高樂氏 (CLX) 2014 Q2 法說會逐字稿

Clorox Company's second-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 call is being recorded.

I would now like to introduce your host for today's conference, Mr. Steve Austenfeld, Vice President of Investor Relations for the Clorox Company. Mr. Austenfeld, please go ahead, Sir.

Great. Thank you. Welcome, everyone, and thank you for joining Clorox's second-quarter conference call.

On the call with me today are Don Knauss, Clorox's Chairman and CEO, and Steve Robb, our Chief Financial Officer. We're broadcasting this call over the Internet and a replay of the call will be available for seven days at our website, thecloroxcompany.com.

Let me remind you that on today's call we will refer to certain non-GAAP financial measures, including but not limited to free cash flow, EBIT margin, debt to EBITDA, and economic profit. Management believes that providing insights on these measures enables investor to better understand and analyze our ongoing results of operations.

Reconciliation with the most directly comparable financial measures determined in accordance with GAAP can be found in today's press release, this webcast, prepared remarks, or supplemental information available in the financial results area of our website, as well as in our filings with the SEC. In particular, it may be helpful to refer to tables located at the end of today's earnings release.

Please recognize that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans. Please review our most recent 10-K filing with the SEC and our other SEC filings for a description of important factors that could cause results or outcomes to differ materially from management's expectations and plans. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

With that, I'll now cover highlights of our second-quarter business performance by segment. Steve will then you address our financial results and our updated outlook for FY14 and, finally, Don will close with his perspective on the business followed by Q&A.

In the second quarter, volume was up a little more than 1% on top of a strong year-ago period when volume increased 5% behind our conversion to concentrated bleach, a very strong cold and flu season, and strong early season shipments of charcoal. Given the very strong top line performance a year ago, we're very pleased to have delivered volume growth this quarter.

Second-quarter volume increases in professional products, home care, and international were partially offset by declines in charcoal and Brita. Sales for the quarter were up about a half point, with increases in professional products, food, and international, largely offset by declines in our other businesses.

Foreign currency continued to have a meaningful impact on our sales results as the currencies of Argentina, Canada, Australia, and several Latin American countries declined [de-meaningfully] versus the US dollar. Excluding the impact of foreign exchange, sales increased 2.3%. Our US 13-week market share results reflect a decline of 0.3 points versus the year-ago quarter, the same as we reported in the first quarter, reflecting ongoing intense competitive activity. Over the same period, our categories were essentially flat, following an improvement of 0.7 points in the first quarter.

Reduced category growth was driven by a higher level of promotion across several categories. Declines in home care, glad and water filtration were essentially offset by solid category growth in laundry, cat litter, and charcoal. Burt's Bees, which is not included in the traditional market share data, also grew share in a growing category during the quarter.

Now, let me turn to our second-quarter segment results. Our cleaning segment volume grew 3% with sales growth trailing slightly at 2%, due to negative mix from consumers purchasing larger sized products, as well as additional trade promotion spending to address competitive pressures. That said, we feel very good about positive sales growth in this segment, recognizing we were lapping a record 15% sales growth in the year-ago quarter.

Strong double-digit volume growth in professional products was driven by gains in our commercial cleaning and healthcare businesses. Our home care business returned to volume growth, driven by record shipments of Clorox disinfecting wipes, behind the incremental merchandising plans we discussed with you last quarter. On the innovation front, new Clorox bath wipes and glass wipes both began shipping in January, as we seek to extend wipes' use to new occasions throughout the home.

Volume in our laundry business was flat, driven by increased merchandising support, partially offset by lower Green Works laundry detergent shipments, due to category softness. As expected, the bleach category's beginning to slow from recent double-digit increases following compaction to single-digit growth today.

That said, our 3D demand building plans for bleach, which we shared with you at our analyst day, are beginning to have an impact. With increased in-store merchandising, our Bleachable Moments marketing campaign, and new advertising noting the significant benefits of Clorox bleach versus the competition, our market share trends are improving. Moving from about a 57% share in the first half to approaching 60% in December. Concentrated bleach also continues to deliver significant gross margin improvement from reduced raw material and transportation costs.

Looking ahead for the cleaning division, in addition of the new bath and glass wipes I just mentioned, we have a number of new products launching in the second half, including our new Smart Seek bleach which began shipping yesterday. Smart Seek bleach is a breakthrough innovation that whitens white and mostly white clothing without affecting colors. Also, last month we began shipping Clorox Fraganzia Bleach. These highly fragranced bleach products are designed to appeal to and attract new consumers, particularly in the Hispanic population.

In our household segment, volume and sales each declined 1%. The segment's top line results were largely driven by declines on our charcoal business, as we lapped double-digit increases in the year-ago quarter. In our cat litter business, volume was up 1% while sales declined 2%, due to increased trade promotion spending. We have plans in place to address the competitive dynamics in litter over time with harder hitting advertising and improved packaging, building off recent product improvements that provide our best odor control ever.

Volume in our lifestyle segment decreased 1%, while sales were flat. Sales outpaced volume due the benefit of price increases and lower trade promotion spending.

Our food business had its sixth consecutive quarter of higher volume, coupled with strong sales growth driven by increased shipments in dry dips and dressings. Whereas Burt's Bees volume was flat, as the brand faced comparison to a high year-ago base from the launch of new lip color products. These results were more than offset by top line decreases on our Brita business, due to declines in pour-through filters in the face of expanded private label distribution.

Turning to our international segment. Volume increased 2% and sales grew 1%. Sales lagged volume due to currency declines across much of the international business, although pricing and positive mix enabled us to offset much of the foreign currency impact. Excluding the more than 8 percentage points of negative foreign currency impact in the segment, international sales growth would have been about 9%.

