高樂氏 (CLX) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to The Clorox Company Second 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 would 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 begin your conference.

Thank you. Welcome, everyone, for joining Clorox's second 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.

We're broadcasting this call over the internet and a replay of the call will be available for seven days at our website thecloroxcompany.com. Let me remind you that on today's call we will refer to certain non-GAAP financial measures including but not limited to free cash flow, EBIT margin, 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, Larry will start with a discussion of our volume and sales results. Steve will follow with a review of our financial performance in the quarter and our updated outlook for fiscal year '12 as noted in this morning's press release. Finally, Don will wrap up with his perspective on the acquisitions we announced about a month ago. With that let me turn it over to Larry.

Thanks, Steve, and welcome to everybody on the call. I'm happy to report that we had another good quarter. As anticipated, volume was up about 0.5 point despite the impact of price increases across most of our portfolio.

Sales were up a very solid 4%, as the benefit from price increases was either in line with or even slightly better than our expectations. This is our fourth consecutive quarter of sales growth during a challenging economic environment, with 8 out of 11 SBUs delivering year-over-year growth, driven both by pricing and product innovation.

In fact, we're on track to deliver a record level of incremental sales from innovations in fiscal 12. Overall we feel great about the quarter and the progress we are making in this tough economy. I am going to focus my comments on market share, volume and sales, and provide perspective on (inaudible) our top line results. Steve will then provide the financial detail.

Starting with our US business, our market share in tracked channels, which account for about one-third of our business, was equal to a year ago in the second quarter. On an all outlet retail basis, we also held share over the past 52 weeks with an absolute market share that remains near record levels. These share results are particularly encouraging given the large number of recent pricing actions.

Turning to our US categories, we are starting to see improving sales trends as pricing kicks in and the economy recovers. Category consumption at an all outlet basis was about flat for the past 52 weeks versus a decline of over 2% just a year ago.

In International our share results were mixed, with solid growth in Latin America and declines in Canada, Australia and New Zealand due to competitive pressures. Categories in international markets continue to be healthier overall than in the US.

In our cleaning segment, which includes our Home Care, Laundry and Away From Home businesses, volume was flat and sales grew 5%. All three Businesses in this segment saw solid sales growth in the quarter driven by the impact of pricing actions in our Home Care and Laundry businesses and very strong volume results in our Away From Home business.

Home care grew sales and market share behind higher shipments of Clorox Clean-up, as well as innovation like our Clorox Foamer spray, and Clorox Toilet Boil Clinging gel and Liquid Plumr Double Impact. In addition we are seeing our Home Care Business benefit from our focus on multicultural consumers, as key brand grew significant share within the Hispanic market. On Laundry we also grew sales and share. Our Laundry additives all outlet market share was up 2.4 points on a 52 week basis.

Finally, our Away From Home business delivered strong double digit volume and sales growth behind new products and expanded distribution in healthcare channels. These are results do not include the impact of the recent acquisitions of Aplicare and HealthLink, which closed on December 31 and will contribute to second half results.

In our household segment, which includes bags and wraps, charcoal and cat liter, volume grew 1% and sales grew 4%. Glad delivered double digit sales growth, although volume declined due to the impact of price increases taken last year. Cat litter volume was up behind new Fresh Step Extreme and new Scoop Away Extra Strength. Sales were down, however, due to higher trade merchandising in support of these new products.

Finally, charcoal sales were down in what is always a light volume off season quarter for that business. In our lifestyle segment, which includes food products, water filtration and natural personal care, volume grew 2% and sales grew 6%. All three business units in this segment also grew sales.

Our Burt's Bees business had a solid quarter driven by a lot of innovation, including the launch of our new natural personal care brand called Good from Burt’s Bees, which targets a younger consumer with a line of highly fragrant face and body value products that are 97% natural. These products started appearing in retailer shelves in the latter part of the quarter.

Brita grew sales and volume behind the continued success of the new Brita On the Go Water bottle. Finally, our food business grew sales as a result of new salad dressing flavors, as well as the benefit of pricing taken last August. In our International segment, volume was down 1% and sales were flat.

Our largest geography in Latin America saw modest volume decline as a result of double digit losses in Venezuela and some declines in our non-strategic export business. The Venezuela government has announced a pending price law, but specifics are yet to be released.

This has lead to a decline in shipments as retailers are delaying orders and consumers are holding back on spending. For a perspective, Venezuela represents about 2% of total Company sales.

Overall we're very pleased with another quarter of very solid results. Although the pricing actions we implemented early in the year will continue to impact volume results for another few quarters, they are playing out as expected resulting in our overall performance being in line with expectations and consistent with our price elasticity and models.

Based on our solid sales performance year-to-date and the future benefit of the recently announced acquisitions, we are raising our sales outlook to 2% to 4% for the fiscal year. We expect to be in that range through the remainder of the year, despite the tougher comparisons we will face in the second half. With that, I'll turn it over to Steve.

Thanks, Larry. Well, hello, everyone. As Larry said, we're very pleased with the quarter. I'm going to provide more depth on our second quarter results and our updated financial outlook for fiscal '12.

