高樂氏 (CLX) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Clorox Company First Quarter Fiscal Year 2014 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, today's conference is being recorded.

Now, I will 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.

Thank you.

Welcome, everyone, and thank you for joining Clorox's first quarter conference call. On the call with me today are Don Knauss, Clorox's Chairman and CEO, and Steve Robb, our Chief Financial Officer.

We're broadcasting this call over the internet and a replay of the call will be available for seven days at our website, thecloroxcompany.com. Let me remind you that, on today's call, we'll 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. A 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 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.

With that, I'll now cover highlights of our first quarter business performance by segment. Steve will then address our financial results and updated outlook for fiscal year '14. Finally, Don will close with his perspective on the business, followed by Q&A.

In the first quarter, volume was up 1% versus the year-ago period, with increases in professional products, charcoal, laundry and Burt's Bees, partially offset by declines in home care. Sales were up 2% with increases in three out of our four reportable segments. As we discussed with you on our last earnings call, we anticipated that sales would be -- in first half of the year, would be at the lower end of our full year range, due to competitive activity and declining foreign currencies.

Our first quarter sales of 2% were in line with that expectation. Importantly, excluding the impact of foreign exchange, sales increased 3.5%. Our US market share results reflect a decline of 30 basis points versus the year-ago quarter, reflecting heightened competitive activity as noted last quarter.

Over the same period, our categories grew about 1.2 points with strong gains in laundry, charcoal, and cat litter. Burt's Bees, which is not included in the traditional market share data, also grew share in the quarter.

Now, let me turn to our first quarter segment results. Our cleaning segment volume was flat with sales growth of about 1%. Strong sales of professional products, due to double-digit gains in our commercial, food, cleaning and healthcare businesses. Volume in our laundry business was also strong, as the category has seen nice growth following the concentration of bleach taking place over the last 18 months. Concentrated bleach is also continuing to deliver significant gross margin improvement from reduced raw material and transportation costs.

Although category growth has been strong, our market share remains challenged as strong merchandising and distribution of private label bleach at a few customers. We believe increased in-store merchandising, continued benefits from our bleachable moments marketing campaign, as well as new advertising noting the significant benefits of Clorox Bleach versus the competition, will improve share trends in the second half of the fiscal year.

Partially offsetting the strong results in professional products and laundry was a decline in our home care business, due to an extremely competitive environment in the Wipes category. In response, we've increased merchandising support, which will benefit the second half of the fiscal year and we're extending wipes to new uses with new Clorox Glass Wipes and Bath Wipes, both of which will begin shipping in January.

In our Household segment, volume grew 2% while sales increased 5%. The segment's top line results were primarily driven by our Kingsford Charcoal business. Following two quarters of soft consumption, largely due to poor weather, this business rebounded in the first quarter with a double-digit volume increase on strong summer holiday merchandising and new late season marketing launched in September, linking tailgating at home with the fall football season.

Our cat litter business also contributed volume and sales gains with the recent launch of our new Clean by Nature product, which uses both carbon and plant extracts to provide strong odor control. Our lifestyle segment enjoyed 4% volume growth and 5% sales growth. Burt's Bees delivered double-digit volume growth, strong growth in the drug channel behind new lip and face care products, supported by strong demand creation.

In January, Burt's Bees began shipping new brightening products in the United States, as well as new facial towelettes. Our food business had its fifth consecutive quarter of higher volume driven by increased shipments in dry dips and dressings, as well as the sandwich spreads and pasta salad kits launched late last fiscal year. In aggregate, our three US segments delivered volume growth of 2% and sales growth of 3% in the face of a sluggish economy and a heightened competitive environment.

Turning to our International segment, Q1 volume was flat and sales declined 3% with strong currency neutral sales more than offset by foreign currency declines in Argentina, Australia, and Canada. Excluding more than 7 percentage points of negative foreign currency impact, international sales growth was more than 4%. Volume in Venezuela and Argentina was down in the quarter, as expected.

In other markets, we are investing behind innovation, such as with our new cleaning utensils and thick bleach products. And, as discussed at our recent analyst meeting, we'll continue to invest behind faster growing markets while prudently managing through the more challenged markets of Venezuela and Argentina.

Looking at the full fiscal year, we've narrowed our sales growth range to 2% to 3%, factoring in an updated outlook for the impact of foreign currency declines, which are now expected to reduce sales by up to 2 points. Volume is expected to improve in the second half of the fiscal year behind increased merchandising and innovation, as well as an easier prior year shipment comparison, particularly in our charcoal business.