With that, let me comment on two countries that have been in the news a lot lately, Argentina and Venezuela, where the volatility in both countries continues to make it difficult to forecast our international results. In Argentina, which represents about 3.5% of Company sales, we continue to experience inflation of 25% or higher, but have been able to cover most of that with price increases.

Also, our second-quarter results from Argentina did benefit by comparing against a lower year-ago base period when we were in the midst of completing our IT systems implementation there. Although this quarter's results were better than anticipated, we are closely monitoring the recent currency devaluation in the peso for the impact it could have on our results.

In Venezuela, which represents about 2% of Company sales, we also continue to experience very high inflation, at times north of 50%, while only having the ability to take pricing due to government controls on non-regulated items, which have made up about a third of our portfolio. As a result, our Venezuela business is not profitable based on recently reported results.

Although we continue to face challenges in these two countries, we are pleased to have grown sales and profit in international during the second quarter. We continue to invest in our faster growing markets and have confidence our investment plans will further strengthen results over time.

Looking at the full fiscal year, we've lowered our total Company sales growth outlook to 1% to 2%, factoring in an updated outlook for the impact of foreign currency declines and continued sluggish category growth. Our outlook also continues to include higher year-over-year trade spending to address competitive dynamics.

That said, on a currency neutral basis, we anticipate sales growth to be 3% to 4% for the fiscal year. In addition, we remain encouraged by our innovation plans as we feel confident in our ability to meet or exceed our annual goal of 3 points of incremental sales from innovation driven by products launched last fall, as well as those coming out in the next month or so.

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

Thanks, Steve, and welcome, everyone.

As Steve mentioned, we grew sales on top of a challenging comparison to the year-ago quarter when sales increased 9%. In the current quarter, excluding the impact of foreign currencies, sales were up 2.3%.

Turning to diluted earnings per share from continuing operations. For the quarter, the 5% decline compares to a strong 18% growth in the year-ago period, which included a gain of $0.03 from the sale lease back of our Oakland headquarters building. Unfavorable foreign currencies also impacted the current quarter results by about $0.05.

With that, I'll take you through you the details of our second-quarter financial results and then discuss our outlook for FY14.

In the second quarter, we grew sales about 0.5 percentage point, reflecting more than a point of volume growth and about 2 points of pricing benefit. These factors were partially offset by about 2 points of foreign currency declines across multiple countries. Gross margin for the current quarter came in at 41.9%, a decline of 60 basis points.

For the quarter, we delivered $20 million in cost savings, or 150 basis points, and about 70 basis points from pricing, primarily in international markets. These benefits were offset by nearly 140 basis points of commodity costs, primarily from resin, as well as more than 120 basis points of higher manufacturing and logistics costs, due to continued high inflation in international markets, particularly Venezuela and Argentina.

Selling and administrative expense for the second quarter was 15% of sales, a slight improvement versus year-ago quarter, primarily driven by lower employee incentive compensation, cost savings, and lapping infrastructure-related investments. These results were partially offset by the impact of inflation in international markets and one-time costs associated with the transition to new IT service providers.

Advertising spending for the current quarter was more than 9% of sales, as expected, reflecting increased support for our brands globally with our US retail business spending at about 10% of sales. Our second-quarter tax rate of 35.6% on earnings from continuing operations was more than a point higher versus the year-ago quarter, reducing diluted earnings per share by $0.02. We continue to anticipate a tax rate of about 34% for the full fiscal year. Net of all of the factors I discussed today, in the second quarter we delivered diluted net earnings per share from continuing operations of $0.88.

Turning to cash flow. Year-to-date free cash flow was $149 million versus $223 million in the same period year ago. This decrease is the result of higher tax payments, as well as the Company's funding of liabilities under certain non-qualified deferred compensation plans, partially offset by lower capital expenditures.

We anticipate the higher tax payments in the first half of the fiscal year to be offset by lower tax payments over the balance of the fiscal year. We also continue to anticipate free cash flow as a percentage of net sales to be about 10% of sales for the fiscal year. For the quarter, we ended with a debt to EBITDA ratio of 2.2, at the low end of our targeted range of 2 to 2.5.

Now, we'll turn to our fiscal year 2014 outlook. As you saw from our press release, we updated our sales and earnings outlook, primarily due to the significant 19% devaluation of the Argentine peso in January.

As Steve mentioned, we now anticipate sales growth to be in the range of 1% to 2%, reflecting more than 2 points of continuing foreign currency declines for the full year, and up to 3 points of impact in the second half of the fiscal year. Looking forward, we anticipate further devaluation of the Argentine peso through the remainder of the fiscal year.

For perspective of the 1 point decrease in our sales outlook, about half relates to foreign currency headwinds and the balance reflects sluggish US category growth. We're now assuming US category growth rates below the 1% level we had previously factored into our last outlook. Higher year-over-year trade spending in the back half of the fiscal year will also temper sales growth.

Turning to gross margin. We anticipate gross margin for the full fiscal year to be down modestly, reflecting the margin impact of our updated foreign exchange outlook, and slightly stronger commodity cost headwinds. All other assumptions about gross margin remain generally the same, including an anticipated benefit of 150 basis points from cost savings, offset by about 100 basis points of negative impact from inflation affecting manufacturing logistics costs.

In the face of elevated commodity costs, we continue to take pricing actions in international where possible to help offset both inflation and foreign currency declines. In addition, we recently announced a price increase of 6% on our Glad trash business to offset the rising cost of resin. This increase will take effect in March of this year.