As Larry noted, sales were up 4% in the quarter, which reflected about 5 points of pricing benefit, offset by 1 point of mix and a slight decline due to foreign currency. Second quarter gross margin decreased 20 basis points to 41.5% of sales compared with 41.7% in the year ago quarter. As expected, higher commodity costs and inflationary pressures in manufacturing and logistics continue to challenge margins.

Mix was also a bit more unfavorable in the year ago quarter. On a few key items, our volume continues to shift towards larger sizes where margins are slightly lower. Volume in the quarter also shifted to a mix of countries where profitability was lower, with declining sales in Venezuela having the biggest impact.

These factors were partially offset by the benefit of price increases, as well as $25 million of cost savings with $20 million of the savings reflected in gross margin. Second quarter selling and administrative expense on a dollar basis was up 2 percentage points versus a year ago quarter, but slightly lower than anticipated. This was due in part to a shift in timing of spending for the implementation of our International systems upgrade and new R&D facilities, as we've discussed before.

Year-to-date, free cash flow from continuing operations was $86 million versus $81 million in the same period year ago. For the full fiscal year, we continue to anticipate free cash flow of about 10% of sales within our targeted range of 10% to 12%. As a reminder, we define free cash flow as cash provided by operations less capital expenditures.

In Q2 we repurchased 2.3 million shares of our common stock for approximately $149 million, using the remaining proceeds from the sale of the auto care businesses. With these purchases, we have now used all of the net proceeds from the sale to repurchase a total of 10 million shares for $679 million since February of 2011.

We ended the quarter with a debt to EBITDA ratio of 2.6 to 1, slightly above our targeted range of 2 to 2.5 times, driven by the share buyback activity in the current quarter and the previously announced acquisitions of HealthLink and Aplicare. We anticipate returning to within our targeted range by the end of the fiscal year.

During the quarter, we issued $300 million of long-term debt and used the proceeds to retire commercial paper. While we view this as favorable for the long-term capital structure of the business, it will increase our fiscal '12 interest expense, which we now expect to be approximately $125 million for the fiscal year.

Net of all the factors I've discussed today, diluted earnings per share from continuing operations was $0.79, a 16% increase, excluding the goodwill impairment charge on the Burt’s Bees business in the year ago quarter. This compares with $0.68 in Q2 of last fiscal year.

Next I'll turn to our financial outlook for fiscal '12, which includes the impact of the Aplicare and HealthLink acquisitions. As Larry said, we are raising our sales outlook to the range of 2% to 4% for the fiscal year, reflecting solid year-to-date performance and the benefit of acquisitions.

As I said last quarter, we believe overall commodity costs will remain elevated during the remainder of fiscal '12. For the full fiscal year, we continue to anticipate commodity cost increases in the range of $140 million to $150 million and $40 million to $50 million of inflationary pressures in manufacturing and logistics.

Our assumptions for cost savings and pricing also remain generally unchanged. However, we are lowering our outlook for gross margin, which we now expect to be down 50 to 75 basis points for the full fiscal year due to unfavorable product and country mix. This assumes lower third quarter gross margin versus the prior year, but higher margin in the fourth quarter, as we begin to anniversary elevated commodity costs in the year ago period.

Before I discuss our outlook for selling and administrative expenses, I want to update you on our multi-year plan for global IT systems and R&D facilities investments, as well as our expected restructuring related costs. I'll start with the systems and facilities investments.

Although we continue to anticipate expenses in the range of $36 million to $40 million in fiscal '12, we will likely be towards the lower end of the range with some expenses shifting into next fiscal year. As I've noted before, most of these costs will be reflected in selling and administrative expense.

As we've updated our assumptions for the projects, we now expect expenses for these initiatives in '13 to be about equal to or slightly higher than fiscal '12. This is due to the timing of spending, as well as a somewhat higher overall cost estimate reflecting the complexity of the systems implementation. However, we have historically planned for $20 million to $30 million in restructuring related costs each year and a portion of these will be used for these investments.

From a timing standpoint, we continue to anticipate completing both the systems and facilities projects at the end of fiscal '13. For fiscal '12 our current estimate for restructuring related costs is about $30 million within our targeted range. About half of that is for the systems and facilities project and the balance is for other cost savings initiatives.

To simplify future reporting on infrastructure and infratructuring-related expenses, we're going to begin discussing them as a combined range of $50 million to $55 million in fiscal '12. For fiscal '13, we anticipate spending at about the same level and will provide an update of spending assumptions on our May earnings call as a part of our fiscal '13 financial outlook.

With that background, we still anticipate that selling and administrative expenses in fiscal '12 will be about 15% of sales, which reflects our updated assumptions for infrastructure investments, as well as administrative costs for the newly acquired businesses. Net of all of the factors I've discussed today, we continue to anticipate diluted earnings per share from continuing operations in the range of $4.00 to $4.10 for the fiscal year.