With that, I'll turn it over to Steve Robb.

Thanks, Steve, and welcome, everyone.

We're off to a strong start in the fiscal year. Excluding foreign currency headwinds of nearly 2%, we delivered 3.5% sales growth. We also delivered 7% pretax profit growth, as well as free cash flow of $152 million, or 11% of net sales, which is about flat versus the year-ago quarter.

With that, I'll take you through the details of our Q1 financial results and then discuss our outlook for fiscal '14. In our first quarter, sales increased 2%, reflecting more than 1 point of shipment growth, about 2 points of pricing benefit, and nearly 1 point of favorable mix. These factors were partially offset by nearly 2 points of foreign currency declines.

Gross margin for the current quarter was essentially flat, which was slightly better than we had anticipated. Importantly, our US gross margin was up versus year-ago, while international margin was down, but better than expected. We're pleased that we're starting to see the results from our efforts to cut costs and improve operational efficiencies in our international business, which helped moderate the margin decline.

For the quarter, we delivered cost savings of $25 million, or 180 basis points and about 80 basis points from pricing. These benefits were offset by higher manufacturing and logistics costs, largely from continued inflation in Latin America and higher commodity costs. Selling and administrative expense for the first quarter was 14.5% of sales, a slight improvement versus the year-ago quarter, primarily driven by lapping prior infrastructure-related investments. These results were partially offset by investments in systems to support the long-term growth of our Burt's Bees business.

Advertising spending for the current quarter was nearly 9% of sales. Our US retail spending was about 10% of sales, reflecting continued support for our domestic brands and categories. We continue to spend prudently in our international business, where we significantly reduced investments in markets with challenging economic environments, while supporting other fast-growing markets; particularly, behind innovation.

Our tax rate of roughly 34% on earnings from continuing operations was nearly 3 percentage points higher versus the year-ago quarter, reducing diluted earnings per share by about $0.04. As I mentioned, free cash flow for the first quarter was $152 million or 11% of sales, about flat versus the year-ago period, reflecting higher tax payments and an increase in inventory, offset by lower capital expenditures. For the full fiscal year, we continue to anticipate free cash flow to be about 10% of sales. As a reminder, we define free cash flow as cash provided by continuing operations, less capital expenditures.

Consistent with our commitment to return excess cash to shareholders, we repurchased about 1.6 million shares for $130 million in the first quarter. 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 times. Net of all the factors I have discussed today, in the first quarter, we delivered diluted net earnings per share from continuing operations of $1.04, an increase of 3% versus the first quarter of fiscal '13.

Now, I'll turn to our fiscal 2014 outlook. As we discussed on our last earnings call, we've been closely monitoring foreign currencies and commodities. Coming into the fiscal year, we faced unfavorable foreign exchange headwinds in multiple countries and oil prices that were above our targeted range of $90 to $100 per barrel. Despite the recent falloff in oil prices, resin prices continue to increase.

Given these elevated pressures on sales and earnings, we've updated our full year outlook. As Steve mentioned, we now anticipate sales growth in the range of 2% to 3%, which reflects up to 2 points of impact from foreign currency declines versus a previous assumption of 1 point. In particular, we're facing weaker currencies in Argentina, Australia, and Canada.

Turning to gross margin, we now anticipate gross margin for the full fiscal year to be flat to slightly down, reflecting higher commodity costs, primarily from resin. All other assumptions about gross margin are generally the same, including the anticipated benefit of 150 basis points from cost savings, some modest pricing, and about 100 basis points of negative impact from inflation affecting manufacturing and logistics costs.

As we've done in the past, when we've faced elevated commodity costs, we'll consider taking pricing, particularly on products impacted by higher resin costs, to support the long-term health of our margins. Our updated EBIT margin range is now flat top 25 basis points, reflecting more than 100 basis points of negative impact from higher commodity costs. Our previous assumption for commodities was an impact of 100 basis points or less.

This range continues to reflect lower selling and administrative expense as a percentage of sales, consistent with our long-term goal of reducing this line item to 14% or less of sales. Due to the timing of spending, we continue to anticipate expenses as a percentage of sales to be higher in the first half of the fiscal year. We anticipate total Company advertising spending for the full year to be about 9% of sales or somewhat below, driven largely by our decision to reduce investments in Venezuela and Argentina.

The Company's outlook continues to reflect $0.05 to $0.10 of diluted earnings per share impact related to the anticipated effects of continued price controls and high inflation in Argentina and Venezuela. As a reminder, our outlook does not assume further devaluation of Venezuela's currency in fiscal '14. Net of all these factors, we now anticipate diluted earnings per share to be in the range of $4.45 to $4.60 for fiscal '14.