We continue to expect our fiscal year EBIT margin range to be flat to up 25 basis points. This range reflects lower selling and administrative expense as a percentage of sales, likely about 14% of sales, consistent with our long-term goal of reducing this line item. Our FY14 EBIT margin will also benefit from a shift of advertising to trade promotion spending to address competitive promotional activity.

Advertising levels will also continue to be impacted by reduced investments in challenged international markets, particularly Argentina and Venezuela. As a result, we now expect advertising spending for the full fiscal year to be slightly less than 9% of sales. Importantly, our US retail business continues to expect advertising spending to be between 9% and 10% of sales.

As we mentioned in our press release, although it's likely we'll see additional currency devaluations in Venezuela, our fiscal 2014 outlook does not assume further devaluation of the Venezuela currency beyond the February 2013 devaluation. Net of all of these factors, we now anticipate diluted earnings per share from continuing operations to be in the range of $4.40 to $4.55 for FY14. The $0.05 reduction, versus our previous outlook, reflects the Company's new foreign currency exchange assumptions, primarily for Argentina.

In closing, I feel very good about our overall results for the first half of the fiscal year, particularly our ability to deliver 3% sales growth on a currency neutral basis, this on top of the comparison to strong sales growth in the year-ago period. Looking to the second half of the fiscal year, foreign currency headwinds and sluggish category growth will continue to weigh on our results. We're responding with innovation and more aggressive trade spending, as well as a continued focus on operational efficiencies.

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

Thank you, Steve, and hello to everyone on the call.

So, as I reflect on the quarter, I do think we performed well growing volume and sales on top of the very high year-ago base that both Steves referenced, and that year-ago base, of course, was really driven by the launch of concentrated bleach and strong innovation pipeline and a double-digit increase in charcoal volume that we had.

Importantly, I think it's good to note that we realized volume gains in six out of the nine US business units, and for the total, US volume was up 1% on top of very strong results a year ago. So I'm particularly pleased with this quarter's top line performance in international, which delivered 2% volume growth and 1% sales growth, despite the material foreign currency headwinds we faced. In fact, as Steve mentioned on a currency neutral basis, international sales grew 9% in the quarter.

Interestingly, the biggest driver of this was Latin America, which delivered 4% sales growth overall, but when you back out its 11% FX hit, [LATAM] for us delivered 15% sales growth on a currency neutral basis, very strong growth. And, as mentioned, we have updated our outlook for foreign currency declines and sluggish category growth with sales now expected to grow 1% to 2% for the year, or about 3% to 4% on a currency neutral basis.

So, as discussed, commodity cost increases, particularly in resin, and increased manufacturing and logistics costs driven by inflation, primarily in international markets, continue to put pressure on Q2 margins. Now, at the same time, we continue to drive efficiencies across the Company and really do remain on track to achieve our cost savings targets for the fiscal year.

We also had success in taking price in some international markets and, as Steve noted, have announced a price increase on Glad that really believe will offset the rising resin cost. Now, we remain highly focused on keeping our core healthy and we're committed to regaining market share, and I feel very good about our plans across our portfolio, including a strong innovation pipeline in this half of the fiscal year, to really drive some improved share results in the second half of the year.

We're particularly pleased with the improving trends for Clorox liquid bleach. For perspective, we just received our January share trends, and for the month, Clorox liquid bleach grew share two-tenths of a share point to 60.7. Now, that's our highest share on Clorox liquid bleach in 10 months, so we're pleased that the programs we put in place are working.

In addition, Clorox 2 color booster and stain fighter grew two-tenths of a share point to 27.3. So, we're pleased to see improving health across the two largest brands in our laundry portfolio, and we expect our investment plans to yield further market share improvements in the second half of the fiscal year.

I do think our second-quarter results are demonstrating that our 3D demand building capabilities are gaining traction here. We're investing in supporting our brands with new merchandising plans, along with national advertising and influencer campaigns, and we're working with our retail partners to grow our categories. I think as many of you saw in October at the analyst day session here, our second-half innovation pipeline is strong, and with new products being launched in nearly every business, and we are on track to achieve 3 points of sales growth from innovation in the fiscal year, consistent with the objective we set.

Now, looking further out, we do believe the unfavorable foreign exchange rates that are currently impacting sales will stabilize over the long term. And we continue to anticipate that our US retail categories, which grew about a 1.5 points in CY12, and about another 1 point in CY13, will, over time, maintain the long-term growth rates of 1% to 2% we've projected, consistent with population growth and an improving US economy. We also remain very optimistic about our innovation capabilities in the pipeline to deliver an average of 3 points of incremental growth from innovation annually.

So, with that, let's go to your questions.

Thank you.

(Operator Instructions)

We'll go first to Wendy Nicholson with Citi Research.

Hi. I have two questions, if I may. First, we all heard from Church and Dwight this morning that they're launching a new OxiClean product sort of directly head to head against bleach, sort of a bleach alternative.

Number one, is that factored into your plans? Number two, do you think you lose shelf stays space to them? Does that affect your thinking at all?

And then just secondarily, Steve, I wanted to go back to the comment you made that manufacturing and logistics cost your gross margin 120 basis points, primarily because of the international markets, and that just seems like a very large impact on your profitability given how relatively small Venezuela and Argentina are. So, I guess the question is, is there anything more you can do to mitigate the margin impact of the devaluation, because that just seems like a big number to me? Thanks.

Wendy, thanks. Don here.

Let me take the first half of the question on bleach and Oxi, and then I'll turn it to Steve. I think in general we feel very good about our bleach plans for the second half. Didn't anticipate another new product from Church and Dwight, but I think the program we've put in place did anticipate significant competitive spending.

So, for example, our trade spending on laundry is definitely up in the second half of the year. The innovation pipeline, as you know, Wendy, with Smart Seeking Bleach which we think helps offset some of the claims around bleach being harmful to a wider range of clothing options helps us.

