高樂氏 (CLX) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Clorox Company fourth-quarter and FY14 earnings release conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to introduce the host for today's call, Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, you may begin your conference.

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

Let me remind you that on today's call we will refer to certain non-GAAP financial measures, including but not limited to, free cash flow, EBIT margin, debt to EBITDA, and economic profit. Management believes that providing insights on these measures enables investors to better understand and analyze our ongoing results of operations. Reconciliation with the most directly comparable financial measures, determined in accordance with GAAP, can be found in today's press release, this webcast prepared remarks, or supplemental information available in the financial results area of our website, as well as in our filings with the SEC. In particular, it may be helpful to refer to tables located at the end of today's earnings release.

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

Turning to our prepared remarks, I'll cover highlights of our fourth-quarter business performance by segment. Steve Robb will then address our financial results and financial outlook for FY15. And, finally, Don will close with his perspective on the business followed by Q&A.

Starting with the fourth quarter, including the impact of negative foreign currencies, sales decreased 2% and volume was flat. On a currency-neutral basis sales grew 0.5 of a percentage point. The fourth quarter reflected many factors we've seen in recent quarters.

Price increases taken mostly in international markets were more than offset by nearly 3 points of negative foreign currency impact, primarily from Argentina and Venezuela, as well as higher merchandising support to drive share and category growth. For the fiscal year, volume was flat and sales were down about 0.5 percentage points, again reflecting the impact of unfavorable foreign exchange rates and higher merchandising support.

On a currency-neutral basis, full-year sales were up nearly 2 point, about in line with our most recent outlook. Positively, we delivered 3 percentage points of top-line growth from innovation for the third consecutive fiscal year, consistent with our long-term strategic target.

In the fourth quarter our US 13-week market shares decreased 0.3 of a point versus the year-ago quarter, reflecting continued intense competitive activity. This slight decline is consistent with results in recent quarters.

The largest market share gains in the quarter versus the year-ago quarter were gains in our Kingsford charcoal and laundry businesses, which were more than offset by decreases in our cat litter, Brita and Glad businesses. Our categories were about flat in the fourth quarter, and category growth for the full fiscal year remained just below our 2020 strategy assumption of at least 1 point of annual category growth. Improving our category trends and market shares remains our top priority.

With that, I'll review our fourth-quarter results by segment. Starting with our Cleaning segment, fourth-quarter volume was flat, and sales were down 1%, driven by decreases in our laundry business due to the lower shipments of Clorox 2 stain remover and color booster, which saw continued category softness and reduced merchandising activity. Volume on Clorox Bleach was up, behind market share increases, and the introduction of Clorox Smart Seek Bleach. With our return to national merchandising following the concentration of Clorox Bleach last year, we've now grown share in the last two quarters.

In home care, which is our largest domestic business unit, our sales were essentially flat. This reflected lower volume on our wipes business, offset by very strong performance across the rest of the cleaning portfolio.

On wipes, we continue to face an intensely competitive environment which, as we noted last quarter, resulted in lost distribution at a major club customer. In response, we're increasing investments in 3D demand building, 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 wipes products for glass, bath tub and shower cleaning. Recently we've also seeing meaningful distribution gains at several retailers.

As we finished the fourth quarter, Clorox remains the clear leader in the wipes category, with market shares remaining near 50% in tracked channels, and with share trends improving. We're optimistic this trend will continue.

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

In our Household segment, volume and sales decreased 2%. The segment's top-line results were largely driven by lower shipments of Glad trash products due to a March price increase. As anticipated, advanced purchases of Glad products ahead of the price increase reduced shipments in the fourth quarter. However, due to excellent execution at retail our volume and market share performance was better than anticipated.

To date, branded competition has generally followed our price increase, although at a somewhat slower pace, and our private-label response remains mixed across retailers. Due to sustained higher resin prices we anticipate competitors will eventually raise pricing at the shelf.

Cat litter volume sales and share decreased as a result of continued intense competitive pressure. In response, we're investing more aggressively to reverse market share declines, and looking forward to this month's launch of Fresh Step Extreme Lightweight, a lightweight cat litter product with excellent clumping and odor control that Fresh Step consumers have come to expect from our premium cat litters. Finally, our charcoal business gained market share and grew strongly behind favorable spring weather, strong merchandising support, and outstanding sales execution.

Turning to our Lifestyle segment,, volume and sales in the segment increased 2%, primarily due to strong gains in Burt's Bees behind new face care products and the launch of new lip crayons, which are off to a very good start. Shipments of Brita products grew behind strong merchandising support, although Brita sales were down due to incremental demand-building investment. The water filtration category remained soft and our shares decreased due to competitive activity. We anticipate meaningful in innovation on our Brita business in the first half of FY15 to help reverse market share declines.

In our food business, volume was flat, and sales were up solidly due to reduced trade promotion spending. We look forward to introducing additional new food items in FY15.

Turning to international, our performance in the quarter was similar to what we experienced in the first three quarters of the fiscal year. Namely, volume growth was more than offset by foreign currency declines. In the fourth quarter volume growth of 1% and positive pricing of nearly 5 points was more than offset by 14 percentage points of negative foreign exchange impact, primarily from Argentina and Venezuela, which resulted in an 8% decrease in sales. Steve will provide further details on Venezuela and Argentina in a moment.

