高樂氏 (CLX) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Clorox Company third quarter fiscal year 2014 earnings release conference cull. 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 call, Mr. Steve Austenfeld, Vice President of Investor Relations for the Clorox Company.

Mr. Austenfeld, you may begin your conference.

Welcome everyone and thank you for joining Clorox's third 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 investors to better understand and analyze our ongoing results of operations.

Reconciliation with the most directly comparable financial measures, determined in accordance with GAAP, can be found in today's press release, this webcast's prepared remarks, or supplemental information available in the financial results area of our website, as well as in our filings with the SEC.

In particular, it may be helpful to refer to tables located at the end of today's earnings release. Please recognize that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans.

Please review our most recent 10-K filing with the SEC and our other SEC 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.

Turning to our prepared remarks, I'll cover today's highlights of our third quarter business performance by segment. Steve will then address our Q3 financial results, our updated financial outlook for fiscal 2014, and our preliminary financial outlook for fiscal 2015. Finally, Don will close with his perspective on the business, followed by Q&A.

In the third quarter, including the impact of negative foreign currencies, sales decreased 2%. The impact from foreign currencies was particularly acute in Argentina as well as in Venezuela, where we moved to SICAD I, effectively resulting in a meaningful devaluation.

On a currency neutral basis, sales increased more than 1%, reflecting strong growth in our international and household segments, partially offset by softness in Home Care, due to a distribution loss and ongoing intense competitive pressures in our wipes business. As well as generally sluggish categories across our US retail business. Volume decreased 1/2 a percent in the quarter.

Our US 13 week market share results show a decrease of 0.3 points versus the year-ago quarter. Reflecting ongoing intense competitive activity. While we saw share gains in of our laundry, Burt's Bees and food business, and flat results in Glad, these were more than offset by decreases in our Home Care, Brita, cat litter and Kingsford businesses.

At the same time, our categories grew 0.4 points in the third quarter. Although it was a bit slower than the prior quarter's growth rate of 0.6 points, due the impact of extreme weather across much of the nation. And category growth remains below our 2020 strategy assumption of at least 1% annual growth. Improving our category trends and market shares is our number one priority right now, which Don will further discuss in a few minutes.

Now let me turn to our third quarter results by segment. Our cleaning segment volume decreased 5% with sales down 4%, driven primarily by decreases tin our Home Care business from disinfecting wipes. As we have discussed, our disinfecting wipes business continues to face an intensely competitive environment. More intense than we have seen in years.

After we achieved a record share a year ago, competitors have become very aggressive in the marketplace, causing us to increase trade spending to even greater levels than we anticipated a few quarters ago. Volume in our disinfecting products was also impacted by a mild cold and flu season, relative to last year.

In addition, the disinfecting wipes category has recently seen significant distribution swings among large retailers. During the quarter, we lost wipes distribution with a club customer, while picking up distribution at two other key retailers. Clorox remains the clear category leader with market share near 50% in tracked channels and with recently improving share trends, we're optimistic this encouraging trend will continue.

We remain committed to supporting this business across our 3D demand building model including increased consumer promotions, consumer communication across TV, radio, and digital, highlighting the value of Clorox wipes versus competitors' products, high levels of quality merchandising, and recently launched new wipes products for glass, tub and shower cleaning.

Our laundry business experienced volume and sales decreases due to category softness impacting our Clorox 2 laundry additives. However, we are pleased with share gains in the quarter for Clorox liquid bleach, which was lapping very high growth in the year-ago period and is once again surpassed a 60% market share.

Finally, volume and sales gains on our professional products business were driven by our healthcare and professional cleaning segments. Looking ahead for the cleaning division, we continue to expect heightened competitive pressures, which we are responding to aggressively with increased investments to drive brand and category growth.

In our household segment, volume grew 5% and sales grew 4%. The segment's top line results were largely driven by increased sales and shipments of Kingsford and Glad products. Our charcoal business grew in comparison to a weak year-ago quarter, and was also driven by increased merchandising support to help kick off the grilling season.

That said, charcoal volume and sales fell short of expectations, as weather was similar to last year, quite poor in much of the country in the third quarter.

Top line growth on our Glad business was driven or due to increased shipments in advance of a price increase, and increased merchandising at a number of key retailers. Advanced purchases of Glad products, ahead of our March price increase, are likely to reduce shipments in the fourth quarter. That said, we are pleased that we continue to grow share in the higher margin, premium trash bag segment.

Turning to cat litter. Volume increased as a result of strong category growth and increased merchandising. Though sales lagged due to unfavorable mix and increase trade promotion spending in the face of heightened competitive pressures.

In response, we're looking forward to our August launch of Fresh Step Extreme lightweight which we believe will provide the lightweight product many consumers seek, with the excellent clumping and order control that Fresh Step consumers have come to expect from our premium cat litters.

Volume in our lifestyle segment decreased 1% while sales decreased 3%. Sales lagged volume, due to higher trade promotion spending, primarily on our food business.

Volume gains on our food business from increased shipments of Hidden Valley bottle and dry salad dressings, were more than offset by decreases on our Brita business, due to ongoing category softness and competitive activity. We anticipate having a meaningful competitive response out in the first half of next fiscal year on our Brita business.

Turning to our international segment. Volume increased 1% and sales decreased 6%. Sales lagged volume due to 15 percentage points of negative foreign currency impacts across many international markets, notably in Argentina, Venezuela, Canada, Chile, and Australia.

On a currency neutral basis, international sales grew 9%, reflecting very strong gains in strategic growth markets behind innovation and higher brand investments. Steve will provide further details on Venezuela and Argentina in a moment.

With that, for fiscal year 2014, we now anticipate sales to be down slightly, reflecting softness in the Company's US retail business and foreign currency declines. On a currency neutral basis, we anticipate international segment sales to increase and total Company sales to grow about 2%.

Steve will provide additional detail on factors impacting our sales growth in fiscal year 2014 as well as discuss our fiscal year 2015 sales outlook.

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

Thanks, Steve and welcome everyone.

For the quarter, diluted earnings per share increased 5%, despite the negative impact of an effective currency devaluation in Venezuela. In March we started using the SICAD I rate of 10.8 Bolivars to 1 US dollar to record our Venezuela business operations. This devaluation reduced diluted earnings per share by $0.13. Excluding this charge, earnings per share from Continuing Operations was $1.18.

