高樂氏 (CLX) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Clorox Company fourth quarter and 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. And 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 fourth 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're broadcasting this call over the Internet, and a replay of the call will be available for seven days at our Web site, 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, EBITDA margin, 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's prepared remarks, or supplemental information available in the financial results area of our website, as well as in our filings with the SEC. In particular, it may be helpful to refer to tables located at the end of today's earnings release.

Please recognize that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans. Please review our most recent 10-K filing with the SEC, and our other SEC filing for a description of important factors that could cause result 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. I will now turn to the highlights of our fourth quarter business performance by segment, and then hand it over to Steve to address our fourth quarter financial results and our outlook for fiscal year '14. Don will then close with his perspective on the business, followed by Q&A.

In our fiscal fourth quarter, volume was down 3%, and sales were about flat versus the year ago period, reflecting the factors we discussed with you on our last call, including unusually cold weather conditions that affected our charcoal business, as well as the impact of declining foreign currencies. We also saw heightened competitive activity, which I will talk about more in a moment. For the full year, volume was flat, although sales grew 3%, within the outlook we provided at the beginning of the year. For the second consecutive year, we are pleased to have delivered more than three points of incremental growth from innovation. Turning to our categories, in the fourth quarter we saw modest growth of 40 basis points in the US, with gains in laundry, following our concentrated bleach transition, as well as home care, water filtration, cat litter, and natural personal care. The only material declines were in the bags and wraps category, and that was solely in the nonstrategic food storage segment, as well as the charcoal category, which was impacted by poor weather well into the quarter.

In Q4, our multi-outlet market share results in the US were essentially flat, reflecting a decline of 10 basis points with mixed performance across our categories. Glad's share was up strongly for the fourth consecutive quarter behind our premium Odor Shield offering. Burt's Bees in the natural personal care category was also up nicely, as was charcoal, which rebounded in recent weeks with improving weather. Overall results were impacted most strongly by a share decline in our laundry additives category, driven by increased private label support for bleach at key retailers, as well as heightened competitive activity in our cleaning business. I will talk more about our plans to address market shares in a moment. With that, let me turn to our fourth quarter segment results. In the fourth quarter, our cleaning segment volume declined 4%, with sales down 1%, driven solely by declines in our home care business, due to competitive activity in disinfecting wipes and toilet bowl cleaners.

After achieving a near record high market share on wipes earlier in the year, we're seeing competition aggressively step-up spending. Despite a challenging fourth quarter, the home care business did deliver strong results for the full year, including record shipments of Clorox disinfecting wipes during the height of the flu season. Looking ahead, we have strong plans in place to address our recent decline, and emphasis on expanding wipes usage to new occasions, increasing our merchandising support, as we lap last year's flu season, and launching new products in fiscal '14. Volume on our laundry business was flat, and sales were up modestly as we lapped last year's Phase I rollout of concentrated bleach, and continue to see high levels of merchandising activity on private label bleach. Looking back over the year, we feel good about the progress made on our bleach business, achieving the highest level of sales growth in 40 years, excuse me, in 20 years, and significant gross margin improvement as we benefit from the cost savings related to our concentrated bleach conversion. While our market shares have been challenged, we expect these declines to moderate over time behind increased demand building spending, and recent assortment gains on shelf.

Lastly, our professional products business again delivered very strong growth, with broad-based gains in food, cleaning, and base health care. In our household segment, Q4 volume was down 1%, while sales grew 2%, with growth in Glad and cat litter more than offset by a decline in charcoal. As we discussed on the last quarter's call, the impact of the very poor weather drove soft consumption on our charcoal business through the early part of the fourth quarter. As anticipated, market share has rebounded into positive territory for the quarter, and were even stronger in the last four weeks. Our Glad business delivered another strong quarter, with gains in volume, sales, and market share, driven by our premium trash bag business, as our trade-up strategy continued to yield positive results. Our lifestyle segment saw flat volume, with sales growth of 2%.

Our food business had another strong quarter with growth in Hidden Valley Salad Dressing, as well as from the launch of pasta salad kits. Despite double digit retail consumption, Burt's Bees sales were up only slightly, due to a comparison against double digit growth in the year-ago quarter when we began shipping several new products. Burt's Bees is off to a strong start in fiscal year '14, due to carry-over from the recent lip color product launches, good consumption on the face line, and strong demand creation focused on the base business. Brita faced another challenging quarter as we lapped the pipeline build from last year's Brita bottle launch, and continued to see competitive activity. We remain focused on bringing innovation to the water filtration category. In July, we launched a new kid's bottles with Nickelodeon characters in advance of the back-to-school season, and have additional innovation launching later this calendar year.

In our international section, volume declined 6%, with sales down 1%. As has been the case for several quarters, the roughly one-third of our business comprising developed markets continued to provide economic stability to the portfolio. The approximate one-third of our business composed of Argentina and Venezuela continued to face economic headwinds that we have seen throughout the year, particularly margin compression reflecting very high inflation and the inability to take price increases due to price controls, coupled with declining currencies. And the remaining third of the business, which is mostly in developing markets, continued to perform very well, as we focus on driving profitable growth with the Burt's Bees expansion, as well as in our established businesses in key countries, such as Chile, Peru, Mexico, and others. In these markets, our categories continued to grow at double digit rates on a local currency basis.

