高樂氏 (CLX) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to The Clorox Company first- quarter fiscal year 2013 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 call, Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, please go ahead.

Great, thank you. Welcome, everyone, and thank you for joining Clorox's first-quarter conference call. On the call with me today are Don Knauss, Clorox's Chairman and CEO; Larry Peiros, Executive Vice President and Chief Operating Officer; and Steve Robb, our Chief Financial Officer.

We are broadcasting this call over the Internet and a replay of the call will be available for seven days on our website at thecloroxcompany.com. Let me remind you that on today's call, we will refer to certain non-GAAP financial measures, including, but not limited to free cash flow, EBIT margin, debt-to-EBITDA, and economic profit.

Management believes that providing insights on these measures enables investors to better understand and analyze our ongoing results of operations. Reconciliation with the most directly comparable financial measures determined in accordance with GAAP can be found on today's press release, this webcast, prepared remarks, or supplemental information available on 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 advise any forward-looking statements.

On today's call, Don will start with his perspective on the management changes announced earlier this week, including Larry's retirement, before then turning it over to Larry to discuss our volume and sales results. Steve will follow with a review of our financial performance for the quarter, as well as discuss our outlook for fiscal year '13. Finally, before turning it over to Q&A, Don will close with his thoughts on our first-quarter performance. With that, let me turn it over to Don.

Okay, thank you, Steve. Thanks everyone for being on the call today. We know it's certainly been a very challenging time for many of you who are on the Eastern Seaboard, obviously, due to the storm and its aftermath. We certainly hope each of you and your loved ones are faring well. We greatly appreciate your flexibility this week as we rescheduled this call to, obviously, to give folks more time along the Eastern Seaboard to begin recovering.

So first, let me start off by recognizing Larry Peiros, our Chief Operating Officer. You obviously read in the Tuesday press release, Larry has announced his retirement from the Company. We're pleased Larry is staying on for the next five months to ensure a smooth transition of his responsibilities; however, this will be his last earnings call, something I know he deeply regrets.

For more than three decades, Larry has had a profound impact on the Company, rising from the ranks of a summer intern in 1980 to overseeing our entire business operations and core functions as Chief Operating Officer. He's had a significant hand, obviously, in the Company's strategies, and priorities, and the results being driven. He's been a certainly great partner to me over the last six years.

But Larry's not one to enjoy being in the spotlight so I'll keep my remarks brief. Suffice it to say, the Company owes Larry a debt of gratitude for his leadership and many contributions and we wish him well as he heads into his retirement. So while we're going to miss Larry's experience and talents, we do have a robust succession plan that provides, I think, a really rich source of internal talent.

I'm excited about the opportunity to give some of our strongest leaders, many of whom you have met or seen on the road, some new and expanded responsibilities. As we talked about in the press release, we are going to be moving to a new structure that has two Chief Operating Officers with clear lines of accountability, George Roeth will have P&L responsibility for about half of the portfolio and the four core functions of marketing, sales, R&D and product supply.

The businesses under George will include Charcoal, Cat Litter, Glad, Food, Brita and Burt's Bees. Now Benno Dorer will have P&L responsibility for the other half of the business and directly manage our corporate strategy and growth activities, so he will be our Laundry, Home Care and International businesses.

So, I think it's important to note that the overall strategies and priorities of the Company remain the same. We have great leadership continuity with, from Benno and George. We expect this will be a very seamless transition. In fact, if you look at it, the businesses that are reporting to them, they've led for more than five years. So in addition, as I said, Benno is taking on international and George is picking up our core four functions.

I think the other thing I would note is of the seven functions of the Company, so the core four plus finance, HR and legal, six of those seven functions are still being led by the same person, so I think we do have great continuity in this change.

I know many of you have met George and Benno on the road and certainly at the Analyst Day in May. I'm sure you'll recognize that they've got a real depth of experience and talent that they bring to their new roles. These roles, as we noted in the press release, are going to be effective January 1. So I hope you would join me in congratulating them on their promotions. Now let me turn it over to Larry. He can cover the first-quarter business results.

Thanks, Don, and welcome to everybody on the call. First, let me say that I have truly enjoyed my 32 years at Clorox. It's a great Company and a great group of people. I will probably always have bleach running through my veins but now is the right time to turn to the next generation of Clorox leaders. I, too, want to congratulate Benno and George. I've worked with each of them for many years. They are both incredible business people and also gifted leaders. The Company is in very good hands in moving forward.

With that, let's get on with the call and our Q1 business results. We had a solid start to fiscal '13 with 3% sales growth on top of 3% sales growth in the year ago quarter and sales up in three of our four business segments. Our Q1 volume was down about 1%, primarily driven by price increases taken over the last year to address increases in commodity costs. We also had again one less shipping day in the quarter and have seen strong volume results in October. Overall, we feel good about the growth in Q1 and confident about our 2% to 4% sales growth outlook for the full year. Solid performance in what remains a very tough economic climate.