On a currency-neutral basis international sales grew a healthy 6%. Across our international markets our market shares remain healthy, but we have recently seen a modestly slower growth rate in some countries. With the exception of Venezuela and Argentina, we're continuing to invest in demand-building initiatives and innovation to support category growth.

As we close the year, we remain committed to growing our categories and market shares through strong brand investment and clearly demonstrating the value our products provide consumers across the three Ds. Looking at FY15, we continue to anticipate sales to be about flat, with growth from innovation offset by ongoing softness in the Company's US retail categories and foreign currency declines. On a currency-neutral basis, we anticipate total Company sales to grow in the range of 1% to 3%.

Now I'll turn it over to Steve Robb to provide more detail on our FY14 performance and outlook for FY15.

Thanks, Steve. And welcome, everyone. In the fourth quarter the Company delivered diluted earnings per share from continuing operations of $1.30 versus $1.38 in the year-ago quarter. This quarter's earnings-per-share results reflect $20 million of incremental demand building investments, as we stepped up our efforts to revitalize our categories and grow our market shares.

While it's going to take time to realize the full impact of our investments, we began to see improving share trends in the fourth quarter. As we look to the FY15, investing in our brands and categories remains a top priority.

Now I'll review our fourth-quarter and fiscal-year results in more detail and then discuss our outlook for FY15. In our fourth quarter, sales were down 2%, reflecting nearly 3 points of negative foreign currency impact and about 1 point of higher trade promotion spending, partially offset by the benefit of nearly 2 points of pricing. On a currency-neutral basis sales grew 0.5 percentage point.

Gross margin for the quarter declined 170 basis points to 42.3% compared to 44% in the year-ago quarter. The biggest factors contributing to the gross margin decline were about 240 basis points of higher manufacturing and logistics costs, and about 110 basis points of higher commodity costs.

For perspective included in this quarter's manufacturing and logistics costs increases were more than 100 basis points of one-time expenses, including higher supply chain costs in order to meet stronger than anticipated customer demand for our charcoal products. These factors were partially offset by about 110 basis points of cost savings and about 80 basis points of pricing.

In the fourth quarter, the Company invested an incremental $11 million in advertising spending, an increase of more than 8% versus the year-ago quarter, to more than 9% of sales, reflecting strong support behind our brands. Importantly, our US retail advertising was nearly 10% of sales.

Selling and administrative expenses were lower in the fourth quarter due to reduced employee incentive compensation accruals, reflecting significantly lower year-over-year payouts, consistent with our pay-for-performance philosophy. Selling and administrative costs also benefited from about $8 million of cost savings. As anticipated, our tax rate of 34.1% from continuing operations was up about 2.5 points in the quarter versus year-ago, largely due to favorable tax settlements in the year-ago period. For the fourth quarter, we delivered diluted net earnings per share from continuing operations of $1.30, a 6% decrease versus the year-ago quarter.

Next I'll turn to our results for the full year. Sales declined about 0.5 percentage point in FY14, reflecting more than 2 points of impact from unfavorable foreign currencies and about 0.5 percentage point of higher trade promotion spending. Price increases contributed about 1.5 points to sales. On a currency-neutral basis, sales grew nearly 2%.

For the year, gross margin was down about 70 basis points to 42.2% compared to 42.9% in FY13, reflecting about 160 basis points of higher manufacturing and logistics costs and about, 120 basis points of increased commodity costs. These factors were partially offset by about 140 basis points of cost savings and about 80 basis points of pricing.

Selling and administrative expenses as a percentage of sales for the full year were down 70 basis points at 13.7%, compared to 14.4% in FY13, primarily driven by a reduction in employee compensation incentive accruals. We expect selling and administrative expenses to be slightly higher in FY15, about 14% of sales, which is consistent with our long-term target. Our target also assumes incentive compensation will return to more normal levels.

Advertising spending for the fiscal year was 9% of sales, a slight increase versus the year-ago period, reflecting reductions in challenged markets such as Argentina and Venezuela, offset by continued incremental support for our domestic brands and categories. Our US retail spending was nearly 10% of sales. Our effective tax rate of 34.7% on earnings from continuing operations was up 2 points versus FY13, reducing diluted earnings per share by $0.13.

Free cash flow for the fiscal year increased by $50 million to $633 million or 11% of sales, versus $583 million or 10% of sales in FY13. This increase was primarily the result of lower capital expenditures in FY14. In FY15 we anticipate free cash flow as a percentage of net sales to be about 10%.

Consistent with our commitment to return excess cash to shareholders, we repurchased about 3 million shares in FY14 for about $260 million. We also increased our dividend by 4% in the fourth quarter. We ended the year with a debt to EBITDA ratio of 2.0, at the low end of our target range of 2 to 2.5, reflecting solid cash flow we had in the fiscal year.