Also, with the value launch of Fraganzia and also value launch on a two-pack bleach, we think we've got a lot of innovation out there and stronger trade support. As I noted in January, we're already starting to see some share gain for the first time in 10 months. So, we feel very good about the plans we have in place and think we can take on the competitive issue.

Wendy, this is Steve.

Let me provide a perspective on the manufacturing logistics costs. So, as you noted, it increased about 120 basis points. A lot of this is coming from high inflation markets of Venezuela, Argentina, and other Latin American countries. We are obviously taking steps, cost savings programs to mitigate it.

For perspective, the 120 basis points represents about $16 million and the total cost savings in cost of goods sold was about $20 million in the quarter. And, in fact, if you look at all of the lines of the P&L, the total cost savings was closer to $30 million.

So, we think the combination of leaning into the cost savings programs, taking pricing where we can, and the belief that over the very long term, both in Venezuela and Argentina we'll be able to get pricing, we'll be able to mitigate that. But certainly the gross margins this fiscal year will be challenged, because we're not likely to recover all of the commodity cost and inflationary pressures we're seeing. But we've got a pretty good track record over the long term of offsetting these costs with pricing and cost savings.

Okay. And then just to clarify on the bleach thing, Don, you're not expecting to lose any shelf space this year over the next six months in bleach, is that right?

Yes, we don't anticipate that, Wendy, because of the innovation behind the two pack, the new Fraganzia line items, and also some new scents on king size we don't anticipate that.

Terrific. Okay. Thank you so much.

Thanks, Wendy.

We'll take our next question from Olivia Tong with Bank of America-Merrill Lynch.

Thank you.

Want to talk a little about promotion, because that continues to be a big topic for both you and your peers. And I'm just wondering how do you think all this plays out> Because it doesn't seem like you're going to take your foot off the pedal nor are any of your competitors. So then is just everyone going to operate at a new lower normal or how do you think that plays out?

And then how has the retail reaction been so far to Smart Bleach? Obviously it just shipped so there's no consumer reaction yet. But can you remind us how that's going to be merchandised? Is it a trade-up for current bleach users? Is it a stain fighter so it potentially can go against this OxiClean product? And essentially where do you expect that share to come from?

Olivia, let me take the last part of your question on smart seeking bleach. We priced it at line pricing to our regular bleach so that we could get co-merchandising together.

We think it's going to expand usage occasions for bleach. That's what we think, particularly among millennials where they don't typically wear just pure white clothing. So, we think it's an expansion of the usage occasion for bleach. And we expect it to be merchandised and shelved along with regular bleach.

That's why we priced it on a line pricing basis so we could get co-merchandising, because we would expect people to potentially buy both bleaches. One, we're seeing more and more usage of regular bleach in cleaning around the home, particularly during flu season and, obviously, Smart Seeking bleach more used ideally in the laundry room.

Now, as far as promotion goes, as you say, everybody is amping up promotional spending. Our spending in the first half of the year was essentially flat on trade spending. We are seeing, as I noted, a ramp-up in the second half, particularly behind those brands that have been challenged from a share standpoint, particularly laundry, home care, litter, and Glad.

So, that's where you're going to primarily see the increases. Most of our increases are behind innovation spending, except in the case of bleach where we're getting one incremental event basically as we get back into the regular merchandising calendar.

So, I don't know if it's a new normal. I think everybody is obviously trying to -- from a retail standpoint, trying to generate traffic. I think they're using number one brands to do that which bodes well for us. I met with about 15 retailers three weeks ago at the FMI midwinter conference in Arizona and I think the biggest issue all of them basically talked about was getting traffic back into their stores.

So, I think you're going to continue to see aggressive activity on everybody's part to help get that traffic, but, again, number one brands are really what's in their forefront of their mind to get the traffic. Private label, focusing on private label is not getting traffic in the stores and they recognize that.

The only thing I'd add, we've seen this before. You tend to go in cycles with light or heavy promotional activity, and it's particularly heated right now to your point. But, as the retailers try to lap this going forward and with their quest for same-store sales growth, eventually they're going to get back to more, call it rational pricing and have some degree of rationality in the category so they can get growth again.

Thanks. And if I could just follow up on one thing. In your prepared comments you talked about mix shift to larger packs. I remember a couple years back that was an issue, but more recently I thought people had switched to smaller packs, making -- not willing to go as far to the stores with the larger packs. Is that a shift back or is this just kind of ebbs and flows?

This is Steve. I think it just kind of ebbs and flows. If you look at the fiscal year-to-date margin, the impact of mix has been fairly benign in the first half of this fiscal year.

Again, over the long term, I think as consumers have more money they tend to shift up to larger, more value-oriented sizes. Which is one of the reasons our cost savings programs look at trying to take costs out of the system to try to mitigate that. But not a big issue for this fiscal year, in terms of the first half, and ongoing, though, I think it's going to be a trend you'll continue to see.

Got it. Thank you very much.

We'll go next to Bill Schmitz with Deutsche Bank.

Can you just give us a little bit more color on what's going on in wipes because I know it's not the bulk of the sales, but the scanner data looked a lot worse than the growth you reported. So, I know it's obviously a big Costco business. Is there anything we should keep in mind kind of as we model the lap for next year?

I think, Bill, on wipes, I think you'll start to see the share losses that we've sustained reverse themselves out in the fourth quarter, as we saw a lot of private label activity in some of our larger customers that started last April, so you'll start to lap that. I think the other thing that you'll see is obviously the new innovation from us behind glass and tub and shower wipes is helping.