To recap, this outlook reflects our strong results in the first half of the fiscal year, continued higher commodity costs and general inflationary pressure, unfavorable product and country mix, updated assumptions for the IT systems and R&D facilities investments and dilution of about $0.04 from the debt issuance. The outlook also includes about $0.04 of dilution from the acquisitions, as we make investments to integrate and grow these businesses.

In closing, I feel very good about our second quarter and year-to-date results. Given the volatility in the currency and commodity markets, we're pleased to be able to maintain our EPS and cash flow outlook for the year. Importantly, we remain committed to using our strong cash flow to invest in growth and return excess cash to our stockholders through dividends and share repurchases. With that I'll turn it over to Don.

Okay, thanks, Steve, and hello, everyone. Certainly pleased with our results in the second quarter of which I think, as most of you know, built on our strong first quarter.

We've had broad innovation across the portfolio, as Larry mentioned, and really strong retail execution, and I think that's really helped contribute to the delivery of our fourth consecutive quarter of sales growth. In addition, as Larry noted, volume was up about 0.5 point for the quarter, which speaks, I think, to the strength of our brands given the level of price increases we've taken over the past six months.

I think as most of you know, in the most recent quarter alone price increases totaled about 5 points across the portfolio. And our consistent delivery of incremental growth from new products has really helped, which is trending above 3% of this fiscal year, which really has helped maintain our recent share gains as the macro trends in our categories continue to improve.

Now, as Larry noted, we've taken up our sales outlook for the year due to those strong first half results and our acquisitions of HealthLink and Aplicare. Just a little bit more color for you on those acquisitions. These acquisitions certainly compliment and expand the breadth and depth of our healthcare portfolio and our Away From Home business, which has been focused on infection control.

Both these businesses had strong revenue growth over the last three years, averaging about 8% to 10% revenue growth as a CAGR. So, building on the [Keltec] acquisition of January 2010, this is really another step in our strategy to use our strong cash flow to help reshape our portfolio and really take advantage of some of these significant tailwinds that are out there to drive growth.

And as to tailwinds, infection control is about a $2.5 billion market. It's rapidly expanding in the US due to the increased attention on healthcare associated infections, along with a trend for just the aging of America, and we believe we can continue to grow our business organically and with strategic tuck-in acquisitions. Now Aplicare expands our portfolio into different forms of products for helping prevent skin infection from needles or surgery and these products are sold to hospitals and other companies that create kits for use by healthcare facilities.

Now Aplicare's expertise also includes really understanding how to develop FDA-regulated products and that really helps our entry into this new channel of distribution for the manufacture of surgical kits where we did not previously sell our product.

Now HealthLink provide products and their sales force provide entry into small clinical sites, such as individual physician and doctors offices across the country where our existing products can also find new outlets for increased distribution products like our germicidal wipes. So combined, we anticipate Aplicare and HealthLink will add more than 1 point of total Company sales growth annually on an ongoing basis. So again, feel very good about the first half of the year.

We certainly all continue to face the challenges in the environment. We've got a fragile consumer out there, but I believe we've got solid plans in place and continue to feel confident about the remainder of fiscal year 2012. So, with that why don't we go ahead and open it up for your questions.

(Operator Instructions) Chris Ferrara of Banc of America. Chris, please check your mute function.

Why don't we go ahead to the next caller.

Bill Schmitz from Deutsche Bank.

Are there signs that bleach is turning the corner, because the scan channel growth looked great. A lot of it was pricing driven, but are you optimistic about that business?

So, we have some plans that we're pretty excited about on bleach. You may have seen our new campaign around Bleachable Moments and essentially we're trying to attract the lighter user and new users to the category and we're convinced that some of this new messaging will appeal to that.

We also have some interesting innovation in place, hitting shelves pretty much as we speak as a gel bleach in a bottle that's easy to use with an HE machine. I think as many people know it's pretty hard to manipulate even some of our smaller bottles to get it into that little container in a HE machine. So, this is a bottle that has a directed spout with a little thicker formula that allows consumers to get into HE machines.

And we know we've had an issue with dosing over the last several years that has impacted volume, particularly with HE machines. So, this is a way that we are addressing the dosing issue, as well as giving a more convenient form to consumers.

We're feeling more optimistic than I think we have in some time, but the category still is definitely not one of our healthiest.

Just to put a point on it, Bill, as you noted when you look at the FDKP data, the track channel data, certainly the data ending in January, we saw a 52-week trend of down almost 4.5 points, and the last 13 weeks up 1.3. As you said, a lot of that driven by pricing, but as Larry noted, we certainly feel better about it now than we have in a while.

And then can you just tell me how the acquisitions were dilutive? Only because money is virtually free now, so was there something funky going on with the amortization or how should we look at that? I know you said $0.04 for the year?

Yes, Bill, we're projecting about $0.04 for this year, probably slightly less in fiscal '13, but we fully expect that these acquisitions combined will be EPS neutral to accretive as we get into fiscal '14. Here is how we would have you think about that. There's really three things we're doing with these acquisitions. First is we've got some money set aside to integrate these Businesses.