Turning to US market share, this is the first earnings release in which we are reporting share results based on this new multi-outlet data. As I think most of you know, this data includes scanner data from Wal-Mart and a few other retailers that were not previously sharing information with syndicated suppliers like IRI and Nielsen. The new database covers about 80% of our US retail sales. The remaining 20% is in accounts like Costco, Home Depot and PetSmart that do not share data.

Our US multi-outlet share results reflect a 0.3 point decline versus a year ago in Q1 and a 0.1 point decline over the past 52 weeks. Our categories grew about 2% over the last year. Burt's Bees is not included in this data as we track and analyze that brand separately. Burt's grew share in both Q1 and the past 52 weeks.

Our Cleaning segment delivered a strong quarter with volume up 4% and sales up 8% behind the volume gains and pricing. Sales grew in each of the business units that make up the segment. The Home Care business grew sales behind solid volume growth and our portfolio of Clorox-branded cleaning products, including strong gains in Clorox Disinfecting Wipes behind back-to-school merchandising.

Liquid-Plumr also grew volume; we had a double impact with [new] product launch. Volume gains in Home Care were offset by declines in Pine-Sol due to a substantial price increase driven by escalating pine oil costs. Our overall Home Care market share was up in Q1 and the categories growing about 2%.

Turning to the Laundry business, sales were up behind the strongest volume growth in Clorox Liquid Bleach in more than two years. Our Clorox 2 brand remains challenged with significant volume losses stemming from the continued impact of a price increase in the year-ago quarter. Our total Laundry share was down slightly in the quarter.

In August, we began the first of our four-wave rollout of our new concentrated bleach in the Midwest and launched wave two in the Southeast in October. The convergence has gone very well thus far with almost all private label offerings converting to the new concentrated format. We expect to complete our national conversion next spring and anticipate a smooth transition.

On our Professional Products business, we saw another strong quarter. Volume was up by more than [50%] driven by the recent acquisitions and a double-digit increase on the base business. Our Household segment was the one segment that did not generate sales growth due to double-digit declines on our Charcoal business. Segment volume declined 7% and sales declined 3%. Charcoal shipments were impacted by price increases earlier in the year as well as lapping some very strong merchandising and very strong volume growth in the year ago quarter. Due to the seasonality of the business, Charcoal had less of an impact in Q2 and we look forward to a strong grilling season starting next spring.

Turning to the Glad business, we grew in both volume and sales behind the continued success of our premium Glad OdorShield trash bags with Febreze. Trash bag gains were partially offset by losses on some of our Glad food storage products. Share was up in trash bags and down a bit on food storage. The Cat Litter business down slightly from a sales standpoint with volume losses stemming from May's pricing actions.

In our Lifestyle segment, volume was down 1% and sales increased 1%. We grew both volume and sales in our food business behind gains in our Hidden Valley brand. Share results were also positive. On Burt's Bees, sales were flat versus a very strong [base] period that included heavy new product pipeline shipments. Burt's Bees share was up in the quarter and consumption growth was up double digits.

Moving to Brita, sales were down less than 1% as a result of a July price increase and lapping the launch of the Brita bottle. We have additional Brita innovation coming on the second half that is expected to drive incremental growth.

In our International segment, volume is down 2% largely due to the exit of some non-strategic export businesses. Sales were up 3% driven by pricing. Within Latin America, our largest region, we saw both volume and sales growth on our base business. Our market share was up in Latin America but down in Canada. Category sales growth in Latin America remained stronger than in the US while category trends in our more developed international markets are similar to the US.

Overall, we feel very good about Q1 top line results and remain on track for our sales outlook of 2% to 4% for the full year. While volume was down in the quarter, it was primarily the predictable impact of pricing actions taken over the last year. In the US, we are seeing modest price promotion by some competitors as commodity costs have been relatively flat. We are closely tracking competitive activity and in some select cases, responding in kind with additional promotional dollars to keep our brand strong.

On the International side, we are closely monitoring consumption, foreign exchange rates and the impact of price controls in our two largest Latin America markets -- Argentina and Venezuela. Although consumption has improved recently, inflation remains high, price controls remain in place, and the currencies are at risk of further devaluation.

Finally, with respect to new products, we are confident of our FY '13 program, Including finishing the national conversion to concentrated Clorox Bleach, the new packaging innovation as we launch across all of our spray cleaners this quarter, and some exciting innovation on Brita in the second half. With that, I'll turn it over to Steve.