Of this $0.10 reduction versus our previous range, about half reflects unfavorable foreign exchange and the balance reflects higher commodity costs, net of the mitigating actions we're taking. In closing, we had a strong start to the fiscal year, delivering solid sales and profit growth in the first quarter, masked a bit by higher tax rate and foreign currency declines.

As I mentioned in the press release, we feel good about the plans we have in place to impact the headwinds we're facing and support the long-term health of our business, including a robust product innovation pipeline and strong cost savings.

With that, I'll turn it over to Don.

Okay, thanks, Steve, and hello, everyone, on the call.

I certainly believe, as well, that we're off to a good start this fiscal year, with the solid sales and profit growth that Steve mentioned, even in the face of these unfavorable foreign currencies at somewhat more than we had anticipated coming into the year. But recall that our outlook was formed about six months ago when the dollar was quite a bit weaker than it is today.

Now, much of our business is performing well, as you heard from Steve's discussion of double-digit volume growth in Professional Products and Charcoal, strong gains in laundry and a double-digit volume increase in Burt's Bees. In total, for the US, volume was up over 1.5% and sales were up nearly 3.25% for the quarter. In addition, we continue to drive efficiencies across the Company, delivering that 180 basis points of cost savings, that Steve mentioned, that benefited gross margin in Q1.

That said, we certainly do continue to face heightened competitive activity and we have updated our outlook to reflect two significant changes -- that greater impact from unfavorable foreign currency and of course, the larger impact from increasing commodity costs.

Now, to mitigate those two items, we're taking several actions. First, we are leaning into deliver strong cost savings for the year and really feel confident about our cost savings pipeline for the balance of the year. As Steve noted, we anticipate a benefit to gross margin of about 150 basis points from cost savings for the year and we certainly exceeded that target in Q1.

Second, we'll consider taking pricing on products impacted by higher input costs. Now, over time, I think we've proven that our brands have the ability to take pricing and we found our pricing models to be very predictive, ultimately recovering short-term volume loss and certainly building margins.

Third, and I think a number of you were out here for our analyst meeting earlier in the month, that we're really pushing innovation with new products being launched nearly every business in the second half of the fiscal year. I would say the innovation pipeline is strong and I'm really confident in our target to achieve 3 points of sales growth from innovation this fiscal year.

I would say more than ever now, we really need to support our brands, partner effectively with retailers to bring excitement into their stores, they're all hungering for traffic, and to grow our categories. As we discussed at our Analyst Day earlier in the month, we have stepped up merchandising plans as well. You're going to see that in the second half of the year. You're also going to see new national advertising campaigns that heavily focus on value and influence our campaigns, as well.

To sum up, the fundamentals of our business are strong. I think you saw that through the quarter. We make more money for our investors by doing three basic things. First, selling more volume. We achieved volume growth in our US business, as well as flat volume in international, despite issues in Venezuela and Argentina. Second, getting more price realization for our products. We achieved 80 basis points of positive pricing impact for the quarter in gross margin. Third, delivering strong cost savings. Again, we exceeded that 150 basis target and delivered 180 basis points of cost savings in the quarter, which helped keep our gross margins flat.

In fact, in the US, as Steve said, our gross margins were up modestly, despite the fact that we did absorb higher commodity costs versus the year-ago quarter. As we've reiterated, the pipeline of cost savings looks solid for the rest of the year. The fundamentals are strong and we're taking the needed actions I mentioned earlier to offset the issues we're facing with foreign currencies and commodities.

We're also committed to regaining market share, and I feel very good about our marketing plans and the product innovation across our portfolio, as we move into the second half of the year, to drive improved share results in the second half of the year.

With that, why don't we open it up to your questions?

(Operator Instructions)

Bill Schmitz, Deutsche Bank.

Can you just talk a little bit about, first, cat litter and then, on the wipes business? It seems like cat litter's starting to turn. I'm wondering what you guys did to get the market share stabilizing again? I guess it was pretty competitive for Nestle in that category. As you enter the new year, it was a really elevated cold and flu season and you had a lot of wipes volume. What's the plan to offset that?

Let me start, Bill, on litter, I think it's a combination of things. It's clearly getting new innovation out there. Steve referenced some of that earlier. Getting new points of distribution has certainly helped. We're also getting more aggressive on the merchandising. Thirdly, I think you're going to see, before the end of the year, you'll see new value-focused, product performance-focused advertising.