Second thing we are going to do is we're setting money aside to further accelerate the growth. And then finally, and this shouldn't be a surprise, we think there's some pretty good cost savings opportunities with both of these Businesses, so we put some additional moneys aside to be able to go after some cost savings so that over time, we can expand the margins of the businesses. And those are really the three factors that are causing it to be slightly dilutive.

And there's one last one, it's a little bit broader. As an organization, was there any sort of soul searching after the whole icon episode? Has anything changed broadly? Did you learn anything from the process?

Well, I think, Bill, what we learned is that we had pretty good credibility with our long term investors, and I think the belief in the investment thesis behind the Company, the fact that our brands shares are near all-time highs, the margins of the structure, or the margins of the business we see continuing to improve as we get into FY '13 as these commodities tend to mitigate some. So, I think what we learned is that the investment thesis behind the Company still is a robust one and our investors certainly agreed with that. So, I think that was the primary learning we got out of it and I think the organization did a pretty good job of staying focused on building the business while this was going on.

Okay, great. That's really helpful, thank you.

Thanks, Bill.

Chris Ferrara from Banc of America.

So pricing, it looks like -- obviously, just going off your schedule, most of the pricing you guys took or the most recent was back in August. Are we at kind of the top of -- I guess, is this quarter a full realization of all the pricing you guys have taken and do you think that process is generally over for now?

Yes, actually the pricing is behind us. We will continue to see the volume impact as we anticipated, but at this point, I don't really have any serious concern we have to roll something back or increase trade spending, or anything like that. It's kind of a done deal for the most part.

And have elasticities pretty much been in line with what you guys thought, because your volume has held up rather well, I guess, relative to the amount of pricing you're taking. I think you have -- you got best-in-class at least this quarter pricing with relatively little volume friction. So is that in line with what you thought or is it coming better?

It's exceptionally close. I mean, every week taken more pricing than we care to over the last five years and we always go back and look at, re-look the model to see how predictive they are and they are amazingly accurate. Obviously, you can't control for all the variables that might occur in the marketplace, but we're very happy with the accuracy of those models.

I think the other thing I'd add, Chris, is that one of the other learnings we've gotten out of this is we much more tied this pricing to innovation, and as Larry noted in his remarks up front, our innovation pipeline this year, and it looks good through, as you go through FY'13, it's trending at 3% or north thereof, so I think linking really good innovation to a lot of the pricing helped, as well.

Right, thanks guys.

We'll go next to Jason Gear of RBC.

I guess just thinking about the updated guidance, we expect another year of operating margins to decline, so it's, I guess, a couple years since 2009 that we've actually seen improvements. Internally, how do you guys talk about that, because your margins probably with -- if you go to your guidance looks like about 16.5%, you're kind of in the 19% range, and if we think about this year, obviously with weak margins, to hit your numbers you need to see the strong sales. Just, I guess, a little bit more color why you're confident that the organic sales can accelerate beyond what you've done in the last couple of years.

Let me just turn to margins. Certainly, the margins have been challenged over the last year, the gross margins, because we face the commodity pressures. This $140 million to $150 million in commodity pressures and another $40 million to $50 million of other inflationary pressures from manufacturing and logistics.

What I would say is the pricing is very noted and working. The cost savings program continues to deliver very strongly. We delivered over $25 million in cost savings in the second quarter and that's actually helped us. In the second quarter margins were about flat when you bring those two things together, and certainly as we look at the second half of the fiscal year, we expect gross margins also to be flat and I think we're cautiously optimistic as we look in the future.

If commodities begin to mitigate and so they don't rise quite as quickly as they have more recently, then there's reason to believe that we'll get back to the typical margin expansion that we've seen in the past.

Yes and I think just to add, Jason, on the top line, as I said a second ago, I think the innovation pipeline, we have focused very hard on that over the last 18 months, given that as categories flattened, and we didn't get the normal 1 to 2 points of category growth tailwind behind us. We knew it was more incumbent on us to drive that growth and what we've come up with, I think, is a pipeline that gives us a solid 3% plus on the top line looking forward.

If we get any kind of resurgence, as we're starting to see now in the categories, we feel very good about the top line and of course I think the health of the top line is really going to drive our ability to get these margins back to where we want, near historical highs. We do see, as Steve said, the first three quarters of FY'13 we are going to have some very high commodity cost in there that we're cycling through from FY '12, so we'll have some easier comps on margin as we get into FY '13. So all in all we feel pretty good about our ability to start expanding these margins again.

And what is it about the innovation that -- I mean, normally I think you guys contribute 2% of sales. You're saying it's closer to 3%. What is it this time around that -- can you maybe talk about the consumer and maybe the affinity back towards premium categories, if that's one of the drivers but what are you seeing this time around that gives you that confidence?

Go ahead, Larry.

Last year we achieved 2.8% of incremental sales from innovation, and as Don says, this year we're trending above 3% and I would say number one, it starts with a lot of focus, so we've been talking innovation internally for several years now. We've put more resources behind it, more focus behind it. And the innovation comes in all kinds of shapes and forms.