As we mentioned in our press release the Company's fiscal year diluted earnings per share results were negatively affected by the macroeconomic challenges in Venezuela, including a $0.14 charge related to the effective currency devaluation, the result of the Company using the SICAD 1 currency exchange system beginning in March 2014. In addition, continued high inflation and government imposed price controls have resulted in sustained operating losses for the Company's Venezuela business.

Net of all of the factors I've discussed today, in FY14, we delivered diluted net earnings per share from continuing operations of $4.26, a decrease of 1% versus the previous year.

Now I'll turn to our FY15 outlook. As Steve mentioned, our fiscal-year outlook continues to anticipate sales will be about flat due to continuing headwinds of category softness and foreign currency declines. Excluding the negative impact of nearly 3 percentage points from currency declines, particularly in Argentina and Venezuela, we continue to anticipate sales growth of 1% to 3%. As we mentioned last quarter, sales are expected to be lower in the first half of the fiscal year since we anticipate foreign currency declines to be higher in that period. As a reminder, we won't anniversary the meaningful devaluations in Argentina and Venezuela as seen earlier this calendar year until the second half of the fiscal year.

Sales should also be stronger in the second half as we anticipate seeing the benefits from our incremental trade and consumer demand building investments. Finally, our sales outlook includes the benefits of some price increases, primarily in international, as well as product innovation, which is anticipated to contribute 3 percentage points of incremental sales growth.

Our FY15 outlook also continues to assume the ability to increase prices in Venezuela. However, we have not yet received pricing relief on our controlled products. As we mentioned last quarter, price controls have been imposed on more than two-thirds of our portfolio for nearly three years. During that time, manufacturing costs have more than doubled due to sustained high inflation. And our Venezuela business has been operating at a loss for more than 18 months. Since the economic environment in Venezuela continues to deteriorate, we are considering all of our options.

Turning to EBIT margin, we continue to anticipate FY15 EBIT margin to increase 25 to 50 basis points, reflecting moderate gross margin expansion, partially offset by incremental investments in demand building programs to help grow our categories and defend our shares. Given the headwinds we've mentioned, we anticipate more downward pressure in gross margin in the first half of the fiscal year.

We also continue to anticipate selling and administrative expenses will be about 14% of sales. We also continue to anticipate an effective tax rate of 34% to 35% in FY15. Net of all of these factors, we continue to anticipate earnings per share from continuing operations to be in the range of $4.35 to $4.50. As I mentioned last quarter, this outlook assumes continued double-digit currency devaluations in both Argentina and Venezuela.

Notwithstanding the challenges we faced in FY14, I am pleased we delivered another strong year of cost savings. I also feel good about the Company's strong cash flow. Even in a tough year, we generated more than $700 million in cash to invest and return to our shareholders. And as I mentioned, we're planning incremental investments to support our categories and profitably grow market shares in FY15.

With that I'll turn it over to Don.

Okay. Thanks, Steve. And hello, everyone, on the call. As I reflect on FY14, obviously it was a challenging year, not only for us but I think the industry in general. And our results were significantly impacted, as we've talked about, by the negative impact of foreign currencies, about 2.5 points there. Price controls and the high inflation markets, the softness in our US retail business as people spend more to be competitive and take dollars out of the category and force the commodity cost increases which we do see mitigating somewhat in FY15.

Now, while we're disappointed with those results, amid a pretty tough environment out there, I do feel good about the progress we're making on our priorities to build back market share, get our categories back growing again and get on course to achieve the 2020 strategy targets.

As we've said many times, and we talked about this in October at the analyst day out in Pleasanton, we're focused on three growth pillars -- our US retail business, which is about 75% of our business; our professional products business, which makes up about 5%; and then, of course, international, which contributes about 20%. Let me take you through a little bit of performance review against those three legs of our stool.

Starting with US retail, as has been mentioned, FY14 sales were about flat with lower sales of Clorox disinfecting wipes due to the loss of distribution, as Steve noted, at one of our key club customers. That was offset by gains in the charcoal business. That said, we're going to continue to invest behind our brands, as Steve just noted. We've invested nearly 10% of US retail sales in advertising and sales promotion, with total Company spending for advertising and sales promotion over our target of 9%.

For the total Company we met our innovation goal with 3 points of incremental consolidated sales from new products. I think both Steves have talked about the fact that growing our market share in categories are the top priorities in this company. And we're investing heavily in demand creation to improve the consumer value propositions we have out there. That's why, as Steve noted, we spent an incremental $20 million in demand spending in the fourth quarter.

Now, in FY14, we've also enhanced those 3D tools which will play off benefit in 2015, as well. It's going to help balance our return on investment among base innovation adjacencies, pricing, trade spending and advertising, and sales promotion spending. We're also focused on improving advertising and packaging with harder-hitting claims to make the benefits of our brand stand out at shelf. And I think we're starting to see the benefits of that, for example, with bleach returning back to share growth.

And as I noted, in Q4 we increased our demand-building investment by $20 million versus the same year-ago quarter. And, as I said, that approach is starting to work, we're starting to see those trends improve on bleach, as we promised. And we're also seeing it on Clorox disinfecting wipes. We just received the July data which is public, and now we're seeing about 0.9 of a share point gain in July on wipes, and 0.2 of a share point gain for the three months ending July. So, we feel good about promises made, promises kept in terms of bleach and wipes shares returning to growth.