I think, clearly, right now it's the distribution gains and the innovation that's driving it. I think we'll combine that, as I said, with this new advertising starting soon. On wipes, clearly, as we head into the second half of the year, as you noted, we've got significant overlaps in this quarter, given the strong flu season that was prevalent last year. So far, we're seeing good start off. We've got increased merchandising coming in the next half of the fiscal year. We've got new innovation, I think most of you saw it out in Pleasanton, the glass wipes and the tub and shower wipes, as we pushed the product into more usage occasions.

You're also going to see more value packs, extended value packs from us, as we move into the new year, grouping more canisters, if you will, into multi-packs. We feel pretty good about it as we move into the second half on wipes, as well. Of course, the value advertising, you started to see that kicked off already in this quarter with the guillotine execution, if you will, where we disinfect twice as much as some of our competitors do. It's a combination of all those elements.

Great, thanks. Maybe you don't want to venture a guess, but what are your thoughts on the Venezuela devaluation in January? Our guys think it's like a 40% chance. You guys are obviously in the market. What's your current thinking there? I know it's not in guidance.

Bill, this is Steve. I think the truth is, nobody knows. What we do know is, the official rate is sitting right around 6.3, obviously. If you look at SICAD, which is the mechanism that they've put in place and they've had periodic auctions there, that's sitting at 11. By the way, the parallel rate, as of this morning, I think was at like 55; so, pretty big spread. I think there's no doubt that there's going to be a devaluation.

Everything we've heard from the experts is, they think it's going to happen sometime next calendar year, probably in the first of the calendar year, but beyond that it's really hard to say. I think the government's trying to slow down in terms of how fast they do that for a variety of reasons. But when you've got a parallel rate that's sitting at almost 55 relative to the official rate, it's not whether there's going to be a devaluation, it's just how much and when. I think that's what we're all monitoring closely.

The intelligence we have Bill is not fundamentally different from what you've said.

Okay, great. Thanks, guys. I appreciate it.

Wendy Nicholson, Citi Research.

Just a follow-up on that, I know your $0.05 to $0.10 full year EPS impact from Venezuela and Argentina, is that kind of pro rata? The impact of those two countries in this quarter is kind of $0.02 to $0.03?

That's pretty close. I think what we've said is the $0.05 to $0.10 still feels right to us to pick up the operating challenges we have. A little more of that's likely to fall in the first half than the second half, but your estimate for the first quarter is pretty close.

Okay. My bigger picture question, two things -- first of all, can you comment on the innovation pipeline? I know wipes launch in January. Just the timing of other new product activity? Because my question really is, you've got a really tough volume comp in the December quarter and I'm thinking in wipes, in particular, maybe you've got destocking before the new launch. Do you think volumes are going to be up or down in the second quarter? Thanks.

Wendy, I think the second quarter will be the toughest one from a volume overlap. Obviously, we had 8.5% revenue growth in that quarter, as you point out, and 5% volume growth. That'll be the most challenging. The new product cadence is obviously these launches and you saw a number of them when you were out. These launches will begin in January. If you look at Home Care for example, in addition to the wipes we talked about, you've got Pine Sol innovation with the floor wipe, the squirt and mop on Pine Sol. We've got new bleach items coming out -- king size, scents.

We've got the Fraganzia line of bleach. We've got smart seeking bleach, which you all saw. We've got new flavors on Hidden Valley, et cetera. If you go down the major brand list, all of that is hitting in the January, early February timing. We're going to see some load of that as we get into the December time frame, as people load up on that. That should help mitigate a little bit, but clearly the second quarter will be the challenge on the volume cycle.

Is there a generalization you could make about the innovations? I know most of the companies in the group, when they launch new products, they like to make them premium price because they're more innovative and they offer value-added benefit. It sounds like on the one hand, you should be upcharging for them because they're new and special and the commodity environment is difficult, on the other hand, you've got all this competitive activity. Can you generalize and say, is this stuff premium price or is it coming out at the same prices as the stuff that it's replacing?

By and larger, if it's wipes, for example, the glass and tub and shower wipes, it's more aligned with the standard wipe pricing. If you look at things like Pine Sol floor wipes and squirt and mop, and some of the new executions or new products on Brita, for example, and on Glad, with the new Hawaiian Aloha scent, it's more of a premium price and more of a trade-up. What you're also going to see, though, in that quarter is a step-up in merchandising to support those new items, so we get off to a fast start. By and large, I would say over half of the innovation we're doing is a margin enhancement to the Company average.