Looking forward, stabilizing Venezuela and Argentina remains a priority, while we drive growth and innovation across the balance of the business. As we close the year, we feel good about the strong growth in professional products, Glad, food, and Burt's Bees, as well as the very successful transition to concentrated bleach. That said, we are disappointed with the results in our charcoal business, driven by the unusually cold weather, the unfavorable effect from foreign currencies, as well as some of the market share decline seen from recent competitive activity. Looking ahead, we continue to anticipate sales growth for fiscal year '14 in the range of 2% to 4%, with the first half of the year at the lower end, if not below that range, due to the competitive activity I've discussed, foreign currency head winds, and challenges in Venezuela and Argentina. We anticipate stronger top line performance in the second half, as our plans to address the competitive environment take hold and we benefit from innovation. With that, I will turn it over to Steve Robb.

Thanks, Steve. And welcome, everyone. I will start by reviewing our fourth quarter and fiscal year financial results, and then discuss our outlook for fiscal '14. In our fourth quarter, sales were flat, reflecting 3 points of pricing benefit, offset by 3 points in volume decline. Our sales results were also impacted by about a point of foreign currency, offset by favorable mix and lower trade spending. Excluding the impact of foreign currencies, sales grew 1.3%. Turning to gross margin, we're very pleased with the strong finish to the year, with an increase of 130 basis points to 44% of sales, compared with 42.7% in the year-ago quarter. The biggest factors contributing to gross margin improvement were cost savings of 150 basis points and about 120 basis points from pricing. These factors were partially offset by higher manufacturing and logistic strength, which reflect continued high inflation in Latin America. As expected, commodity costs were about flat year-over-year.

For the fourth quarter, we delivered diluted net earnings per share from continuing operations of $1.38, a 5% increase versus the year ago quarter. Next I will turn to our results for the full fiscal year. Sales were up a solid 3% in fiscal '13, with gains in all four segments, reflecting the benefit of price increases, moderated by the weather's impact on our charcoal business in the second half of the fiscal year, declining foreign currencies, and challenging market conditions in Argentina and Venezuela. Fiscal '13 gross margin was up 80 basis points to 42.9%, compared with 42.1% in fiscal '12, reflecting 160 basis points in cost savings and 120 basis points in pricing. We're proud of the track record for delivering cost savings, and fiscal '13 marks more than 10 consecutive years we've delivered at least 150 basis points of margin improvement from our cost savings programs. These factors were partially offset by the impact of higher manufacturing and logistics costs, due to high inflation and price controls in Venezuela, and Argentina.

Selling and administrative expense for the full fiscal year was 14.4% of sales, down slightly versus fiscal '12, primarily driven by lapping nearly $12 million in advisory fee related to the withdrawn proxy contest last year, and reduced costs associated with prior infrastructure-related investments. These benefits were partially offset by higher wages and employee benefits, largely due to inflation, as well as investments in systems and processes to support the long-term growth of the Burt's Bees business. Advertising spending for the full fiscal year was about 9% of sales, a modest increase versus the year-ago period. Importantly, our US retail spending was nearly 10% of sales, a 5.5% increase versus year ago, reflecting continued support for our domestic brands and categories. Advertising spending in our international business was lower, as we reduced investments in markets with challenging economic environments and reallocated the funds to our US business.

Our effective tax rate of 32.7% on earnings from continuing operations was up over a point versus fiscal '12, reducing diluted earnings per share by about $0.09. Free cash flow for the full fiscal year increased to $583 million, or about 10% of sales, versus $428 million, or about 8% of sales in fiscal '12. This increase was the result of favorable changes in working capital, the prior year settlement of interest rate foreign contracts, and higher earnings. In fiscal '14 we anticipate free cash flow as a percentage of sales to be about 10%. As a reminder, we define free cash flow as cash provided by continuing operations less capital expenditures. In the fourth quarter, we sold our former R&D facility in Pleasanton, California. That transaction, combined with the second quarter sale of our general office building in Oakland, California, resulted in net sales proceeds of $135 million for the full fiscal year. Consistent with our commitment to return excess cash to our shareholders, we increased our dividend by 11%, and resumed share repurchases in the fourth quarter, purchasing 1.5 million shares for $128 million.

We ended the quarter with a debt to EBITDA ratio of 2.1, at the low end of our targeted range of 2 to 2.5. Out of all of the factors I've discussed today, in fiscal '13 we delivered diluted net earnings per share from continuing operations of $4.31, an increase of 5% versus fiscal '12. Now I will turn to our fiscal year 2014 outlook. As Steve mentioned, we anticipate sales growth in the range of 2% to 4%, with the first half of the year at the lower end, and possibly below that range. Contributing factors include a challenging comparison to about 5.5% sales growth in the first half of fiscal '13, heightened competitive pressure on laundry additives and disinfecting wipes, and about a point of impact from foreign currency declines. As you saw from our press release, the recent strengthening of the US dollar is putting more pressure on sales than we had previously anticipated. If exchange rates remain elevated, our full year sales and earnings results will be negatively impacted.