It's not just new product innovation. It certainly is not just premium items. A lot of this is base innovation that drives incremental sales. One recent example would be on our base trash bag we have a trash bag that actually has less resin in it, but is stronger and better perceived by consumers. And obviously we also have examples of going into new spaces, like the Brita On the Go water bottle.

So it's a variety of innovation. The good news is it's broad scale innovation across almost every business unit. So this is not the case where we had one big game changer kind of innovation that's driving the numbers, but it's virtually on every part of the portfolio.

Well, I think to Larry's point, the innovation is much more broad scale across every major brand. I think the other thing that's changed, about 2.5 years ago we put all of our insights people, and we have three different groups of insights people, consumer, shopper, and user, and they were fairly siloed from each other and we've combined that into one global insight group. So, I think we're getting better insights into the consumer and specifically really understanding more precisely what problems we're trying to solve for consumers across these brands. So, I think there has been a structure and process change in how we approach innovation as well.

And then just one question if I may and I'll hop off. Just some comments maybe around the promotional environment, and maybe within that context, the price gaps -- after all the pricing the price gaps versus your branded peers, private label, but in general, just with the promotional environment, are you seeing some of the spending abating? Is it more rational? Which categories do you still worry a little bit about? Thanks.

I would say it's stabilized. So, we aren't seeing increases. Our spending is essentially flat versus last year at this time. I would say things have calmed down a bit and maybe a couple categories we're seeing a little bit more than others but nothing dramatic in the current quarter.

To give you one example. If you look at bleach, which is our most challenged category, the price gaps in the IRI data, the track channel data, a year ago we had about a 29% premium versus private label. Today we have a 32% premium. So there hasn't been a material change, so I think we've done a pretty good job of watching these price gaps on core businesses and keeping them fairly tight.

Connie Maneaty from BMO Capital Markets.

I have a question, I'm not sure I understand the dynamics in the gross margin, how the second half should be flat but the third quarter down and the fourth quarter up. I mean does the third quarter need to decline something on the order of 100 basis points, and why would that be?

Well, a couple things. So first of all, the third quarter is expected to be down slightly versus a year ago. It's a reflection of mix, little bit of currency drag and keep in mind we are still anniversarying quite a bit of commodity cost increases.

When you get to the fourth quarter with the commodity cost comparisons were just a whole lot easier, and that, combined with pricing and the cost savings, starts to look a lot better, as Don mentioned in his earlier comments. And at this point, we believe that it should be about flat when you look at the entire view of the second half in terms of margins.

And then also, there were some comments about rising costs in manufacturing and logistics. Is this wage related or something else?

We talked pretty consistently about inflationary pressures in obviously the manufacturing and logistics areas. Certainly there's some wage inflation and healthcare inflation included in that number. There's also just transportation cost increases. In the depth of the recession, you had quite a few carriers that dropped out of the market and we've just experienced more pressure on the logistics side over the last year, and so it's a reflection of all of those factors that cause that number to be in this 40-50 range.

Yes, Connie, just a little more color on the wage inflation in manufacturing. A lot of that is more Internationally driven, where you've got markets like Argentina where you've got double digit inflation and the salaries have to be kept up with the double digit inflation rate. So, a lot of it's International, more so than domestic.

Okay, great. Thank you.

Lauren Lieberman from Barclays Capital.

Was going to follow-up on trash bags. So, must be my mistake, I thought the base trash upgrade was launching in the December quarter, but you guys actually talked about volume being down. So, is it a Q1 launch and should we expect volume and are you expecting volume to accelerate in that business even though the pricing is still there?

So, we've taken a lot of pricing, so I think that our base trash improvement is definitely helping, but we are seeing volume losses as a result of pricing. So, if you net out the two, we're definitely seeing a positive impact on the innovation, but we have taken a lot of pricing. So we took a May price increase, a November price increase, we're up close to 20% on trash bags.

How much was the November increase?

9.5.

9.5. Okay And then just -- I know it's -- four weeks doesn't make a trend, but the latest track channel, but it looked like there was a real surge in volume in Hefty trash in the last four weeks without any real change in promotional activities. So, are you still seeing -- base trash you feel like it's getting the traction you've expected and is pricing in the category overall kind of symbiotic and everyone playing along at this point?

I would say everybody is, I don't want to use the word playing along, but I would say essentially, we've been followed by both private label and Hefty in the category on our pricing actions and there's nothing out of kilter broadly. There are always some individual retailers that behave differently, but generally speaking, this is going kind of as expected and as we would want it to go.

And then just real quickly, on the Away From Home sales. What's the relative profitability. I know you talked about the acquisitions still being slightly dilutive next year, but if they're adding a full point to top line growth going forward, that's really significant. So, at what point can we think about them even just being operating profit margin neutral? Is that second half of fiscal '13 or is that more fiscal '14?