Turning to professional products, we've delivered 8% sales growth in FY14. That was driven by strong results in cleaning and healthcare, partially offset by the impact of a fairly mild cold and flu season. We continued to make good progress here, as well, with new product innovation and partnerships. In the area of surface disinfection we obtained soft surface sanitation claims for hydrogen peroxide sprays. That's enabling us to pioneer some new usage occasions in healthcare and other commercial channels.

I think, as many of you know, we finalized a partnership for the Clorox Optimal UV system, becoming the first CPG company out there that focuses on healthcare to provide both a surface disinfectant as well as UV technology. We've got a strong pipeline of professional product innovation planned for 2015, and anticipate a strong year, consistent with our long-range growth target of 10% to 15% in that business for this fiscal year.

We continue to believe there are tailwinds in that space and that we do have a differentiated right to win. We're going to seek to grow our base business with a focus on M&A, as well. And you'll see us expanding organically through product and category adjacencies.

On international, sales were down 4% for the full fiscal year. There were about 11 percentage points of unfavorable foreign exchange impact in numerous markets. But as noted, it was obviously most significant in Argentina and Venezuela. On a currency-neutral basis, our sales internationally grew 7%.

As we said in our press release, the economic environment in Venezuela continues to worsen, and we are considering all of our options there. In International as a whole, we're taking the right actions to drive profitable growth in and beyond Latin America. And during the fiscal year we focused on the global expansion of Burt's Bees, which continues to grow strongly in international markets. We also continued to build out our adjacencies in the Middle East and North Africa with the launch of new products across the region, continuing growth in cleaners, and expansions into new countries.

In closing, I would say this -- I'm feeling very good about setting the organization up for success in 2015 and beyond. 2014 was a disappointing year but it was a catalyst for change. And these are the changes that are going to ensure that our brands have the necessary support to regain share and top-line momentum. And as I said, I think we've got a couple of proof points out there on Clorox bleach and disinfecting wipes.

Our increased spending last quarter and throughout fiscal 2015 will ensure we continue to be very competitive in the marketplace. And that spending is going to be focused on harder-hitting advertising and packaging claims that can show the consumers the value of our brands in plain English -- or plain Spanish or any other country we're competing in.

In addition, our continued focus on cost savings and our agile enterprise initiative is going to ensure our cost structure continues to be very competitive, and that our demand spending increases are sustained over time. So, these increases are now being built into our base.

And, lastly, our long-term focus on total shareholder returns is still at the center of everything we do. I think strong evidence of that focus, as Steve noted, is the free cash flow we achieved in FY14.

So, Clorox is fundamentally healthy. We've got great brands, we've got great people, we know what to do to be competitive in this environment, to the fact that we ensure our shareholders benefit from that, and we're on it.

And with that, we'll open up for questions.

(Operator Instructions)

Jason English, Goldman Sachs.

A quick housekeeping item -- can you give us the magnitude of the incentive compensation cuts back of the envelope? I'm getting to around $40 million, maybe, headwind next year to reload. That's almost $0.20 of EPS. Is that in the right ballpark?

That is right. That's a pretty close number in terms of the headwind that we've got. It's actually a little bit higher than that but that's pretty close.

Thanks for that. And then, Don, a question for you in terms of brand building A&P support. You're running right at the very bottom of that 9% to 10% target. If we look at A&P it really hasn't budged in the last four or five years. You're suffering weaker categories, share hasn't been great. Do you see a need to really up the investment here and throw more money at it to try to get this going?

I think we do, Jason. I think one of the proof points is the $20 million that's now in the base for the fourth quarter, and then the additional more than $30 million we've added incrementally into FY15.

I would say this, too, Jason, we compete in some categories where private label is the primary competitor. We have brands that are spending north of 15% in terms of consumer promotion and advertising spend. We get a little bit lost in the averages here, but to answer your question, clearly there is significantly more support in the fourth quarter of 2014 and throughout 2015. That will be baked into the base as we go forward.

We're striving to get an additional full point in as we go towards the 2020 strategy. And I would say that in those categories where we compete primarily with private label, we've got 100% share of voice. And we're seeing two of those three categories now where private label has lost share in the last quarter.

So, bleach we've gain share two quarters in a row, private label has lost share. Charcoal, we're gaining share again, private label losing share. Glad, we've lost some share but we're finally seeing private label come up and start to match the price increase.

So, yes, a lot more spending going on, if you will. And we're putting it on those brands that need it the most.

Got it. Thanks a lot. I'll pass it on.

Steve Powers, UBS.

On that same theme, Steve or Don, of your total demand building spend at this point, roughly how much is devoted to advertising versus trade spend? And how has that changed over the years, to the extent that it has?

That ratio, Steve, is fairly even although it's probably in the 45/55 range. I'd say low 40s to mid 40s on advertising and consumer promotion, and the rest being trade.

Let me just built build on Don's comments. We spent about $0.5 billion a year in advertising and consumer promotion. We spent a bit more than that, as you would imagine, on the trade spending that goes through. So, call it a 60/40, 70/30 split with an emphasis on trade.