Thanks, Larry, and welcome everyone. We had a good start to the fiscal year and as you saw in the press release, we reconfirmed our outlook. I'm going to provide more depth on our first quarter results and our financial outlook for fiscal '13. Starting with sales, we delivered 3% sales growth in the quarter, which included 3 points from price increases and over 1 point from acquisitions, partially offset by nearly 1 point from the unfavorable impact of foreign exchange. Volume was also down about 1 point due to the price increases.

Turning to gross margin, we're very pleased with our efforts to rebuild margins are beginning to pay off. Our first-quarter gross margin increased 110 basis points to 42.9% of sales compared with 41.8% in the year ago quarter.

The biggest factors contributing to the gross margin improvement were strong cost savings across our portfolio of $26 million, with $22 million of that reflected in gross margin, and the benefit of price increases. These factors were partially offset by inflationary pressures in manufacturing and logistics and other supply chain costs. As expected, commodity costs were about flat and we anticipate an overall flat commodity environment for the fiscal year with some variability across the quarters.

For the full year, we continue to anticipate the combined benefit of cost savings and price increases will enable us to deliver both gross margin and EBIT margin expansion. We also continue to anticipate 150 basis points of margin benefit from our cost savings programs. First quarter selling and administrative expense increased versus the year ago quarter, due in part to the continued infrastructure investments, including our IT investments in Latin America.

We recently completed our IT systems rollout in the region as planned with all 12 countries now up and running on the new system. We are pleased with how well the implementation has gone so far. And we're now moving to the next phase of stabilization of these systems.

As previously communicated, we continue to anticipate fiscal '13 spending against our systems and facilities investments, as well as other infrastructure-related investments to be about equal to fiscal '12, or in the range of $50 million to $55 million. Overall, we expect selling and administrative costs to be about 15% of sales in fiscal '13, reflecting infrastructure investments as well as the continued high inflation in many international markets.

Our effective tax rate of 31.6% through the current quarter was up versus a year ago quarter, but lower than anticipated, driven by the benefit of a recent international tax settlement. For the full fiscal year, we anticipate our effective tax rate will be between 33% and 34%.

Turning to cash flow. Free cash flow increased to $154 million, or 11.5% of sales, compared with $94 million in the year-ago quarter. The increase was the result of improving margins and favorable changes in working capital, partially offset by higher capital spending. As a reminder, we define free cash flow as cash from operations less capital expenditures.

We ended the quarter with a much higher than normal cash balance. Specifically in September, we issued $600 million of senior notes with an annual fixed interest rate of 3.05%, temporarily increasing our cash balance. Net proceeds from the September borrowing, we used to repay commercial paper and all of our $350 million of senior notes which matured on October 15. We anticipate cash returning to a more normal level by December 31.

Now due to the $600 million debt issuance in September, we ended the quarter with a debt-to-EBITDA ratio of 2.7 to 1, slightly above our 2 to 2.5 times. The debt-to-EBITDA calculation, however, does not factor in the higher than normal cash balance at the end of the quarter. Including our cash balance, our net debt-to-EBITDA ratio was well within our targeted range. We continue to anticipate reducing our leverage as we go through the year and by the end of the year, anticipate being at about the midpoint of our targeted range. Net of all the factors are discussed today, we delivered diluted net earnings per share of $1.01, a 3% increase versus the year-ago quarter.

Turning to our fiscal year outlook, we continue to anticipate sales growth in the range of 2% to 4%. As previously communicated, our outlook continues to anticipate modest category growth, continued product innovation across our portfolio, and some foreign currency headwinds. This range also reflects a more challenging comparison to strong fiscal '12 sales growth in the back half of the fiscal year.

We continue to anticipate EBIT margin expansion of 25 to 50 basis points and diluted earnings per share in the range of $4.20 to $4.35. We're also closely monitoring our International business, particularly in Venezuela and Argentina, where price controls and high inflation have been negatively impacting our business. In closing, I'm very pleased with our results for the first quarter and remain confident in our plans for the balance of the fiscal year. And with that, I will turn it back over to Don.

Thanks, Steve. In summary, we're off to a good start to the fiscal year. We're especially pleased that we delivered increases in both sales and margin in the quarter. Although it's still early, and there are factors we need to watch closely. We're certainly confident in our outlook and our plans for the balance of the fiscal year. In particular, we're encouraged about the growth we continue to see in our categories. We believe our product innovation plans will help drive continued category growth and maintain the strength of our brands. The next wave of innovation for us, of course, is in the January timing.

