高樂氏 (CLX) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to The Clorox Company first quarter, fiscal year 2012 earnings release conference call. At this time, all participants are in a listen only mode. At the conclusion of our prepared remarks we will conduct a question and answer session. (Operator instructions) As a reminder, this call is being recorded. I'd now like to introduce your host for today's conference, Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, you may now begin.

Thanks, David. 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; and Steve Robb, our Chief Financial Officer elect. We are broadcasting this call over the internet and a replay of the call will be available for 7 days on our website thecloroxcompany.com. Let me remind you that on today's call we will refer to certain non-GAAP financial measures including but not limited to pre-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 in today's press release, this webcast, 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.

Today, Don will start with some opening comments, Larry will then discuss our top line results for the quarter followed by Steve who will review our financial performance and outlook for fiscal year '12. And finally, Don will come back to wrap-up with his perspective on our current operating and business environment before we take your questions. With that, let me turn it over to Don.

Thank you, Steve. Hello, everyone. Thanks for being on the call today. I would really like to start out today by thanking Dan Heinrich. Many of you know Dan well, who is retiring from the Company as CFO later this month. I think through Dan's leadership over the past decade he has certainly had a substantial and positive impact on the Company's performance. As many of you know, Dan joined The Clorox in 2001 as our controller, and then, in 2003 was promoted to The Clorox Executive Committee and Chief Financial Officer. He is certainly a strong leader and advocate for our finance organization and really made people development a top priority. And, I think that is evidenced by our ability to name a new CFO, Steve Robb, from within our organization.

Dan was instrumental in developing our overall Company strategies which, obviously, have delivered superior results -- stockholder returns over time. Now, in addition to his leadership with the Company, I think Dan worked very effectively with the analysts and the investment community over the years. I think no doubt that had a hand in his being twice named the best CFO for our sector by Intuitional Investor Magazine among his many awards. Importantly, I think in the 5 years I have been here Dan's been a great partner to me and the rest of the Executive Committee. I'm certainly going to miss having him here. We are grateful to Dan for his many contributions and wish him the very best as he moves on.

I also want to congratulate our CFO elect Steve Robb, who is with us today on the call. Steve has been with the Company, I think as many as you know, since 1989 and most recently served as Vice President of Finance. So, Steve really had day-to-day responsibility for the global finance function. Steve, obviously, brings a lot of deep Clorox and finance experience into this post. He's served as VP of Finance for several of our major businesses and as Finance Director for product supply as well. In addition, Steve, for a number of years, has overseen our cost saving efforts which I think as you all know have been very successful. And, Steve's going to give you the financial perspective in a few minutes and the outlook. But, first I'll turn it over to Larry.

Thanks, Don, and welcome to everybody on the call today. As you saw in our press release, we had a solid quarter and a solid start to fiscal year 2012. Our volume was up 2% and sales were up 3%. Top line results include 9 of 11 SBUs delivering year-over-year growth driven primarily by product innovation and pricing across most of our businesses. Our margins were severely pressured by commodity costs and other inflationary pressures. But, we feel good about our actions to get to improved margins over the course of the year. Overall, we are pleased with the results for the quarter in what continues it be a difficult economic environment. As usual, I'm going to focus my comments on market share volume and sales, and provide perspective on what drove our top line results. Steve will then provide the financial detail.

Starting with our US business, we continue to be confident about the strength of our brands. Our track channel share was down slightly in the first quarter and for perspective track channels now account for about a third of our sales. On an all-retail outlet basis we grew share over the past 52 weeks and held or gained share in all of our categories. Our total Company share remains at an all time high of 27.9%, up 1.4 share points since fiscal 2008. With private label up only one share point during the same time frame. While our US categories continue to be impacted by the weak economy, the trends are improving. Category consumption on an all-retail outlet basis was down only 1% for the past 52 week period, versus year ago declines that were closer to 2%. In international, our market shares were more mixed. With shares down a bit in Latin America, due to pricing actions. Categories in international markets are healthier than in the US, with both positive volume and dollar sales trends.

In our cleaning segment, which includes our Home Care, laundry and away from home businesses, volume declined 1% and sales declined 2%. Home care, the largest business in this segment, grew sales and market share behind higher shipments of Clorox's disinfecting products driven by stronger merchandising support for the back to school and cold and flu seasons. We also saw growth behind innovations like our new bleach foam or spray and new Liquid-Plumr double impact. Gains in Home Care were more than offset by lower shipments of Clorox laundry additives driven by continuing weak category trends and recent pricing actions.

In August, we executed a 12% price increase on Clorox liquid bleach and a 5% increase on Clorox 2 to address higher commodity costs. Most private label and branded competitors have followed. On the positive side, our all-outlet share of laundry additives is up about 2 points on a 52 week basis and we achieved an all time record share on Clorox Liquid Bleach. Improving our laundry business is a major area of focus and we feel good about the new plans we have in place to drive brand and category growth over the long-term. We just launched a new advertising campaign called Bleachable Moments that targets a new generation of users employing humor to highlight problems that only bleach can solve. In addition, in January, we will introduce a new bleach gel in a precision pour spout package that will make it easier to use bleach in the new HE machines.

In our households segment, which includes bags and wraps, charcoal and cat litter, volume increased 5% and sales grew 3%. Glad had strong sales growth but volume was down slightly due to the volume decline in base trash bags driven by our May pricing action. Sales grew behind pricing and trade up to premium trash bags like Glad Odor Shield with Febreeze. We also launched several new products that drove sales growth in our Glad food storage line. Looking forward, we just introduced a new Glad based trash bags that used break-through patented technology to deliver a stronger consumer preferred bag with less plastic. This is the first major innovation on base trash bags since we purchased Glad back in 1999.

Cat litter grew sales and market share behind product improvements on the base brands as well as a new line extension focus on extreme odor control. Charcoal volume was up in the high single digits, although sales results were less impressive because of a mix shift to very large sizes. A number of major retailers have been investing and selling large packages of Kingsford at sizable discounts in order to build store traffic during key holidays. We sold a lot of charcoal on July 4, but the mix was unfavorable from a sales and profit standpoint. We plan to put a number of changes in place to diminish this issue for next year's charcoal season.