With that, let me take you through the details of our third quarter financial results. Sales for the third quarter declined 2%, reflecting more than 3 points of foreign currency declines and nearly a point of higher trade promotion spending, partially offset by about 1.5 points of pricing, primarily in international and 1 point of favorable mix. Excluding the impact of foreign currencies, sales were up more than 1%.

Gross margin for the quarter came in at 41.8%, a decline of 30 basis points. We delivered $21 million in cost savings or 140 basis points, and about 80 basis points from pricing, primarily in international markets. These benefits were more than offset by 120 basis points of commodity costs, primarily related to resin. As well as 120 basis points of higher manufacturing and logistics costs, due in part to continued inflation in international markets, particularly in Venezuela and Argentina.

Selling and administrative expense for the third quarter was about 13% of sales, down 80 basis points versus year-ago, driven by a reduction in employee incentive compensation accruals, reflecting anticipated lower year-over-year payouts, consistent with our pay for performance philosophy.

The total incentive compensation accrual reduction was about $25 million, or about $0.12 of diluted earnings per share impact. Benefiting several lines on the P&L, including cost of goods sold, selling and administrative expense, and R&D costs.

Advertising spending for the current quarter was nearly 9% of sales. Spending in the US remained above 9% of sales, exceeding investment levels in international. On an absolute basis, advertising dollars were lower as we shifted a portion of our demand building investment in the current quarter to trade promotion, to address the intense competitive environment.

Our third quarter effective tax rate of 35.3%, on earnings from Continuing Operations, was more than a point higher versus the year-ago quarter, reducing diluted earnings per share by $0.02. The higher rate was primarily driven by the nondeductible cost related to the Venezuela currency devaluation this quarter. For the full fiscal year, we now anticipate an effective tax rate of about 35%.

Net of all of the factors I've discussed today, in the third quarter we delivered diluted earnings per share from Continuing Operations of $1.05. Year-to-date free cash flow was $346 million, versus $352 million in the same period year ago.

This modest decrease is the result of the timing of tax payments, funding of liabilities under certain non-qualified deferred compensation plans, partially offset by lower capital expenditures. Importantly, we continue to anticipate free cash flow as a percentage of net sales will be about 10% for the fiscal year.

In the third quarter we repurchased about 1.5 million shares of common stock at a cost of about $130 million. And we also ended the quarter with a debt to EBITDA ratio of 2.2 to 1, within our targeted range of 2 to 2.5 times.

Now I'll turn to our fiscal year 2014 outlook. As Steve mentioned, we now anticipate sales to be down slightly for the fiscal year, reflecting softness in our US retail business, including lower than previously anticipated charcoal sales in the second half of the year.

In addition, our outlook continues to reflect more than 2 points of foreign currency declines for the full year, with about 3 percentage points impacting the second half. For perspective, softness in our US retail business is contributing about 3/4 of the decrease in our sales outlook, with the Venezuela devaluation making up the balance.

Higher year over year trade spending in the fourth quarter will also temper sales growth. On a currency neutral basis, sales are now anticipated to grow about 2% for the fiscal year. Turning to gross margin.

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

We continue to take pricing actions where possible to help offset higher commodity costs and inflation. And as we mentioned in our press release, we increased Glad trash prices by 6% in March to help offset the rising cost of resin.

We continue to expect our fiscal year EBIT margin to be flat to up 25 basis points, reflecting lower selling and administrative expense as a percentage of sales, driven by reduced employee incentive compensation accruals, and the Company's ongoing productivity programs.

Advertising spending on our US retail business is expected to be about 9% of sales. With $0.15 of negative impact on the fiscal year from the recent currency devaluation in Venezuela, we now anticipate diluted earnings per share from Continuing Operations to be in the range of $4.25 to $4.35 for fiscal year 2014.

Now I'll turn to our financial outlook for 2015. As we noted in our press release, our preliminary outlook anticipates flat sales for the year. On a currency neutral basis, our outlook anticipates sales growth of 1% to 3%, excluding the negative impact of more than 2 percentage points from currency declines in Argentina, Venezuela, and other countries.

Following the third quarter devaluations in both Argentina and Venezuela, we expect currency declines to be higher in the first half of the fiscal year. These headwinds, combined with intense competitive pressures, may result in lower sales in the first half of the fiscal year followed by stronger sales in the second half.

Finally, our sales outlook also assumes about 3 points of incremental sales growth from new product innovation and the benefit of price increases, as well as the negative impacts of higher trade promotion spending and unfavorable mix. Now let me make a comment about Venezuela.

Our fiscal year 2015 outlook also assumes the ability to increase prices on controlled products in Venezuela, where price freezes have been imposed on more than two-thirds of our portfolio for well over two years.

Over the last few years, continued inflation in Venezuela has more than doubled our manufacturing costs. Although it's our desire to continue supplying millions of Venezuelans, with a product they use everyday, we continue to seek immediate, meaningful, and ongoing price relief to address the deteriorating margins and operating losses in that country.

Turning to EBIT margin. For fiscal 2015, we anticipate margin to increase 25 to 50 basis points, reflecting cost savings of about 150 basis points, some benefit from pricing in international markets, and moderated year-over-year commodity costs.

We expect these factors to be partially offset by high inflation impacting manufacturing and logistics costs, as well as higher advertising investment.

Selling and administrative expense, as a percentage of sales, are forecast to be about 14%, which assumes a return to targeted levels of incentive compensation versus the significantly reduced level this year.

We also anticipate an effective tax rate of 34% to 35% in fiscal 2015. Net of all of these factors, we anticipate fiscal 2015 diluted earnings per share from Continuing Operations in the range of $4.35 to $4.50. Importantly, this outlook assumes continued double-digit devaluations in both Venezuela and Argentina.

Looking forward, we're committed to accelerating top line growth through product innovation and stepped up investments in our demand building programs. To fund this, we're going to continue to the focus on the things we can control. Including leaning harder in on our cost savings programs and driving efficiencies to increase productivity.

And with that I will turn it over to Don.

Okay. Thanks, Steve and hello to everyone on the call.

As Steve said, we delivered 5% diluted EPS in the quarter, even with the impact of the devaluation of Venezuela. That said, we're certainly not satisfied with the results of this quarter. And looking ahead, our top priorities are building our market share, driving category growth, and getting back to the trajectory to achieve our strategy 2020 targets.

Those are the targets we shared with you last fall on the Analyst Day out here in Pleasanton. So as we've shared with you for several years now, we've looked at our growth strategy in terms of the financial algorithm, which rolls up on our US retail business, which represents about 75% of our business.