Yes, it will take us about 18 months to fully integrate this Business, to implement the cost savings programs, and the other investments that we're making. But I think when we get to fiscal '14, the businesses are expected to be EPS neutral to accretive and at that point we would also expect them to be operating margin accretive to the Company, as well. So this is just the typical time that it takes to integrate a business and again do the things that we do so well in terms of taking cost savings out of businesses.

The other thing I'd say, Lauren, is that the healthcare side of our Away From home Business, those margins are quite a bit accretive to the Company average. So, when you look at that business, given the high growth rates on the top line, we feel very good about the margin structure and its ability to contribute, not only to the top line, but obviously the bottom line.

Okay, great. Thanks a lot.

We'll go next to Tim Conder from Wells Fargo.

To follow on, can you talk a little bit about, since Lauren hit the trash bags, talk a little bit about what you're seeing in litter? You gave a few comments on that. And then any additional pricing at this point contemplated for the second half of the fiscal year as you see the world at this point? And then thirdly, strategically your views, just maybe articulate out on the Brita business, given the divestiture of Pur by P&G?

In cat litter we saw good volume gains. We were hurt on the sales side because of some trade spending behind new products, but we're seeing our brands being healthier than they have been in the recent past and so we're feeling good about our position in that category. That is a lower margin category for us, and there's some commodity pressure there. We haven't taken pricing on cat litter, and that's really one that we would look at over time.

Just a point I'd add on litter, Tim. When we look at the all outlet data, so obviously this combines with all the channels, not just the track channel, that's probably been one of our strongest performing share items in the last 52 weeks. We're up over a share point in litter, so we feel really good about the price value we're offering consumers there.

And then, gentlemen, pricing looking into the back half of the year as you see the world at this point?

I would say that we've taken the bulk of our pricing, the vast majority of our pricing already in the fiscal year. There is some limited pricing going on in the second half, but I think we would rather not be specific about that pricing until its been announced in the marketplace.

I would say that just to build on Larry's comment that any pricing we would take in the second half would obviously be cost justified and a lot of that would be internationally focused where we're seeing inflation.

And then lastly on the Brita business?

So, obviously, we're very pleased that we had done very well despite Proctor's presence in that category and a lot of effort and spending on their part. We don't know as much, obviously, about the new ownership, but we're certainly going to take them seriously. They have some good brands and good customer presence, and so we plan on being as aggressive as possible in the category as we have been in the past.

Okay, great. Thank you.

We'll go next to John Faucher from JPMorgan.

I'm going to follow-up on Bill's question, because I'm really not sort of understanding the math on the dilution here on this deal, because given the cost of debt, if these businesses are margin accretive, it seems to me you'd have to be paying sort of like a high single digit multiple of sales to not have this be accretive, unless there's just an amazing amount of spending here and I guess if that's the case, can you give us a better handle in terms of what the spending is, what the key investment criteria are, et cetera, just so I can try and get a better handle on these numbers, thanks.

Let me see if I can give you additional color. So, today, these businesses were small family held businesses. So these businesses today are not margin accretive to the Company. We absolutely believe that when we bring our scale and our capabilities and cost savings to it, that they will be accretive to our operating margins in fiscal '14, but today they are slightly dilutive to the Company margins and so maybe that's part of what you're struggling with. The other thing, again, is we are setting aside money early in this first 18 to 24 months to make those investments, particularly the cost savings investments to get the margins where we believe that they ought to be and that they can be.

And I think, John, just to put it in the order of magnitude, we are talking about $7 million to $8 million here. That's what we are talking about. So if -- and as Steve said, we really think there are some pretty significant cost savings opportunities going down the road, and there are some integration costs and there are some retention costs as well.

Okay, great. Thank you.

We'll go next to Nik Modi from UBS.

Just a couple quick questions. Can you provide any context on nat gas and the exposure to the P&L, because I recall many years ago that it was one of the most critical cost drivers, and nat gas prices have imploded year-to-date. So just if you can give me some context there.

And then the second question is Don, a year ago, you had discussed the impact one of your largest customers was having on your business, just given the slow traffic growth. And I'm just wondering if you're seeing the business there improve, at least over the last few months. Any context on that would be helpful.

So Nik, let me start off with the natural gas. Probably what you're remembering is first off, natural gas is trading at historical lows. Obviously, there's a lot of supply out there in the market and so clearly it's trading pretty cheaply. Natural gas is one of the feedstocks for resin, which as you know we buy a lot of resin. And normally you would expect then with natural gas trading at these levels that resin prices would be significantly lower than they are. But as a reminder, natural gas is just one of many inputs that goes into it.

There's supply and demand, overseas demand for resin, and so on balance, despite the fact that natural gas is at historical lows, we continue to see resin prices firming up and staying fairly elevated on a year-over-year basis.

Your question, our largest customer, we are definitely seeing improved performance at that customer. They are doing lots of good things across many of our categories. We're helping them change some of their assortment across most of our categories, and so we're feeling much better about that business. That business is much healthier today than it was a year ago.

And Larry, a question was asked earlier about the volume has held up in spite of some pretty big pricing. Could reinvestment at that retailer by that retailer, drive some of the variance between kind of the volumes that you've printed versus what everyone was expecting?

