高樂氏 (CLX) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Clorox Company's second-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, you may begin your conference.

Great. Thank you. Welcome, everyone, and thank you for joining Clorox's second quarter conference call. On the call with me today are Don Knauss, Clorox's Chairman and CEO, 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 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, 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 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.

For today's call, I will start off by covering some of the highlights of our second-quarter business performance by segment before turning it over to Steve to take you through the financials. Finally, before turning to Q&A, Don will close with his thoughts on our first-half performance.

In the second quarter, we delivered 5% volume growth and 9% sales growth versus the year ago period. Performance across the portfolio was quite strong with sales increasing in all four of our reportable segments.

Turning to our US business, we grew our multi-outlet market share during the second quarter by a 1/10th of a share point with relatively modest increases and decreases across the businesses.

The health of our categories continues to improve with category sales up 1.5 percentage points for the 52 weeks ending December 23. Consumption grew in six out of our eight domestic retail categories in the second quarter.

Our Cleaning segment delivered a very strong quarter with volume increasing 13% and sales increasing 15%. Sales grew in all three business units within the segment.

The Home Care business saw record shipments across multiple brands including strong sales of Clorox disinfecting products to combat this year's severe cold and flu season.

The Laundry business reported strong results behind the continued rollout of new concentrated bleach, Clorox Bleach, which has also had a significant positive impact on the category. We fully converted two regions, the Midwest and Southeast, and started shipping last month to the Northeast. We are on track to complete our national conversion in the spring, finishing the western part of the US.

Our Professional Products business also saw another very strong quarter, mostly due to the Aplicare and HealthLink acquisitions made in December 2011 and a double-digit increase on the base healthcare business.

In our Household segment, volume growth of 1% was driven by early shipments in our Charcoal business, ahead of this year's growing season. Sales grew 7% in this segment behind price increases taken during the last fiscal year across all three businesses. Our Glad trash bag business had a nice quarter with sales and market share up on premium trash bags, consistent with our strategy to drive trade up for the consumer and improve margins on the business.

Cat Litter volume was flat in the quarter due to negative volume impact of pricing, but sales were quite healthy.

Our Lifestyle segment saw strong volume growth of 7% and sales growth of 8%. Burt's Bees had a great quarter with record shipments of lip products as well as face products during the holiday season.

Our Food business grew strongly behind the higher shipments of Hidden Valley dressings, including new Italian flavor offerings which expand the franchise beyond just ranch. Brita volume and sales were down due to continued category softness. However, we have Brita innovation coming in the second half that we expect will drive incremental growth for our business and the category.

In our International segment, the volume was down 3%, largely due to decreased shipments in Latin America and Canada, although sales were up 3% behind price increases. Our overall market share was up in Latin America; however, we continue to face market instability and difficulty implementing price increases in two of our larger markets, Venezuela and Argentina.

Looking at the second half of the fiscal year, for the total Company, we have factored in a more challenging comparison to strong fiscal year '12 sales growth in the second half of last year which was nearly 6% as well as a possible currency devaluation in Venezuela. However, based on our strong year-to-date sales performance, continued growth in our categories and our pipeline of second half product innovation, we are raising our sales outlook to 3% to 5% for the year, up from 2% to 4% previously.

With that I will turn it over to Steve Robb, our CFO.

Thanks, Steve, and welcome everyone. We feel good about the quarter and our overall results for the first half of the year, based on strong year-to-date sales growth as well as two consecutive quarters of margin expansion. We raised our full-year sales outlook to 3% to 5% and increased the lower end of our earnings per share range while increasing our contingency for potential devaluation in Venezuela by $0.05. I am going to provide more depth on our second-quarter results and our financial outlook for fiscal '13.

As Steve reviewed, we delivered 9% sales growth in the quarter, driven in large part by strong shipment growth of 5% and about 3 percentage points of benefit from previously implemented price increases. Included in our sales growth is a combined benefit of about 3 points from an extra shipping day and acquisitions in fiscal '12. Excluding these items, overall sales grew more than 5%.

Turning to gross margin, we are very pleased to be on track to meet our fiscal year margin improvement goal. Our second-quarter gross margin increased 1 point to 42.5% of sales compared to 41.5% in the year ago quarter. The largest contributing factors to the gross margin improvement were a robust $24 million in cost savings or about 2 points and the equivalent of about 1 point from pricing. These factors were partially offset by higher manufacturing and logistics costs which include the impact of significant inflation in Latin America as well as the typical supply chain costs related to rolling out our new Concentrated Bleach.

As expected, commodity costs were about flat year over year and we continue to anticipate an overall flat commodity environment for the fiscal year.

For the full year, we continued to anticipate the combined benefit of cost savings and price increases to enable us to deliver both gross margin and EBIT margin expansion. This includes about 150 basis points of margin benefit from our cost savings programs, consistent with our long-term annual target.

As expected, second-quarter selling and administrative expenses increased versus a year ago quarter due in part to continued infrastructure investments, including our IT investment in Latin America and our new campus in Pleasanton, California. As we mentioned last quarter, we continued 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.

In fiscal '14 and beyond, we expect to invest about $20 million to $30 million for restructure and related costs, down from the $50 million to $55 million this year. This reduction will help us offset inflationary challenges, particularly in some Latin American markets. We now anticipate selling and administrative costs to be slightly below 15% of sales in fiscal '13, reflecting the higher sales growth for the full fiscal year. Advertising spending increased in the absolute but was slightly below 9% of sales. Importantly, our US and retail spending was barely 10% of sales, but lower in international markets based on investment adjustments for countries with challenging market conditions.