I think what I'm hearing from retailers, as well, is they start to lap the private label push, particularly some of the largest retailers we have, they're hungry for growth because they're already starting to see the category slow. If you look at -- this is a category that's been growing in mid- to high-single digits.

If you look at the last quarter, the category actually declined two-tenths of a point. And if you look at January, it declined 3.2 points. I think people are finally recognizing you can't grow this category if you've got a 50 share brand sitting on the sidelines.

So, I think you're going to see, through our innovation and also increased merchandising focus, in not only this quarter but the fourth quarter we'll start to see those share declines reverse and I think you'll start to see a little bit more robust category going forward.

Got you. It grew in the quarter, right? So, is there a difference maybe between --?

Yes, it grew substantially in the quarter because of, as you said, we have a strong Costco business, club business which wasn't reflected in those numbers, and also the professional side of our wipes business grew substantially as well.

Thanks. And then is there any more activity on sort of professional products acquisition front, because it seems like we hit a little bit of a lull. That was obviously a huge priority. I know it's still a very fragmented business. Are you still in integration phase before you look for new properties to add in, or is it lack of available properties right now?

We have a pretty robust pipeline, targets, companies we're interested in. Keep in mind, many of these are smaller bolt-on acquisitions that are held by families and others, and we're going to continue to work the pipeline.

We haven't had anything, as you say, in the last year or so after we completed Aplicare and HealthLink, but we have money to spend. We're actively looking for deals, and we think, over the next couple of years, we ought to be able to get some more bolt-on acquisitions, but it takes times to work these.

I think just to help and give you all some perspective on that business and the health of that business, fiscal year to date, recall that at the analyst day we talked about that part of the business growing 10% to 15% annually. That business through the first half of the fiscal is at the upper end of that range, lapping over 50% growth in the year-ago half. So, that business organically is really coming on strong and continues to be a real growth driver.

Great. Thank you so much.

Thanks, Bill.

We'll take our next question from Ali Dibadj with Bernstein.

Hi, guys. Just to follow up again on the M&A piece. Professional is still the number one priority in terms of acquisitions. You don't have that much more interest in some of these OTC properties that are coming on the market or the healthcare business for Kimberly or anything like that? It's still these kind of smaller roll-up plays in professional, is that a fair assessment?

Yes, Ali, I think that's a very fair assessment. What we've said to date is, stopping the spread of infections in the professional space with these bolt-on acquisitions, that's center of play for us.

We're also open to looking at bolt-on acquisitions in core CPG brands where we think we can add value, things like Soy Vay and other brands, and that continues to be the primary focus for us. These larger acquisitions, they tend to have a lot of happy sellers and less happy buyers in our experience, so never say never if there's a good deal that comes along, but at this point we think bolt-ons in the spaces we've identified are right.

Okay. That's helpful. And then on this trade spend, I'm trying to get a sense of how much more it will be in the back half of the year and perhaps even ongoing. The helpful gross margin driver chart that you show shows over the past couple years the price changes have been 100 basis points plus and very much over, much higher than the market movement or the commodities number that you have. And now they've dropped down to kind of the 75, 70, or 80 basis point level.

Again, from your discussion it sounds like a lot of that is trade spend. I'm just trying to figure out, as you go forward, how much more trade spend, how much less maybe price change should we expect in this gross margin chart as we look forward, given the competitive intensity you're feeling and the retailer pressure you're feeling?

You got a couple questions embedded in there. Let me say this. Second-half trade spending will be higher than what we saw in the year-ago period, in part because we're reallocating [spunning] out of advertising over to trade to drive some of the merchandising and some of the new products that we have coming up. So, don't want to quantify a specific number, but you will see the numbers going up. And that's part of the plan that we have to vigorously defend our market shares.

In terms of the price changes, in the second quarter we had about 70 basis points of lift from pricing. I would expect that, over time, that number is going to continue to hopefully go up, but a lot of it depends on our ability to get pricing in some of these international markets like Venezuela and Argentina.

In the US, you'll see us priced to recover long-term commodity cost and other inflationary pressures. So, commodities go up, we're likely to take more pricing. If commodities stay benign, we'll take less. So, that number's going to float up and down based on what we see with inflation and commodity cost.

Just to be clear, as we do allocate some more demand spending behind trade, particularly behind new products in the second half, the US retail advertising and consumer promotion number is still going to remain in the 9% to 10% range where it's been for the last couple years. In fact, this quarter it was at 10% for US retail.

So, we still feel strong about maintaining at least the mid to high nines in the US retail, even as we allocate some of the spending out of particularly troubled international markets where just doesn't make a lot of sense to put TV of on, or other forms of mass media when we have price controls.

Ali, just a point of clarification. That table that you're referring to, which is I believe attached to our earnings release, and I know it's on our website, that price change is strictly a rate change for price, a rate impact. It doesn't reflect changes in trade spending. I think to the extent that you see trade spending increase in the second half of the year, that will probably be reflected more in the all other line.

That's actually the clarification. That's very helpful because I thought that was net of trade spending.

No. That's strictly rate adjustment for price.

Okay. So, then the all other would go up because currently you're not -- Steve to your point, you're not offsetting the commodity movements at this point with what you're seeing from the a price change, rate price change perspective. And you expect that gap to close going forward?

I think over the long term it will close, but there's always a lag. So, we took 6% price increase on the Glad business, as an example, to reflect the higher costs that we're seeing in resin, but we're taking that in March. It's going to take a couple of months to sell through.

So, pricing, we try to price as much as we can to the long-term average cost of commodity costs but there tends to be a bit of a lag. And so I think, over the very long term, we remain confident in our ability to protect our gross margins, but you are seeing a lag. And, again, as we've said many times, unfortunately the price controls in Argentina and Venezuela just add to that, certainly in the short to intermediate term.