In our Lifestyle segment which includes food products, water filtration, and natural personal care, we increased shipments across all of our businesses. Delivering a 6% volume increase and a 6% sales increase. Burt's Bees had an excellent quarter with double digit volume and sales growth behind wipes and sensitive skin care product launches, innovation in lip products, and expansion into international markets. We are also excited about the upcoming launch of a new brand called Good from Burt's Bees. This brand is targeted to younger consumers and will offer natural products with vibrant fragrances. It could hit store shelves in early Q3. Brita grew sales behind our launch of the new Brita on the go bottle, which is well ahead of expectations and largely incremental to Brita volume. Finally, our food business saw solid volume gains as a result of base brand growth, new salad dressing flavors, and Hidden Valley branded veggie kits.

In our international segment, volume increased 3% and sales were up 9% driven by both price increases and favorable foreign exchange rates. The greatest volume gains were in our well established business in Argentina, the expansion of our Glad business in China, and distribution gains in a number of small emerging countries in Asia and the Middle East.

Let me now provide an update on pricing since it's a topic we often get a lot of questions about. We took a 10% price increase on Glad Trash Bags back in May and included aggressive pricing in other products in our FY '12 plans given the dramatic escalation in commodities. We are happy with the results behind our Glad Trash price increase given that our recent track channel shares remain very healthy. The bulk of our fiscal '12 price increases were executed in Q1, and included increases on Clorox Liquid Bleach, Hidden Valley salad dressings, Brita pitchers, and many of our Home Care products. We also took aggressive pricing actions in international markets like Argentina and Venezuela to keep pace with high inflation rates.

Thus far, our pricing actions have gone as expected and competitors, including private labels, have also increased prices in most categories. We do expect pricing to have a near term dampening impact on volume as it typically takes 3 to 4 quarters for consumers to adjust to new pricing. That said, we anticipate our pricing actions will contribute to sales growth for our brands and our categories. Coupled with our brand building efforts and strong innovation pipeline we continue to feel good about our sales outlook for the year at 1% to 3%. So, to sum up, our Q1 results show a solid start to this fiscal year. We are on track despite weak US categories and aggressive pricing actions to offset commodities and other inflationary factors around the world. And, we continue to invest in the long-term health of our brands with strong demand building programs and strong innovation. With that, I'll turn it over to Steve.

Thanks, Larry, and welcome everyone. I'll provide more depth on our first quarter results and our financial outlook for fiscal '12. We are pleased with the start to the fiscal year. As Larry said, we delivered 2% volume growth and 3% sales growth and we continue to anticipate sales growth in the range of 1% to 3% for fiscal '12. First quarter gross margin decreased 250 basis points to 41.8% of sales, compared with 44.3% in the year ago quarter. The decrease was driven by higher commodity costs, inflationary pressures, and manufacturing and logistics, and unfavorable mix. But these factors were partially offset by the benefits of price increases and strong cost savings of $24 million with $20 million of the savings reflected in gross margin. While we had anticipated our Q1 margin would be down, our results came in lower than prior assumptions, due to unfavorable mix and higher inflationary pressures. For the fiscal year, we continue to anticipate commodity cost increases in the range of $140 million to $150 million, as well as $40 million to $50 million of inflationary pressure in manufacturing and logistics.

Although there was a decline in the price of oil during the last few months, energy costs remain highly volatile. Equally important, overseas demand for many raw materials remains quite high. Both of these factors lead us to believe that, overall, commodity costs will remain elevated during this fiscal year. We are taking steps to offset these impacts for the year. We anticipate the combined benefit of cost savings and broad price increases across our global portfolio will enable us to hold gross margin flat for the fiscal year with year-over-year improvement expected to begin in the second quarter. Our fiscal '12 outlook continues to anticipate total cost savings in the range of $90 million to $100 million. First quarter selling and administrative expense increased versus the year ago quarter as a result of nearly $12 million in advisory fees, related to the withdrawn proxy contest.

As planned, we are continuing ramp up our multi-year investments in global information technology systems and new R&D facilities. About a month ago, our first countries went live with new international systems and we are please with how the transition has gone so far. For fiscal '12 we continue to anticipate incremental spending in the range of $36 million to $40 million behind the extension of our SAP platform globally, as well as our R&D facilities. This incremental spending will be made throughout the fiscal year. Making these investments in fiscal '12 and into the first half of fiscal '13, will provide platforms for long-term growth and cost savings.

In addition we expect selling and administrative costs to reflect higher incentive compensation expense than in the prior fiscal year when we didn't hit all of our financial objectives. We also expect a negative impact from very high inflation in many international markets as we saw in the first quarter. Overall, we anticipate selling an administrative expense to be about 15% of sales in fiscal '12 before tapering off over the next several years. Advertising for the quarter was 9% of sales, about flat year-over-year. As a reminder, we were up double digits in the fourth quarter of last fiscal year. Q1 also reflected a greater investment in introductory trade promotion behind new products launched in the quarter. We expect that our mix of spending will shift to advertising later in the fiscal year. For fiscal '12 we plan to maintain our targeted range of 9% to 10% of sales to support our new product introductions and base business.

Our effective tax rate of 30.5% in the current quarter was about flat versus the year ago quarter, as rates for both periods reflect the benefit of tax settlements. For the full fiscal year we now anticipate our effective tax rate will be in the range of 32% to 33% with some variability across quarters.

Turning to cash flow, free cash flow from continuing operations increased to $94 million, or 7% of sales, compared with $92 million in the year ago quarter. The increase was a result of a discretionary pension contribution of $15 million in the year ago quarter, partially offset by lower earnings in the current quarter. In Q1, we did repurchase a small number of shares of our common stock at a cost of about $9 million. We currently plan to use the remaining $150 million of proceeds from the auto care business to repurchase shares, likely in the second half of this fiscal year. Net of all of the factors I've discussed today, we delivered diluted earnings per share from continuing operations of $0.98 flat versus a year ago. Turning to our earnings outlook, we continue to anticipate diluted earnings per share from continuing operations in the range of $4 to $4.10 for the fiscal year.