With our raised sales outlook, advertising will be about 9% of sales for the year, reflecting a healthy increase of spending in the second half. Our tax rate of 34.3% for the current quarter was in line with expectations, but up almost 2 points from the year ago quarter. For the full fiscal year we continue to anticipate our tax rate will be between 33% and 34%.

Year-to-date free cash flow increased to $223 million versus $86 million in the same period a year ago. This significant increase is the result of favorable changes in working capital and higher earnings. We continue to anticipate free cash flow as a percentage of net sales will be in the range of 9% to 10%, but more likely at the higher end of the range. We also now expect capital spending to be between $200 million and $210 million. As a reminder, we define free cash flow as cash from operations, less capital expenditures.

As we mentioned in our press release, we ended the quarter with a higher than normal cash balance due in part to the December sale and lease back transaction of our Oakland general offices, which generated $108 million in net proceeds. Although our headquarters will remain in Oakland, we sold the building in order to monetize an asset that had been underutilized.

We anticipate using the proceeds and the issuance of commercial paper to refinance $500 million in long-term debt maturing this March.

We ended the quarter with a debt to EBITDA ratio of 2.3 to 1 within our targeted range of 2 to 2.5 times. We anticipate continued strong cash flow to further reduce our leverage to about the midpoint of the targeted range by the end of the fiscal year. Net of all of the factors I have discussed today, we delivered diluted net earnings per share of $0.93 in the quarter, an increase of 18% versus the year ago quarter.

Turning to our fiscal year outlook. Sales growth is now in the range of 3% to 5%. This is consistent with our long-term annual target that we shared during our analyst meeting last May. For the full fiscal year we continue to anticipate gross margin expansion, including continued growth in the second half. We also continue to anticipate even margin expansion of 25 to 50 basis points in fiscal '13 and again consistent with our long-term annual target.

Our diluted earnings per share is now in the range of $4.25 to $4.35, reflecting a $0.05 increase to the lower end of the range. Importantly, our updated outlook also reflects a range of $0.05 to $0.10 of diluted earnings per share impact from an expected currency devaluation in Venezuela and the continued difficulty of taking pricing in that country. While we can't predict the timing or impact of the devaluation, we do think it is prudent to include a larger contingency in our earnings assumptions for the fiscal year.

We are also closely monitoring market conditions in Argentina where, like Venezuela, price controls and high inflation have been negatively impacting our business.

In closing, I feel great about the second quarter and our overall results for the first half and remain confident in our plans for the remainder of the fiscal year. And with that, I will turn it over to Don.

Thanks, Steve, and hello, everyone. Let me summarize fairly quickly for you before we go to Q&A, but obviously we feel very good about the results two quarters into the year.

We have delivered strong first-half sales growth of about 5.5% growth and margin expansion. We are especially pleased that our earnings per share results have enabled us to raise the lower end of our outlook range, even with the increased advertising spending in the second half to support a really good innovation pipeline, a greater contingency for the possible Venezuela evaluation that Steve just mentioned and then continued difficulties also there in implementing price increases, the higher tax rate that we see and then the comparison we faced in strong year ago sales. Recall that last year in the second half we had sales growth of nearly 6%.

Now with that, let me shift to the macroenvironment and share our perspective on the current state and health of the overall economy and what is going on with consumers in the retail environment as context for the updated outlook.

First of all, on the economic recovery, it obviously remains slow and bumpy. The consumer confidence dipped again in January following a December decline, but I am pleased to report that we are generally holding market share in the US overall and our categories have continued to improve, growing at about 1.5% for the 52-week period in December and we have seen that same trend continue in the past 13-week data and certainly in the past four-week data as well. We are all in that range of about 1.5%.

Internationally, we feel good about the majority of the markets we are in, but recognize we still face a challenging environment particularly in Venezuela and Argentina. That said, we feel good about the long-term prospects of our international business, based on the improving macroeconomic trends in many of the emerging markets.

What's clear is that wherever she may live, the consumer is behaving obviously cautiously, opening her wallet when she finds the right value for her everyday needs while holding out for deals on the frills she might otherwise want. In our view that growth in value channels that we have seen since the onset of the recession is likely to continue for the foreseeable future.

And this consumer dynamic is showing up in the US retail environment with a shift towards consumers, making more quicker what we would describe as fill-in trips and far fewer pantry stocking trips. In fact, the latest data we have shows that these quick trips are fill-in trips, and that is defined as a trip purchasing less than 15 items, now account for about 83% of all the shopping trips out there. And they account for just about 50% of the dollars spent. So, obviously, consumers are managing their wallets and the cash flow.

All this supports our keen focus certainly on the affordability value megatrend and providing innovation that has that value equation that meets our needs. In Q3 what you'll see from us in addition to completing the rollout of Concentrated Bleach is some more great new innovation broadly across the portfolio.

So let me take you through some of those examples. Consistent with a focus on value in the Cleaning segment, we are really excited about a packaging improvement featuring a smart tube technology across all of our spray cleaning products. This is the new packaging that integrates the tube into the side of the bottle. So there is no longer a tube coming off of the trigger. It is built into the size of the bottle and it ensures full usage of the product so you don't have to worry about getting out those last ounce or two. The early consumer response to this improvement has been very positive. We expect to continue to support our market leadership of the spray cleaning category.