For the full fiscal year, we continue to anticipate gross margin to be about flat, reflecting cost savings of 150 basis points and the benefit of price increases, offset by about a point from inflation impacting manufacturing and logistics costs, and about a point from commodity cost increases. We anticipate significant downward pressure on gross margin in the first half of the fiscal year, due to the challenges in Venezuela and Argentina, and the impact of elevated commodity costs, mostly from resin. However, we anticipate improvement in the second half of the year, driven by some pricing benefit in international and moderating commodity costs. We're closely monitoring oil prices, since they've rallied significantly over the last month, and remain above our outlook for $90 to $100 per barrel, which in the near term are driving some commodity costs above our forecast. If energy costs remain elevated, our margins will be pressured, and we will have to take a hard look at pricing.

We continue to anticipate EBIT margin to increase between 25 and 50 basis points, reflecting lower selling and administrative expenses as a percentage of sales, consistent with our long-term goal of reducing this item to 14% or less of sales. Due to the timing of spending, we expect expenses to be higher in the first half of the fiscal year. We also anticipate a higher effective tax rate of 34% to 35% in the next fiscal year. The Company's outlook continues to reflect $0.05 to $0.10 of diluted earnings per share impact, mostly affecting the first half of the fiscal year, related to the anticipated effects of continued price controls and high inflation in both Argentina and Venezuela, as well as the carry-over impact from the devaluation of the bolivar in February. As a reminder, we are not assuming any additional Venezuela currency devaluation in our fiscal '14 outlook at this time.

Out of all of these factors, we anticipate diluted earnings per share to be in the range of $4.55 and $4.70 in fiscal '14. In closing, I'm pleased we delivered solid results in fiscal '13. Our team's hard work to deliver strong cost savings and margin improvement has certainly paid off. I'm also very pleased that we met or beat our financial targets compared to our fiscal '13 outlook we provided a year ago, including 3% sales growth against our range of 2% to 4%, 60 basis points of EBIT margin improvement versus our target of 25 to 50 basis points, and $4.31 of diluted earnings per share versus our range of $4.20 to $4.35. Moving forward, we will continue to be very prudent on managing through the macroeconomic challenges we continue to face, as well as the recent changes in the economy impacting both foreign currencies and commodity costs. And with that, I will turn it over to Don.

Okay. Thanks, Steve. And hello everyone on the call. And while I feel good about our results overall for the year, I am sure we all would have liked to have had concluded with stronger sales in the fourth quarter, and we will talk more about that as our plans for the fiscal year '14. But there are many parts of the portfolio that performed well in the fourth quarter. Notably, our premium brands such as Glad, Hidden Valley, and Burt's Bees, as certainly as well as our professional products business, which had strong double digit growth again. Now at the same time, our recent top line results were dampened by an increasing intense competitor environment that Steve mentioned, particularly in our cleaning segment. But I would say we've got strong plans in place to address the heightened competitive environment where it is affecting our business. And while it will take some time to turn those shares around, I'm very enthusiastic about the demand building plans we have, including the innovation we recently launched and we have teed up for fiscal '14, with another round of innovation coming in January of '14.

So as Steve discussed, we're also facing commodity costs and currency headwinds as we enter fiscal '14. We've seen a run-up in resin cost, which impact us across the business. We continue to anticipate meaningful currency declines in Argentina, and the US dollar has certainly strengthened across many geographies. So we're closely monitoring both. Looking at the full year, which is our focus, I really do feel good about the accomplishments that Steve just mentioned, but we did deliver that solid sales growth of 3%. We had gross margin expansions of 80 basis points, and we slightly reduced SG&A costs as a percent of sales, resulting in 8% pre-tax profit growth and economic profit of $426 million, and that was an increase of 6% versus last year. And we said many times that we manage our business on an annual basis, recognizing that we're going to get some variability in quarters. But looking at '14 -- or looking at fiscal '13, for example, we had about 5.5% sales growth in the first half, and less than 1% growth in the second half.

We're in one of those periods now that we encounter on occasion where the going is a little tough, and it is going to continue for the next couple of quarters. But I certainly feel confident that the strength of our brands, the heightened investment we're putting behind them in fiscal '14, and the continued innovation you will see in nearly every part of our business will return stronger results, certainly by the second half of this year, enabling us to deliver solid results for the entire year. Now, just stepping back for a moment from the year, we also take a longer view over the horizon of our strategic plans. Our Centennial Strategy successfully guided us through the most challenging economic period we've all witnessed since World War II. If you look at the five-year period of Centennial, and this is when it was firmly embedded in our plans, this would be from July 1, 2008 through June 30 of this year, we consistently grew sales and economic profit, delivering a 3% compounded annual growth rate for sales and a 6% compounded annual growth rate for economic profit.