We certainly do have a proven track record of innovation, as I think many of you know, and for the last 10 years, we've delivered against the annual target of at least 2 points of incremental growth. Right now, I'd say with high confidence we're on track to meet our higher target of 3 points of growth in this fiscal year. So, as Larry mentioned, we're pleased with the introduction of the new concentrated Clorox Bleach; it's doing quite well, and feel great about the new products that we've lined up for this January launch. So with that, why don't we open it up for your questions?

Thank you.

(Operator Instructions)

Joe Lackey, Wells Fargo.

Thanks and congratulations on your retirement, Larry.

Thank you.

I guess I'm a little bit concerned with the volume being negative this quarter and I know you mentioned pricing was an impact there. But it seems like in the last half of 2012, you guys were able to offset that a little bit in gain volume even though you have a significant pricing. I guess the 3% pricing in the quarter, it seems like we're almost getting to a point where it laps. So is this volume a temporary impact of weakness in Household, one-offs in Charcoal and that sort of thing? What are you guys expecting going forward? Can we see that volume start to turn around?

So let me give you the perspective on volume in the quarter, and the overwhelming factor is pricing. And you know we've been taking a lot of pricing, some of it fairly recent, to offset the commodity cost and I expect that particular factor to be with us pretty much throughout the year. We did have one less shipping day which doesn't sound like a big deal but it does impact you a bit in terms of the delivery on the quarter. We did have a weak quarter on Charcoal. And it really was indexing off of a very high base period driven by some incredible merchandising. I think if you go back to the year ago quarter, you'll remember us talking about some particularly hot feature pricing in places like the home hardware channel where they are trying to drive traffic with the Kingsford brand and then a little bit of a verbal from non-strategic export issue and in international. So I would say the one factor that will continue is really the pricing factor, the one less shipping day, and we're already making up for that in the current quarter, Charcoal is -- will be back to normal. Of course, it won't impact as much in [olivee] because it's pretty small now. We expect a normal year and we started lapping this little bit of non-strategic export issue immediately. So I expect we'll be about flattish for the year and most of it will be around the pricing impact.

The only thing I would add, Joe, is if you take this one less shipping day, for example, as Larry said, it doesn't sound like a lot but we do, on average, about 1.5 million cases a day. Our volume decline in the quarter was 800,000 cases so we would had the normal shipping day, it would have been positive volume, so I think there will be some pricing impact throughout the year. I think Charcoal, as Larry said, will return to more normalcy now, so I wouldn't put too much into the quarter.

Okay, and then if I could just ask a quick one on category growth. Correct me if I'm wrong here, I think you said category growth was up 2% in the quarter; is that all-outlet? I guess if you look at it on the track channel data which is all we can see, it looked like some of the key categories like Garbage and Lawn Bags and Bleach and Charcoal, the growth is sequentially slowing there. So what are you guys seeing on an all-outlet basis as far as category growth? Is it stabilizing? Is it increasing? How is that trending?

So just to clarify, the all-outlet data we refer to now is really the MULO data which is 80% coverage. So unfortunately, we don't have any -- no longer have any category growth numbers on these untracked customers like the home hardware, specialty channel, and Costco. We obviously track our results but we can't track the category. So if you look at MULO, the multi-outlet data, the categories are growing about 2%. If you look at that versus history, we've seen a delta of improvement of about 1 point to 2 points over the last three years or so. So we are seeing some recovery in our categories. There's always variability category by category, differences are driven by various things like innovation, in particular, but overall, the categories are about 2% on the quarter and the multi-outlet data.

Joe Altobello, Oppenheimer.

I also want to congratulate Larry on retirement. Good luck. It was very enjoyable working with you over the last few years so good luck with that.

Thank you.

In terms of the EBIT margin, I think that was the biggest surprise, the gross margin being higher and also EBIT margin being higher. Could you walk us through what the big surprises were to you, at least in the quarter?

Yes, Joe. This is Steve Robb. As expected, we fully anticipated that the gross margin would be up on the quarter and of course it was, but it came in better than we had expected. There was really two drivers for that. Number one was our cost savings program. Cost savings came in very strong. And as you know, we target 150 basis points with margin improvement from the cost savings programs each year and we got about 170 basis points in the first quarter. The second driver was the timing of certain manufacturing costs. Our inventory levels were running a little bit higher because of the SAP implementation as we do product work, and so we had some favorability come through inventory absorption. Now some of that is going to reverse out of subsequent quarters. So I would say the fact that we did better in the first quarter on an EBIT margin basis is really a reflection of the strong gross margin but I would not have you take all of the goodness in the first quarter and project it to the full year. A good part of that's going to fall but not all of it because some of that is in fact timing. Nonetheless, we feel great about the margin improvement plans and they are working for us.

Okay, that's helpful. And then secondly, you mentioned earlier that there is some competitive activity going on in some of your categories. I imagine that it includes Glad but which other categories are you seeing the most intense competitive pressures?