In Household, Kingsford is going to start shipping a new smoke-filled briquette, smoke-flavored briquette whereas Glad is introducing an improvement in its Odor Shield trash line which will enhance fragrance delivery across [all defense].

In Lifestyle, Brita is introducing a new hard-sided Bottle on-the-go, building on the growth of the Portable Water Filtration segment and a premium stainless steel pitcher. Our food business is launching new Hidden Valley sandwich spreads in four flavors. Our Gud brand is introducing a new scent called Ruby -- Red Ruby Groovy -- and Burt's Bees is launching a new line of lip wands which we believe will continue to drive strong growth on that brand.

Now away from the retail business, our product or Professional Product business, which includes Healthcare, is we expect that to be a continued strong driver of growth for the Company. This is one we obviously profiled at the analyst meeting with you in May and, as we successfully integrate HealthLink and Aplicare, we expect that Healthcare business to continue to drive strong growth for the Company.

So to wrap it up, obviously very pleased with the strong 5.5% sales growth and 10% earnings per share growth in the first half. We have taken into account, we believe, the challenges we are facing, particularly in Venezuela which we will continue to monitor. And I certainly believe that our second half plans which reflect our view of the macroeconomic environment for the economy, the consumer and the customer are strong and certainly competent of our full-year outlook.

So with that, why don't we open it up for your questions?

(Operator Instructions). Joe Lackey, Wells Fargo Securities.

It sounds like you are being fairly conservative with your EPS guidance, despite the strong quarter here. And maybe you can walk through your outlook and point out where your concerns are in the second half, kind of preventing you from being more optimistic. And I think you touched on these a little bit, I guess, Venezuela maybe advertising tax rate, but if you could break down maybe expand on some of those impacts.

Let me start and then I will turn it over to Steve. I think when you look at the second half and we are still confident with the consensus numbers on the top line, for example, but we are lapping nearly 6% growth in the year-ago second half.

The other thing is we will have fully integrated by February the acquisitions from HealthLink and Aplicare. So we are not going to get the benefit of the acquisition on the top line. So that will be integrated in.

And third, as you said, is just the questions around the uncertainty in Venezuela and what that potential devaluation could do. But what I think when you look at our innovation pipeline, what's coming, some of those that I just highlighted, I think we feel good about where the consensus numbers are.

Steve, I don't know if you want to add anything to that.

Yes, let me just build on that. Turning to earnings per share, we do think we have a balanced outlook at $4.25 to $4.35 earnings per share.

Just a couple of things I would point out as you think of earnings per share growth in the second half of the fiscal year. Number one, advertising. As I mentioned just a few minutes ago, we fully expect that we are going to invest about 9% of net sales in advertising and when you look at the investment in second half of fiscal '12, that number was closer to 8.5%. So it does present a significant ramp-up in spending to support the innovation that Don talked about.

The other thing is, we believe that we have appropriately set aside contingency for potential risks in Venezuela and that is certainly a drag of probably $0.05 to $0.10.

And then finally, we have got a higher tax rate. So those are really the three factors that are causing the earnings per share in the second half to probably be up modestly although it could be flat or down a little bit, depending on what happens in Venezuela, relative to the 10% growth that you saw in the first half.

Thanks.

Michael Steib, Credit Suisse.

Can I ask a question about the Household division? The price ,ox number was a very strong 6% lapping [4]% from last year. Can you tell us whether this was primarily driven by price or by mix and to what extent do you think this is a sustainable number?

The 6% differential was pretty equally split between both pricing and mix. On the pricing side as I think I mentioned, we, over the course of the last year, have had price increases on all three of the businesses in that segment. And then, in the mix side, we saw particularly in the Glad business a nice trade up to our premium trash bags, which obviously helps us there on the top line as well.

Thanks.

Wendy Nicholson, City Research.

two questions, if I can. The first on Venezuela. Can you break out how much of the $0.05 to $0.10 is just devaluation-related and how much of it is struggling because the market is so tough? In other words, if there is no devaluation, how much upside do we think we can add back to the numbers?

And then the second question is on Burt's Bees. I know you have called out some new products in the lip category, but was there anything else that drove the particular strength there? Whether it was more marketing or more merchandising or something, because it is unusual for that business, I think, to be so strong.

Let me take the first question regarding Venezuela and let me step back and just provide a perspective on that. And then I'll turn it over to Don and Steve and they can talk a little more about Burt's Bees.

For Venezuela, a couple of things I would just highlight to everyone. Number one, obviously the situation remains fairly volatile in that market and we believe that the risks and devaluation have gone up not down over the last couple of months. If you look at the exchange rate in the parallel markets, that exchange rate is up in the high teens. The government-controlled rate is probably in the 4s. So it is a pretty wide gap.

So, for a lot of reasons we thought it prudent to be increasing the contingency from $0.05 to $0.05 to $0.10.

In addition to that, it is becoming increasingly difficult to take pricing in that market. And these things are pretty tightly correlated.

So in the event that there isn't a devaluation this year, then we think it is extremely likely it will happen in fiscal '14. And if we don't see devaluation this year and we are able to take pricing, which remains uncertain, then we could likely [build] up in the earnings-per-share range. We might even be slightly above it.

But at this point it is really hard to call that because generally devaluations and pricing decisions run hand-in-hand. So we are going to continue to monitor the situation. We will keep you informed as we learn more, but we certainly want to be transparent with all of you and our investors that we think this is an increasing area of risk and try to dimensionalize it for everyone.