Our professional products business, which makes up about 5% and then international which tribes contributes a little over 20% to overall sales. What I thought I'd do is give you a look at how we anticipate each of those three legs of our business contributing to sales growth in fiscal 2015.

So in US retail our 2020 goal that we laid out for you last fall was growth of 2% to 3% annually and in FY15. While it will certainly be challenging to achieve that, particularly in the first half of the year, we believe we have the plans in place to grow near the low end of that range for the full year.

In the US as you all know, we face an intensely competitive environment and sluggish categories and the economy continues to be bumpy. Just noting GDP being basically flat for the first quarter is testament to that.

Now despite a March uptick in consumer optimism, confidence again dipped slightly in April with consumers reporting less optimism regarding current business and labor market conditions with a proportion of consumers anticipating a drop in income growth given the increased payroll taxes now for more than a year. And certainly reductions in key government assistance programs like the SNAP program and concerns about healthcare costs.

Now for us, nothing is more important than profitably restoring our US market shares and growing our categories. And we're investing heavily to improve our consumer value proposition. Here's what we're going to do.

As we head into -- as we are in the fourth quarter and heading into FY15 our 3D brand building execution is going to focus on harder hitting consumer communications that demonstrate visually, and through messaging our superior value to drive desire. I think one testament to that is the new bleach advertising I think many of you have seen.

Second, superior benefit oriented packaging and competitive price points at the point of decide. I think an example of that is our new four pack wipes package that is now out there, touting our benefits much more boldly.

And then lastly, consumer preferred new product innovation with harder hitting claims that demonstrate our superiority and would delight our consumers. You'll see new Burt's Bees lip crayons for example hitting this summer that are 100% natural.

And as I said, those are examples and we think this approach is certainly working holistically on bleach. As we shared with you last fall when we launched the fully integrated 3D plan, we wanted to reinforce the value of Clorox bleach. And using innovation to differentiate our products versus private label.

And I think you could see with our share results, I think they speak for themselves, having once again surpassed a 60% market share. We were at 60.6% for the quarter, the past 13 week period, up nearly half a share point.

The 2020 goal for professional products is for 10% to 15% annual growth and we anticipate this fast growing business to have another strong year in fiscal 2015, to land within that annual growth range. We continue to believe there are certainly tail winds in that space. And we have a differentiated right to win there as we seek to grow our base business and organically expand through product and category adjacencies.

In international, our 2020 goal that we communicated to all of you was annual growth of 5% to 7%. In fiscal 2015 this is where we are most challenged because we face negative impacts from foreign currency in numerous markets. As Steve noted most significantly in Argentina and Venezuela, along with certainly difficult operating environments in those two countries.

We're focusing on the things we can control there such as preserving cash and reducing costs, while we work persistently with governments in both countries to secure meaningful price increases. While we expect we can achieve the segment growth goal on a currency neutral basis, our outlook reflects continued devaluation in both of those countries. It also assumes we'll be able to execute price increases at some level in Venezuela.

Now, factoring in these impacts, we project a single digit decline for our international business next fiscal year, which is the reason we're projecting to fall short of our annual 3% to 5% sales growth target as a Company.

Apart from the difficulties in Venezuela and Argentina, our international business remains pretty healthy and we're executing well. We're seeing growth in many markets in and beyond Latin America and our Burt's Bees business outside the US. I think that's why on a currency neutral basis we had almost double-digit growth in international.

To summarize, we're certainly facing some speed bumps in the year ahead and I believe we're being prudent in our assumptions regarding the headwinds we face. Importantly, we have strong plans in place to address them.

First, as we noted, we're investing about one additional point of demand spending to support our brands and turn our market shares around and grow our categories. Nothing is more important and we are keenly focused on ensuring consumers understand the superior value our products offer.

Second, we believe in innovation and remain committed to our goal for 3 points of growth from innovation next year. The August introduction of Fresh Step Extreme lightweight builds on the innovation we launched earlier this year including the new wipes Steve mentioned, Clorox Smart seeking bleach and Clorox Fraganzia bleach and more.

Third, we're driving improvements in productivity and administrative costs even with increased spending. And finally, we are certainly doing all we can to manage through the challenges in Argentina and Venezuela.

With that, let's go to your questions.

Thank you, Mr. Knauss.

(Operator Instructions)

Our first question comes from Steve Powers with UBS.

Steve, just maybe as a quick clarifying question to begin with. Did you -- if I missed it I apologize. Did you talk about or could you quantify the impact if you aren't able to get the pricing in Venezuela or Argentina that you've assumed, what that financial impact would be next year in 2015?

What our assumption is for pricing next year it's about a point of incremental sales growth for the Company as a whole. I will tell you that a small piece of that is Venezuela from a total Company perspective.

So getting pricing in Venezuela is critical to the health of the Venezuelan business and our ability to continue to produce product for that country and those people. But it's a very small piece of the sales growth that we're counting on next year.

Okay. Thank you. I guess my real question is more around innovation and the challenges you're facing in categories like wipes, and Brita, cat litter.

Just given how focused you are on innovation, I guess I struggle with how you've seemingly ceded the innovation lead in those categories, opening the door to rivals and or copy cat, private label type imitations. I guess my real question is why weren't those categories better protected? Or maybe that narrative is incorrect, so if you could just set me straight there, that'd be helpful.

Steve, let me start. This is Don. Let's take it one by one.

On wipes, I don't think we ceded the innovation agenda at all in wipes. I think what we saw in wipes after about a year and-a-half ago we hit almost a 60% share, just before the start of the 2013 flu season. We were pounding on competitors pretty good. And what we saw, and basically our wipes issues are focused in two or three customers, is we saw an onslaught from private label on pricing.

We've always maintained that our brands had the ability to command a price premium. And when we're in the 25% to 30% premium range like we are on bleach, for example, and we're gaining share again, we can do that. When we start getting outside that 25% to 30% band, which is exactly what happened to us in wipes, we got hammered.

Now, we've rolled out glass wipes which are doing quite well, tub and shower. We've also launched just a new four pack for example in our largest customer and that's doing extremely well. We're launching a new five pack in club and we're getting much more declarative in terms of our benefits versus competition on that packaging.

I think it's been more of a victim of our own success in wipes and creating a bit of a pricing umbrella which we are managing now. But I think from an innovation standpoint in terms of the quality of the wipe, getting into different cleaning occasions, like glass and tub and shower, I don't think anybody touches us there. So that's wipes.