Joe, let me first go back to the first question on category consumption because Don pointed out that I was -- the 2% I referred to as the category growth is a 52 week data. The past quarter is more like 1% so we have seen a bit of a change there. With respect to competitive activity, definitely most acute in the Glad business and the Glad Trash business, specifically. That's very typical when you see commodity price pressure relief that some competitors steal back some of that commodity savings in terms of trade spending and that's where we are responding to some degree in kind relative to the competition. The rest of the portfolio, I would say, we're -- it's really quiet.

Okay, so it's really concentrated in Glad Trash at this point?

Yes.

Jason Gere, RBC Capital Markets.

I wanted to go back to the price elasticity that you talked about what you saw this quarter. Can you frame up how pricing was, the effect on volume compared to what you saw a couple of years ago, when we were at the heart of the recession and obviously, there was a trying time to take pricing through so did you see this? I guess I'm trying to frame up the consumer and right now the impact of pricing on the consumer. Is the consumer as weak as you anticipated? I do have a follow-up after that.

So in terms of the, I think we've talked many, many times about all these models that we run which are terribly predictive of the impact of what our pricing actions are going to be. I would say those predictions remain very high, very accurate. We have not seen any difference in elasticity, by and large, during the economic downturn so that may appear a little counterintuitive but we have not really seen any change in elasticity driven by the economic downturn. What you do see, obviously, is people seeking more value and trading up to larger sizes, bigger packs, so there is that value impact because of the recession. We can continue to see that on things like trash bags and wipes where people are trading up to use at the club sizes or larger packs within other channels.

The other thing I'd add, Jason, is through panel data now, we know that about a little over 80% of the shopping trips are defined as fill-in trips, so this is buying 15 items or less. So clearly, people are doing a lot of channel hopping, value seeking, looking for the deals, but despite that, I think the model accuracy that we've seen has been very high.

Okay. Thanks for the clarification. The next question is really look at advertising versus promotional spending. I think you're saying in Glad, there is a little bit more promotional spending out there. The advertising levels have been near at the low of your long-term 9% to 10%, so with some of the gross margin upside that you're seeing. Category growth, I think you're saying is now closer to 1% in the quarter, what are the plans, at least what you can say, in terms of reinvesting a bit more of the gross margin upside into advertising, so you can hit that 2% to 4% sales growth with ease?

This is Steve Robb. Let me lead off on this question. So the advertising as we have communicated and expected was about 9% of sales and that's in the 9% to 10% range. I think if you pull out the international business and look at the US domestic business, the number was closer to 10%. But keep in mind that some of our international markets, particularly those markets where we were focusing on price controls and other challenges, we're trying to be smart in the deployment of our advertising dollars, creating demand that you may or may not want to fill. It's a challenge. So I think we feel good about the advertising levels. I think over the long term, as we rebuild the gross margins, we will make sure that we're reinvesting to keep the brand equities healthy over the long term. But feel very good about the level of investment we're making today.

Yes, I think that's important point on this, is that the US spending is at the upper end of the range since the international drag, in particular Venezuela, Argentina, with the price controls. It doesn't make a lot of sense to do a lot of advertising until we get the price gaps right.

Okay, great. Thanks, and Larry, congratulations.

Thank you.

Ali Dibadj.

Just to share again, congrats again Larry, Benno and George. To get to a couple of things. One, if you could talk a little bit more in detail about the drivers of top line growth that you expect to accelerating going forward? You talked a little bit about innovation, if you could talk a little bit more about that? And also, the impact of the concentrated bleach in that calculation, given particularly your tougher compares across the board?

So innovation definitely would be the number one driver of improvement over time and we feel very good about our innovation program. We exceeded our target last year and we expect to be near or above our target for this year. It's pretty much across-the-board so we're not focused on one or two business units but it's pretty broad-based. So I'd say that's the number one thing that will drive growth and drive both brand growth as well as category growth.

The other thing I would add, Ali, is the healthcare business, as we talked at the May analyst meeting with all of you, we look at the business in three chunks -- the US Retail Products, Professional Products and International. I think if you look at Professional Products, there's another acceleration there for our business. Even the base, we talked about the base business in healthcare being up double digits again. We see that continuing to ramp up so as we go through the balance of the year as we integrate Aplicare and HealthLink, and we see some cross synergies, if you will, in terms of, for example, the HealthLink sales force selling Clorox Disinfecting or Germicidal Wipes into doctors' offices. There's another piece of top line acceleration and then I think, lastly, we are seeing some stabilization in some of the international markets. We'll see what happens in Venezuela with the devaluation. We don't fully expect it but we are seeing some fairly good volume growth in a lot of the Latin American countries, along with price growth.