Does that answer the Venezuelan question?

If I could just ask one follow-up. But your market shares in Venezuela, how are they doing?

Market share was generally remained fairly healthy for the business. Again, the business is fairly healthy. The biggest challenge is the inability to take pricing and you are in a market where you have got double-digit inflations. So have certainly seen the margins get compressed and the earnings have come down quite a bit. And it also makes difficulty bringing new products to market because of the exchange controls. You can't bring products in from outside of the country easily, because you can't pay for those products in dollars. But generally the business is healthy, but the conditions are challenging.

Got it. That's helpful.

On Burt's Bees, if you look at the last 18 months on Burt's, it basically has grown in double-digits. So it's really at post the recession the brand has come on strong. I think in this quarter, in particular, a lot of innovation on lip. We really have refocused hard on lip with like tinted lip balms. Also the lip wands have started to really impact positively the business.

Gud is continuing to do well particularly in shampoos and conditioners and we have got the new scent coming out in Gud in the third quarter. And then the holiday season this year was really good for Burt's.

So I think as people are getting back into -- we had a fairly rough holiday season in calendar year '10 certainly and '11, but we saw much better holiday pullthrough this past season. So add all that up and we've got strong double-digit growth. And the International side of Burt's continues to do well as well.

Terrific. Thank you very much.

Ali Dibadj, Sanford Bernstein.

Want to get underneath your long-term topline growth prospects, particularly [stepping out] volumes versus price. Because the detail is very helpful on this report. Because if you look at -- and I think so you start from your 9% growth rate overall and if you build the waterfall, I know it is imperfect but if you build the waterfall you have 4% price, about 1.5 extra day, 1.5 acquisition. You get down to about 2% volume, kind of organic-y volume and then you have flu, that helps our estimate about 1 point or 2, compaction probably helps about 1 point or 2. So your volume overall as a company at best was flat if not probably down a little bit with as far as I can tell Lifestyle, the only one there that is actually growing well and didn't have any kind of crazy stuff going on there.

So how do you think about the repeatability of some of those factors going forward, particularly around the volume versus price differential there? And if any of that stuff is wrong let me know.

Let me check your numbers here. I think you are fairly close on the drivers, but I'd give you this perspective. When you look at the difference between the MULO data, for example, and our reported sales in the US, first of all about 25% of that is Puma where you are -- or our project Puma, what we call bleach compaction. So we are getting about between 20% and 25% more units on the shelf and, obviously, the revenue is going up because we are getting more bottles on the same space. We have not lost any space. So that explains about 25% of it.

The other thing we saw last year was an artificial depression in inventory, and that was replenished in this quarter. So I don't think that your zero to slightly negative is accurate, because last year we saw an artificial completion in inventory particularly with some of our largest customers. That has been replenished. And obviously that was more around disinfecting wipes and bleach and if you look at the consumption, the last 13 weeks and last four weeks on whites, for example, it is in the mid to high teens.

And then, the other roughly 40% of the difference is inventory builds for strong merchandising programs in the third quarter particularly on Charcoal as we get into the grilling season. We are even seeing some of that on our cleaning products like Pine-Sol. So hopefully that helps you understand it. But there was last year, a bit of a depression in inventory that was a bit artificial.

The only other thing I would add is that you noted the pricing benefit of which we got almost 3 points of benefit in this quarter. As you know, that has at least for a period of time a negative impact on volume as consumers adjust to the new prices. We fully believe that if we were not taking that level of pricing you would have seen stronger underlying volume growth because historically that is what is reflected.

And I think if we are going to go into a period where maybe commodity costs are more benign as they have been recently, which wouldn't necessarily support additional pricing, or at least not significant amounts of pricing, then I think you would begin to see volume become more of the equation as we talk about our topline growth.

That is actually helpful because you are comparing it to Nielsen data which I wasn't really doing so it might have been a better question. Maybe let me ask a little bit of a different one around the same topic, which is, just how much do you think flu and compaction helped this half quarter from a volume perspective?

As we have said a couple of times this year that, over the course of the year, we expected every quarter to be more or less the same, plus or minus. You would not see a significant change one quarter to the next. And previously our sales outlook was as you know 2% to 4%. We have now raised that 3% to 5% for the year this year, which is great news.

I think as we came into the second quarter, the expectations were somewhat similar. We would be somewhere in that 2% to 4% range, maybe closer to the higher end of that. So if you compare that versus the sales growth of a little over 5%, when you exclude the impact of the acquisitions and exclude the impact of the extra shipping day then that probably gives you your difference. It is probably 1 point to 2.

On each of the fill-in compactions or just --?

No, in combination.

In total. So that is where I got the flattest volume. So, let's talk about [myself] if we could just for a second. Can you talk about margin expectation you have for that business going forward? Because it did grow well. There was a margin impact because you had to invest as you mentioned to yourself in your press release.

What should we expect about that business? So if a year early on with Burt's Bees was, as we expand here outside the Company was as they expand Burt's Bees expands, the margins may have to take an impact as they try to go more math-ish.

Is that still a fear or is that just already run through and this is an investment for particular innovation that dissipates over time?

We actually -- we look at the margins of both our Brita business in there, our Burt's Bees business and food. They actually have some of the highest margins in the Company. We have got a pretty good pipeline of cost savings projects and innovations that's margin accretive.