On litter, I think this is again, a value issue. If you look at our share loss over the last year, 2 share points, it's all in Fresh Step. Scoop Away, which is our value brand, has held share, in fact built a little bit of a tick-up in share. We did get outflanked in innovation, I believe. And I think sometimes we try to be too perfect. Perfection's the enemy of progress.

I think the lightweight product that we are coming out with in August is a better product, we believe, than our competitors have at least that's our consumer testing. It's also only a 12% premium versus its competitor products that are lightweight that are over a 50% premium versus regular litter. So I think we're going to retake the high ground in litter as well.

In terms of Brita, we are the category in Brita. And again, this was a, not so much a lack of innovation, although there has been -- in total. The innovation we did on on-the-go bottles for example has driven us to an 80% share. In fact in the April data that we just got yesterday, we've seen Brita gain share in total again.

I think we did get, again, outflanked on a pricing standpoint. We got up to a 50% premium on our three pack filters versus private label competitors. That cannot stand.

And right now we're going back through and looking at how we allocate retail customer marketing funds and trade funds to get more into the cost of goods to lower that price to get it back into a 25% to 30% range.

You're also seeing new innovation from us on bottle on-the-go. We just launched a 34-ounce solid bottle. You're going to see new pitchers and new filters from us in FY15. That kind of gives you a snapshot, Steve of how we're trying to relaunch and reclaim the ground that we've lost. But a lot of this has been because of extremely competitive pricing pressure.

Thanks, Don, that's helpful.

We will take our next question from Nik Modi with RBC Capital Markets.

Good afternoon, everyone.

Hi, Nik.

Hey, Don. Two questions from me. Just talking about the wipes distribution losses. My understanding is I think a very large customer, but their category growth has really real slowed since that transition has occurred. And I'm just curious if you think perhaps you might be able to get back distribution just given some of the category trends?

And then the second questions is kind of more bigger picture. I've always regarded Clorox as Best-in-Class when it comes to category management. You guys do a great job of managing the businesses you're in. I just wondered, just given the top line has been struggling for quite some time -- I mean I get the macro environment, I understand that.

But it just seems like you could put your capabilities more to use by being a little bit more acquisitive in other categories within the supermarket. And I just -- Don I was wondering if you could just philosophically explain how you think about that?

On the first question, the customer that we lost distribution, and I've lived through this in other companies, it's typically -- this is an annual program. We'll see if it -- if we can make an adjustment inside that 12 months.

But to your point, their category is down in significant double-digits. And interestingly, the distribution that we picked up in another large customer, their wipes category is now larger as a total category in wipes than the other customer. But we don't have an 80 share in that customer.

So we haven't made up totally the volume there. But I think we've not only gained distribution in another top five customer, but we've also picked up in another top 10 -- two other top 10 customers some incremental distribution. So I think it will play out over the course of the next three to six months as we build that back.

We always have hope that we'll be able to go in where we lost the distribution, especially after a six month check-in with this customer, to see if those trends continue at the current rate, we would expect and hope that they would be open to that discussion.

But I think with the distribution we have gained in other customers, and that continues to build, and with the innovation around the four pack, and the new five pack, and glass, et cetera, I think we feel much better about our position.

And in fact, I would say to you just like we told you folks in October that we would see share gains on bleach again in this quarter, which we delivered on, I think we're confident that you will see share gains again from us on wipes in May and June, as we cycle through this. So feel good about that.

As far as the other thing, Nik, igniting these categories and getting more category growth, we are pushing harder into adjacencies. Let's take Hidden Valley as an example. We now have the number two brand in pasta kits, for example. We have the number two in sandwich spreads or the number three in sandwich spreads now.

So our dry dip and dry salad business is growing 14%, 15%. So we are starting to push into these adjacencies and you'll see more of that's as we go forward. We're doing everything we can to ignite the growth by looking at adjacencies.

We'll also continue to look at acquisitions that are down the middle of the fairway for us like we did with Soy Vay. Clearly that's a small business but it's really growing at double-digit rates. So beyond personal care or healthcare, the second priority for us is acquisitions that are in those core categories for us.

Great. Thanks, Don.

Thanks, Nik.

Our next question comes from Jason English with Goldman Sachs.

Hey, good afternoon, folks.

Hi, Jason.

Hope you all are well. Two quick questions. First, a housekeeping item. I think I heard you when you were talking about fiscal 2015 guidance say that you're assuming continued currency erosion in Venezuela and Argentina. Did I hear that correctly?

Yes, you did. We're assuming double-digit decreases in both the Argentine peso and the Venezuelan Bolivar next year. To be really clear about it, we moved to SICAD I. And we expect that it's more of a free floating rate. It will continue to [die out], so we're not assuming it will go to SICAD II, but we are expecting ongoing devaluation.

Sounds like a pretty prudent assumption. Now I want to turn my attention to a category that you haven't really talked about, liquid cleaners.

It's a category that by our data just looking at the Nielsen numbers you've been losing quite a bit of share in for a pretty persistent period of time with private label gaining, SC Johnson gaining P&G gaining.

Can you talk about some of the dynamics in that category and what may stem those share losses?

Well, let me start by saying this, Jason. I think in Home Care we actually -- we've been hit by share losses primarily because of wipes. But to your point on dilutables in particular we've lost share on Pine Sol, although there is light at the end of the tunnel.

In March we saw actually a total -- in total Home Care we saw a share gain of 2/10 of a share point. I would say this on Pine Sol. I think what we've seen a lot of innovation from Proctor on Mr. Clean. And we've seen a lot of competitive pricing from other competitors in that space, from Fabuloso from Colgate.

So clearly we're focused on innovation around Pine Sol. The squirt and mop thing we just rolled out. It's too early to tell how that's going. You'll see new fragrances from us, you'll see different bottle shapes and sizes down the road from us.

But it's clearly going to be -- it's an innovation game and it's also a pricing, same kind of issue I talked about in the other categories where we've let our price gap drift up too much. And that's one of the things we're going to reference.

Now, as I said, I think we feel good about the fact now that Home Care shares in total are growing again. I do think you'll see our wipes shares regain and rebound in May and June. And the dilutable piece is something we're focused on but with an innovation bent as well as a looking at our trade spending and how we deploy those funds to get the pricing on shelf right.

Thanks a lot. I'll pass it on.

Thanks.

Our next question comes from Olivia Tong with Bank of America-Merrill Lynch.