To recap, this outlook anticipates continued commodity and general inflationary pressure, higher selling and administrative expense including our infrastructure investments, the advisory fees related to the withdraw in proxy contest, and inflationary pressures in international markets. The outlook all the also reflects updated foreign exchange rates, the updated timing for share repurchases now occurring later in the fiscal year than previously anticipated, a lower anticipated tax rate, and our solid top line performance in the first quarter.

In closing, we are pleased with the first quarter and we remain confident in our fiscal '12 plans and outlook. Our innovation plan is off to a good start. We anticipate strong incremental sales from new products. We are taking the right steps to recover gross margin through aggressive pricing actions and cost discipline. We are also investing in global information systems and new R&D facilities to enable long-term growth and cost savings. And, we remain committed to using our strong cash flow to invest in inorganic growth and return excess cash to our stockholders through dividends and share buy backs. With that, I'll turn it back over to Don.

Why don't we go ahead and open it up to questions?

Thank you.

(Operator instructions)

Bill Schmitz with Deutsche Bank.

Good morning, did you say what the $6 million of other income was in the quarter?

Bill, keep in mind the other income includes some transition services revenue we're getting from the sale of the auto business. We are continuing to support that transition. So, the primary difference in the other income and expense is the fees we are getting on the TSA agreement that we have.

Will that be pretty consistent throughout the year or does this look like --?

We have some in Q1. There will be a little bit in Q2. And then, you are going to see it drop off because the transition will wrap up in Q2 and early Q3.

And, just on Argentina. Are there any concerns that it is heading toward hyper inflationary land? Because I have seen some of the price increases across the group and the inherent inflation in that market. Is that on your radar screen?

So, we don't see hyper inflation coming. But, they do have high inflation rates. They are higher than the government will admit to. They are typically cited in the 20% to 30% range. Essentially, we are taking as much pricing as we can to keep up with that inflation. And, I obviously can't predict government actions and other activity in Argentina. But, we're not projecting hyper inflation at this point.

Bill, the other thing I would add on that. When you look at our volume growth internationally, excluding Canada. So, as you know, as you exclude Canada most of our international volume is in Latin America and Argentina is a big chunk of that.

Our volume was up 6% in those markets. The volume is pretty robust. We think the pricing we are taking is certainly not dampening down pretty solid volume performance.

Can you tell us directionally what percentage of sales Argentina is?

Bill, it is about 1% to 2% for total Company sales.

Okay, it's tiny. Okay. You probably won't answer the question, but do you think the bleach business can grow this year, total sales? I know there is a big price increase coming through.

We sure hope so. I think pricing will be part of it. Also, as we look forward to the later part of the year and early next year there will be more and more innovation that will help drive that growth.

Ali Dibadj with Bernstein.

Wanted to learn a little bit more about the volume versus price mix trade-off. Given the guidance for the year, it still is and was, volume is roughly flat and 1% to 3% sales, so mostly price. I'm just trying to get underneath, why, exactly, what is so different this quarter? I understand the bucket is mixed, but why was it different?

I guess, I ask that coming from, or in the context of, our common at least refrain, which is not as positive as yours, around the price [legacies] of your categories. So, just trying to understand what's different? What didn't happen like you had planned?

I would say that volume was a bit ahead of our expectations, quite frankly. We expected more flattish volume in the first quarter. I would also say that a lot of the pricing activity has just barely kicked in. Most of it took place effective in August, so it is barely getting on the shelves. The elasticity varies considerably by brand and by category.

But, in most cases, we see volume dampening as a result of pricing actions. The other thing I would say is the competitors following us is probably, if anything, a bit ahead of our expectations at this point. So, in each case when we model pricing action on any brand we look at, will competitors follow? When will they follow? How quickly will they follow? What portion will they follow? At this point in time, we are a bit ahead of those projections. We are optimistic that we will weather the storm in terms of this pricing.

I think Ali, as we noted on the prior call, and I think some of you folks have noted, that in our modeling we have been some what more conservative on the volume fall off than some of our competitors. So, I think, as Larry said, we were certainly heartened by the almost 2.5% volume growth in the first quarter.

The other thing I'd say is that the bulk of the pricing in Q1 was really on the international side. That was really keeping up with inflation in places like Argentina and Venezuela.

I guess I'm a little confused. You didn't say mix as any part that answer. That seems to be a surprise. Why can't I read this as, yes, volumes were a good way to take prices but people traded down?

We did have a little bit of a mix issue in Q1. I cited one big element of that, and that was the element of charcoal being what you might call footballed by some major retailers, particularly around key holidays like July 4. We sold a lot more large sizes, we sold a lot of charcoal which is good, but we sold a lot of large sizes of charcoal. These were investments made by our retail partners not money that we invested. But, it did drive a lot more volume towards bigger sizes that tend to be less profitable and lower sales per unit.

July 4, you probably knew about, happens every year last time we talked.

It was actually quite a bit more extreme this year. If you look at the pricing and the individual retailers versus year ago. And, in one case it was actually 50% below what they did last year and in another case 20%. So, it was definitely exacerbated versus anything any reasonable person would have predicted.

Okay, so Kingsford -- but, if you look at price mix for cleaning, probably down a little bit over 1%, for household close to 2%, for lifestyle roughly flat, if price is always up and up and up, then I guess I'm confused about how we keep saying a lot of pricing power when it feels like there is massive trade down going on. Which you yourself, in this report, say that you are surprised by. I'm just having, honestly, trouble putting everything with what was expected but it wasn't together.