I think as you all know, we also generated strong cash flow that enabled us to significantly increase our annual dividend rate from $1.60 to $2.56. With our recent 11% increase to our dividend in May, that marks the 36th consecutive year we have increased total annual dividends paid to our stockholders. Most importantly, between the share price gains, share repurchases, and increase in total annual dividends paid to our stockholders, we delivered total shareholder returns of 88% in that five-year period, compared to an average of 82% for our peer group, and about 40% for the S&P 500. So looking ahead to the 2020 strategy, I really do believe we have strong plans that build on our success from Centennial, and we all look forward to reviewing that with you at our Analyst Day here in California on October 3. For those of you who can attend, you will have an opportunity also to tour our state-of-the-art Innovation Center. This is the new investment we made over the last year, and you can see how we're really bringing new product ideas and packaging ideas to life. And if you haven't made plans yet to attend, please do so soon. Steve and the IR team can answer any questions you may have about that. And with that, let's go ahead and open it up for questions.

Thank you, Mr. Knauss.

(Operator Instructions.)

At this time we will take a question from Ian Gordon with S&P Capital. Please go ahead.

Hi there. So you commented, I think in the release that advertising as a percent of sales in the US was 9% in the quarter. I thunk your longer term targets are 9% to 10%. And I know a lot of the overall lower level in the past year has to do with some of the pull-backs overseas, but this maybe seems like the first time the US is coming in a little bit low. Can you perhaps shed some light on that? And do you think maybe that has any of the impact on your sales in those categories where you were facing a lot of competition?

Yes, Ian. This is Don. The actual spending was 9.2% for the US retail business. It was a little below 9% if you include the PPD, which is our business that is going into, basically into hospitals. So if you exclude that where you don't have typical advertising, it was actually at 9.2%, and that compares to 8.8% a year ago. So it was actually up. And if you look at the full year, it was in the high 9%s. So I feel pretty good about both the quarter being up and the full year being up. And if you look at the brands where we typically face-off with private label, for example, Glad, trash, charcoal, and bleach, two of those brands in the last 13 weeks have gained pretty significant share. Glad gained 0.8 of a share point and charcoal's gained 0.8 of a share point. Clearly, we have some challenges on bleach which we will be addressing, but think -- I don't think it's a function of the advertising spend at all, because, as I said, both in the quarter and in the full year we're up.

Great. Thanks.

Looking forward, we will hear from Bill Schmitz with Deutsche Bank.

Hi, guys. Good morning.

Good morning, Bill.

Hey, what are your category growth assumptions, maybe I missed it, for next year, to going to get to the 2% to 4%?

Yes, Bill. This is Steve. Category growth assumption has not changed from the last time we discussed this on our last call. Basically, we're assuming categories are flat to up about 0.5 to 1 point, so somewhere in that range. We do expect category growth is going to be sluggish. Importantly, we are counting on 3 points of incremental sales growth from innovation, and feel very good about that. And again, embedded in the outlook is also about a point of foreign exchange headwinds, and again, as you saw in the press release and as I mentioned, that is something we're also monitoring carefully.

The 3 points from innovation, can you just talk a little bit more about what you have out there in the trade already that is going to drive that 3 points?

If you look at, for example, let's just take the innovation that is gone out the last few months, Bill. If you look at the spray cleaners, like the new tubeless technology on spray cleaners. There has been a number of new color additions on the Burt's Bees line, new fragrances on the bleach line, new fragrances on the Glad Odor Shield line, the new lavender there. The new hard-sided Brita bottles, and then the Nickelodeon bottles for kids on the Brita on-the-go bottles. So it is pretty widely spread across every major brand we have. And you will see another round of innovation as we come into January of this year. Bleach, for example, we had two new SKUs that just started shipping in June. That would be, these were on the king sizes. That was a new splashless and another fragrance on king size. So we got incremental shelf space on those. So it is pretty broadly across the full range of the major brands.

Okay. And why do you think the category growth is still sluggish? Because like there are certain signs of green shoots in the economy, and some categories are accelerating and others are still flat. So what's the best way to explain that?

I think it is more about competitive intensity than it is about any particular drama with the consumer. Our categories, when you think about it, are really in this fairly tight band of up two or down two, and when I look at the competitive intensity in the last 13 weeks, you've got a number of multinational brand players who are refocusing on the US market. And we're seeing increased trade spending, which is lowering pricing and taking dollars out of the category, and I think that's -- it is really more of a phenomenon of the competitive intensity that we're seeing, rather than it is the consumer shifting their buying habits, because if you look at our shares, for example, the last 52 weeks, we've lost less than 1% of our share, and private label has gained about 1%, up a couple of tenths. So there is not any real dramatic movements in share. So I think it is more about the competitive intensity taking dollars out.

Right. Thanks. And one last one, what is the fix on bleach? The product is great, obviously. Private label has been pretty aggressive. You said you had some plans in place, I was just curious what they are.