Good afternoon. Thank you. Quick question first. You talked about the fact that embedded in your fiscal 2015 outlook is your assumption that you will get some pricing.

So you've obviously had a couple of discussions with the government around getting pricing in Venezuela, Argentina. But what's sort of the plan of action if those discussions don't turn out fruitful and pricing isn't an option?

Let me take that, Olivia. We have been in high level discussions with the government. I think we want nothing more than what the government of Venezuela wants, which is to be able to make a fair profit. And I think they recognize the straits that our business is in and the fact that something has to give or certainly the business in its current form is not sustainable.

So I think we'll be able to give you a much better update when we get to the August call as we work through these issues with the government. But given the recent price increases they awarded to the food segment in that country, I think we have some level of optimism that we're going to be able to he get this pricing through.

I want to really be clear for everyone and with our investors that I just want to build this algorithm for you so that there's no confusion or that there's any conclusion that we're overly dependent on getting pricing in any given market. When we put the top line algorithm together, we said look, we've got about 3 points of growth from innovation and 1 point of growth from pricing. And about 90% of that pricing is in international markets.

Now, that gives us 4 points of growth. We've got more than 2 points of currency headwinds in this thing. So let's just round it to about 2.5 points of currency. And that includes these double-digit assumptions on devaluations in Venezuela and Argentina, which as Jason noted, we think is prudent. That gets us down to about 1.5 points.

The reason we're not coming out with a higher top line estimate than the flat that we put out there, is given the competitive intensity in the US and the volatility of foreign currency, we don't think it's prudent to promise more to investors than that. We may be accused of being somewhat prudent in these assumptions, but we think that's the right way to go.

Thanks. And then you mentioned a couple times about price gaps drifting up too much between you and private label and some of your other competitors.

Yes.

And with that, you've got a fiscal 2015 outlook for 25 to 50 basis points of EBIT margin expansion despite the fact that FX will still be a near term drag.

Can you talk about some of the puts and takes within that margin? If you've got to spend more, if you've got to promote and price more? Is cost saves coming up to offset that delta or what else is going on in the equation to help offset that? Thanks.

Sure, this is Steve. Let me lead off on that. It starts with gross margin expansion. As we look into next year, we, number one, have very good cost savings programs planned so we feel very good about that. And as Don and I noted earlier, we also are anticipating about a point of pricing.

We think those two factors are going to be sufficient to kind of overcome inflation and commodity cost increases and should lead to solid gross margin expansion next year.

And I think if you let that just flow through the bottom line and again we're going to continue to aggressively pursue savings on the SG&A line, we think the combination of those things should translate into solid EBIT margin expansion.

Thank you.

Thanks, Olivia.

Our next question comes from Wendy Nicholson with Citi Research.

Hi.

Hey, Wendy.

Good morning or good afternoon. My two questions. First of all, just on Venezuela. I think you've already been taking some pricing on a piece of your portfolio. Is that not correct?

About two-thirds of our products, a little over two-thirds are under price controls, a third is not. We've been able to get very small limited amounts of pricing in the non-controlled categories historically.

And Wendy, one thing I would note too, that of the pricing that we've assumed for Venezuela next year, almost half of it is carryover pricing that we've already gotten this year.

Got it. Okay. Fine. And then turning to the wipes business. If I'm not mistaken, and I may have a faulty recollection here, but I think you used to do some private label manufacturing for the wipes business for certain customers and then you decided to exit that.

But given how private label is gaining share and seems to sort of be a more persistent thorn in your side, I guess number one, does that reflect your loss of control over private label since you're no longer doing it? And would you entertain bringing that back in-house?

We didn't do private label on wipes, Wendy. We did private label on food bags in Glad that we exited about five years ago. We've never done private label on wipes.

I would say that with the tremendous focus on private label in a couple of key customers, what is happening is the category is now slowing to -- the category grew in the last quarter just 0.5. This is a category that was growing in the mid-singles consistently for quarter after quarter after quarter.

I think the retailers whose have driven this hard are recognizing that it's almost impossible to drive a category forward if you don't have the 50 share branded guy, who's premium priced, driving with you.

I think as I said, I'm pretty confident as we sit here today that you're going to see our shares rebound there. I think private label has its role to play but I think you'll see a resurgence from us as we lap through this last year.

Okay. Terrific. Thank you very much.

Thanks, Wendy.

Next question is from Chris Ferrara with Wells Fargo.

Thanks. Can you I guess characterize the type of competition you're seeing. It's not a new concept obviously. We've heard that from a bunch of companies this quarter. Obviously you said you're promoting more.

But what do you see from competitors? Is it your sense that this is just a momentary reaction to weaker volume in the near term? Or are you seeing anything that might make it sound or seem a little bit different from what you've seen in the past?

Let me start, Chris. I think there are a few things going on.

First of all, why these categories in general, not just ours but across the CPG space, are fairly sluggish and I think there are a few things obviously going on. We talked about the fragile consumer, the fact that wages are stagnant. We've talked about the fact that government assistance programs have been whacked back. We've talked about the horrible weather in the quarter, which obviously had an impact on GDP.

I think the other thing is we've seen a spike in the number of people 18 to 34 living at home. I mean six years ago it was 27% of people in that age group living at home with their parents. Now it's 31%. We think there's about 1.5 million to 2 million households that haven't been formed that should've been formed. You add up all those factors and I think you get sluggish categories so people are chasing volume.

The other thing is you look at the volatility in emerging markets and the currency issues and people are refocused on the US market and driving -- trying to drive growth in the US market. I think you put all those factors together and you get kind of a perfect storm of events going on.

And then if you look at the last year, the pattern in CPG for the previous four years had been a fairly good consistent pattern of pricing. And volume was kind of sluggish to declining. No you're seeing volume and pricing almost matching up with each other because people are chasing that volume.

And I think that's more of a temporary phenomenon than not. Hopefully as we see the economy pick up. But we are seeing there's such a lack of pricing in the category because of all those other events that I mentioned. You got a fragile consumer out there. So it's pretty tough. So I think that's what's going on.

That helps. And actually leads to sort of a follow-up. Gross margins and I know there's only one quarter left in 2014, but gross margins you're still looking for them to be modestly down. That's unchanged. But there's more pressure, right, and you guys obviously have said you're going to promote more.

Sounds like pricing may be positive, but it's probably going to be less than you thought it was going to be? And maybe that's wrong. Can you talk through that? I mean your ability to sustain that gross margin guidance despite the fact that there seems to be more incremental drags than there are helpers to gross margin.