I'll get international in a second but just if you could help me with the concentrated bleach part, in particular, to that question? So as that's rolling out, what type of volumes are you seeing? What type of category response are you seeing? We see it just as well as you do that the private label and any other brands in that area, if any, are following? So what are your hopes from that particular innovation, if you could share those?

It's early. Really hard to conclude from the anecdotal data we have but I would say anecdotally, we are seeing very positive trends in terms of shipments. I was, I visited a bunch of stores in Chicago which is part of the first wave. The shelves looked terrific. Private labels have fallen. We haven't really lost any incremental -- haven't lost any shelf space so a number of facings on shelf is higher and out-of-stocks are therefore down. We saw the first growth in terms of [CLB] shipments of in two years in the quarter so we're hoping this will stabilize as we start to grow the Clorox Bleach business over time. We're pretty optimistic at this point but it's definitely early going. As I said, we've been in wave one for about two or three months and just started wave two and we'll finish out at the end of the fiscal year.

The other thing I would add is we're seeing better growth in the wave one conversion markets than we are in the balance of the country. So I think some of that may be due to out-of-stocks going down over the weekends. Also there's more shelf presence for some of the higher-margin trade-up items like Gel Bleach in those shelf sets. So as Larry said, it's early but those trends bode well we think.

Okay. So is it better or worse that [peblo] falls? It sounds like you're saying it's a positive because it probably reduces confusion, get there on the same page (multiple speakers) --

We did this before and many of the categories have converted to a more concentrated formula. You definitely want the category to convert with you so that your price value perception doesn't get out of whack with the competitive set, so --.

Okay.

We work very hard with our retailers to convert the entire category versus just our brand.

Okay. Then two other relatively quick ones. One is on inventory. You've been doing SAP for a while but this is the highest inventory days, at least I've seen, in a long, long time, many, many years. So how much of that really is SAP versus some lower-than-expected volumes or resetting because of the concentration on Bleach or Charcoal or --? Can you aggregate that for us in terms of what's the driver of the increased inventory?

We certainly touched on a couple of the drivers. SAP is certainly a part of this. We -- don't forget, in the last three or four months, we've been bringing up quite a few of our Latin American countries and we've got all 12 countries now up and running. We did build some inventory in advance of that just to make sure that if there was any disruption, which we're pleased that there wasn't, but that we would have inventory on hand to be able to work through that. We also were building up some inventory to work through the transition to the new bleach and just other new products. So inventory is up a bit but we've got plans in place to bring that back down again to a more normalized level and feel good right now about the inventory levels.

And I think just to put it in perspective, the total inventory levels for the Company in dollar were about 2.5% above what they were last year in the quarter so I don't think it's a significant move.

Even with the one-day loss, it's not a big deal. Okay, so it looks like we're good now. I do want to get back to international comments. So what are you seeing? Because we're not seeing necessarily great trends in Latin America in many categories, say, for Venezuela. So if you were to exclude Venezuela, it sounds like you're entering new areas. Can you just give us a little bit more of a view on that? And then also about how you're thinking about Venezuela specifically, in that region? Thanks.

So we are seeing growth in our Latin America business, which is the biggest, by probably the biggest chunk of our International business. So I would say the results on the top line are pretty good. We are seeing high single-digit growth in terms of the categories. We're, actually we're growing share right now across the categories, so feeling pretty good about that. The issue in Latin America is obviously on the bottom line more than the top line at this point, so where we have price controls. Unfortunately, two of our biggest countries that where there are price controls, Venezuela and Argentina. That's where we're having some margin pressure and it shows up obviously in the segment results. A part of the decline in the profit in the segment is due to the SAP implementation, which we have just completed. But a lot of it is due to the pressure that we have to improve margins while price controls are in effect, and we have high inflation rates. But the volume and sales rate looks, I think, very solid.

So just to give you a little color on that, Ali. If you look at, I'll give you an example of three countries -- Mexico, Peru and Chile, three of our larger mid-size countries in Latin America, we're seeing volume growth in the mid- to high single digits. I think one of the reasons the volume is a little bit less than those countries are putting out because of the export business we exited in Central America, which we didn't think was profitable. I know it wasn't profitable so I think the base trends in those countries look pretty good.

Chris Ferrara, Bank of America.

Could we -- I just wanted to follow up on Venezuela. Could you talk a little bit perspectively, about what you think Venezuela could possibly look like over the coming months? I think it seems like a foregone conclusion you're going to see a devaluation? Can you talk about how you'd handicap the odds of price controls sustaining, remaining in place even through a devaluation and I guess what you're doing to prep for that?