So we actually look at that business as a business that has got some head space to be able to further improve margins over time. So fast-growing business, margin accretive to the Company, good opportunity to improve it. So we are feeling very good about the health of the margins in that segment to both now as well as into the future.

Yes, the other thing I would say about that as we get into the second half of the year, if you look at the innovation pipeline, each one of those three businesses -- and this is some of this, this is a build as we go into the second half. Each one of those businesses has strong innovation coming and had strong innovation in the second quarter.

So there is a bit more of the advertising and consumer promotion support behind those three businesses.

Okay, that's helpful, because from something just on the lifestyle, not compared to the overall business, Burt's Bees is growing well, Hidden Valley is growing well. Those are high margin businesses. Water filtration was down, but then later on you say unfavorable product mix had a negative impact on margins. So that is what I am trying to figure out. Is that going to continue? What was that?

In that segment, the mix was a slight trend towards larger sizes which I know, as we have talked in the past, tends to have a little bit of a mix drag, on our margin drag. I think that is primarily in the Food business. But that was more a point in time and I wouldn't think of that as a long-term factor outside of as we said, before consumers are generally looking for value and they can get that through larger sizes.

And this is my last silly housekeeping question is when you go from normal bleach to concentrated bleach, from a volume perspective, the underlying question I guess is what do you expect to happen? And then just the very housekeeping-y question. Is it -- are you looking at volume from an ounces perspective or a loads perspective? Thanks a lot.

When we talk about volume, we tend to talk statistical cases. So let's talk uses is generally how we think of it. We think that bleach compaction is a positive thing long-term for volume. It deals with one of the fundamental consumer to satisfiers which is the product is a little bit hard to use when you are trying to put it into the laundry machine. So we feel good about that.

I would also point out that as you get more units on shelf, one of the problems that we have with Clorox Liquid Bleach is that during high periods of traffic, the stores can run out of stock. And so by getting more units on shelf, we think for the retailer they are more likely to run in stock which means they pick up those purchase occasions and of course the consumer will find a product when she is looking for it. So net net, we think is positive for the category and the consumer and obviously positive for the retailer as well.

Thanks a lot.

Joe Altobello, Oppenheimer.

Good morning. Two quick ones, if I could. First, the facilities and infrastructure spending you mentioned this year is $50 million to $55 million you said that in the past and next year looking at $20 million to $30 million. So the incremental call it $25 million you pick up next year. What happens to that money? Does that get reinvested? Does that drop to the bottom line, is it a combination of the two?

Well, two things. So with the $50 million to $55 million, the bulk of that is actually sitting in our SG&A cost, which is one of the reasons SG&A is a percentage of sales. We had been saying about 15%, we are now saying it will be actually be somewhat below 15%. But that is one of the reasons you are seeing it elevated. So, yes.

As you look to fiscal '14 and beyond, one of the reasons we believe we can get SG&A costs as a percentage of sales to 14% or less and this will take a couple of years, but one of the reasons we think we can get there is because we are going to start anniversarying some of these costs. So you should see SG&A costs start to come down in the second half of this fiscal year and we would expect that to continue to trend down as we get into fiscal '14 and beyond.

So it should help us offset other inflationary pressures that we are seeing, particularly in some international markets.

That's helpful. And secondly in terms of the new Concentrated Bleach. Are you seeing any initial indications that people are overdosing there?

Too early to tell. We don't think so. There has been a shift by mix shift into larger sizes. We think some of that is due to -- the king size which is we think due to some initial consumer confusion on this, but we saw that over 10 years ago in the other compaction cycle. So that tends to wash out after a few months.

And of course we will have a better answer for you probably in May once we get this thing rolled out across the country. By May, we will have been in the market for over six months in the center part of the country, so we can give you a better answer. But nothing right now that should suggest that.

Thank you.

John Faucher, JPMorgan.

Wanted to follow up a little bit. You talked a little bit about mix and it sounds as though with some of the improvements in the underlying trends that maybe mix is going to be less of a drag going forward. Is that a sign of a healthier consumer who is less focused on some of these hot price points you had to deal with over the past, let's say 12 to 18 months?

What I would say is mix this long-term trend to consumers trading up to larger sizes, more value-oriented packs, that is likely to continue. But what we have said pretty consistently is the level of mix, the negative impact on mix in fiscal '12, which was pretty significant, that we did not project that going forward. And that is certainly what was seen in the first two quarters of this fiscal year.

So I think mix will continue to challenge us. It will be a modest drag on our margins over time, but we think that the combination of pricing, cost savings, innovation, will allow us to get over -- overcome those things. So it was a modest impact on the quarter. We continue to anticipate it will be a modest impact going forward.

I think the other thing I would add is, as we drive growth on the higher margin businesses, for example, Burt's continues to grow at this double-digit clip we have seen in the last few quarters and, in fact, over the last 18 months. The Food business growing at an accelerated rate. I think the product, the Professional Products business has margins that are higher than the Company average. So as we continue to drive these other businesses, I think that is why you will continue to see you'll see some headwind, probably certainly more benign than it has been.

So it is the right way to look at it then, as you think the package mix and the channel mix will continue to be negative, but the opportunity is on the product mix side as the consumer comes back.

Yes.

A little bit better as you guys innovate a little bit more.

Correct.

Great. Thanks.

Jason Gere, RBC Capital Markets.