Sorry, just a quick -- quick clarification on the free cash flow to sales at 10%. That's a step-up starting at quarter, right? The taxes and the pensions effectively go away this quarter and that's a step-up to get to that 10%, right, it's not a ramp-up, is that fair?

Yes, you will see free cash flow as a percentage of sales significantly better in the second half than the first half and that should get us to the 10%, because the tax payments in our estimate are essentially timing. We expect them to offset in the second half.

Okay. Thanks very much.

We'll take our next question from Chris Ferrara with Wells Fargo.

I just wanted to go back on cleaning for a second. Obviously, the volume growth is pretty heroic on that comparison, and it sounds like wipes were up again better than what the scanner data would have indicated. But can you just talk about, I guess, how big a deal were the bath and glass wipes, and how sustainable is that? And, I guess, is there anything going on at inventory levels at the trade with those products, is everything kind of normalized?

On the wipes business in the quarter, it was really driven by merchandising support as the flu season ramped up, particularly in December. It was really tied to some incremental activity behind merchandising and some of the larger customers behind wipes. Obviously, glass wipes and tub and shower wipes did not ship until January, so that really didn't impact the quarter at all.

So, I think as I said about the second half of the year, we're going to start to see, obviously, improved performance on wipes behind the innovation, behind ramped up trade spending resulting in more merchandising events going into the back half, as well as lapping starting in April this significant push by private label for the few key customers. So, a lot of the October, November, December wipes business was driven by incremental merchandising activities, getting secondary locations in a number of retailers, not only in the club channel, but in the grocery channel, as well, in pharmacies across the country.

So, I think a lot of guys learned from last year when the flu season ramped up that they needed to get secondary locations. So, we had a lot of shippers out there, a lot of incremental locations.

So, do you feel like -- so if this cold and flu season to the extent it's less a deal than it was last cold and flu season, all these secondary points of distribution, does that essentially end up amounting to inventory in the channel or does it not work that way?

I think we've seen pretty good sell through. I don't think we've heard from any retailers that we've got a lot of hanging inventory at all, particularly because the flu season this year really got more aggressive in late December and early January, through January, than it did last year. Last year remember the flu season was really ramping up in November, this year it's been -- October and November. This year it's been more like December and January.

Got it. Got it. And then just on Argentina. It sounds like you guys said that with mix and pricing you've been able to offset the currency devaluation so far, and relative to the $0.05 to $0.10 you guys had baked into the guidance, do you feel like, again, incremental devaluation aside, has that $0.05 to $0.10 been an over management of that? Did you even need the $0.05 to $0.10 so far?

Yes. The $0.05 to $0.10 was primarily designed to cover for the operating challenges in Venezuela, the high rates of inflation, the price controls, and it's certainly embedded in the outlook that we've shared with everyone today and we're using it. As Steve mentioned, and as I've mentioned before, we're losing money in Venezuela now and we've lost money in the first half of the fiscal year, fully expect to lose money in the second half of the fiscal year, and the $0.05 to $0.10 really covers for that cost.

The Argentina business, excluding currency effects, is actually performing quite well from an operating standpoint. I think the team's doing a very nice job there but, unfortunately, what we're starting to see now with the devaluation and some of the challenges, it's going to certainly make for a much more difficult second half in Argentina.

Got it. Thanks, guys.

Thanks, Chris.

We'll go next to John Faucher with JPMorgan.

Just a follow up on Chris' question. If we look back at your Brazil business, which you guys had exited, if I remember correctly, is there a way to sort of look out four or five years on the Argentina and Venezuela businesses and say, okay, here's where we think we need to be? Is it a situation where you could manage the portfolio down, sell fewer products? I guess the real question is are there structural options from a more aggressive stance to manage these businesses going forward, or do you just at this point need to sort of ride things out?

I think it's -- each country's a bit different. Argentina, again, that business has done really well for us. We know how to ride the ups and downs.

Obviously when it goes up it feels pretty good and when it goes down it's a bit more challenging. But that's a business that we think we're taking all of the right actions to make sure that we keep a very lean cost structure. We keep those brands healthy and we kind of weather the storm, if you will. So, I feel very good about that business over the long term.

Venezuela's actually a much more challenging situation for us. It's a business that historically has been very profitable, one of our better businesses. And certainly the brand equities and -- I think are holding up very nicely.

The challenge we have is we've got inflation that's running north of 50%, and we've got the government that's imposed price controls on more than two-thirds of our portfolio and, as a result, the business has gone from profitability to losses. What we need to assess I think over the next couple of quarters, year or so is, number one, our ability to get pricing through, and that's where the government's going to have to kind of weigh in and say are you going to let companies take pricing or not and, second, what's going to happen with the currency because we're currently translating that business at a CADIVI of 6.3 to 1.

If you look at the parallel market, it's in the high 70s. So, it's a pretty big gap there. So, I think the combination of understanding what's going to happen with the currency as well as price controls will probably inform longer term what do we want to do with that business.

John, the only thing I would add is if you look at Argentina, for example, I mean, Argentina in this quarter grew over 9% in sales and over 5% in volume, so from an operating standpoint and that's not -- that's not a currency neutral, that's in US dollars. So, strong operating performance in Argentina we did get pricing through on a number of products in October.

So, we're doing quite a bit better than forecast in Argentina. As Steve said, the wild card here is the inflation rate and the currency issues going into the second half. I think from the an operating standpoint we're doing the right things.

In Venezuela, there are structural things that we are changing. I can give you an example. We used to have, for example, double-digit SKUs of bleach. We're going down into a handful of SKUs on bleach so we run the lines more efficiently.