We are not suggesting that all of the mix with was a surprise. There was certainly an element of the mix we were anticipating with some modest trade down across the portfolio. We have been seeing that for some time. The biggest component of that was the charcoal promotion, and frankly, I should say the charcoal activity driven by the retailers, and frankly, that's not going to be that extensive through the remainder of the year. As you know, given the seasonality of that have business, that will lessen into the second quarter. So, I wouldn't want to make too much of a deal about the mix issue. It will probably be modestly negative throughout the year, that's what we're assuming. But, I don't think it will be as great as it was in the first quarter. Again, not a significant surprise to us.

Okay. But, just to finish that one, was the mix intra-category mix, so i.e. trade down? Or inter-category mix, i.e. you sold more of the lower price per unit stuff?

A combination of factors. Little bits and pieces all over the place. Some cases it is category, different country, but there is definitely -- it has been and continues to be a bit of a size migration toward value channels, which tends to have bigger sizes. Charcoal being one notable example.

Okay. I guess I'll stay a little bit confused still on that one. Let me ask you on something totally different, and it may be a detail, so I apologize. But, there are different ways one can interpret the signaling you may be creating with a statement that you are going to buy the auto care shares mostly in the back half of the year. Of course, there are many ways to interpret that. I'm just trying to understand why, and maybe I'm just misinterpreting it.

Ali, this is Steve Robb. Let me see if I can bring some clarity. Let me step back and just make sure everybody understands this. First of all, in fiscal '10, we repurchased about 10 million shares, okay? As we had indicated earlier in my comments, we also went back into the market with a 10b-51 and repurchased a few shares in the first quarter.

We have $680 million of net proceeds from the auto business. Of the $680 million we have about $530 million that we've used to buy back shares. There is about $150 million left. At this point, we do anticipate taking the $150 million of auto proceeds and going back into the market, probably sometime in the second half. Now, our outlook assumes a range of potential things that we may do. So, depending on market conditions and other things we could choose to go in a little early or not. But, as of today, our expectation is we'll go into the second half, use the $150 million of proceeds, and go ahead and complete the share buyback tied to the use of the auto proceeds. We'll update the outlook as appropriate as changes warrant.

Chris Ferrara with Bank of America.

In the release it says there was $8 million in restructuring and related charges. I apologize if you have said this already. Can you talk about how much you guys spent on the IT and facility stuff? I think last quarter you guys had said it would be evenly split by the halves but it would be Q1 heavy. How much of that was the IT and facility stuff?

Chris, for the year we are still anticipating the restructuring related costs will be in the range of $20 million to $30 million. And, as noted in the press release it was about $8 million in Q1. I think what you are pointing out is you don't see any of that on a typical restructuring line of the P&L. And, I think that is going to be the nature of the type of costs we are going to incur this year. Where there are going to be on other lines of the P&L. That is no different than what we have seen in past years as well. Specific to Q1, the $8 million broke down is about $5 million or so in cost of goods. Another $3 million, I believe, round numbers, in the selling and admin line. And, a good portion of that was related to the IT transition we are going through on international businesses. I think you'll see more that as the year goes along.

Okay, great. And, I guess last quarter you guys had said that you thought EPS would be about 35%, 40% in the first half. Is that still a good number to work off of?

Yes, there is not a material change or financial outlook at this point to suggest that would be materially different.

And, I guess also on commodities, right, so you kept the commodities guidance the same. And, I think you said something like $80 million to $90 million of commodity pressure in the first half, so not much of a change there either, right?

Yes, that is absolutely right. We are still holding to the $140 million to $150 million in commodities. It will have more of that have impact is going to happen in the front half versus the back half.

Keep in mind, I know there has been a lot of discussion about softening in the energy markets, but one thing that we have seen over time is that in order for unit prices to really start coming down, we need to see energy prices come down and stay down for some sustained period of time.

At this point, while we do think certain commodity groups may have peeked in the short-term and will begin to taper down through the second half of this fiscal, we are still projecting $140 million to $150 million in pressures. And, that seems directionally correct based on what we know today.

Joe Altobello with Oppenheimer.

Just a couple of quick questions. First, in terms of volumes you saw in the quarter, in terms of the trends in particular, did you guys notice a tapering off of volume growth after the August price increases?

Generally, on the brands where we took pricing yes, we saw tapering off.

Was that be because of pre-buying ahead of it? Or, did you feel like there was less demand on the part of retailers?

That was driven by inventory adjustment more than anything else. I wouldn't call it material, but we are not really seeing a consumer impact as yet.

Secondly, on the gross margin line. It looked like the impact from manufacturing logistics was rather large relative to what you have seen in the past few quarters. Can you talk to that? Is that mostly diesel?

Well, it's got a little bit of that. But again, If you step back and just look at our first quarter gross margins, gross margins were down about 2.5 points. We had about 3 points from commodity pressures that we have already discussed. And, there was 2 points from inflationary pressures that we're seeing in logistics and manufacturing, really globally. I guess the good news about the gross margin in the first quarter is the combination of the partial pricing benefit as well as the cost savings allowed us to reduce that about 50%. So, we cut that in half. As we look to the balance of the year, we are still looking at the gross -- the commodities $140 million to $150 million. And, we are still going to have those pressures we discussed in manufacturing and logistics. Although, there again, that should start to ease as we go through the year.

Why was that piece so large though in the quarter?

You would be surprised. There is even some tightness in the markets for trucking and things of this nature. And, we've got diesel costs in other wage and other inflationary pressures. There is just a lot of pent-up pressure that's in the system that's been building for sometime and that's really started to come through.

Just one last one. The advisory fees you saw in the quarter, are there any additional ones you are expecting in the December quarter?

I'm sorry, can you repeat your question we couldn't hear it?

Was it the advisory fees Joe?

Yes, the advisory fees. Is that over? Or do you see any additional fees in the December quarter?

That is the bulk of it. That's essentially it on the year. It was $12 million on the quarter. There might be a little bit in Q2. But, it is essentially over.

Alice Longley with Buckingham Research.