Terrific. That's helpful. Thank you so much.

Olivia Tong, Bank of America-Merrill Lynch.

First, what's your updated expectation on crude versus the $90 to $100 that you had before? On cost cutting, clearly, it looks like you saw a little bit more of an improvement than you had expected, so was there just an overage across the board or is there a specific project that came in better than you expected?

This is Steve. Let me lead off. From a crude oil standpoint, our latest assumption is that oil will trade in a range of $95 to $105. Although as I say that, the one thing I always want to remind folks that a lot of the markets where we're buying commodities, things like resin, they trade as much on supply and demand as they do crude oil and nat gas and these other things. But $95 to $105 is what we're assuming.

As far as cost savings, we got off to a pretty quick start. We had 180 basis points of cost savings, as I mentioned, in the first quarter. A lot of that was being driven by the new bleach, the concentrated bleach, and that has really been delivering pretty significant results for us in the P&L and we're certainly seeing that come through cost savings.

In fact, we're still targeting the 150 basis points of margin expansion from the cost savings programs, but this is one of the things we'll be leaning into to try to mitigate some of the higher commodity costs that, obviously, we're seeing in the form of resins. Feel good about the pipeline and the programs and our ability to help mitigate, at least some of the higher commodity costs this year, and certainly, over the longer term.

Got it. But still too early to update the cost savings target at this point?

We're going to hold with 150 basis points. That's our long-term target. Again, our goal is always to try to hit that and try to beat it when we can. But I would also say that, when have you a three-year pipeline of ideas that you're constantly pursuing, we're focused on steady, solid execution of the projects we have, as opposed to trying to spike it in one quarter or another, which is very hard to do, given how we run the programs.

Got it. Just a follow-up on Professional Products, you guys talked a little about that at the Analyst Day. Maybe if you could give us an update on how the acquisition environment looks there? Because you've talked about how you want to grow both organically and inorganically in that market, but haven't heard much in terms of acquisitions more recently. Thank you.

Yes, again, we had done three acquisitions in the space over a couple of years. What I would say is, we've got a robust pipeline of companies that we're always looking at and that we're interested in. It's really hard to call the timing of these, but feel good about the pipeline, feel good about our ability over the next three to five years to get some additional bolt-on acquisitions in that space. But you have to kind of work these free over time and it does take a little time. Very hard to predict, but again, good healthy pipeline, feel good about our prospects for the future.

The one thing I would add, Olivia, on that is that when we put our algorithm together to get the Healthcare business from the $130 million it is today roughly to $300 million, we thought we needed about $100 million of additional bolt-ons over the next three years. That's come down to $60 million because of the strength in the organic growth of what we have acquired and integrated. It takes some of the pressure off us, but as Steve said, we've got a pretty robust pipeline there.

Michael Steib, Credit Suisse.

Do you know when you're likely to be back on the normal merchandising cycle for bleach? Is that still expected for early the third quarter? That's my first question. Secondly, could you give us a bit more detail on why the margins in the lifestyle segment were down 250 basis points? Is that all related to the investments behind the [diversity] launches?

Let me start, Michael, on the bleach and then I'll turn it to Steve and he can talk on the second question you had. We're already starting to see the bleach improving. We're starting to see improved consumption trends as we move into this quarter. I think, to your point, the bulk of the merchandising improvement we'll see as we move into the second half of the fiscal year, particularly as we get some of the new items moving out like the new king lavender scent or the new king scents we're putting out, the Fraganzia bleach we're putting out and then, smart seeking bleach. We're going to align more of that merchandising support behind those new items as we move into January and February, but we're already starting to see some modest improvement right now.

Okay.

Regarding your question about Lifestyle margins and profitability, it is all due to the investments we're making in systems. Essentially Burt's Bees, as we talked before, this business is growing double digits, fast growing, it's expected to continue to grow pretty fast. We've simply outgrown the systems that we have in the business when we acquired it. We're in the process of investing to move them on to our US SAP platform. Good news is, we turned the system on in October. It's going extremely well and we think that you're going to continue to see costs come through that segment for another quarter or two. But after that, we should start to anniversary that and you'll see the profitability come right back.

Okay. Thanks very much.

Ali Dibadj, Bernstein.

Just first off, a quick clarification on the $0.10 guide down for the year, what would have that have been without the tax improvement? Also, is there a different amount of contingency for Venezuela in the number going forward versus what you'd said before?