There are a number of things we've done to lower our cost structure and be prudent so that, while we're losing a modest amount of money year to date in Venezuela, we're better than we forecasted going into the year. So, the team's making some improvements there.

There are trigger points down the road where we say when we look at inflation rates, we look at the operating efficiencies we're getting, the ability to take pricing. For example, we're having ongoing dialogue with the government.

I think the government's starting to realize a number of businesses are in a very tough spot and they're going to have to do something if these businesses want to keep producing. And I don't think they want essential products like bleach out of production. So, there are a number of things that we're doing, but I would say both in Argentina and Venezuela, given the changes we have made, we are doing better than forecast and we're starting to see some vibrancy in Argentina.

John, I think it's also helpful to remember when we exited Brazil, that was many years ago, we had a very fragmented, relatively low market share business. I think it's helpful to remember, in Venezuela and Argentina, these are very strong market share businesses. In fact, Argentina, which is the bigger of the two countries for us, you got market shares that are equal to if not north of some of our US market shares. So, we've got very strong businesses there.

Okay. Great.

And then one sort of unrelated follow-up question, which is cat litter, which you guys have talked a lot about, showed us some new products at your analyst day. We're hearing more about this category. We've seen packaging improvements, new product improvements. Is this a category where you can push the consumer that far ahead so that she is willing to pay more, because it seems to be getting more competitive and can you really grow the profit pool in that category with this much activity?

I think you can, John. I think if you look at some of the recent success that one of our competitors had with a light weighting product, that is a significant premium price to what the normal litter is in the category.

So, we think this is a category that the last 13 weeks has grown a little bit north of 5%. We think the demographic trends are great. We do have some significant innovation coming that we think out-flanks competition. And our odor control is better than it's ever been.

Our trade spending will go up on this business in the second half. We're going to defend these shares. So, I think the combination of innovation and trade spending and packaging, basically all elements of the marketing mix, everybody's hair's on fire over here to get this thing turned around, and I think we have the plans in place to do it, and I do think it's a category that has terrific trends and demographics in its favor.

Great. Thanks.

And we'll go next to Javier Escalante with Consumer Edge Research.

Good afternoon, everyone. I have a question with regards to the guidance, right. If I go to the release, you got higher commodities, greater currency impact. You are facing slower category growth, and you need to fund an increasing trade spend.

So, it looks as if you have a lot of headwinds offset with only one point of pricing at a corporate level at the end of the third quarter, which corresponds to what you're doing in Glad and you just lowered guidance by one point. Is this enough of reset in terms of to deliver your earnings forecast? And then I have another question.

So, Javier, this is Steve. Let me try to provide you perspective.

So, in our previous outlook we had anticipated sales growth in the range of 2% to 3% and, as I had mentioned in my opening comments, the devaluation of the Argentine peso was significantly larger than we had anticipated. So, we do think that bringing this down from 2 to 3 to 1 to 2 to reflect the new foreign exchange assumptions, and somewhat slower US category growth, makes sense.

And basically that implies that we've got 3% to 4% currency neutral sales growth on the full year. And I would just point out in the first half of the fiscal year, sales growth on a currency neutral basis was about 3%. So, it implies 3% to 4% growth in the second half. We think that's very reasonable.

From an earnings per share standpoint, we did drop the range by a nickel in the top and the bottom. That was to deal with the FX assumption change for Argentina. Commodity costs are about what we thought in the previous outlook. They're up a little bit but not a lot.

Trade spending is expected to be elevated in the second half but, again, not much different than what we had thought in the previous outlook. So, we do feel that this outlook is balanced and anticipates a range of assumptions. The biggest open item will be what happens with Venezuela and that's the one we're watching carefully.

Okay. The second question has to do with the increasing trade promotions. Church and Dwight said it today that they're going to do the same. So, how big of an increase in shelf space, whatever you're going to do buys you and for how long?

So, I wonder whether these payments that you're going to do to the trade are going to benefit through 2015 or just a one quarter thing just to support the innovation and that's it?

I think, Javier, the elevation in trade spending is concentrated on a few businesses. I don't think you'll see it across -- you're not going to see it across the board. For example, we just talked about litter. You're going to see clearly support behind new products there and support behind incremental merchandising events.

So, it's not really payment for shelf space as much as it's payment for feature and display activity. And whether that continues into FY15, we'll see how the dynamics in the category go. But it's really more of display and feature support behind new products and increased frequency of events than it is anything to do with slotting allowances or anything like that.

Okay. Thank you.

Thanks, Javier.

We'll go next to Michael Steib with Credit Suisse.

I have two questions if I may. The first is on Burt's Bees. You mentioned that growth was flat in the quarter.

Is that entirely due to just a comparison base and should we, therefore, expect growth to pick up in the second half of the year? And then the second question is on the concentrated bleach formula, can you just confirm that it's back on the normal merchandising cycle so should that also support volume growth in the second half?

Michael, on Burt's there was a significant growth last year, so you're right there. The interesting thing is, while it was flat in the quarter, consumption was up 7% and the category was up 4%, so we gained share and consumption was in the high-single digits. So, we feel good about we're lapping this big inventory move-in last year with the new lip products, but consumption looks strong.

In fact, consumption in January on Burt's was up 11%. So, we feel like the trends are very good on Burt's. And there's some interesting innovation coming on color for lip in the second half of the year.

Would you repeat your question on bleach? I couldn't quite hear it.

Back in the merchandising cycle.

The bleach cycle, I think one of the things you're seeing with the January share increase to 60.7 we hit in January is, we're getting back into the normal cadence. We're up about one full event which is about 15% to 20% increase in merchandising activity for the year. So, we're back more into a normal cadence now on bleach. And I think as we go through the balance of the fiscal year, you'll continue to see the share position improve, particularly behind the new products that are out there.