I think, importantly, as you look forward to FY15, you will see us ramp up the level of demand-building investment. We're going to focus that investment on the vehicles that offer the highest returns. So, you're likely to see some of that flow into trade spending and some of that flow into advertising and consumer promotions.

Okay. Thank you for that. Shifting gears towards Venezuela, which you commented upon, maybe Argentina, as well, any updates there. But Venezuela specifically, can you define a bit more about how much pricing you've assumed? And if you can or can't, either way, from your perspective, has the likelihood of pricing gone up, down or remain unchanged since April? I'm just trying to get a sense for your comment. At some point, if you don't get the pricing, what the magnitude to your guidance would be or whether it even would come to that. It sounds like you're open to, as you say, all options. At what point would you decide to exit altogether?

Okay, there's a lot of questions embedded in there. Let me take a try at this. First is a reminder. Venezuela, in terms of sales, is a little less than 2% of our sales. Looking forward, based on the most recent evaluation that we saw earlier in this calendar year, I would say the business is probably a little more than 1% of the Company's sales.

We are losing money in Venezuela, as I've said for quite some time. I think we're rapidly reaching the point where we just have to get pricing. You cannot have double-digit inflation go on year after year and not get some level of pricing.

We've certainly requested the pricing. I think we've had a constructive dialogue about that pricing. But the reality is we haven't gotten anything yet. And I think we've reached the point with the deterioration of the economic environment, the lack of pricing, where all options are on the table.

I don't want to get into the level of pricing that's been assumed at this point, or speculate on what the Company may or may not do, other than to say that we will always do what's in the best interest of our shareholders. But I think it's prudent at this point to look at all of the options, and that's exactly what we're doing.

Let me add a little more color to this, Steve, too. I think, in some ways, Clorox is a bit uniquely disadvantaged in Venezuela. When I look at other CPG companies in Venezuela, I can't find another one where almost two-thirds of their portfolio has been under price controls for almost three years. So that puts us in a bit of a unique spot.

I would say, to your question do we feel more optimistic, less optimistic, three months ago we felt more optimistic. We had verbal commitments on pricing in early June. That pricing has not been published as of today. That pricing was near what we had requested, and I think what other companies had requested. I think the government understands the situation we are in and other companies are in in Venezuela.

But, as Steve said, given the operating loss we've sustained there over the last 18 months, this cannot go on too much longer before we have to take a decision on what we ultimately do with that business. But I would say today, based on the performance or based on the lack of publishing of that pricing that was verbally agreed to, I'd say I'm more pessimistic than I'm optimistic about getting that pricing.

Okay. Thanks a lot. That's very helpful.

Olivia Tong, Bank of America Merrill Lynch.

On cost savings, 110 basis points, still solid clearly. But that's a bit light relative to your typical run rate. And you obviously reiterate a next year book. What caused the deceleration in the cost savings progression and did you already expect that?

Olivia, actually we're coming off of a record cost savings year in FY14. The 110 basis points that you're referencing is the cost savings that flowed through gross margin for the quarter.

If I just step back and I look at the year, we delivered probably 2 full points of margin improvement from the cost savings programs. Now, about 140 basis points of that flowed through the gross margin. But we also had some additional cost savings flow through selling and administrative expenses and other lines of the P&L. So, there has not been a deceleration of the cost savings program. The savings are just flowing in different parts of the P&L.

I would also just echo that looking forward we continue to feel very good about the 150 basis points of cost savings. Although, again, as I've said many times before, we're going to look at every line of the P&L. Some of that will go through the gross margin, probably most of it, but some can also flow through other lines of the P&L, including our SG&A costs.

Olivia, the one other thing I would point out is the fourth quarter for us is our largest sales quarter of the year. So, although dollar amounts can vary by quarter, you could have consistent dollar performance from a cost savings standpoint in the fourth quarter but have lower basis point benefit just because of the higher sales.

Got it. That's really helpful. And then in terms of the businesses, is Cleaning -- it looks like it actually rebounded a bit relative to where you stood in Q3, but households swung down. So, how much of that would you attribute to Glad pricing, which it just takes a bit of time for that to flow through and you'll see some volume degradation in the interim, versus something that's a little bit more systemic like the cat litter underperformance?

Olivia, I think you picked up on it. A great portion of the decline in household was due to Glad. I think I mentioned in my comments, that was something that we'd anticipated. We took the price increase in March. We saw a little bit of accelerated purchases from our retail customers. And, so, coming into the quarter we knew that Glad volume would be down. I don't think you'll see that continue to the same extent as we move into FY15.

Yes, I think, Olivia, now that we've seen pricing at some of our largest customers being matched from our branded competition, as well as private label, starting to move up in most customers, I think we'll see the Glad volume decline start to mitigate now. And in the quarter, charcoal also almost offset the entire Glad decline. So, I think they played kind of a counterbalance. But I think we feel more bullish going forward that the pricing is starting to get matched.

Got it. And then, just lastly, in light of Proctor's announcement this morning about paring back their portfolio, can you remind us what your M&A priorities are other than obviously getting bigger in the professional business? Are there certain categories that you are more interested in? And of course we know about the professional but in the consumer-facing business? Thank you.