I think your profits turned positive according to your guidance in the second half of the year. If we look at the pre-tax profit performance of your 4 groups, you were up international and down in the 3 domestic groups. Are we going to see international profits turn down on unfavorable exchange in the second half? And then, for the 3 domestic groups, will they all turn up? Or could you give us a sense for where we are going to get the better performance of the 3 groups in the second half?

Let me lead off and give you an update on foreign exchange and then ask Larry to talk a little bit about the segments. In terms of foreign exchange first, the good news is Clorox is less exposed, I think, to the many other companies in our industry, obviously to foreign exchange. I think if you go back about 3 or 4 months ago, there was a hope that we might have some very modest tail winds in foreign exchange. I think as we look at the markets today given everything that transpired, I think what we would say is that foreign exchange would probably be about neutral for the company on a full year basis. It might be slightly unfavorable. And, that might come through over the next couple of quarters. At this point, we don't think it is material to the Company.

I don't know that I want to get too specific on segment profitability by quarter. But, I would say directionally, in addition to the FX reference that Steve just noted, we would certainly expect our household and lifestyle segments to improve profitability as the year goes along. Household because the pressure on resin to do with the Glad business will lessen. And again, that's not that we're expecting resin prices to come down. But, just the year over year comparison will be more favorable.

And, in the lifestyles segment you do have an awful lot of promotional spending going on right now behind a lot of innovation on really all those businesses. As that becomes more normalized throughout the year, I think those 2 businesses, in particular, should start to see some year over year profitability gains. I think cleaning will probably still be our most challenging business from a profitability comparison primarily because of laundry.

Can household profits be actually up in the second half?

Depends on where resin goes to a great degree, but yes, it's possible.

Joe Latchkey with Wells Fargo.

First of all, congratulations, Steve.

Thank you.

Have you -- Don, have you talked to Icahn since you withdrew his slate of directors? Any indication of his level of involvement or cooperation going forward?

Obviously Joe, I don't comment typically on conversations I had with investors. I will say this, and it just is a reinforcement of what Carl has said publicly, which is he is an activist, and that's what he does. If he doesn't believe he can activate, so to speak, he is probably going to be fairly quiet. I don't know what Carl plans on doing. But, so far, it's been certainly a good relationship. And, I don't expect that to change. We'll see what given his focus on other areas right now, like Navistar, we'll see where he goes in the future.

And then, a question here on the cleaning segment. If you could go through the laundry and the other parts of it, I guess you are seeing some ongoing category weakness in laundry? If you can maybe talk about trends you are seeing there? Whether it is accelerating, decelerating on a category basis.

You also mentioned some increased merchandising needed for disinfecting products. Are those basically neutralizing any price increases you are having there? For the category as a whole, or for the segment as a whole, when do you expect the pricing mix to turn positive?

So, let me try -- there is a bunch of questions there, let me try and tackle them one at a time. In terms of the segments, obviously the 2 big components are home care and laundry. I would call our home care business in very good shape. We're growing volume, we're growing share. And, we had another good quarter on disinfecting wipes as well as other disinfecting products behind both the normal flu season back to school merchandising activity that we do every year. And, we continue to do it in a very strong way, as well as good innovation on some, what you might call base brands, as well as line extensions. Things that I mentioned like the Clorox Bleach Foam or Spray which is doing quite well and above expectations. The home care store I think is a very solid one, that's our biggest business unit, that's a big portion of that segment.

Quite a different story on the laundry side where we are definitely seeing very weak laundry trends, bleach trends. We continue to do well from a share standpoint, particularly on liquid bleach, where we had all time shares, but we are suffering from category declines. As we take pricing, this is probably the single brand where we have paid the most attention to in terms of what the modeling is. And, what both the customer and competitive behavior is going to be. So, we are in the very early beginning of that, to see how that will play out. But, generally this is a brand where pricing does impact volume. Obviously, this is a pretty aggressive price increase, we're taking a 12% price increase on CLB.

Net, we think we will be positive probably on the sales line over the longer term periods, over maybe the next 12 months. We'll probably see some positive sales growth because of pricing. But, we'll definitely see some dampening on the volume side.

Larry, If I could just add -- Joe, on CLB, in particular, because that, as Larry said, is the most challenging. I think there are 2 fundamental issues which we believe we are tackling, both of them. The first fundamental issue, and we've talked a bit about this before, is dosing, where now with the US market about 30% to 35% HE machines, clearly the dosing issues, the confusion of dosing and the difficulty of pouring into those small additive and laundry compartments is problematic. We think the new product that we're launching in January, the gel product, helps address that fundamental issue.

That product will be introduced in January, it will be tied to the second key issue, which is we have not educated the newer generation of people on how to use bleach, both in the laundry room and outside. The Bleachable Moments campaign is certainly an attempt to do that. We have gotten good feedback from consumers so far about that campaign. It just started about 3 weeks ago. But, clearly we will tag the gel product on the end of that campaign as well. Those are the 2 big issues we think we are hitting head on as we move into the second half.

Javier Escalante with Consumer Edge Research.

I have a couple of questions. One is simply a clarification on the SG&A leverage. You guys said that, or implied, the target of $36 million to $40 million in IT spending and at the same time, are providing a breakout of restructuring charges versus costs of SG&A. So, I'm a little bit confused of how much of it is the same thing.

So, if you can clarify whether the IT spending is above and beyond what you guys are referring as restructuring? And, if it is, how much of that IT spending fell in Q1? And, whether we should expect an acceleration for the back of the year? And then, I have a question with regards to volume and innovation.

Javier, this is Steve Robb. We may be best in taking this one off line and giving you a little bit more granularity. What I would say is, our outlook does anticipate $36 million to $40 million of infrastructure investments. IT, as you had mentioned, is clearly included in that.

And, yes, we do expect the investments in our ERP implementation to ramp up as we go through the next couple of quarters. And, you'll see that in the numbers. Some of that is reflected in the $20 million to $30 million of restructuring costs. But, again, I think -- let's have a discussion maybe off line and we can give you more granularity around that.