For fiscal 2014 as you say we're three quarters into it and gross margins in the third quarter were down about 30 basis points. We would expect gross margins to be down modestly in the fourth quarter.

I think the difference in fiscal 2015 around gross margins is in commodity costs. Commodity costs are running well north of a point this fiscal year, fiscal 2014. As we look to fiscal 2015, we think commodity prices are likely to continue to trend up, but not at the level we've seen.

When you take the cost savings programs, call it 150 basis points and you add to that the point of pricing and the other things that we're doing, gives us some reason to believe that our gross margins should start normalizing and start building back again.

We'll have to get into the year and see how things play out from a commodity standpoint, but that's the assumption we're working with at this point.

Chris, one other thing just to keep in mind is that the price increase we put through on Glad to help offset some of the commodity pressure that Steve just noted, that just went into effect in March. So we'll effectively get about a years benefit of that going forward.

Great. Thanks a lot, guys.

Thanks, Chris.

Next question comes from Ali Dibadj with Bernstein.

Hey, guys.

Hi, Ali.

So trying to dig a little deeper in the competitive environment, that looks like it's gotten tougher. Clearly you mentioned things like the macro environment.

Are there other elements, so for example, do you guys have a sense of the manufacturing capacity utilization for the non-wovens, so for the wipes, for resins, that's out there right now? Is that at all driving some of this pressure?

I think it's probably more retailers looking to lean into private label as a way of getting a little bit more margin than it is excess capacity chasing the system based on what we know today.

Okay. Okay. And then on that, so does it sound like -- you mentioned the price gaps in some categories up to 50%, that's not sustainable, totally makes sense.

How much of that is you guys innovating over the years versus a quick change by the private label manufacturers and/or the retailers in expanding it downward? So how much of it is you guys going up versus retailers taking the prices down or private label?

It's interesting, Ali. Where we've really seen private label focus is where we have branded shares north of 50.

So when you look at wipes, the most extreme pressure we've seen from private label has been in bleach, in wipes, and in Brita. And each one of those is a brand that has north of 50 share. And so when you have that kind of leadership share, I think that people really think that there certainly is a pricing or margin umbrella created. I think that's where we've seen the most pressure.

So we haven't seen that same level of pressure for example in salad dressing, where while we have a leadership brand, it's south of a 25 share. So it's really where we have these high share brands that we've seen the pressure. And I think sometimes, we've seen it in charcoal as well with a 70 plus share.

You think of all those businesses where we have those kind of leadership shares. And I think you've just got to -- we've got to double down and be very prudent that we don't create a pricing or margin umbrella where people can crawl underneath them. But I think private label really focuses there because there's not a lot of other branded competitors to focus on.

So I think they obviously believe there's an opportunity there. And certainly on the wipes example and the three pack filter example on Brita and you look at lump and some of the other things that are going on in charcoal with private label there. I think that's where you see the focus.

This is great because this is something you guys know I struggle with. Because those categories are where you also have your highest margins and so frankly it's been --

I wouldn't -- I would stop you there and say that's not necessarily true, Ali. If you think about -- let's think about bleach, wipes, charcoal and Brita. Clearly Brita has high margins. The other three are in the middle of the pack. Food has much higher margins. Burt's Bees has much higher margins. So we're not seeing it there.

It's really more of the share position you have and the lack of other branded competition in those markets. And I think us just needing to be much more watchful about keeping a pricing umbrella narrowed down so people can't crawl underneath it. And keeping the innovation up so we continue to offer new offerings there that people want to buy.

Okay. And that's helpful. Thank you very much for the color. Question I did have on just separate question on professional.

Yes.

If you could give us an update on that, it sounds like that was certainly a jewel in the crown that's growing for you guys for the CAGNY presentation before that. How is that proceeding, how's the growth going in that category?

And particularly from a margin perspective, is it still holding in at about Company or is it trending downwards? And if you could also mention because in the M&A discussion a second ago, you mentioned a lot of other core categories. Professional used to always be your number one it sounded like. Has that shifted a little bit from an M&A priority perspective? Thanks.

On professional we expect another double-digit growth year out of that business, Ali. And we also expect that trend to continue in fiscal year 2015. The margin structure of that business is actually accretive to the Company margin structure, so we feel good about the margins in that business as well.

I think that we just, as you may recall, we talked about it at CAGNY, we just launched the UV light partnership. We think there's a lot of upside in some of these different channels and categories as we drive that business. So I think we remain very bullish on that business.

As far as the -- I'll let Steve talk about the acquisition pipeline and the focus there.

Ali, you know that one of the things that we really like about this business is the fact that when we look at the categories, it's still fairly fragmented. We think there's an opportunity to roll up some of these small family held businesses.

Certainly we did that with Aplicare, HealthLink, and then a few years ago obviously Caltech bleach acquisition, which has wildly exceeded our expectations since we acquired it. And I think we feel like we've got a healthy pipeline of bolt-on acquisitions ahead of us.

It's going to take some time to shake these free. They don't always come in when you want. Sometimes you have to get into long-term discussions with people which is what we're doing. I think we feel very good about the M&A pipeline in professional products and you'll see more activity there over time.

And we certainly at a 2, 2 debt of to EBITDA, Ali, we've certainly got enough dry powder there if we need it.

Thanks very much, guys.

Thanks, Ali.

Our next question comes from John Faucher with JPMorgan.

Thank you very much. Wanted to sort of continue this theme here. And Don, you have talked a lot about product preference as something that you're really focused on in terms of getting consumer -- in terms of getting your products to where consumers really prefer them.

I guess and we look at this you've worked hard on that. And yet, is it just the consumer has changed and that's becoming less important? And therefore, you won't be able to charge the type of premiums that you think that product preference deserves?

And then you also talked a little about the brand investment going up. Can you talk a little about some of your marketing mix analysis. It's continued to come up over the years that your ad to sales has moved down. Should we expect a continued shift from that standpoint more toward the trade promotion?

If we do see that, is that permanent price cuts or is that going to be just sort of hitting hard at certain points of the year where you know you need to drive that value equation? Thanks.

Okay, John. Let me take the second part of your question first.

If you look at the incremental spend that we're putting in for next year, the majority of that spend is going into advertising and consumer promotion, not into trade. So we want to get comfortably back into the 9% to 10% range in total for the Company and to get back near the 10% level for the US retail business. So that's what we're doing there.