Two questions. One, when you are looking at the underlying category trends I think you are saying 1.5 in this quarter. Can you talk maybe a little bit about some of the challenge businesses that you have had over the last two years, which I guess were a little bit more the discretionary products, Clorox 2. Can you talk about the trends there? And what type of impact overall that you are seeing, or are you anticipate you might see in the retail environment and just fiscal class payroll taxes, just given that you have a little bit more of a premium tier to some of your products and then I actually do have a follow-up. That was just one very long question.

Yes, I think, on the products where we are seeing some challenge, obviously Clorox 2 is one of those. If you look at the category, the category that Clorox 2 participates in is down about negative 7 in the last 13 weeks.

You'll see news coming on Clorox 2, not only new advertising, but product news as well as packaging news coming out there as we try to reposition that as a he stain fighter brand. But that category in general has been challenged as a heavy investment from a couple of years ago when Tide launches has gone out of that category and so that is one that has challenged. But as I said, you'll see news there coming up in the next six months.

The other one is Brita. Where it that the water filtration category is down about 4.5% to 5% in the last 13 weeks. That is more driven by faucet mount where we are not really that strong. You'll see again more news in Brita coming up in this quarter with the hard sided bottle. We saw some slowdown in the portable on the Go Bottle category because we are lapping, obviously, that strong set of numbers from a year ago. But that has been the other category that is challenged and we think innovation is the answer there as well in that category.

And I think the third one would be in the Trash business.

While the premium segment is doing exceptionally well for us and those margins are quite a bit better than the Company average, the base Trash business is challenged and that is where we've just taken 7% of the resin out over the last few months in that category. We think having the strongest bag in that space bodes well over the long term, but those are the three categories I would say were challenged.

If you look at obviously the bright spots are the ones we have already talked about like Home Care, Natural Personal Care, Food, Premium Trash and Bleach. We will probably have the strongest bleach growth each year than we have had in 40 years in terms of volume and sales growth. So that bodes pretty well. We haven't seen that, as I said, certainly almost in our lifetime.

And second question and I apologize if you did talk about this earlier. Just a manufacturing logistic cost. I think you are up 200 basis points. Can you talk maybe a little bit about that and how we should think about that going forward? Within your 25 basis points to 50 basis points of operating margin that was in that context?

Yes manufacturing logistics is almost always going to be a negative line item only because we pull out cost savings and show it differently. If you want to get a true understanding of our manufacturing costs, you would probably net those two line items and you can look back over the last several quarters. In many cases they would be about neutral. In some cases it is actually accretive, which suggests that we are doing a good job controlling our manufacturing logistics costs.

In terms of -- once you pull the cost savings line out and show it separately, as we do, what you do see is a pretty negative trend on manufacturing logistics. But the primary drivers of that and the reasons why it is probably a little bit elevated right now are that we are experiencing pretty significant inflation in some of our Latin American countries. I think we talked about that. And then until that subsides, that is going to put pressure on that line.

And then the other thing right now that, again, will begin to dissipate over time is we have some incremental costs in there for the conversion to the Concentrated Bleach, some manufacturing costs. And I think as we conclude this fiscal year, get that fourth region completed, have the updated manufacturing plant for that then I think you'll see at least that component of the manufacturing logistics line come down a little bit. And so all I would say is going forward, it is part of our 25 basis points to 50 basis point EBIT margin goal. That line is likely to be negative, just not as negative as you are seeing it right now.

Great. Thank you.

Bill Schmitz, Deutsche Bank.

Good morning. I'm sorry to beat this one to death, but I think if you look at the Nielsen data through December 22 it said that your Company sales were up 40 basis points. So is there kind of a better way to triangulate the difference between 40 bps and what is right around 7% if you take out the extra day and the International acquisitions.

Well, like I said, if you do take that out it is basically about 5.5% organic growth. If you -- and we had it at 1%. And I don't know what -- are you looking at 13-week data, or were you looking at?

12 week to December 22.

Yes there is some difference between Nielsen and IRI, too. So we are trying to triangulate this. But call it 1% versus 5% to 5.5%. Like I said if you break that down, about 25% of that is the Concentrated Bleach issue of getting more revenue into the same retail shelf space. So that's 25% of it. Again, about 35% of it is this replenishment of artificially depleted inventories a year ago particularly in Home Care which we saw in some of our larger customers. The other 40% of it is prebuilding for merchandising events that are coming up. And if you add all that, it gets you about 4 points.

And how do you feel about pantry inventories and what that means for consumption going forward?

In the category, like I said, let's take the 25% that is Concentrated Bleach. That is not pantry inventory that is just inventory on the retail shelves. The consumption -- like our consumption in the last 13 weeks on bleach was a little north of 3%. So we don't think that we are building inventory in the homes on bleach.

And then if you look at the 35%, I said that was replacing artificially low inventories from a year ago. Principally that was around disinfecting wipes and some other home care cleaning products. If you look at the consumption in Home Care, the last 13 weeks for us it is about 4.5%. When the category is growing about 1.5%.

So we don't see inventory. It is good consumption. We are not hearing anything about pantry loading there. I think with the flu, people are obviously using those products because we are continuing to see if you look at the four-week data, those consumption trends accelerate beyond the 13-week data. So it seems like they are replenishing those stocks that they had at home.

So all in all, we are not certainly seen anything that would say to us we have got inventory builds. And I think if you look at that four-week data which goes through January 20, which is our strongest consumption data out of the 13-week or the fiscal year-to-date consumption data would say that we are off to a solid start in January.

Great. And two more quick ones. Was there any pre-buy ahead of the Charcoal price increase in December?

I'm sorry. I couldn't hear --.