So, basically the recent overlap between the 2, it's not the restructuring plus the IT? There is a little bit of overlap in these 2 figures right?

Yes, there is some overlap in the figures and we can get you information on that off line if that is helpful.

No, for sure it is going to be helpful. The second question has to do with how the pricing goes or flows through your P&L and we see it on the retailers shelves, right? I know that IRI is only a third of your volume -- of your sales. But, in IRI, actually, we saw price increases already in the September quarter. And, we saw volume deceleration basically in the levels of 3% to 4%. So then, the question then is you basically are saying, in terms of the reported volume, that because pricing was taken in the middle of the quarter, basically in August, you didn't see volume actually decelerating. When the country volumes actually turned out better than expected. If you can explain why is it that we saw price increases in Hidden Valley, and all this stuff, in the track channels, even though it seems like you guys didn't report it.

So, it is a little bit confusing, basically to see the price increases come in first on the consumer level and not seeing it in the reported side. I would have expect that to be the vice-versa. So, if you could clarify that situation. And, what you should be thinking about volume then in the second quarter, given that basically what you are telling us is that volume didn't weaken because there was barely any pricing in the marketplace.

So, let me be a little more specific and maybe this will be helpful. I talked about the Glad trash price increase which was back in May.

Yes.

So, that is a price increase which has been basically fully reflected at retailers where we are seeing the volume impact in our trash business. And, volume on Glad, as we reported, was down slightly. Sales were up but volume was down. So, that is the impact we see from -- typical impact we see on from pricing.

On the other brands, it is just starting. So, the consumer impact is barely out there. You have all kinds of other merchandising activity going on, particularly in the broader set of channels. Charcoal, it is a big quarter for charcoal. We have talked about some of the special merchandising that went on in charcoal that affected our volume in a big way, didn't help our sales in a big way. So, there are all kinds of other factors. But, generally speaking, we definitely will see volume lost as a result of pricing. And, our forecast for the year is about flattish volume despite our sales going up 1% to 3%.

Would you say volume still weakens, say, in the realm of 2% to 3%, given that this is pretty much what we saw back in 2008 and 2009. That would be a reasonable expectations for volume to weaken in the second quarter.

If I understand your question right, I don't think you can extrapolate and say, hey you did okay on volume in Q1 and therefore pricing is okay. Particularly, when you dissect that volume a lot of that volume growth came in international markets which have the natural buoyancy of healthy categories. And, the US markets, our volume wasn't as strong. That is I think the pricing that you are addressing here the track channel data.

Javier, I think one of the messages we are trying to communicate today is by and large, at this very early stage, pricing is playing out about as we expected. To Larry's point, it's still early so you are not seeing the full impact on volume yet. Even in the track channel data, I'm glad you acknowledge it is only about a third of our business in the US, but even there some of the analysts were reporting, our IRI and Nielsen were reporting in September you start to see the mix of sales growth shift a bit. With pricing playing a greater role and volumes starting to taper off. I think that's what -- consistent with what Larry said and what we have been pointing out lately as we move into Q2 and Q3, you'll begin to see that dynamic play out. Pricing will play more of a factor in both track and mall outlet. Performance and volumes will begin to taper off. And, overall, for the year, It is early but I just don't think we would expect to see any material difference versus our earlier assumptions.

Because what's confusing about this quarter is that it leaves relative to your own expectations, right? Gross margin actually came weaker but in the end the operating profit growth decline was a lot, at least in my numbers, a lot better than you guys thought it would be. So, essentially the upside, or the benefit, came in the SG&A line even though you have $12 million of legal charges. So, I'm trying to understand how that SG&A leverage play out, how much -- what exactly is happening. It is very confusing this quarter for you guys, at least for me.

This is Steve Robb. I would just say, that I think we had a very good start to the year in the first quarter. I think we feel very good about the numbers. We certainly delivered good top line growth. We did have a little bit more pressure on the gross margins.

But, it is 1 quarter of 4 quarters. I think, at this point, we feel like flat volume on the year. The 1% to 3% growth and gross margins being about flat. That still feels right to us. And, there is no question but that we had good volume in the first quarter based on the fundamentals of the business. To Steve's point you will see that taper off a bit as expected. As we've seen before, it tends to come down for a couple of quarters and then it comes back. Okay?

The other thing I'd point out is it is obviously quite different by business units. We talked about great growth on Burt's Bees, which is totally unaffected by pricing now or later in the year. It really depends on the business unit in terms of those trends.

John San Marco with Janney Capital Markets.

I was just hoping you could discuss the margins in the lifestyle segment. And, whether there was also a meaningful mix issue specific to that segment or if it was innovation costs or what exactly keeps pushing margins lower there?

John, there were 2 primary elements there. 1, is that segment, as with the others, is facing some commodity pressure. And, you weren't seeing, perhaps, the same amount of pricing there taken in that segment as we have some of the others. But, I think the other primary aspect of Q1 was a lot of the introductory margin costs and the advertising behind new products. Because every one of those segments had a pretty healthy amount of innovation in the quarter. And, you might see that continue for another quarter or so, but I think that will normalize as we go throughout the year.

Yes, I would just build on that. It really is the commodities and inflationary pressures that we've talked about it that appear to have peaked. Again, it should be tapering off over the next couple of quarters and you will see those margins improve as we go through time.

The year over year commodities actually worsened in the September quarter?

They were higher than the year ago period, yes.

Okay. And then, some of it also you said was the new product. But, is it that -- it's not that the new product is lower margined and will be structurally dilutive, but just --?

It is the introductory costs, John.

Would you expect it to be accretive over the longer term?

Yes, the new products that we are bring out are very high margin, they're very good, they're not dilutive to the franchise.

And then, lastly, just a quick house cleaning item. Was there some IT -- I guess a footnote was a little confusing to me. Was there some IT expense allocated differently this quarter out of corporate and into some of the segments?