We continue to be interested, as you said, in professional. We think that's an attractive space. We're also interested in US-centric consumer packaged goods companies. We love natural personal care, we think that's interesting. We did a very small acquisition, obviously, in food additives, with Soy Vay, which is a sauce.

So I think any of these mid-sized categories that have good tailwinds, attractive margins, US-centric, would be particularly attractive for us. Certainly as they look to divest brands it will be something that we take a hard look at as a company to see if there isn't something that we might be able to extract cost synergies on and accelerate the growth of the Company with.

Thanks, guys. Appreciate it.

Ali Dibadj, Bernstein Research.

You and a lot of your CPG peers, you have a common theme of incremental demand building. Some people call it different things, but basically incremental demand building. And I'm trying to understand, underneath it, why is that necessary right now? Clearly there are many drivers -- consumer, macro, other competition, race to the bottom type stuff. But I'm just trying to understand why, number one.

And then how do you think about the returns you're getting from the incremental demand-building, both trade and advertising? And, Don, maybe if you could chime in at some point about that question, given your past experiences in carbonated soft drinks. And there, I think they're starting to realize that you've got to push more on price mix collectively, between the volume just isn't there. And I wonder sometimes, especially with your private-label competition, why that isn't going to be more the case here, too.

Yes. Let me start, Ali, and then I'll ask Steve to jump in, as well. I think why it's necessary, I think, is to get stronger communication and delivery at shelf on the value of our brands, quite frankly. We're calling FY15, for example, the year of value for Clorox. And when you look the value communication, the fact is, where we're doing an effective job of that, like in bleach now, for example, like we've done in Hidden Valley, even though it's largely our most highly-priced premium product we have, we see the positive share results.

I think the other thing is -- so, one reason is just the consumer's empowerment, if you will, and the consumer's ability to understand what the best value is out there. And we've got to be competitive with that value communication and value delivery at the shelf.

The other thing is, in the last year to year and a half, we've seen a lot more competitive intensity in the US market, as other multinationals have been focused on this market. So just the level of competitive intensity is there.

Third, I think the retailers need to get traffic into the stores. They continue to push their own retail brands harder. So, to be competitive I think the branded manufacturers have to push their innovation harder and push their own marketing harder, as well.

So, it's kind of a combination of all those reasons that we think it's necessary. And I think this is true of most of our competitors, we've got pretty sophisticated return on investment models that give us a really good indication of if we're getting a return on that investment or not. But those are the three reasons that I see, Ali, out there why that incremental spending is necessary. And I don't think, when I think about our spending relative to our competitors, I think we've been very efficient with our spending anyway.

I would just echo Don's comments and say, if you go back to the 2020 strategy we had as a company, one of the things we indicated that we wanted to do was to spend an incremental point of sales in our demand building investment programs. I think what we've seen over the last year is we're just going to accelerate that. So, we're going to put that point in a little bit faster and a little bit harder than we had originally anticipated.

But we've got very sophisticated tools. We know that when we put a certain amount into trade we get a pretty nice lift. And when you start to emphasize things like feature and display, and doing those things together, the brands tend to respond very well.

The advertising, it's getting a lot harder hitting. We've got some pretty good scoring advertising that we're bringing to market. And we think, again, investing behind that makes sense. These are smart investments. They're consistent with our long-term goals and objectives and I think we feel very good about them.

This is helpful because I always wonder about the marketing ROI sophistication, and everyone says they're sophisticated. I'm not as sophisticated and all I look at is reported results. And I don't see it. So I'm just trying to --.

Let me give you a few proof points, Ali. Because I think we do have a few. If you look at bleach, we said over a year ago that we would get back to bleach share growth. And clearly in the last two quarters, we have seen share growth return.

We said the same thing on wipes. We said once we got into the June-July period we'd start to see share growth. We've had much harder hitting advertising on wipes, comparative advertising on wipes, and on bleach. And our packaging is much more declarative on our wipes business and our bleach business.

So, I think where we're making this focus, I think we're starting to see the share growth that we promised our investors that we would deliver. So I think there's some proof points out there. I think another one is charcoal. We've amped up the spending there. And we're starting to see share growth come back in the Kingsford brand, as well. So, I think there's some proof points out there that say it's working.

Okay. That's helpful. And two quick ones, all in one. Manufacturing logistics costs, can you give us a little bit more detail about that, being negative 240, and then the 100, which is the one-time on charcoal. So, any detail there. And then I noticed your Green Works pricing up 21%. I'm just curious about that. Thank you.

Let me start with the manufacturing and logistics costs because the fourth quarter gross margin was a bit disappointing. And one of the biggest surprises, I think, for us is -- and it's a good news/bad news story. Good news is our charcoal business was a whole lot stronger than we had anticipated. But to meet that consumer demand with what the retailers were asking for, we had to redeploy a lot of inventory across the United States. And we incurred some incremental manufacturing costs.

That cost us a little over 1 point. We're happy to have the growth. We're happy to have the business. Wish it hadn't hurt gross margin as much as it did. But it's really one-time in nature.