So, I think you're getting attached over pricing. We have seen probably less pass-through at Wal-Mart, in other words, they have decreased their margin across some of our categories to be more aggressive in the marketplace. I think that is one of their stated goals.

This happened particularly in bleach, where they have taken less of a price increase on bleach than they have on some of our other products. So, they are being more aggressive in the marketplace and happily we are benefiting and they are benefiting.

Yes, I think, Nik, just to add a point to that. I think in what they would describe as these heartbeat categories in the center of the store, Home Care, Laundry. Certainly when you have the number one brand and number two brands in that space, it certainly benefits.

So we're seeing it there. But like brands like Glad, they've reflected all the pricing. So it's kind of a mixed bag, but in general, as Larry said, we're seeing very much improved trends there.

Thank you very much.

Ali Dibadj from Sanford Bernstein.

A couple things. One is you mentioned a few times about negative margin mix, so from gross margin, operating margin, et cetera, you mentioned product and country and other. Could you talk a little bit more about that? So, Venezuela in particular, how that affects that issue. Channel if any margin degradation trade down, just to give us a sense of what we're really looking at and how we should think about that issue going forward.

Let me start giving you a quick update on Venezuela. I think as you're already aware, a couple months back the government expanded price controls in Venezuela. Those have yet to take full effect. What we have been saying since that time is that retailers, and consumers to a lesser extent, are really holding back of the purchases of inventory under the hope and expectation that future prices might be lower.

And that's certainly having an impact on our Venezuela business, which albeit small, it's only about 2% of sales, it's a very profitable and a very good business for us. And that's the negative country mix that we're really experiencing in the second half of this fiscal year and projecting.

In terms of product and size mix, we've just continued to see a trend where consumers are very value conscience and they are trending to buy more of the larger sizes which are slightly dilutive from a margin standpoint. Relative to the other products and SKUs that we've got in the portfolio.

So, Venezuela 2% of sales, is it that big from a profitability perspective? Is it double the 4% of profitability? How should we think about it? Because in calling out one country as a country mix issues is meaningful enough, and you may have implications for the rest of the sector.

So, first of all this is an example of the country mix that we're seeing. And second, to answer your question, it's about 2% of sales. It's about the same in terms of profitability. The profit and the sales are fairly close.

I think the key point, Ali, is that Venezuela is down strong double digits in volume, as Larry noted in his earlier comments, and I think that's really driving it maybe to a greater extent than you might otherwise imagine.

Yes, I think, Ali, that really, that double digit decline in volume -- the sales were up in mid single digits, the volume off significantly, as Steve noted. I think people are just locked down on buying any inventory until the price control clarification is supposed to come the middle of this month, so we'll see what it does, but I think it's impacting a number of categories.

One of the things that's different from last quarter is last quarter we talked a lot about consumers trading down, some little bit rougher patches of elasticity and this quarter we're not talking about it as much. Can you talk about why and how much of that is the consumer versus the lack of pass-through pricing versus some other effects, competitive, et cetera?

So, I don't remember talking about such a difficult time last quarter, to be honest. I think we have always said, and we have seen, that taking pricing, particularly in this economy does affect your volume, and there is a pretty big swing between our sales number and our volume numbers because of the reaction we get from consumers.

So, it's all as anticipated, as expected, as modeled. But nevertheless losing unit volume is not a positive thing from our standpoint, or, quite frankly, our customers' standpoint. So that's the rub in taking pricing, again, totally as expected, in fact, a little bit better than expected, but you do take a volume hit, particularly in a difficult economy when you take pricing up.

I do think, Ali, there is a difference in the macroeconomic environment out there versus last quarter in the sense that if you look at the jobs report today with unemployment now at 8.3%, one of the things we know in this country is we used to think our business correlated with GDP. We know it now correlates a lot more with the employment rate or unemployment rate. So, I think there certainly is some positive momentum out there in the macro economy I think that benefits us and I think it's also the innovation we've got out there. Its certainly helped mitigate the effect of some of that pricing.

Just my last question is around innovation. So, obviously, very good innovation quarter and you've talked a little bit about sustainability, but if you get down to that 3.5% sales growth that we're talking about, the organic sales growth, how much of that is consumer take away? Is consumer take away 3.5% or is there a significant amount of inventory load that is going on because of the good innovations that you have?

I don't think there's an inventory issue at all. I don't think there's one whit of inventory change.

Well, but when you're sending a new inventory you are filling up shelves that may not have been there, eg with Good, for example, from Burt's. So, it's insignificant in the 3.5% number?

Yes, I think it's insignificant. Ali, in the sense that if you look at some of the significant innovations, they've been out there for three, six, nine months. Take the case of Febreeze Odor Shield, take Brita On the Go, which has been out there for months. So a lot of the stuff that manifested itself in the October, November, December quarter was out the previous quarter or the previous even six months before that. So, I think it has very little impact with inventory.

Very helpful. Thanks guys.

We'll go next to Javier Escalante from Consumer Edge Research.