Keep in mind that the international ERP implementation -- we are charging our international division as you do in this for the cost of that implementation. As we make these investments in infrastructure you will see that come through the international numbers. And, that will have the tendency to suppress the profitability. You have to look through that to look at the underlying health of the business.

Was there something that came out of the corporate line as a result or some --?

John, I think what you are referring to is in the corporate profitability, a lot of the up front discovery work related to the implementations we are doing now was done a year ago and that ran through the corporate segment. This year, as Steve is noting, more of that is going actually against the business segments which is international for the most part. Because, now we are going through the implementation.

That answers that. Thank you, very much.

John Faucher with JP Morgan.

Just wanted to talk a little bit about the charcoal promotional activity. You talked about the seasonality of the business going down. But, is this something where, longer term, we are going to have to look at some potential margin degradation in terms of this continuing? Do you think the retailers are switching to this as a go-to package?

And then, separately, on Good, which I realize is a relatively small piece, but the last time you saw you guys go a little more mass with a higher priced products that was out of your category sweet spot was on the Green Works Laundry detergent. So, I'm just wondering what are lessons learned on Green Works Laundry that maybe will help you as you look at Good this time? Thanks.

So, I think on charcoal, Kingsford is one of those brands that retailers will invest behind because it builds traffic in their stores, particularly on the key holidays. We have a lot of untracked channel business in Kingsford these days in places like the home hardware channel. We saw basically one retailer respond to another retailer.

At the end of the day, it is probably not good for anybody. To some degree, I think they are all concerned about how do we address this. We will be addressing it in some structural ways in terms of sizing and other things that could hopefully prevent. Obviously, in some ways this is good for us because it builds our business and gets us big feature ads. In other ways it is not so good. I think this was -- probably will go down as an extraordinary year in terms of the impact it had on the business.

As far as Good, John, what I would I say as learning, as it applies to Green Works. One of the things we learned in Green Works, launching prior to the recession hitting, was if we could get the price points of natural products closer to traditional cleaners in that market we would stand to have a much better chance of driving trial and repeat and depth of repeat. So, we continue to re-engineer the Green Works products to get the pricing down and we are doing that. For example, in one major retailer now Green Works All Purpose Cleaner is the same price as Clorox Clean Up. We are stating to see that -- some vibrancy come back. I think the learning, how that translated into Good was, we wanted to offer a product that met the Natural Product Association definition of natural which is 95% of the ingredients being natural, but at a significant discount to natural products.

So, you see Good pricing coming in at 15% to 20% cheaper than Bert's, for example. So, I think that's the learning, we wanted to make sure we were offering a natural product but even getting it below the gold standard in the category and closer to traditional personal care products.

Lauren Lieberman with Barclays Capital.

So, just a quick one on SG&A. Given that you guys had the advisory services costs in there this quarter, outside of that, it looks like there were remarkable SG&A savings or controls of overheads or whatever it may have been. Can you just help a little bit with where you were able to maybe save some short-term in SG&A or selling and admin? If we should think about that accelerating from here outside of what we know in terms of the IT and ongoing investment in the infrastructure?

I think it is a good question. Just to recap, SG&A for the quarter was at about 14.5% of sales which, to your point, did include the advisory fees of $12 million. What I would say is first and foremost we do continue to very tightly control our SG&A spending. That is not new. We tend to have SG&A spending historically in the range of 13% to 14% which puts us in that top tier tile in terms of companies that are really controlling SG&A. That said, I think you will see the infrastructure investments in IT and real estate build as we go through the year. Which is why we are projecting SG&A costs to be about 15% of sales this fiscal year. And, it will probably be somewhat elevated as we go through the first half of fiscal '13. Because we are going to be continuing those infrastructure investments. All of the that said, we would anticipate that as we work through these infrastructure investments that we will get back into this 13% to 14% SG&A range as a percentage of sales as we anniversary these investments.

But Lauren, there was nothing extraordinary in the first quarter, to your point. I mean, it's just continued discipline against travel and entertainment spending and everything else that impacts that line.

The only thing I would say is relative to the 15% of sales outlook that we are suggesting for the year, there is no minimum incentive compensation here. Last year, as Steve noted in his remarks earlier, we reduced that expense as the year went along last year because we admittedly didn't hit all of our financial targets.

This year we are just assuming a more normalized expense. I think as you get into future quarters that will add a little bit to the selling and admin. What I would also point out though is if you back out incremental IT and R&D investments we're making this year and the advisory fees from in the first quarter, our selling and admin is growing about in line with sales. So, to Steve's point, I think it is all being pretty well managed.

Okay. So then, last year's first quarter was a normalized incentive comp quarter? It was through the year that number, that accrual started to decelerate?

That's correct.

Okay. And then, was there any, and I know people asked it in different ways, but on the intended $36 million to $40 million that was going to be more first half weighted, was any of that delayed a bit this quarter given the advisory expenses?

It wasn't delayed because of the advisory. But yes, you will see a little bit of a ramp up as you are going into the next coming quarters, Q2 through Q4, but that is strictly in terms of how we are managing those products. It's not because we're doing anything unusual.

Okay, got it. There was a little bit of a timing issue there versus initial plan.

There is a bit of a timing issue, but again it is just a question of how we are working very large complex projects.

Great. Thanks, so much.

Nik Modi with UBS.

Good afternoon, everyone.

Hello, Nik.

Just 2 quick questions. Just quickly on commodity costs. It seems like it's been surprising almost every company this quarter in terms of being worse than everyone expected. Curious on why you think that is the case? And, what gives you confidence that it is actually going to hit the guidance range that you have set? The second question, Don or Steve, if you can just talk about the payback of some of these white space expansion initiatives that you're pursuing right now? Whether it be in China or across certain of your categories.