It is interesting on the category, this is the strongest category growth rates we've seen probably in over 20 years on bleach, 8.5% category growth, in the last 13 weeks, 7% category growth in the last 52 weeks. There are two things we're focused on, Bill. One is merchandising. We've got to get back into a more national cadence on merchandising. Because of the staggered role we did, which we just completed in March, recall we started that roll in August of '12 and we completed it in March of '13, we couldn't do national merchandising events with a number of national footprint and customers. We're starting to get back into that. So that is one. The second, we're also going to increase the number of events we have this year. So you will see at least a 10% increase in merchandising events. The other thing you will see is more innovation. On large sizes, more fragrances, different formats like splashless, and we're focused on getting increased shelf space with those new items.

Great. Thanks very much.

This time we will take a question from Joe Lackey with Wells Fargo Securities.

Hi there. Just hoping you might be able to pare through some of the reasons for the top line weakness in the quarter, and more so like why you guys didn't really see it coming from a few months ago? And maybe if you could, along those lines, kind of quantify the impact versus your expectations, way between home care, charcoal, and international, those three buckets.

Well, let me start off, and then I think Don and Steve can weigh in. I think going into the quarter, the one thing that we did anticipate and we did communicate was the fact that the weather was particularly bad, and that was impacting our charcoal business. You might recall that we had indicated that April weather wasn't particularly good, and that certainly carried into May. So that was not a surprise to us. And it was for that reason that we actually indicated that our sales outlook of 3% to 4% was likely to be at the low end of the range. Now, I think the other thing that we saw in the quarter was that the merchandising and competitive intensity, primarily on the disinfecting wipes business, it really ramped up significantly. And if I was to point to one thing that was different, that would be the item. I think importantly is, as Steve said in his opening comment, the charcoal, as the weather has begun to improve, we've really seen that business bounce back nicely, and we're putting plans in place to vigorously defend the shares of our disinfecting wipes business, and so we feel good that we're taking the right steps there. And while it is going to take a couple of quarters, we're certainly taking actions to defend that business as well. Those are probably the two things that I would point you to.

And then I guess a follow-up, I guess on the cleaning segment where are you seeing a lot of promotion on the wipes business. I mean, obviously that offset a number of the positives that you had with the bleach sell-in and professional products. I mean, was there anything else in there driving weakness? Was that all wipes? And I guess that would lead me to believe that there was a pretty serious deterioration in the level of sales for wipes. And if it is all driven by essentially competitive promotion, does that mean that essentially price and promotions are the primary consumer consideration in the wipes category? It is really not based upon branding at all?

Well, I would say that, recall that, because I don't want one quarter to paint a picture on wipes, that this has been an extremely successful franchise for the Company. I mean, we reached a 60 share last September. And I think we're still -- while we're not happy with the fact that we've have lost significant share down into the 50 range in the last 3 months, we think those shares will start to improve in the second half with some innovation. But there was very aggressive pricing in a couple of major retailers. And given the size of the business, it is not a $2 billion or a $1 billion brand, it is a several hundred million dollars brand, you can get movement like that on shares pretty dramatically.

So I think you are going to see from us a couple of things, Joe. One is, you are going to see more innovation in the second half of the year. You are also going to see us drive at least five pulse periods on wipes, where last year we had about three pulse periods. We are going to amp up the merchandising. We are going to defend this business, just like we have done in the past. And one of the learnings we got after H1N1, we were all concerned, remember four years ago, about lapping that spike from H1N1, we are getting back into the same kind of merchandising cadence we did the following year there where we protected that business. So I wouldn't want one quarter of fairly dramatic share erosion to paint a picture that this business is in a steady decline, because it is not. We got caught, and sometimes it is not bad to get punched. It wakes you up, and we're wide awake right now.

Okay. Thanks.

We will go to Michael Steib with Credit Suisse.

Hi, can I ask two questions, please? One is going back to the question on pricing. I was wondering what level of pricing is implied, really, in your 2% to 4% sales growth outlook for next year, and how could that change if the oil price indeed does stay where it is now? I think you indicated that you'd review the pricing strategy if that was the case. And then secondly, why are the margins in the lifestyle segment down? It is the only segment, the domestic segment, where it is down. I was just wondering if you could explain why that is the case.

Yes. So starting with pricing, in our outlook of 2% to 4%, we do have some pricing built in. Some of it is a carryover of the pricing increases we took in fiscal '13. And we have incremental pricing, primarily in the second half, that has been assumed in international markets where you're dealing with very high rates of inflation. So I would say we have a modest level of pricing. And if energy costs remain elevated for an extended period of time, we will have to take a hard look and that and figure what is the right level of pricing. But at this point, we will see less pricing in '14 than '13, but we are monitoring the energy markets and the impact that that's going to have on our feed stocks over time.