And I certainly think as we look at our gross margins on a go-forward basis, I would not have people take this 240 basis points of manufacturing costs and project that forward. I think it will continue to be a headwind but it's going to be a headwind consistent with what we've seen, which is probably a bit north of 1 point but certainly not the level we saw in the fourth quarter.

On Green Works, Ali, we've had one of our national top 10 mass customers really recommit to that brand. And starting in July, we've got, depending on the region of that customer, we've got 10 to 12 new SKUs of Green Works into that account. And we think that account's customers line up perfectly with the Green Works brand, consumer, as well. So, we expect good things out of that. So, that's what you're seeing, is that initial bump as we go into that customer in a big way.

Thanks very much.

Bill Schmitz, Deutsche Bank.

On the S&A side, I know you guys are 14% of sales in 2015. Why isn't it that coming down, because obviously historically -- and I've asked the question before -- but is it just a function of lower sales growth? Because I know you have all these great ongoing productivity programs in place, but it stays stubbornly at that 14% level. And then I have a follow-up, if you don't mind.

I think if you go back a couple years, Bill, I'm actually feeling very good about the discipline we've applied to our SG&A costs because at one point, I think, just a few years ago it was about 14.6% of sales, fiscal 2013, if memory serves, it was 14.4%. Obviously this year we got it down to 13.7%.

But there's two challenges we face as you look at fiscal 2015. Number one is we're going to bring these compensation accruals, ideally the comp programs payout, closer to target levels. So, that's going to put some upward pressure on SG&A costs.

The other challenge is just inflation, particularly in some of our international markets. Now, all of that said, we feel very good about the cost savings programs and the productivity programs. And, so, we think that should enable us to offset some of these.

And net-net we should be at about 14% in FY15. And our goal is to get, as you know, that to 14%, ideally less, and then take some of those savings and reinvest it back in the business. So, I would say we're very much on track with the multi-year plan to get this to 14% or less.

Bill, I think having to reinstate north of $40 million in incentive comp puts a big rock to hurdle. So, I think when you think about it going from 13.7% to 14%, that's about $15 million of increase, and we're offsetting over $40 million of comp. So, you can rest assured there's some real productivity in there.

Got you. That's helpful. And then can you just clarify, on the wipes side, you said market share was up. Was that just in Nielsen or does that include some of your panel data on Costco and some of the club stores?

The 0.9 of a share point gain, Bill, was in the multi-outlet data we get, our syndicated data, which covers about 81% of our volume. So, yes, it was syndicated data.

Got you. If you took a stab at it, I'm sure you'd get, like the panel did, is it, back end, is it flat? Is it up? If you included everything?

In wipes? It's hard to say. We've made up about 35% of anything we lost in that one customer already. So I'd say we're probably flattish to down slightly, if you add them back in. We'll see how they net out on that experiment as we get through the rest of this year.

But, what has happened is we've picked up distribution in a number of key customers. And so that's enabled us, as I said, to replace about 35% of what we lost in the first five months. We're already five months into this, we've replaced about 35% of it. But on the 81% that's covered, we're feeling very good about almost a full share point of growth.

The interesting thing, too, Bill, if you look at the data, and other folks look at the data, as we gain share back in the wipes category, the category growth rate accelerates. And I think that's what the retailers are looking at. For example, if you look at the last 52 weeks, the category -- this is ending July -- the category was up about 3.7, 13 weeks, as we're starting to gain share it's up almost 6. So, as we gain share and get back into the game, so to speak, the category accelerates. Which you would expect when you've got almost a 50 share brand that's premium priced.

Got you. And then you guys historically, when a brand is troubled, when you've promised to fix it you fixed it. So would you commit to turning cat litter around and gaining market share over the next 12 months?

That's certainly in our crosshairs, Bill, is that by the time we get into the second half of the fiscal year we want to see much more positive share gains, stabilizing share gains, on litter. I think the initiative with Lightweight starting to ship in about two weeks, and then you're going to see revised packaging. You're also going to see a lot more what I guess I would call a little-i innovation on litter as we go forward.

So, clearly, as we get into the second half of 2015 we expect to see some real improvements in those share results on litter. It's interesting, Bill, too, about 45% of our share loss on litter in Fresh Step is in one customer, so we're on it.

Okay. Great. And then, Steve, one last one. The leverage ratio is at 2 turns now. It seems like there's not a lot to do really with the cash. So, are you content letting that ratio continue to slide down?

We're going to continue, Bill, doing what we've been doing, which is trying to be disciplined with the allocation of the cash. To date what we've been doing, last year we bought $260 million back of shares, and obviously increased the dividend 4%. I think you'll continue to see us focus on keeping a healthy dividend. We'll probably periodically go back into the market and repurchase shares, if for no other reason than just to offset stock option dilution.

I think beyond that, if cash builds up, we're going to look for ways to get that back to the shareholders. The one thing I would remind everyone, we do have $575 million worth of debt coming due in January of 2015. So, that's also something we need to plan for and think through over the next say, six months.

Great. Thank you so much.

Chris Ferrara, Wells Fargo.