Okay. Thank you very much.

Thanks.

And we'll go next to Connie Maneaty with BMO Capital Markets.

Hi. I have a question on Venezuela, of course. We're hearing a couple of things. One is that instead of a devaluation there in the form of an event where the government would say we're devaluing by 40% that there might be a rolling devaluation, sort of unannounced but every month or every so often the prices change.

Are you seeing that in your operations yet? And is a rolling devaluation easier or harder to manage? And then I have a follow-up.

It's actually a hard question to answer. The government has come out and publicly said there's no devaluation, the CADIVI remains at 6.3. Concurrent with that, they've run [C-cat] auctions and while they have not published these rates, the market would seem to indicate they're running between 11 and call it 14. So, it's a form of a stealth devaluation.

We have not been able to participate in the C-cat auction to date, at least successfully, so it's fairly unclear to us what is the exchange rate we're all going to have to use and for what transactions, and what will the rates be and I think we're waiting to get additional clarity on what is this multi-tiered exchange rate system look like, and what does it mean if you've got dual exchange rates and the CADIVI is held at 6.3 and then C-cat or something else continues to devalue. So, a lot more questions than answers.

I think the only thing that's certain is that the Venezuelan Bolivar is significantly over-valued, and probably the good news is the Venezuela business for Clorox is something less than 2% of sales. So, it's an important business but it's not the biggest thing we've got in the portfolio.

That brings up the follow-up question. This has been going on since 2010, where every so often you have to take out $0.10 to $0.20 from your earnings outlook for a business that's 2% of sales. So, when do you decide if this is really strategic or why bother at all?

First of all, I'm not sure that's completely accurate, Connie. In 2011, we had an all time record profitability in Venezuela. So, I wouldn't say it's been going on for three years. It's really been the last 18 months to 24 months when things have changed dramatically.

As I said, we've taken structural changes to lower the cost structure of that business. As I said, the team is performing better than we had forecast. We are looking at a comprehensive plan to say okay, how do we stay in -- we want to stay in this country for the long term, because it has been over the last 10 years one of the best, if not the best performing countries in Latin America for us.

So, we're making it more efficient. We're having dialogue with the government. I think we're getting at a tipping point where the government is going to have to sit down with a number of businesses and just say, look, if you want us to stay here long term you're going to have to give us a reasonable profit margin. And we'll be having that dialogue in the next 30, 60, 90 days with the government. Clearly, we don't like the situation we're in through FY14, but we are doing better than forecast and it's not going to be a significant drag unless there's another major devaluation going forward.

Thanks very much.

Okay, Connie.

We'll go next to Lauren Lieberman with Barclays.

Thanks. Good morning -- good afternoon, sorry.

First question was just on private label. The mention of it in the release and I think on the call, so with Brita filters, that was actually the first time I had heard about that. So, could you just -- is that a newer dynamic? How prevalent is private label? Has there been shifts in shelf space, and do you at this point have any plans to kind of be able to stay ahead of that becoming a more lasting trend?

Lauren, it's primarily in one customer. A large customer, but it's in one customer, and we do have plans to change our filters over the next two quarters. So, you'll see a very different filter structure for us coming out, and we think it addresses this issue.

And will those different filters then require new pitchers, too?

Put it this way, the new filter will be unique in how it fits into our pitcher.

Okay. Great.

And then second thing was just I'm actually feeling a little bit confused on the conversation on your own spending on trade promotion, because my understanding was that your expectation for the year was that first half was heavier trade promotion activity until you had the innovation that you had planned to launch in the second half. So, you how did that not exactly play out? Was it that it was just in terms of a first half, second half story, did I misunderstand to begin with? But I thought really the plan was we'll promote to protect our share until we've got new product activity.

Lauren, this is Steve. I think you probably misunderstood. Our trade spending for the first half of the fiscal year is essentially flat on a year-over-year basis.

As a percentage of sales.

As a percentage of sales. And as we look to the second half of the fiscal year, the plans that we put in place many months ago is to increase that to defend our market shares and to support the innovation.

So, there's been no change to the trade promotion plans. We're just continuing to echo the fact that trade promotion spending will be up in the second half as planned.

Okay. And the final thing was just on pricing in Argentina. If you had heard any chatter, anything around price controls potentially becoming more onerous or coming into some of your categories or if that's not really been a sores of worry just yet?

We've been under price controls for some time. We were able to get pricing through in the second quarter, which is certainly going to help the results.

I think we'll have to see, following the significant he devaluation, what the government does. They tend to tighten up a little bit on the price controls in the short term has been our experience. But, in Argentina, we have been able to take pricing, just not as much pricing as we would like to get and we'll have to see how it plays out over the next few quarters.

The government in Argentina has certainly more flexibility around pricing, particularly behind innovation, so that's what was successful in October. I think that's what helped drive the results in the second quarter.

Okay. And does the outlook and the adjustment you've made for Argentina, what's the assumption around your ability to price in the second half of the year?

Essentially it assumes that the pricing that we have taken that we can carry into the second half of the year, we're hopeful to get more pricing but we're not counting on it right now.

There's nothing -- no incremental pricing baked into the plan for the back half, Lauren.

Okay. Great. Thanks so much.

Thank you.

That concludes the question-and-answer session. Mr. Knauss, I'd like to turn the conference back over to you.

Thank you, everyone. We know you had a lot going on today with the Church and Dwight analyst day, as well, so we appreciate the strong attendance and we look forward to talking to you on the next call. Thanks, everyone.

Thank you. That does conclude today's conference call. Thank you for your participation.