In terms of the margins in lifestyle, we are make some increment investments in our Burt's Bees business in particular. One is to support the growth of the business. That business has been on fire. It has been growing double digits for quite some time. And one of the things that has happened is we have actually outgrown our systems platform that we have in the business. So we are in the process of basically transitioning them from their current systems platform over to the US SAP platform that we have, and we are making some incremental investments to do that, and you're seeing that come through in their profitability. That will continue into the first couple quarters of this fiscal '14. But it should generate not only better growth over time, but also some additional cost savings for us.

Thank you.

At this time, we will take a question from Ali Dibadj with Bernstein.

Hey, guys. So a few things. One is the 3% incremental for next year expected from innovation. We get that number often. How much of that, if you could is price, incremental price versus incremental volume? Just on that piece? Because obviously if you take a away from the 2% to 4% growth number, you're talking about flattish underlying growth, and I would hope that gets a little bit better, particularly around the bleach compaction that should be increasing that category growth rate like you've seen so far.

Ali, the 3% growth number that we have been talking about, and actually delivering and oftentimes beating, that is the incremental sales on a year-over-year basis, net of cannibalization. So it does not include pricing either up or down. It is really just the incremental lift that we're getting from the new products, again net of cannibalization.

But sales have -- sales have two components, right, price and volume. If it is net of cannibalization, what is incremental? So Pure share gain? Is that another way to think about it? Volume share gain? Or is there price because it is innovation and you're taking prices on that innovation? You know what I'm getting at?

I would say generally it is incremental volume that we're picking up. But again, if you bring new products to market that are at higher price points, if you're trading the consumer up to premium products, you will certainly have that in there. Does that answer your question?

Sort of, I guess. Let me shift a little bit to the competitive situation, which you mentioned a couple of times, both in the release and in this call. And trying to get an understanding a little bit more about that. So if it is in particular set of categories, home care wipes in particular you've talked about, and if it is extra trade spend, why does it take six months to respond?

I don't think it takes six months to respond. The response is almost immediate. You will see response in this quarter, starting in July. You will see response, Ali. It doesn't take six months. What does take six months is just I'm talking about the cadence on our innovation, which is a July/January cadence. So what I'm speaking of is the merchandising response begins immediately. Those five pulse periods I talked about, for example, are spread across the year, including starting this fall. The next wave of innovation is in January. So that is what I'm speaking about.

Okay. That's very helpful. Thank you. And then my last question is, you make note of your 2.1 debt to EBITDA, which is the low end of your 2 to 2.5. Can you talk about that in the context of what you do that with that extra flexibility? So M&A has been something you've done in the away from home category, some smaller ones here and there, sauces, et cetera. Can you tell us how you think about M&A, given that flexibility, versus buybacks as another example.

Sure, our uses of cash remain essentially unchanged. Number one priority is to support the organic growth of all of the things that we've talked this morning, but also bolt-on acquisitions. If we've got opportunities, particularly in the professional product space, but even in US consumer package goods, if there is attractive businesses that offer good growth and margins, we will certainly look at that, and we've got enough dry powder to be able to do bolt-on acquisitions. So that is probably the highest priority. Second priority has been to support the dividend. We know that is important to a lot of our investors. And in the fourth quarter, you saw a fairly nice increase there of 11% on the dividend. And finally, I would say we are going to look at share buybacks over time. We did it, re-enter the market, as I mentioned in my opening comments, to pick up about 1.5 million shares. We've been out of the market for a while as we focused on paying down debt. I think you will see us certainly come back into the market to offset stock option dilution and soak up the incremental shares that have been out there for a bit of time. Beyond that, if we start to build up cash and we don't have a need for it, in partnership with the Board as we always do, we will look for ways to get that back to the shareholders, either in share repurchases or dividends over time.

And on your second priority, how far off the 2, 2.5 or even higher would you be willing to go in this current environment for M&A?

I would say that 2 to 2.5 is the right long-term number for the Company. That doesn't mean it couldn't actually go a little below that over time, if you're building up some dry powder for transactions. If we had a really attractive transaction, again that met our criteria, we would be willing to float a little above the 2.5 for a short period of time, but I think if we did that, what you would see is that we would work to get that paid back down. We recognize that interest rates are fairly low right now, obviously. But I think it is also important that we keep the leverage ratios in check for the long term as well.

Thanks very much, guys.

Thanks, Ali.

At this time we will go to Javier Escalante with Consumer Edge Research.

Good morning over there. Thank you for taking the call. I'm sorry for coming back to the wipes stuff, but looking at the data that we get from our channels, what we see is that the share losses are to private label, and essentially your wipes are at 25% premium to private label. So I guess the question is, what change in private label? Is it that there is new capacity there for private label that it wasn't before? And to what extent that is a structural change in the industry that may force you to (multiple speakers)

Yes, let me start there on wipes. First of all, just for some background, regardless of the fourth quarter where we obviously saw the decline, wipes have a strong year mid-single digit growth rate in volume. So it was still a really good year on wipes. But -- and the price gaps versus private label, on a day-to-day basis really haven't changed. I mean, we haven't taken pricing on wipes in over 10 years. So it is not a question, really, of everyday pricing. It is a question of merchandising support, add feature activity, and shelf positioning, where private label is on the shelf, vis-a-vis our offering. And this is concentrated in a few key customers. So it is not an everyday price issue. It is more that merchandising phenomenon I talked about, and that is why it is so important for us to increase the pulse periods we are going to drive against.