This is Steve. Let me take the first part of it, and maybe Larry can weigh in on some of the business things that we're doing. I think we, like everyone else, fully expect that there's going to be a devaluation in Venezuela. In fact, as we've previously communicated, we've included in our earnings-per-share outlook about a $0.05 earning drag because we believe a devaluation is highly likely. What's uncertain to us and I think others is how much of a devaluation we are going to see and when it's actually going to occur. We try to take appropriate actions in terms of making sure that you don't overinvest in the country, making sure that you deploy your assets as effectively as you can to minimize the impact of a devaluation. But at the end of the day, there's very little that you can actually do to prevent it. You basically have to respond once it actually occurs and we think we've taken all the appropriate steps. As far as price controls, again, over the very long term, price controls are very difficult to keep in place and maintain their effectiveness. But I think we expect that price controls will continue even after a devaluation, at least for some period of time. Although, generally after a devaluation, what you tend to see is, you get some pricing flexibility will tend to open up a bit but I think we're going to have to just see what the government does, and then respond in kind.

In terms of the sales of [our] results, we're positive in Venezuela at this point. So that's good. Categories, I would say, are flattish, not a lot of growth. As Steve said, we don't know when the devaluation will hit and we don't know what the impact might be on price controls post-evaluation, but right now about 70% of our portfolio is affected by the price controls.

Got it, thanks. And a quick follow-up. Do you guys still expect EBIT margins to be down in the first half of the year?

I think EBIT margins are going to be a little bit better than that because obviously, we had good growth in the first quarter driving the gross margin. So EBIT margins are not likely to be down in the first half but they will continue to be challenged because we are completing the SAP implementation in Latin America, and our investments in Pleasanton, California. So I think you're still going to see some challenges there.

But you're not changing your full-year EBIT margin outlook, right? So I guess some of that relates to what the timing on the manufacturing variances you're talking about that you'll get back in the back half of the year? Is that the way you're thinking about it?

Yes, and we've got a range on it, of 25 to 50 basis points. I would say we're off to a very good start, data for 25 to 50 basis points. We're probably even more confident today than we would have been 90 days ago but we still believe that 25 to 50 basis points of EBIT margin makes sense. Again, as we just talked, we're closely monitoring the situations, including Venezuela, which, depending on what happens there, that can also have an impact on margins.

Great. Thanks, and congratulations, Larry.

Thank you.

Bill Schmitz, Deutsche Bank.

It's Nick Cavallo filling in for Bill. Just wanted to ask quickly about the Lifestyle segment. I think you guys have laid out the drivers of at least most of the volume decline in the quarter but curious in this segment in particular, if you've seen any inventory destocking or any changes in customer ordering patterns? And then secondly, I was wondering if you would actually tell us what the sales decline was for Brita-on-the-go in the quarter? Thanks.

No significant inventory changes that I am aware of, so nothing there that I can point to. There was a comparison on Burt's Bees to a quarter that had a lot of pipeline on new products. So the results were flattish for the quarter but the consumption rate was actually very high so that business is very healthy. We just had a year-over-year comparison issue that deflated the shipments.

Got it. Thanks and do you have the sales decline for Brita-on-the-go?

We don't release that level of information, but the Brita-on-the-go continues to do very well for us, and we're very pleased with the results today.

We're just launching the introductory period and that's what drove it down somewhat.

Javier Escalante, Consumer Edge Research.

I have -- I mean, I'm going through the micro level but it has to do with the $50 million to $55 million of spending and how that impacts operating margins calculations and your guidance. Could you please tell us two things? One, whether it's the spending last year had -- was lumpy or was evenly spread? When do you think the $50 million to $55 million spending is going to be over this year? My understanding is that it's not going to go all the way until June next year so if you can let us know, when do you expect to complete the IT spending on the R&D facility? Thank you.

Javier, this is Steve. So we are anticipating still $50 million to $55 million of restructuring and other related costs. The bulk of it, as a reminder to everyone, is the IT investments we're making in Latin America and the rebuilding of our R&D facilities in Pleasanton, California. We expect a disproportionate amount of that is going to fall into the first half of the fiscal year, but we also continue to expect costs to continue into the second half. So it will continue through Q3 and Q4 of this fiscal year. In terms of how that fell in the first quarter, to give you a little bit of color, we did see a larger amount come in this quarter versus the same period in a year ago. We had about $14 million, $15 million of infrastructure-related costs this year and we had about $7 million last year so that's part of the reason you're seeing SG&A was up a bit in the first quarter this fiscal year.

Going into the -- I mean, just for modeling reasons, going into the second quarter, it seems like we should be modeling a pretty big hike in that spending as you accelerate for the completion of all these new projects, right?

