in-store, are more our focus.

Great, thank you.

And our next question comes from Lauren Lieberman with Barclays Capital.

Great, thank you. Hi, guys.

Hi.

I just wanted to go back to the quarter just reported, because what really stood out to me as being a surprise was how impactful the sequential shipments around charcoal and Hidden Valley Ranch really were. I feel like my memory is that we had a conversation at the back-to-school conference, also on last quarter's call, about how impactful was being on that significant rollback with, would it matter, would I need to remember it in next year's quarter as a comparison issue, and the answer was it's not that big of a deal.

I just want to get a sense for, is it a matter of you didn't have the visibility and then at some point in the quarter Wal-Mart just stopped ordering in those categories? I'm just confused about where the disconnect came from with those two particular issues. Thanks.

Let me give you specifics about Hidden Valley and I don't know quite in context of the response to your question, but, obviously, in the context of the entire portfolio, it is not a huge impact, but we did see a very significant, dramatic increase in Hidden Valley behind one of these extreme price reductions at one of our largest retailers, our Hidden Valley Ranch. It did grow the business considerably behind that promotion.

What was hard for us to decipher was how much of that was true incremental shipments and how much of that was either loading the consumer pantry or loading the retailers inventory, so that played out over the course of, quite frankly, JAS and I would have to say we saw it not only in July and August, but we even saw a bit of the, what we would call, trough, in September on Hidden Valley as a result of that promotion. As I said, you look at the consumption of Hidden Valley overall, it's very strong, continued strong in the first quarter, so this is more of an inventory adjustment, maybe a piece of it being consumer pantry, a piece of it being retailer inventory adjustment versus any kind of health issue on Hidden Valley. If someone were to respond to your question, is it a big deal, Hidden Valley, we would say the brand continues to be very healthy, but there was some inventory adjustment that did have an impact in Q1.

Okay.

How about on charcoal?

On charcoal, I think, Lauren, the issue is more widespread across a number of retailers, particularly the home improvement channel, as well. So there was significant merchandising behind Memorial Day and then Fourth of July, and so I think that was driven across a number of, across several channels at a number of different retailers. It wasn't concentrated at any one retailer.

If you look at our charcoal business, we've seen some incredibly strong growth in the Home Depot, home hardware kinds of channels, and that played out in spades in Q4 and we saw double-digit, mid-teen growth in our charcoal business, which is obviously a very big business and very big quarter to see that kind of growth on and we have seen similar inventory adjustment going on that weakened Q1 results.

When we were at the conference, we had projected some trough. I think the trough was certainly more than we thought it would be.

So how much of this quarter's, of the sales disappointment in this quarter, was related to those two issues those two brands, I should say?

When we look back on our budget, Lauren, when we put our budget together, in fact, put our initial outlook out in May of a -- five months ago, we're not materially off what we put into the budget. We felt we had some better momentum coming in, but we're within $20 million of revenue where we had put the budget. It's not, I suppose, a material change from what we had already put in.

Okay, because that actually -- that's a good lead into the next part of my question, although I still need to understand better the source of disappointment in this quarter, in particular, just reported.

When I look the a the guidance for the rest of the year and knowing now there's a 70 basis point drag from the change in the customer shipment program, unless you do the very low end of that sales guidance range, where people who were towards the mid- or bottom end of your range for sales growth previously don't need to change anything in the next three quarters? Part of me is feeling like this conversation the last hour is a lot more dire than what we're really talking about numerically.

I don't think we're tracking with you in terms of more dire.

No, nothing's really changed all that much, and I just feel like the whole conversation is, "The categories are terrible; we're doing great, but the categories are terrible." It doesn't really flow through to the numbers.

Lauren, let me try it this way and I'll come back to an earlier point I made. Our outlook range was 2% to 4% on full year, although we were planning around 2%.

Right.

And we're now 0% to 2%, and we've got about 70 basis points from the CPU. And the other change is really the weakness that we saw in some of our categories. Again, we saw it was more pronounced in September and October.

As we look at first half, second half, the category weakness that we're seeing in the first half is really what we factored in the additional incremental impact on the top line, but as we look out in the second half for a lot of reasons, we're reasonably encouraged in terms of top line growth. While we will have the CP issue we have to deal with, we'll have the noise of H1N1 behind us in trying to figure out, unstack the bodies as to what that meant for category growth in different channels. That will be behind us. We'll have all of Venezuela through it. So that will be behind us.

We won't have any carry-over impact on either food or Hidden Valley because of some of the retailing, and so as we look out in the second half of the year, I think we feel more positive in terms of what our top line is going to look like. So while we are seeing some category softness, as we said in September and October of Q1, Q2, right now for the full year, we're not projecting that we're going to see that negative category impact extending out for the full year. Does that help?

Yes, it does. And, I'll follow up with Steve offline, as well.

Thank you.

Thank you, Lauren.

And our next question will come from John Faucher with JPMorgan.

Hi, guys.

Good morning.

Wanted to follow up a little bit on the dilution guidance, which is, if I look at the impact, and I realize there's some seasonality in the business. If I look at the impact on the quarter, you notice, basically looks like it's about $0.04 a month, so that would be about $0.48 total, and you're really guiding to, between the continuing ops piece and the go-forward guidance, it looks like you're guiding -- and the net dilution, guiding to about $0.40, so that would imply $0.08 from the buyback, but when I look at the order of magnitude and the timing, it seems like the benefit to back half EPS should be more than that, maybe about twice that.

Can you break out the components in terms of that dilution, so I get a better handle on it? Thanks.

Sure, John. Let me see if I can unstack the bodies for you.

I'm not sure that's the best metaphor to use, given the fact your stock's down 4%, but okay.

Obviously, there's a lot of confusion. Let's see if we can get this right, so people understand it.