I thank you for the clarification, but the data also shows that you had been increasing volume from -- I mean, under merchandising. So it seems to me that probably there could have been something on the private label side in terms of a new co-packer out there. Is something in that regard that you know of that may have triggered the accumulation of buildup of market share in the last six months?

No structural change that we've seen in the category, other than the increase in merchandising support, some changes in packaging graphics, and -- which -- and some changes in shelf positioning, items being moved to eye level, that may have been on the top or the bottom of the shelf in some retailers. But no other structural change in terms of capacity in the category, or a new entrant.

I guess just for clarifying, and then this is my last question, is it -- do you produce wipes internally, or you do it with a co-packer?

We use a mix of sources for that. But we use a co-packer primarily to produce a lot of the volume and have long term arrangements put in place.

So that co-packer could be producing the same thing for private labels, right?

You know, I don't want to comment on

I don't know we want to get into that for competitive reasons, but I would just say there are different formulations. Our substrate, which we think is superior in cleaning and that's what the consumer tells us in blind testing, we have a different substrate than what you would see in private label. We also have different chemistry on the disinfectant formulas. So in terms of cleaning and disinfectant efficacy, we win. We have superior offerings in both those dimensions. So we feel very good about the offering. So again, once we get into this more aggressive merchandising support, which we will amp it up and get back to some innovation in January which will get us some more shelf space, we feel like we've got the right plans in place.

Thank you very much. Very helpful.

Thanks, Javier.

Moving forward, you will hear from Olivia Tong with Bank of America.

Thank you. I want to talk about price versus volume. Was the makeup of contribution from price, was that in line with what you expected? And can you sort of parse out how much was, in price mix, how much was price versus mix?

Are you talking about gross margin to clarify?

No, on the top line.

On the top line? So we picked up about, in the quarter, fourth quarter, we picked up about 3 points from pricing, and we picked up a little bit from mix, offset as Steve mentioned in his comments, by about 3 points of volume decline.

Right, but I'm trying to understand how much -- was that pricing in line with what you had expected, and then also --

Yes, I would say pretty much in line, Olivia, with what we expected. If you want to look at trying to understand the relative impact of volume versus price, it was more impact from volume than it was price. And volume and mix were pretty strong.

Correct.

And that's what not only drove the top line, it drove the gross margin expansion.

Got it. And then on compacted bleach, just this is a more philosophical question but has there been any change to purchasing patterns, other than obviously consumers seem to purchase half as much as they used to? Are there any difference in terms of acceptance on compaction, or is there anything in terms of one region versus another?

We're not seeing much change in region, although we did see more trade-up to king size in the middle part of the country. But there are a couple of things that are interesting that is going on, and I think that are certainly driving the category into these mid-high single digits. One is, we're seeing proper dosing now. In fact, we may see some overdosing, and that was certainly the phenomenon years ago when laundry detergent first compacted. So people can get the proper dose now. We're also seeing less out-of-stocks because we've got about 24% more units on the shelf in the category. So less out-of-stocks is obviously driving the volume as well. And I think the third thing we're seeing is we are seeing a change with the Bleachable Moments campaign of millennials coming into the category. So we are seeing a mid-high single digit increase in people under the age 35 coming into the category. And most of that, a lot of that is not just for laundry use. It Is for disinfecting and cleaning around the house, which leads to higher volume, typically. Cleaning drives higher usage volume than laundry does.

Got it. Thank you.

And at this time we will move to Lauren Lieberman with Barclay's.

Thanks. Good morning.

Good morning.

I know you guys have gotten questioned many times in the past about the difference between Nielsen numbers and then what you report, but I was just curious this time around if your perception of retail inventories, particularly in some of the categories where sales fell short of expectations.

Lauren, this is Steve. We look at this pretty closely at the end of every quarter. And this quarter there didn't appear to be any major variants or difference in retail inventories. I would say early part of the quarter we might have been a little concerned on charcoal, just because the sales had been down due the to weather, but it picked up strongly toward the latter part, and we were fine in that category as well.

Okay. Great. And then, I think it was in the press release and then also the commentary, the two businesses mentioned that have been discussed so far were Clorox 2 and toilet bowl cleaners as areas as of, kind of again increased activity and some challenges. Just anything you could offer there would be great.

On Clorox 2, Lauren, I think it is a continuing relevancy question. I think we've got a repositioning on that brand more as a stain fighter. We've been focused on that the last few months. We will continue to drive that. There is some new innovation coming there in January, as well. On toilet bowl cleaner, more of a merchandising uptick by competitors than anything else. We saw the same phenomenon on spray cleaners with some innovation on spray cleaners from some of the multinational competitors, and a focus on driving merchandising against that innovation. So both from -- there were several multinationals that came out with spray cleaning innovation, and then obviously supported that with some heavier merchandising.