On the preference question, we still think that the 60/40 wins, the superiority of our products is extremely meaningful. I think where we got out of whack a little bit in the last year is these price premiums. There's only so much you can ask from a consumer, especially in tough times. I think we did not, especially on high share brands, we did not stay focused enough on the price point delivery at the shelf.

We also did not have packaging that was really hard-hitting visually on what our benefit advantage is versus our competitors. At the end of the day we've got to be able, as you know, we've got to be able to answer this fundamental question that consumers have, why should I buy your brand in preference to that one?

And I think while we've got great products in terms of 70/30 wins on Glad Odor Shield for example, and the same thing on Hidden Valley, if we let these premiums drift above 30%, we're asking too much especially in this environment.

I think we're going to continue that focus on 60/40 wins. We're going to continue to drive for product superiority but we're going to be damn sure that we've got these price points relevant to people where we're just not asking them to stretch too far.

Okay. And then one sort of further follow-up on this. One of the things you guys have historically talked about is wanting to focus in categories with more private label.

You've talked about that strategically and I guess this kind of goes back to Nik's question. Which is, is that still the right structure, the best structure for you guys to be in longer term? Those types of categories where you guys have big shares with private label.

Yes. I still think it is, John. I think that we still would say that if you gave us a preference to competing against private label versus competing -- like in Home Care with five different national branded and international branded companies, I think we would say, yes, we'd still want to compete against private label.

Because -- not because they're easier but because they have a more clearly defined unique role. We each have a unique role. We're the innovator, they're the opening price point. You get into a Home Care situation where you've got four or five other multinational companies, everybody's got the same role. I think we want that model.

We think that model works and I think -- we didn't build a 60 share a year and-a-half ago in wipes and a 60 plus share in bleach and a 70 share in charcoal and a leadership branded share in Glad because we can't compete with private label. We've done that very well.

We just got to re-sharpen ourselves in terms of making sure the balance between product superiority and price point is right. And we're getting there and I think bleach is a good proof point of that and I think you'll see the wipes coming back in May and June. It'll be another proof point.

Got it. Thank you very much.

Thanks, John.

Our next question comes from Bill Schmitz with Deutsche Bank.

Hi, guys, good morning.

Hey, Bill.

Hey is there any share repurchase in your 2015 guidance? Because as Don said, I know you're sort of at the low end of our debt to EBITDA range.

We're at about 2.2. So we certainly have dry powder for M&A and we've got dry powder to be able to do share repurchases. What I would say is that certainly people should expect that in the outlook we're going to continue to soak up dilution from stock options. Going beyond that, I think we have to look at the M&A pipeline and I think we just have to look at how much excess cash we build up.

As we've said for many years, and I think as we've consistently done, if we build up excess cash that we don't need in the M&A environment, we'll go ahead and look for ways to get that back to the shareholders either through the dividend or through share repurchases.

But at this point there's a range of expected outcomes and share repurchases is certainly one thing that we'll look at.

Got you. And then just a follow-up on the M&A question. Are there any opportunities for you guys to get bigger in sort of niche food categories? Because if you kind of look back the last five years, probably the all star in the portfolio has been Hidden Valley. You've done such a terrific job extending it. Is that something you kind of open to beyond the little small stuff like Soy Vay?

Yes, we would be open to that, Bill. And in fact, as you say, we know how to do and compete in that category quite well. I would classify that as down the middle of the fairway for us. Clearly that is something we would be interested in.

Okay. Are there any sort of sub-categories that you've targeted as being sort of complementary to the Hidden Valley business or is that too much detail?

I think for competitive reasons I wouldn't want to get into that one, Bill. Clearly where you're poking at is something that we have interest in.

Got you. Great. Just a last one. I know you still want 3 points of growth from innovation. I know you talked about the lightweight charcoal. Is there anything else you can talk about that's going to help drive that 3 points? That's already been announced or is about to be announced.

I think I'll give you another example. The lip crayons for Burt's Bees that are rolling out, we think it's quite a big deal, actually. There's not a -- that we're aware of, there's not a 100% natural lip crayon for women out there.

And as you know, lipstick is such a huge category. The lip crayon continues to push that Burt's Bees brand into beauty away from just functionality. So we think there's a big opportunity there.

I think obviously the lightweight litter we think is a big opportunity. The aloha scent we just launched on Glad, which is doing extremely well, which is Procter & Gamble's number two scent on Febreze that carries over mostly into fiscal 2015. We could go through the list by brand. But I think you're going to see a pretty full package across every major brand will have news. And I talked about Brita earlier.

Bleach, one of the things on bleach that continues to do extremely well and we're expanding this into new scents is the splash-less part of our portfolio, is up over 3 share points. That's one of the things that's driving our overall bleach share. So splash-less has clearly resonated with consumers.

Smart seeking, it's a little early to tell. A lot of that's carry over to next year. Smart seeking and outdoor have added about a share point plus already. So I think all in all, we're feeling pretty confident in the pipeline as we go forward.

Thanks. If I could sneak in one quick other one, kind of to John Faucher's question.

When you look at the basis testing before you guys do these launches are you seeing that once you launch them that the results are materially worse in this environment than they were sort of prior to this consumer malaise?

I'm trying to think of an example, Bill, that would be either worse or much better. I can't -- I think the models are still fairly predictive. And I think the reason is if you look at the category growth, now this quarter was a bit of anomaly. We grew 0.4, all of our categories. The categories were negative 1.8 in February because of the weather.

If you look at the fiscal year-to-date, our categories are growing 1%. The historical average is 1% to 2%. So it's nothing like there's some massive deceleration in these categories. They're softer and we're assuming kind of flat to up 1 next year.

But I don't think there's anything dramatic going on, so I don't want to read too much into it. We haven't seen anything in the predictive models on any of the major launches that we've done that would say they're way out of whack.

Thanks so much.

Thanks, Bill.

We'll take our next question from Connie Maneaty with BMO Capital.

Thanks. All my questions have been answered.

Okay, Connie.

Thank you very much. We'll move next to our question from Javier Escalante with Consumer Edge Research.

Hi. Good morning everyone there in California.

Hi, Javier.

How are you? I would like to revisit this issue of the relationship with the retailers. First a clarification. We saw a drop in ad spending in the third quarter. There was a commensurate increase in trade spending in the third quarter.

Yes.

There was?

Yes.

Okay. So then the question is if you can, to the extent that it's not confidential, talk about what exactly was the point of the retailer when you lose distribution for the wipes, you having 80% share?