Okay. Ali, let me start with the tax piece. There's been no fundamental shift. We're saying tax rate's about 34%, so really wouldn't attribute it to any of that. It really is what I said in my opening comments, which is about $0.05 is related to the foreign currencies. The previous estimate we had for foreign currencies was done six months ago. Things have obviously shifted.

Then, the other $0.05 really is this higher commodity cost, net of all of the mitigating actions that we're taking to offset it. As far as Venezuela, again, as I said, we're continuing to use the official exchange rate, like everyone else, of 6.3 and we really haven't made any changes in our outlook for Venezuela, either in terms of devaluation or the operating climate; notwithstanding that we did a little bit better in the first quarter than we had expected there.

From a mitigating perspective on commodities, can you give us a sense of how much of the commodity costs, what percentage, you expect to be able to offset and whether you think that's different today given some of the share pressures and competition and retailer pressures that are out there right now?

Long-term we feel very good about being able to mitigate this and protect our margins. Again, we took a pretty sharp increase in resin in September. Within any given fiscal year, it can be a challenge to offset 100% of this. Certainly, over the long term, we feel very good. The actions, as I mentioned earlier, that we're taking, we're going to take a hard look at pricing, primarily international pricing, where we think we have some opportunity.

Cost savings certainly came in strong for the first quarter. That's an area we're going to continue to lean into, and then of course, SG&A. I think we're going to do what we do well, which is focus on the fundamentals and take the right actions, understand the share challenges. But we fundamentally believe that these brands have pricing power. We've seen that over the long term and remain fairly confident that we can recover any margin pressures from commodities over the long term, doing the things that we do well.

My last one, I just want to dig in a little bit with innovation from a pricing power perspective. Certainly, one of the ways you do that is through innovation. I'm trying to get a better understanding of really how you think about the ROI on innovation? Not so much in your R&D process, but in terms of how you think about it philosophically going forward. We keep hearing it drives 3% of incremental top line growth, which is great, but it feels like that then drops off, so you're only growing 3%.

You get one year out of it and then it drops off, you have to start from scratch again. I'm trying to understand, from a longer term perspective, how to square that, how to understand that? And whether from a pricing perspective, it's a necessity or are you gaining more shelf space, do you get a sense of shelf space changes you're anticipating from these innovations in the short term? Trying to put it all together to understand you're investing, you get 3%, it disappears, you have to invest again to get another 3%.

Let me take a shot at this, Ali, and then we can certainly have an offline conversation about this. It might take longer to get into it. But I think you and I talked about this a little bit at the Analyst Day. If you take the innovation that drives the 3 points of growth, let's take the smart tube technology on spray cleaners, it's not like the 3 points of growth is coming from completely new products. It's coming across a broad range of our existing products.

For example, that smart tube technology on our spray cleaners is an innovation that's counted in that 3% growth. Obviously, it's manifested on Tilex, on 409, et cetera. We're not counting those brands as new, if you will. A lot of this investment and certainly, the 9.9% advertising and consumer promotion we're spending in the US is dedicated to reinforcing those innovations. It's not like we start over every year, I guess that's where I'm struggling a bit. The innovation a lot of times is across the base legacy brands.

Ali, this is Steve. I'd make a couple of other points. Number one, just for clarity, the 3 percentage points that we talk about from incremental sales, that's net of cannibalization. Second, in our internal financial hurdles, we're always focused on long-term incremental sales associated with consumer meaningful innovations. It's not like this stuff is launching and disappearing. We try to focus on consumer meaningful innovation that has staying power and ideally, it's margin accretive. As a minimum, we like it to be net neutral to an SBU, but we really do target to make it margin accretive, because that creates the fuel for growth to be able to invest more behind the brands. This stuff does have staying power, certainly, what we've been seeing in all the work that we've been doing.

I think Steve's comment, as he said, once you launch it and you get 3 points of growth you use the words that it drops off in year two. It actually is built into our base at that point. We're still typically getting incremental growth off items we launched the prior year or the year before that, it's just, we no longer count it as part of the 3 points.

That's helpful. What about shelf space? Do you incrementally get shelf space every time?

Yes, we've seen, obviously, it depends on the category, Ali, but we've seen no real loss on shelf space at all, but net gains on assortment. I think one of the issues we've had, for example, on bleach is -- the issue on bleach, for example, in terms of our share loss hasn't been that we've been getting less distribution gains than private label, but that the productivity of their gains was better. For example, if you look at the bleach share we've lost, and we think that's why we're more confident in the second half, we'll start to reverse this, if you look at where private label has really driven growth in bleach, it's through scented kings where they really had no innovation and no presence and we had that. Those are more mainstream items. We rolled out things like gentle bleach and while we've got distribution gains and assortment gains, if you will, some shelf space for that, it didn't have the productivity or velocity that a lavender king size private label bleach had.