On September -- our forecast for the auto business roughly, order of magnitude, for the full year was in the $0.55 to $0.58 range. That was the outlook we had for the auto business. That includes the direct costs associated with business. It does not include the indirect cost, the stranded costs that remain. So that's your starting point for the full year.

As you point out, there is seasonality in this business. There is a big spring and summer business here, and therefore you see a pretty significant seasonality in terms of the profit and sales progression of this business. But if you start with the $0.55 to $0.58, what we currently estimate that the net earnings of this business from July 1 through the anticipated date of sale, we think for the full year that represents about $0.16, so that's a benefit that will accrue to us. We're also providing the buyers some services as they transition into their structure, and we think the benefit of that revenue that we'll receive is another $0.04 on the full year. Then we plan to use the net proceeds of the sale to buy back shares.

Now, you've seen the progression of what we're seeing with the buyback, with about two-thirds of those shares to happen in the second quarter, with the balanced to happen in Q3. The benefit of those share repurchases, given that pattern, we estimate will be, call it $0.17 worth of share benefit in the fiscal year outlook. So when you net all of that together, that comes to roughly the $0.20 dilution that we're projecting for the sale of the auto business. That's how the math flows in the year and how it flows in the outlook.

Got it.

Any thoughts on the ability to take away some of that stranded overhead going forward?

Certainly, we're going to be very focused on that. The good news is with the revenue from the transition services, it gives us some runway to get those costs out, so we're going to provide certain level of services for up to 18 months to the buyer and we're working on plans now to get some of that stranded cost out over that period of time.

Now, while we're providing the services, we still need -- the costs to support that will still be there, but certainly, we have 12 to 18 months to work on getting that level of stranded costs out.

Okay, thanks.

And our next question will come from Karen Lamark with Federated Investors.

Hi, I've got a few questions.

I'm trying to reconcile your guidance to expectations for margin expansion and better understand a couple of assumptions. With trade spend up, at least right now, commodity costs higher, your sales expectations lower, I know you took the cost savings to the higher end, but what are you assuming on price and mix for the aggregate portfolio?

If you're looking for the full year, again, cost savings, $90 million to $100 million, probably at the high end of that range. Pricing will be a net benefit for us for the year. We have our international businesses pricing to offset some of the inflation and currency impact that they have seen. We just announced obviously the Glad price increase. There's a little bit of negative on the price adjustment we took recently in the litter business, but on an overall basis, pricing will be positive for us.

We continue to believe that commodity costs will remain in this $50 million to $60 million range. We think it's in that trading zone. Logistics and manufacturing will be a little bit of a drag for us for the full year, but it's not a huge amount. We do have a little bit of negative mix in there, again, both a little bit of business mix as well as channel mix.

Restructuring for the full year on COG's is about flat, and we actually for the full year expect some modest benefit from trade spending and we still have a little bit of negative from foreign exchange in the back half of the year. If you net all of those factors, and there's a lot of moving around, but if you net all those factors, we're still in a 25 to 50 basis points.

And the way I like to think about it is, well, there's lots of moving parts in here. Basically, you've got about $100 million worth of cost savings; you got about $50 million to $60 million of commodities. We're still net -- and then you throw in a little bit of pricing, it's able to create an algorithm for us that we believe will allow us to increase margins about 25 to 50 basis points.

Okay. That's helpful.

And then just a follow-up. With respect to your commodity outlook,obviously, not changed, did you originally have a more negative outlook than you thought. I'm just really trying to get to how much wiggle room you might have in your commodity forecast.

I would say things are not more negative today than what we thought at the beginning of the year. For us, we keep a close eye on oil and resin, Chlor-Alkali, things like that. Those commodities have opinion generally trading within the ranges we had anticipated for the year and as we look out over on the next couple of quarters, we're anticipating those commodities will remain in those trading ranges, which is why we're staying with the 50 to 60.

Okay.

And with respect to sales guidance, excluding the change in the Wal-Mart distribution, you cited a lot of well known and well-acknowledged factors as pressures. It seems odd to extrapolate very recent deter racing in sales and potentially temporary -- especially given variability around trade programs. Did something else change or have you gotten some indication of an upcoming change in distribution with any of your retailers?

I don't think that we've extrapolated and said the entire year is going to be as weak as what we've seen very recently. On the other hand, we have to take the actual results for what's occurred in Q1 into account when we look at the full year.

As we said earlier, this is not all that dramatically different than what our original outlook was when you take into account that we're losing almost a point in terms of the expanded customer pickup program. It's basically about 0.1 difference, maybe a little over 0.1 and it's simply attributable to actual results we've seen and some category weakness that we're projecting.

Yes, I think the original outlook on category was flattish to up 1 and we're saying now flattish to down 1. It's not a massive swing, but it's certainly a big enough swing that it's going to influence that top line outlook for us, as we've talked about.

Okay. That's helpful. Thank you.

And one last question. Given your expectations for the top line, does M&A assume the higher priority for you with respect to your capital allocation plans?

Thank you very much.

M&A continues to have the same priority that we've had for it. We're focused in a couple of key areas there. What we're looking at today, likely to be more bolt-on type acquisitions than anything else, so as I said before, we'll generate some good free cash flow this year.

If we don't need it to build the business or for M&A, then we'll look at returning that cash to shareholders. It just depends on how the M&A agenda plays out over the next couple of quarters.

Great, good luck. Thank you.

Thanks.

Thank you.

This concludes the question and answer session.

Mr. Knauss, I would like to turn the call back over to you, sir.

Yes, thank you.

We appreciate everybody's time today and we look forward to giving you a further update on the business in early February, as we move through this second quarter. Thanks, everyone.

This does conclude today's conference. Thank you for your participation.