Was there any sort of retailer pre-buy ahead of that December price increase in Charcoal?

Yes, there was, but it was very modest. So it is not a meaningful impact either for the quarter certainly for the year. So it is not concerning. But as we used to do the price increases in January. By bringing the price increase to December you get a little pre-buy, but again it is moderate.

Got you. And then the volatility by segment, if you see the margin so your Lifestyle margins were down quite a bit, but it seems like the margins -- Cleaning and Household -- also increased quite a bit. So should we expect a kind of volatility going forward? Or is there a volume-related anomaly this quarter?

You know what, it always -- you can see some volatility quarter in quarter out depending on what we are doing with demand building investments, the cost of launching new products, things like the bleach conversion, et cetera. I would encourage you to really focus on probably longer term margins kind of the full year when you are looking at segment by segment because without the underlying details, quarter to quarter you would probably go to the wrong conclusions. So full-year margins are probably a better way to look at the health of those businesses and the direction.

And will they track the corporate aggregate margin, do you know what I mean? Like -- or will they be big?

Over time, yes. So as we, for example, as we rebuild our gross margins and we are certainly off to a very good start in the first half, absolutely. You'll see that flow through these businesses.

The one business that will continue to be challenged for some period of time is our International segment. And as you have seen, both our margins and profit are down in that business, in part because of the SAP investments we are making and partly because we are challenged in some markets with a combination of high inflation and price controls.

So I think that is probably one business that will be challenged for some period of time. But the other businesses over time should do fine as we rebuild our margins.

The only thing I would add, and I think Steve made an appropriate comment which is you have got to look at the longer-term margins at least on an annual basis for these. But the two things that can drive variability and margins in a quarter are usually marketing support. As Don noted even though margins are down slightly in the Lifestyle, a lot of that is because we are strongly supporting those brands. Again, pointing back to Burt's Bees having such a strong quarter to the holiday season, a lot of that was supported by us. And then on the Household segment which saw I think it was about a 600 basis point improvement in the quarter this year versus last year. That was driven by the highest cost savings in the Company among all of our segments.

So depending on the cost savings flow and the marketing support, those are the sort of activities that can drive differences in margins in a given quarter on the different segments. Other than that though, as Steve said, you really have to look longer-term.

One last one, I promise. Was there anything specific at cost? I know you don't want to talk about individual customers, but was there a fence or anything in the quarter that maybe drove the dislocation between the Nielsen data and the reported data you have?

No. No. The Costco fence activity every year it is in the mid-February to mid-March timing. So there was nothing pre-build or anything else from Costco there that would influence it.

Great. Thank you very much.

Lauren Lieberman, Barclays.

Good morning. Two quick things. One was following up. I think, Steve, when you were articulating the difference in expectations going into the quarter being higher end of the 2% to 4% range and that you ended up doing 5%. That that 1-point difference was due to both flu season and compaction. So should I interpret that as compaction going significantly better than expected? Or is it -- was that sort of a mis-statement?

Let me start into it. I would say that our bleach compaction we've converted two of the three regions that I think Don and Steve talked about. It is going very well. Retailer execution is going as expected.

It is too early to read the consumer, but at least the early indications are that everything is on track. So it certainly was positive on the quarter. It wasn't the largest driver in terms of what happened in the quarter, but I would say we are on track, maybe slightly ahead, but it is early days still.

So on track to slightly ahead.

But again it is very early. We are going to need more time as Don said to really start looking at consumer repeat and consumption, but --

Yes, I think one of the positives there that was a bit of a positive to the quarter on compaction was that we didn't lose any shelf space. We had probably thought we were going to lose a little bit and we didn't. So therefore you have got more units being packed out.

Makes perfect sense. And then, on International, you just heard this, talk about it a little bit and I understand that right now we are in a particularly difficult macroenvironment, but single-digit margins for that business and given that you are telling us it will take some time, just as an example, to get your SG&A from total Company perspective back down to below 14% after several years of investment, what is the reasonable timeframe for thinking about International margins getting back to something that maybe is significantly investable? Is it getting back into the teens and how long could it take to get there and is that even the right level to be thinking about?

: Yes, I don't want to comment on the specific margins. What I would say is the following. Number 1, we are obviously putting plans in place over the next couple of years to rebuild those margins back to what we think they ought to be. Some of that will be contingent on what happens around Venezuela and Argentina. Some of this we can control, some of it we can't. So we think it is going to take time. But I need to be completely transparent.

The second half of this fiscal year, going to continue to seek international margins challenged and probably certainly into the first half of next fiscal year. But again, we think there's a lot of opportunity through combination of cost savings, pricing over time, and just bringing new products to market that are margin accretive where you can set new price points. All of those things give us a reason to believe that we can rebuild the international margins.

But it is going to take some time. And I suspect calendar '13 is going to be a challenging period for International.

And I think one of the things that gives us confidence that other than the usual suspects that Steve just ticked off like innovation, that is margin accretive and cost savings is the SAP investment, we are now up and running in 12 countries. We had no glitches in doing that. I think you're going to see over the next 12, 24, 36 months a very different way of managing working capital, more accurate forecasting, ability to get non-performing SKUs out of the system. So you are going to see a bunch of improvements in the International processes going forward.

I think that is going to enable some real tangible benefits on the P&L. But it is going to take us a little -- it is going to take us some time to get it.

Thank you.

Javier Escalante, Consumer Edge Research.