I would like to understand what is the other side of the conversation, why is it that you couldn't get into an agreement that essentially didn't avoid this loss of distribution? That is point number one.

Point number two is trade spending overall it seems like there is an increase in the laundry aisle. There is an increase in litter because of innovation. And most of these monies are not seen by the consumer.

So is this a new normal that essentially the retailers are asking more money just to put the same products on the shelf? Thank you.

On the first question, let me see how I can answer this for you, Javier. I think what we saw in that case was an offering from a competitor that was on a cost per wipe basis we thought that we could not replicate that price for other customers.

And while we wanted certainly to maintain distribution in that customer, where we had been for over a decade and had been doing quite well obviously, it being the lion's share leader in share in general, we thought competing at that price level, particularly in a category where there is only 50% household penetration, we thought that was the wrong strategy for that category.

And we also thought, as I said that we could not deliver that price point to other customers. And we are a fair and equitable Company in terms of allowing everyone to compete. So we just didn't think we could make it work. And we thought it would have channel repercussions that would be serious that we wouldn't be able to deal with.

And we also thought it was wrong in terms of the dynamics in the category that you didn't need to push pricing that low for a product that was on trend. And had only 50% household penetration.

So we chose not to go that route and told our story differently at other retailers and that's why we're picking up distribution at other retailers. That's to question number one. We thought it was the wrong strategy.

On your second question, we have not seen an increase that I'm aware of in any of our top 20 customers in terms of slotting fees or any other incremental costs. Haven't seen any of that. I think people are getting even more and more everyday low cost, everyday low price, pushing money into cost of goods as most they can.

Certainly we have in our top 20 customer set, high, low competitors as well as everyday low price competitors. But I have been out with four retailers the last three weeks across the country, four different major retailers, all in our top 20, and that has not come up at all.

As a follow-up, in the case of the laundry aisle. Church and Dwight did say that they're going to increase a slotting fee or spending in trade, in the trade.

Yes.

My understanding is that there is a situation also with Proctor with regards to Tide Simply with some retailers. So to what extent are you getting kind of like hurt in the crossfire or not? I mean for your laundry additives.

We haven't really seen that Javier. As you know, we don't really play much in that aisle, certainly not in detergent. But the laundry additives seem to be a separate deal. We certainly have seen no bleed-over into the bleach section.

In fact, I think one of the reasons our shares are back to over 60 is we are now back to historical levels on merchandising. And we're actually starting to see household penetration decline slowing in bleach now. And dosing seems to be at the right amount. So we're not seeing that kind of effect in our segments. Okay. Thank you very much. Thanks, Javier.

Why don't we take two more callers.

Thank you. Our next question comes from Leigh First with Wellington Shields.

Good morning in California. I also wanted to ask about the professional cleaning business. I'm wondering if the infection rates are going down at the hospitals and other facilities? And if not, if that's still an opportunity for you and if healthcare reform is helping drive demand?

Lee, on the first part of the question, clearly the 100,000 people dying every year from hospital acquired infections is not really moderating very much, at least we don't see a discernable trend down.

We do see -- in fact, last night I was watching NBC Nightly News and they a segment on MRSA and MRSA killing itself I think over 23,000 people last year. So that opportunity, that issue of public health is still front and center with infection control people across acute cares facilities in this country and other countries. So that continues to be a very important opportunity for us and really important public health issue that we can help resolve.

We have seen in tests that we've done for example with the Mayo Clinic where we have greatly reduced those infection levels using our products and the protocols that we recommended. So clearly bleach is the most inexpensive and effective disinfecting agent against all those bad bugs. So that we feel good about.

And is healthcare reform helping and are the protocols being followed?

It's a little early to tell on that one. I'm not sure that the healthcare reform is going to materially affect that business one way or the other. I would say that one of the things that has happened under the Obama Administration about three years ago, is Federal Government Medicare changed their policy that they will not -- they won't reimburse hospitals for preventable injuries.

They classify these acquired infections as a preventable injury. Clearly the folks who have to deal with these protocols and infection control in hospitals are even more focused on it now. Because the expense of one of these, not to mention somebody potentially dying, is massive. So none of that has changed and so I think it's a very fertile opportunity for us.

Thank you.

Thanks, Leigh.

Our final question comes from Erin Lash with Morningstar.

Hi. Thanks for taking the question. I was wondering if you could speak a little about the Burt's Bees business. And I apologize if I say this wrong, but particularly within the context of how Gud it's performing relative to Burt's Bees and that sort of mix?

I'm sorry, I didn't hear the last part, Erin.

Okay. Just within the context and I apologize if I say it incorrectly. Within the context of how Gud is performing, or Gud, performing relative to Burt's Bees.

I got you. Burt's over 90% of our personal care business is obviously Burt's Bees. Burt's is continuing to perform extremely well. I think this will be our fourth year in a row, assuming we continue on forecast for the fourth quarter, our fourth year in a row of double-digit growth for Burt's.

The international business now doing extremely well, north of 25% growth. Gud is challenged. It's a very small piece, as I said, of the business. The shampoos and conditioners seem to be hanging in there fairly well. I think distribution is challenged on the other items in that business. ¶ But clearly Burt's is the engine that drives our personal care business. And with the innovation we have coming like lip crayons, we're very bullish about FY15 for Burt's Bees.

Thank you. That's very helpful.

Thanks, Erin.

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

Thanks everyone for joining us on the call. I would like to just say this.

I would like our investors and all of you folks who cover this Company to understand that we are focused on three things like a laser, and I wish you'd take these away.

That is, first, the value propositions of our brands and our categories is center most in our minds. And I think the one point of incremental spending we're putting in next year is testimony to that. And all of that spending is going to be oriented around the guiding principle of never give consumers a reason to choose another brand. That's number one.

Number two, we're going to ensure that our cost structure is as lean as possible to provide additional fuel to reinvest in growth. And I think you all know that we have quite a track record on cost savings and we will redouble our efforts there to ensure we've got the fuel for growth.

And third, we're going to ensure that our people, who we think are the best in the business, that they can and are able to focus only on the work that the consumer is willing to pay for. And get rid of a lot of this other extraneous work that doesn't really add value to the consumer or to the customer.

So we're going to focus on those three things. Certainly better days are ahead, but with that focus we believe we can not only deliver on the FY15 expectations, but hopefully in our investors minds and yours, exceed them.

So with that we look forward to talking to you in August. Take care.

Thank you, that does conclude today's conference. Thank you for your participation.