It's not just, are you getting the assortment gain and the shelf space, is the productivity of that SKU what you thought it was? If you look at the bleach innovation coming out, for example, the kings, we're starting to plus out the scents because that's where the growth is really being driven. We tend to get shelf space. We tend to get more distribution points. What we're trying to do is make sure the efficacy of those distribution points is as solid as it can be.

Thanks very much, guys.

Erin Lash, Morningstar.

I just wanted to ask about the Hidden Valley business. Obviously, you've cited that business continues to do well. Kraft noted last night that the salad dressing business continues to be ultra competitive. I wanted to get your thoughts on the overall category.

Yes. If you look at the category trends on salad dressing, the last 13 weeks, the category's been down about 0.5 point. We ticked up our share about 0.1 points. If you look at the last four weeks, the category has rebounded a little bit. You never put much into a four week number. The category's been fairly solid over the last year, 18 months.

The constant flow of innovation we've had on Hidden Valley, like with Farm Fresh, has really helped drive our share position in that category and helped drive the category growth. I think a lot of it's been due to our innovation. The interesting thing about Hidden Valley is, as we expand that franchise into adjacencies like pasta salads, sandwich spreads, et cetera, I think it actually helps drive our salad dressing business as well. It just gets the brand out there front and center into more occasions. I think that's one of the things that's helped us really gain fairly significant share over the last three years.

That's very helpful. Thank you. I apologize if I missed this, but If you could just speak to the consumer spending environment and what you're seeing with regard to consumer attitudes with spending?

Yes, the interesting thing is, we obviously have all talked about the fragile consumer for the last few years. If you look at the last 13 weeks in our total categories, they're up 1.2%. If you look at the last month, categories are up about 1.4%. If you go back to calendar year 2012, our categories were up about 1.5%. We're getting back to the historical range of growth in these categories, which is about 1% to 2%. We did have a dip in the first six months of this calendar year, in 2013, where we kind of went flattish, but we're starting to see the categories come back a little bit north of 1%. We think that bodes well that we're at least getting back into the historical range.

Thank you. That's very helpful.

Lauren Lieberman, Barclays.

First, on Brita, I know the business is probably still down this quarter, if you could talk a little about that? I apologize, I don't remember if the hard sided bottle had formally launched yet or if that was still to come. The second thing was just anything you could offer in terms of the retail inventory environment? We've kind of heard a very mixed bag of perspectives on what's going on in terms of how retailers are managing inventory, so would love to get a sense of what you guys are seeing. Thanks.

Let me start, Lauren, and then maybe Steve will want to jump in. I think, on Brita, we saw a little bit of a volume loss; not much in the quarter, but we did see some sales growth again. We're starting to see some share gain again. If you look at the last four weeks, we've seen a little bit of share gain as the category rebounds a bit. This is a category, if you look at the last 13 weeks, water filtration's been down almost 3%. If you look at the last month, it's actually been up a little bit, about almost 1%. It's a category for the last year or 18 months has been under a lot of pressure from bottled water, as these guys really go deep on pricing.

I think we're fairly pleased with the innovation. The kids bottles have done okay, they haven't blown the doors off, but they've certainly done okay. If you look at what's coming in January, we've got more prints coming out. We've got the universal filter coming out. We've got a hard sided 34-ounce Brita on-the-go bottle, if you will, and we've also got the Hello Kitty bottle for kids coming out. There's a lot of news coming on that business. We feel fairly bullish coming into the second half of the fiscal year. It's probably the strongest innovation pipeline we've had on Brita for a while.

Lauren, I'd just add, on the bottle segment of water filtration, which is the fastest growing segment, we have a market share that's even higher than our broader business which, as you know, is pretty healthy. We feel pretty good about that.

That share is approaching 70 or north thereof. We do feel pretty good about that. That's one of those things, though, that business, Lauren, to us is much more of an image business than, obviously, what you put in your refrigerator. It takes constant innovation around design and that's what we're focused on is having a cadence of innovation on the bottle business that keeps it on the forefront of people's minds from an image standpoint, and design standpoint.

Is the hard sided bottle just launching in that adult size but not yet kids? Is that right?

No, kids was launched basically with the back-to-school season this year, so in the last few months.