Okay. And on Clorox 2, is there any work that you guys have done or plans you can talk about, similar to Bleachable Moments for regular bleach, right, to try to get at this usage and relevancy issue, because I feel it has been a couple of times of try to answer this challenge with product. Maybe it is a merchandising and positioning question.

We do think, given that our testing on the product efficacy against most stains is superior to our competition. We haven't done, to your point, Lauren, a very good job of communicating that from a positioning and marketing standpoint. So that's really the focus going forward is, to your point, understanding how to better position the efficacy we have in this product.

Great. Thank you.

Thanks.

At this time we will take a question from Connie Maneaty with BMO Capital Markets.

You said or alluded to in your prepared remarks that if foreign exchange and raw materials stayed at elevated levels, it could have an impact. So could you quantify if they do stay at these rates what sort of margin compression or EPS risk you think there is?

I'm not going to give you a specific number. I would say this. Let me take each one in turn, starting with foreign currency. What we have embedded in the outlook, as saw from our press release and our comments, was about 1 point of foreign exchange headwinds. I think the risk is if the spot rates stay at today's level. And I would just remind everybody that foreign exchange markets are incredibly volatile. So this can change pretty quickly, one direction or the other. It will have downward pressure, but I think it is premature to speculate as to what that would be. We're one month into a fiscal year. We got a lot of time left. Commodity costs, certainly we're going to see a little bit more pressure in the first quarter than we may have originally anticipated. We have built into our outlook 1 point of gross margin compression from commodity cost increases. What I would say is that in order for us to say greater than that, you would have to see oil remain elevated for an extended period of time, and if that was to happen, then it will put more downward pressure on the margins, and it's something we're watching carefully, but then we would respond over by taking pricing to recover it. But beyond that we need to get farther into the year to really see how this is going to affect both sales and earnings, if at all.

Okay. Thanks.

At this time we will go to Jason English with Goldman Sachs.

Good afternoon, folks.

Hello.

A quick question. You ran through a number of headwinds in the first half. Lower sales growth, lower gross margins, higher expenses. Should we expect any earnings growth in the first half of the year?

I would say earnings growth -- earnings are going to be challenged in the first half, and earnings could potentially actually be down. This is something we're watching closely. And I think what we're going to have to see is what really happens with both foreign exchange, as well as commodity costs, and how that plus competition plays out in the first half. But I think it is fair to say that earnings growth will be much better in the second half. And at this point we do have plans in place to get to the outlook range that we've shared. It will be much more challenged in the first half than the second half.

Is it fair to say that the second half acceleration is contingent upon the success of this competitive response that you're mounting?

That is certainly one piece of it. But we also think that when you look at sales, we've got strong innovation that Don talked about. We've got the plans that we're putting in place to vigorously defend our shares that should get traction as we move through the year. And we even have comps that are a bit softer when you're looking at in the second half, year-over-year. So for a lot of reasons we think certainly the sales growth is going to be much better in the second half than the first half. Same thing with margins. We're expecting much better margins in the second half than the first half.

Jason, I don't want to overplay the competitive response. If you look at the challenges we've had on wipes and bleach, for example, wipes in the last quarter and bleach for the last 9 to 12 months, those two represent about 12% to 15% of our overall business. And if you throw in the entire home care side, including spray cleaners, you're talking about a fifth of our business. So when you see -- we've seen strong growth on Glad, strong growth on litter in the recent couple of quarters, charcoal coming back, food still strong, Burt's still strong, PPD very strong. I don't want to overplay the competitive intensity, but it is going to be a challenge, certainly in the first half of the year, and obviously we're comping 5.5% growth as well. But I wouldn't want to paint the picture that the competitive intensity is dialing up and hurting 50%, 60%, 70% of our portfolio, because it is just not accurate.

Thanks. That is helpful. I want to come back real quick, just to get comfort on this back-half acceleration. Is there anything unique about the shape of inflation throughout the year, or the shape of your productivity curve?

Well, in terms of gross margins, as we look at commodity costs, we do think that, again, we've got about 1 point of margin compression from higher commodity costs. It is likely based on what we know, it will be likely be a bit more in the first half and a bit less in the second half. Our outlook is for oil to be in this range of $90 to $100. The other thing I just would point out to, you think of the margins, first half, second half and inflation. Tremendous challenges in Argentina and Venezuela in the first half. The combination of price controls and inflation is really putting a drag on the gross margin in the first half. We do anticipate that the second half is going to be a bit better. And that we are likely to be able to get some pricing through in the second half, and that should, again, take some of the pressure off the margin as well.

Thanks, guys. Very helpful. Passing on.

Thanks, Jason.

This concludes the question-and-answer session. Mr. Knauss, I would like to turn the call back over to you.

Okay. Well, we appreciate everybody being on the call today. I know there were a lot of competing calls going on. And we look forward to seeing everything in October out at our Analyst Day when we share the 2020 strategy with everyone. So thanks, and take care.

Again, this does conclude today's conference call. Thank you all for your participation. You may now all disconnect.