I don't want to get into the quarter-by-quarter split. As you say, a bit more than 50% is certainly going to fall in the first half and again, a bit less than 50% will fall into the second half. We're going to continue to see expenses obviously come through the second quarter. You are likely to see SG&A, as a percentage of sales, higher in the second quarter, because of (inaudible) the sales and these investments that we've talked. But I think that gives you a pretty good sense for your modeling.

Connie Maneaty, BMO Capital.

Let me also offer my congratulations to Larry, George and Benno. About Venezuela, the $0.05 hit in this fiscal year, does that assume Venezuela operates at a loss or are margins just compressed? Secondly, should we, assuming [up] first a January timeframe for devaluation, do you think it's wise to put another $0.05 into the back half of the calendar year which we would be the first part of your next fiscal year? And then finally, if the business goes into a loss, do you make a determination at some point on whether or not it's in your interest to stay there?

Okay. Let me see if I can answer each of those in turn. So first, we don't give out the relative profitability of the countries, but the number one challenge, as we've indicated before, is the rising inflation and the pressure that creates on margins, particularly in a price controlled environment. So it's really a margin challenge that we're having. We have a good business in Venezuela today, the businesses stabilizing, we've got leading brands, even with everything that's going on. We're going to continue to invest for the long-term health of the business and we like the business that, clearly were going to be challenged over the next couple of quarters.

And then finally, regarding the devaluation, we wish we knew the timing. We don't. We put a $0.05 placeholder into the outlook because we recognize this is a fairly high risk and something's going to happen but as I mentioned earlier, the timing, the amount is unclear. So I don't think we can predict whether the $0.05 is sufficient or whether we need another $0.05. I think we need to see what the government does, one, with the devaluation, and then two, how that manifests in the form of price controls and what adjustments they make there, if any. So we're just going to need more time on that. But we'll keep people updated as we all learn more.

Are you having any negotiations or conversations with the government about the trade-offs between price controls and actually being able to supply retailers and consumers?

So definitely, our ongoing conversations with the government, the government [reached] out to the manufacturers. I can't say that we've seen a lot of impact from those conversation as yet but they are going on.

Right.

I'm hoping, Connie, that post the election now, that those conversations will become more fruitful than they were before the election.

John Faucher, JPMorgan.

Thank you very much. Larry, congratulations as well.

Thanks, John.

There have been a number of incremental restructuring announcements over the past few months from many of the consumer companies, even ones like you, that have a strong history of delivering on cost saves. I'm wondering if there's some sense that companies need to run faster these days just to stand still. I know you're a little more optimistic about the categories, but it certainly seems like growth has taken a step function down over the last couple of years. So as you look at that, do you have any thoughts in terms of whether your current incremental approach to cost savings needs to step-up in any way? Do you need to start thinking bigger about this or do you feel like you have the right approach right now and how long can that keep going?

Well, let me start, John. I think because a number of our competitors who are stepping up are stepping up to get into the range we've delivered, so I think we've been in the zone, as you know, of 150 to 200 basis points a year for multiple years on end. I think the first quarter at 170 basis points is just another indication that we think we've got the right approach to this. I do think, to your point, that companies are obviously getting more and more focused on cost savings as something they can control a lot more than they can control category growth and what the consumer is doing. I think though, that based on the engagement of our people, the strength of our brands, we want to stay focused on the approach we've got and not whipsaw this organization with this whole notion of big lay-offs which we just don't think are necessary.

Got it. And then in the timeframe you guys have historically talked about having visibility, I don't know, let's say four or five years out, do you feel like you still have that level of visibility with your current programs?

Yes, we actually run it through your pipeline so we literally have teams of people as we've talked before that are not just managing the cost savings that we're focused on delivering this year of 150 basis points. But they also project out one, two and three years and both develop the ideas and we start to put plans in place. I think as Don said this is really important. We would rather focus on consistent steady cost savings results because we think over the long term, that translates into better margins than focusing on cost savings for short periods of time and then people are off doing something else and then they come back to it. So this notion of consistency and your cost savings and focusing on a three-year pipeline and making what I would define as modest smart investments over time to support that, we think it's a best-in-class approach and it certainly will work well for us.

I think that systemic approach, John, if you look at, once we get past these investments this year, we get back into this 13.5% to 14% range which is our top quartile performer and we've been there for years. So I think it's that systemic consistent approach if it delivers that result, we think that's absolutely the right way to go.

At this time, I would like to turn the conference back to Mr. Knauss for any additional or closing remarks.

Okay. Well thank you everyone for joining us on the call. I know it's been particularly difficult for a number of you and we certainly hope things start to settle out in the Northeast soon. We'll look forward to talking to you at the -- in February as we get through the second quarter, but thank you for being on the call with us today.

Thank you very much, and that does conclude our conference for today. Thank you for your participation, and you may now disconnect.