Is it the hard sided bottle or the soft one?

The hard sided.

Okay. Great. Sorry. I wasn't sure.

That was the one when you were out for our Analyst Day you may have seen, we had a number of different Nickelodeon-type characters on it?

That was Dora the Explorer and the Hello Kitty version is coming in January.

Got it. And then, just the retail inventory trends would be great, too.

I think, as we said in the last Analyst Day, from a retailer inventory, there's always going to be adjustments in the retail environment, but our categories tend to be fast moving off-shelf. We tightly control the inventories in partnership with our retailers. It can have a little bit of noise in the quarter, but it hasn't meaningful for us, I would say.

That one has certainly not been meaningful to us.

Thank you.

Chris Ferrara, Wells Fargo.

I wanted to bring it back to Venezuela for a second. Can you talk about your view on price controls in the event of another devaluation? Do you have any idea how that's going to go, if you're going to get more flexibility around the ability to price, if you do see a substantial devaluation there?

It's hard to know. Historically, if you look at countries of price controls, including Venezuela, usually, following a devaluation, although this can lag sometimes, generally there's some kind of relaxation on the price controls because ultimately, what they're trying to do is get more product on shelf that's both domestically produced, as well as imported product. It's the scarcity on shelf that they're trying to fix by making some of these changes. I think it's a fairly decent presumption that if there's a devaluation, at some point, price controls will be relaxed at least somewhat and you'll be able to get some pricing through. But that's a pretty unusual market there and we'll just have to wait and see.

Chris, I was down in Colombia, Peru, and Argentina about three weeks ago and I think certainly, one of the things we're doing in Argentina is innovating, being fully aware of where the price controls are, and how we innovate to get around some of those price controls with different products that the government says is okay. I think, having said that, we are getting more positive signs from the government, post the Congressional elections of this month, that they may be more open to pricing. We'll see how that plays out.

Got it. Thanks. And just totally unrelated, can you just remind me again of the latest and greatest on how you're buying resin? What's your exposure to spot price movement as opposed to forward buys? Also, is Glad still all LIFO, where you do kind of feel it right away? I'm just trying to get a sense for the lag on raw materials.

It's a little complicated, but I would say is we don't do any formal hedging. I'll say that. What we do is, because of just the flow of resin through the cycle, we can sometimes lag anywhere between 30 and 90 days, depending on the form of resin. The resin blends that we use depends on the product that we're making. We buy HDPE, we buy linear load density polyethylene, so we're buying all the various grades, typically. The trash bag business, which is the biggest one, uses linear load.

Thanks, guys.

Jason English, Goldman Sachs.

I wanted to talk about cash flow. This is the second quarter in a row where we've seen a pretty large share repurchase number flowing through the cash flow statement and for the first time in a while, your net debt's actually creeping up. It looks like you leaned on short-term notes payable to fund some of this. In that context, can you help us with your current thinking in terms of buyback activity, willingness to take on leverage, and what we should expect from you going forward?

Yes. To your point, we did enter the market and we picked up about 1.6 million shares, spent about $130 million. First, I would point out that our debt to EBITDA ratio is about 2.1, so we're certainly at the low end of our leverage range. The outlook that we provided today does anticipate we'll continue to do some level of share repurchases, but probably more to just offset stock option dilution than anything else. I think going forward, what we have committed to, and I think we've got a pretty good track record of doing, is if we're building up excess cash, we'll look for ways to get that back to shareholders. At this point, the idea of doing a major share repurchase by leveraging up, that is not something that we're contemplating at this point. I think we're comfortable with our leverage ratio, feel very good about the strength of our cash flows, and I think it's safe to say as we build up cash flow, we'll look for ways to get that back to our shareholders consistent with past practice.

Jason, just for clarity, you mentioned I think your words were, leaned on leverage a little bit. Steve noted we're at 2.1, we were at 2.1 prior quarter, 2.2 the quarter before. I'm a little unclear in terms of what you're referring to. I just want to be certain of that.

I'm seeing the exact same ratios. I was looking at absolute debt load.

Okay. But we all acknowledge that, within our leverage range, on a debt to EBITDA basis, we've been pretty consistent or flat the past couple quarters.

Yes, looks clean. I'm not trying to imply anything different than that. I'm just trying to get a sense of use of cash. Thanks a lot, guys.

This concludes the question and answer session. Mr. Knauss, I will turn the conference back to you.

Okay. We certainly appreciate everyone's participation. Happy Halloween to all and have a safe one. We'll speak to you next quarter. Take care.

Again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.