Good morning. Question for you. On the -- you make a comment with regards to the IT R&D spending seems to be -- I kind of understood that it's ending this quarter. Is that correct? Or if not, what percentage of this $50 million to $55 million in spending for this year is already accrued in the first two quarters? And then I have a follow-up.

Let me start on your first question. So as we have said consistently we do anticipate spending about $50 million to $55 million for both the SAP implementation in Latin America as well as rebuilding our R&D and other facilities in Pleasanton, California. We are on track to complete both projects this fiscal year, more than half what we spent in the first half and has been spent in the first half, but there will be some continued investment into the second half of the fiscal.

So we are not done with the projects and we are going to continue to have some of that spending in the second half. Nonetheless, as we move through the quarters, the numbers will start to come down a bit and so it you'll start to see SG&A return to more normalized levels. But you should absolutely expect additional spending in the second half of this fiscal year for those projects.

Importantly, so when we get to fiscal '14, we should be anniversary and most of those calls but we will then continue to invest this $20 million to $30 million we have talked about for some time which is the ordinary level of investment that we make to support our cost savings pipeline that delivers this 150 basis points of margin expansion that we have done so well over the last decade.

And a follow-up. Thank you for the answer. And a follow-up on these how to see earnings trending going forward? You have neutral commodity environment for the first time in eight quarters. You took additional price increases in December and there seems to be another price increase coming due in March. You have these SG&A coming down. Shouldn't we see an acceleration in EPS growth starting this following quarter going heading into fiscal 2014?

All those things are true, but I would remind you of a couple of things about our second half. Number 1, as I said earlier, we are going to make incremental investments in advertising. Our advertising is expected to be about 9% of sales for the year and the second half. That is 0.5 point higher than you saw in the same period year ago. We are making an assumption that we fully expect the evaluation in Venezuela. Difficult to call the timing, but we have certainly put $0.05 to $0.10 of earnings associated with that aside.

And then finally the higher tax rate. So while the gross margins are continuing to grow, we feel good about the direction our business is moving in. Those are some challenges that we have in the second half, which is why the earnings per share growth is likely to be less than you saw in the first half where it was particularly strong in 10% growth.

Thank you very much.

Connie Maneaty, BMO Capital Markets.

I was hoping to get a little bit of your opinion on the role of gentle bleach in the Bleach portfolio. What is the price premium to the regular bleach and what have you seen in terms of consumer offtake in the markets where it has been introduced?

Well, I would say it is a little early to tell so far. I would say the price premium is in the 5% range versus 5% to 10% range. It depends on the retailer and what they are rolling through. But like gel bleach, it is small. It just kind of rounds out the portfolio for us. So we will see.

Like I said on the question before -- I could probably give you a better answer in May when we have a few more months under our belts and see what the consumer reaction has been. But solid performance so far on expectations, price premium in the 5% to 10% range depending on the retailer and we'll see how it plays out.

That's all I had. Thanks.

Chris Ferrara, Bank of America.

I guess trying to get around the granularity. On the long-term growth rate as you mentioned 3 to 5 is your rate and it sounds like categories obviously accelerated to plus 1.5. So I guess, are we there? Are we at the point now after a couple of years of pretty significant macro challenges where you can get back to that sustainable 3% to 5% range, do you think?

Yes. I believe so. Let me tell you if you look at the last 18 months and the proof is in the pudding, the last 18 months we have averaged 5% growth. Now there's some acquisition in there, it is probably closer to 4% organic growth, but feel pretty good about being in the last 18 months at the top end of that range. When we built that 3% to 5% algorithm, the assumptions that went into that were 1 to 2 points of category growth, 2 points of new product growth and then maybe 1 point of mix and/or pricing.

So if you look at that algorithm as we look at it today going forward, we are back to those historical category growth ranges of 1% to 2%. So check that off.

Our innovation platform is now generating about 3 points plus of growth, not 2. So we feel very good about the innovation pipeline. It looks solid for 2014 as well. So pricing and mix (technical difficulty) commodity environment stays benign, you won't see much pricing from us except in high inflation markets internationally if we can take pricing. But you will start to see, I think, some margin accretion from innovation that is focused on products that have higher margins than the Company average. So you add all that up, it gives us pretty good confidence that we are in the upper half of that range going forward. And that is what we certainly delivered the last 18 months.

That's helpful. And on SG&A getting back down below 14% of sales. I know that you are saying that that benefit gets offset or helps you offset inflation in other markets. Are we talking about inflation in Venezuela and Argentina or is there something else we are not picking up or is that just sort of a contingency you are thinking about?

I think it is inflation broadly defined in our international market. Certainly Venezuela and Argentina, those inflation rates are well above 20% in both of those markets. So that is the biggest piece of it. But we have got inflation in other international markets and even here in the US. You have got inflation on wages, benefit costs which continue to rise despite the recent legislation that was put through. So I think it is all of that.

All that said though, we are pretty confident that over the next couple of years we can get this back down to 14% or less. Not all of that will happen in fiscal 2014, but we think we can take a big step forward in 2014 and beyond and that should help us get to this EBIT margin expansion of 25 to 50 basis points that we have been talking about.

This concludes the question-and-answer session for today. Mr. Knauss, I would like to turn the program back to you.

Thanks, everyone, again for joining us on the call today and we certainly look forward to speaking to folks (technical difficulty) in Maine when we go through the third-quarter results. Take care, everyone. Thank you.

Everyone, that does conclude our conference call for today. Thank you all for your participation.