I have a question on gross margins, but not in the shorter term, but rather over the longer term and particularly in the past so we can think about the future. Over the past five years, I think, you have said that you have pre-prices about, I don't know, something times on that date success ratio is about 96%. So, would you didn't need rolled backs, and there has been periods in which commodities have come down.

And why shouldn't we expect, then, if you are keeping all this pricing to see gross margins inching up a little bit over the long run, as we had seen with Colgate over the past three or four years. Why is it that your gross margin gyrates so much if you're keeping all this pricing? Does it have to do with the channel shift? What is the drivers that is offsetting all this pricing power that you guys certainly have?

I think, Javier, if you look at the last five years we've only had one year of those five where actually commodities were a tailwind, and that was a slight tailwind two years ago of about $20 million. So, when you look at the commodity market movement over that period of time, it's well north of $500 million and when you look at the pricing we've taken, until this year we always lagged in pricing.

We've only recouped about 65% to 70% of that commodity increase over that five-year horizon. I would say I think this year is a good example of us getting faster on the price increasing and also getting more bullish on the innovation to try and tie that pricing to innovation. So, I think in the last year we're almost at a historical high again in gross margin.

But I think that's the central point is over a five-year horizon we did not recoup all of that commodity increase, but now we're at the point where we're taking pricing faster. We're taking it to reflect the true nature of the cost increases and we're also tying it to innovation that has higher and more accretive margins to us overall, so you should start to see, over the long term, that margin march up.

And finally on the -- I think you have alluded this in many ways, but I don't think that, at least to my view, you have answered this unequivocally. Certainly, your larger peers, Kimberly, Colgate, Proctor, they also have innovation and they had a terrible fourth quarter in the US, with volumes down as much as 5% for Proctor, things like Kleenex down 12%, and you guys held up really well. So, if you can help us understand how you dodged the bullet?

You have more exposure to Wal-Mart. Wal-Mart has been very open saying that they are trying actively to trade consumers down. So, if you can help us understand how you maneuver all this that you wind up to be so much better than your larger peers, thank you.

So obviously, it's hard for us to understand what's going on with our competitive set in detail, but I would say we're doing the basics very well. We've been focused on the 3D. We talked about how we develop our brands for a long time. We pushed really hard on innovation, which has been particularly important during a tough economy.

We have taken a lot of pricing, but we have been very selective about how we take pricing, where we take pricing. So I would just say this is kind of managing the day-to-day business exceptionally well. And again, I can't speak for what our competitors are doing or not doing across many, many businesses and categories.

Let me add a color point to it, Javier, maybe this will help you, as well. When you look at the three segments of the US business, the Household segment, the Cleaning segment, and then the Lifestyle segment.

Well, Household up 4%, Cleaning up 5%, and then Lifestyle up 6%. I think what that says is very good balance across those three segments from an innovation standpoint. Everyone of those business units had strong innovation across a number of SKUs in their portfolio.

The second thing I think we're doing very well is retail execution. I think if you look at our top 25 customers, I would say our execution at retail is as good as anybody's. And it's fine to have great ideas like Brita On the Go, but if you can't execute it at retail it doesn't much matter. And I think if you look at the ACV coverage of our innovation, we're getting to shelf quickly. I think the retailers are excited by the innovation. So I think it's the broad scaleness of our innovation across all the Business units, and our ability to really double down on superior retail execution that's helping.

Thank you.

We'll go next to Leigh Ferst of Wellington Shields.

You mentioned that the aging of the US population is a positive for your Healthcare business. Could you comment on how it affects your other Businesses?

I would say, yes, it's probably a little bit more of a negative trend in general. I'm trying to think off the top of my head. I mean, obviously, Clean Tech categories with smaller households is, we clean less and we've seen that trend for some time. Other categories might be relatively unaffected or maybe even boosted, like a food business like Hidden Valley.

It may be a positive in some ways. So I wouldn't say it's a huge improvement and probably a bit of a drag across the rest of our categories. Obviously, it is positive on healthcare type categories and certainly positive when it comes to disinfecting products that can turn around germs.

I don't think, just to add to Larry's point, I don't think it's a material effect on a lot of our categories. I do think, obviously, in healthcare it is a fairly substantial impact given the incidents of hospital stays and also the other side of the acute care equation is nursing homes. We talk a lot about hospital acquired infections, but it's also a major issue in nursing homes and as the population ages, obviously, that's going to be a significant market that expands. This whole infection control market for us is, we think it's at least a $2.5 billion category.

We can't find anybody with more than a five to seven share of that business. So we think it is extremely fragmented, wide open for somebody that really understands how to build brands, and I think these two recent acquisitions really bode well to increasing our product exposure, as well as the channel exposure we get now with the new products, as well as the existing ones.

At this time we have no further questions.

Well, if there are no further questions, we certainly look forward to updating everyone in May when we will do our fiscal '13 outlook. Thanks, everyone, for being on the call today. We appreciate it. Take care.

That does conclude today's conference. We thank you for your participation.