Let me start with the commodities and try to provide a little bit more color. Certainly when you had energy prices for a long period of time that were sitting -- oil was sitting well above $110.00 for a long time. That got into the cost system and it's raised a lot of the unit costs. What we are seeing is it is not just on resin, it is not just on packaging materials, it is literally across the board. Even very small commodity groups that you buy are seeing some fairly significant increases. So, what is true is that we absolutely expected to face quite a bit of commodity pressure. The first quarter did come in a bit higher. That said, as we still look at the full year we are still thinking it is within the $140 million to $150 million. And again, I would just say that it is probably the across the board nature, even in small category groups, that is causing this number to be maybe a little bit high for us and even for other people.

Nik, as far as the priority in terms of inorganic growth, and where we see that playing out. As we've talked a lot about the away from home business, that business continues to be a really well performing business, particularly around the healthcare side. The CalTech business has been fully integrated at this point.

We do have, I would say now, the most robust full-time acquisition pipeline we have seen in a long time on that particular business. So, stay tuned on that. We think there is a real opportunity to consolidate and roll up that industry, if you will, around the healthcare and acute care side. Particularly around disinfecting products, but also getting into different spaces like potentially skin for disinfecting. That continues to be the top priority.

The second priority is again bolt on acquisitions in the international markets. China business is growing rapidly, it's off a small base that is focused primarily on the Glad business. We do have plans to expand into disinfecting business in the near term in China. But, right now the focus is on Glad and it is growing in fairly strong double digits there.

The third is the ability to get some bolt on acquisitions in Latin America in our laundry and home care businesses. We are continuing evaluate those. Those are moving as we had expected.

Thanks. I was actually also curious on -- you were talking about white space expansion initiatives with some of your businesses. I'm just trying to get an understanding of the pay back for some of those. Obviously, you guys don't have much scale on some of these markets. So, just curious on when you think -- how long it will take for you to get a pack on some of the investments you're putting into place?

We look at those through a pretty tough lens which is economic profits. Typically, those things, on an EP basis could take 6 to 8 years. We think on this bolt on side, when we look at acquisitions like CalTech, which of course is domestic, but also the international ones like the Colgate Bleach acquisition we did, we think we can get paybacks in the 3 to 4 year range or if not quicker. They are much more accelerated than say a strategic acquisition which could take a lot of years for any company to engage in.

Great. Thanks a lot.

Connie Maneaty with BMO Capital Markets.

Thanks, my questions have been answered.

We'll next go to Ed Kelly with Credit Suisse.

Hi, good afternoon or good morning on your end. You have given color on this, so I apologize if it is repetitive. But, can you give us more color maybe by category and the timing of price increases in the US the rest of this year?

So, as I said, the bulk of the price increases occurred in Q1, August timing. There were a few at the end of last fiscal year I mentioned, the Glad trash one and a couple of smaller food items. There is at least one brand increase planned for the second half of the year which we haven't quite gone public on. The bulk of the pricing is in the first quarter on both the domestic side as well as the international side.

Ed, you're probably aware of this, but on our -- there is a supplemental schedule to our news release that actually details the pricing actions for the last couple of years. If you need the category or brand break out, we provide that.

Assuming that commodities stay where they are now, is that adequate? At this point in time?

Yes, we do believe that the pricing actions that we've taken, when we start to get the full benefit of the pricing, and as the comps for commodities on a quarter over quarter basis continue to improve, yes we believe it is sufficient for us to be able to go back and start rebuilding our gross margins and get the flat on the year.

Your largest customer has been talking about stepping up price investments really over the next 5 years or so. Does this impact your business in any way? Are you being asked to help at all? Does this --?

Yes, it is really positive from our standpoint. We have a very good business with Walmart, a very good partnership. They are getting sharper on their pricing and getting back to their historical EDLP approach with good prices on major brands. We are definitely seeing that across our portfolio and our business is definitely starting to pick up. So, that is all good.

I think, as Larry said, the way they certainly demonstrate their price leadership is through pricing on national brands. So, I think when you have the bulk of your brands number 1 or number 2 in your category it certainly bodes well in relation to our business with Walmart.

They are funding most of this and not asking to you help much?

That continues to see how it plays out. All of our customers are treated the same in terms of the pricing we give them. So, any investments by these retailers, what you tend to see, Ed, the margin -- if there is margin compression in a typical category by a retailer, it is typically going to be around a number 1 brand. So, I would think, over time, we'll see how this plays out. But, it would disproportionately affect and help those people who have number 1 brands.

Last question for you. Seems like flu is off to a little bit of a slow start. Are you seeing any of that? What are you embedding in your guidance, I guess?

I'm sorry, was that Flu?

Yes, like the cold cough and flu related to your business that would impact.

I can't speak to the flu season. But, I will tell you we had a healthy quarter on Clorox wipes on top of a healthy quarter in the base a year ago. So, no signs of problem so far.

Okay, thank you.

Why don't we take 1 more question.

Next we'll take Priya Ohri-Gupta with Barclays Capital.

Thank you. Just wondering if you could talk to your thoughts around potentially refinancing some of your outstanding commercial paper. And, secondly, when you look at management of your maturity profile do you look at it through a 7 year and end or 10 year and end? Thank you.

A couple of things, as you know, we do have a commercial paper market that we regularly access to support the business on a day-to-day basis. Commercial paper is up a bit in terms of what we are holding today. The reason for that is because we had a $300 million worth of debt that came due. At this point, I guess all I would say is that we are strongly considering looking to take advantage of some fairly low interest rates in this environment and to potentially go out with a debt placement. But, we'll provide you with an update on that as appropriate.

And then, finally, just in terms of the capital structure, I think we are very comfortable with our debt to EBITDA ratio. I think we have communicated to folks that we'll target 2% to 2.5% and we'll make sure that our debt maturity profiles that we are comfortable with the debt and when it is coming due and how we are managing is that.

Thank you, very helpful.

Thanks everyone, for joining us on the call. As we said throughout the morning, I think we are certainly pleased with our start to the fiscal year. We have a lot of good innovation coming through our pipeline. So, we look forward to updating you more on that as a lot of that innovation starts to manifest itself in the marketplace over the next few months. Take care, and we'll look forward to talking to you in February.

That does conclude today's conference, and we thank you for participating.