I'm sorry if you did this already, but can you just talk about for fiscal 2015 what you think the breakout will be on the organic sales between volume and price?

We do expect -- we haven't actually given that specific breakdown, but I would say that we are expecting positive volume growth in the year. And we are expecting a modest level of pricing, primarily coming out of our International markets to deal with some of the higher inflationary environments.

We did take some pricing earlier this calendar year on Glad. We took about a 6% price increase that I think, as Don and Steve have mentioned, we've seen certainly the branded folks have followed. Private label, looks like they're beginning to.

So, I think you're going to see a mix. But certainly we are expecting positive volume growth, more leaning towards the second half of the fiscal year as we get more traction on some of the demand-building investment and the innovation.

Got it. Thanks. And on another note, last quarter you ran the one-time balance sheet devaluation, the balance sheet charge, the write down of asset charge. That happened from the Venezuelan deval through your core numbers to get to the 106. I know you're assuming SICAD 1 for 2015 but you're not necessarily assuming SICAD 1 stays at 11. So, the question is, do you have incremental balance sheet devaluation running through your P&L baked into the fiscal 2015 guidance?

without getting into too much detail, because there's a lot of scenarios that we've obviously run here, what I would say is this. We're assuming, number one, that we continue to use SICAD 1 as the exchange rate mechanism. And then, second, we expect that there will be, as you say, ongoing devaluation.

What we have not assumed in the outlook is that we go to SICAD 2, which, again, for perspective, SICAD 1 is at about 10.8, SICAD 2 is closer to 50. We expect them to devalue, SICAD 1, but we expect that to happen over the course of the year. And I think we have to get into the year and see how this plays out. There have been some discussions about moving to a unified exchange rate at, call it, 25 to 30. The only thing we know for certain is that there's three official exchange rates and it's a pretty complicated situation right now.

Great. That helps. What I'm asking more specifically, too, is, I'm not just talking about the ongoing P&L. But just because it's fairly atypical that you guys took the balance sheet charge into your numbers, into your P&L. Like your report, your normalized numbers last quarter. Do you have a coincident balance sheet reduction charge baked into your 2015 numbers, as well, not just the ongoing P&L effect?

Yes. The short answer is yes. It is not unusual for companies, when you're going through currency devaluations, to have both the transaction and translation losses that you're referencing, but also balance sheet remeasurements. So, our fiscal outlook for both Argentina and Venezuela does anticipate some level of currency devaluation. That would include transaction, translation, as well as the balance sheet remeasurement component.

Again, the thing that I continue to emphasize, it's a pretty volatile situation with multiple exchange rates. So, it gets complicated depending on what the governments decide to do. But we think we've captured a reasonable place holder for what could occur.

Got it. Thanks a lot. That's helpful.

Wendy Nicholson, Citigroup.

Two questions, if I can. First of all, the international business, can you give us a sense for what the margins there would be if you didn't have Venezuela? It used to be low double digits. Would it snap back that high? Or are there other markets where you're investing at such a rate, either to expand berths or something like that, that business is just structurally lower margin than it used to be?

What I would say, without getting into specifics because I don't think that's right to do that at this point, the Venezuela business is a fairly good-sized drag on the total Company, and certainly on the international business. If you took a hypothetical and that wasn't in the portfolio, then you certainly would see international margins come up. And you would also see an impact to the total company margins. But I really don't want to get in and speculate as to what the impact would be at this point.

I think, Wendy, you'd not only see -- I wouldn't call it significant but you'd see a modest increase for the total Company. You'd also see a modest increase on the top-line growth rate.

Okay. That leads a little bit into my second question. Embedded in your guidance right now, for the full year, you've talked a lot about how things are going to kick in the back half, FX should be less of a drag. Some of the effect or the boost from your demand-building stuff is more back half, and the gross margins are going to be down in the first half. But just as I'm playing with the model here, so everyone's on the same page, do you think earnings, bottom-line EPS is actually going to be up year over year in the first and second quarters? I know you don't like to give too much quarterly guidance but maybe just so we're all the same page if you can help us with a range of possibilities.

I think, as we've said -- actually, as we said on the last earnings call and as we've echoed again today, I think you should expect that based on the foreign currency headwinds which are significant in the first half, and the incremental demand-building investment that we are putting in this business, to defend our market share and get categories back on track, sales is very likely to be down year over year in the first half. And I think earnings could very well be flat to down. And I think we're going to have to get in and see what really happens with currencies in the categories, but I think both sales and earnings will be challenged in the first half.

Got it. That's helpful. Thank you.

Connie Maneaty, BMO Capital.

I have a question on Argentina. And I'm wondering how you are thinking about it now that it's at least in technical default. And I'm wondering if you think you might need to go to hyper inflationary accounting since the official rates for inflation are 12% but the private forecasts are for 40%. Just how does the deteriorating situation there fit into the outlook right now?

Couple of thoughts, Connie. Number one, the technical default of the Argentina debt, we don't think that has any near-term impact on our business. Now, we are closely monitoring, obviously, the economy in Argentina. And if that was to slow down, that could have an impact. And we're also closely monitoring the foreign exchange environment to find out if that triggers something around devaluation more than we're otherwise expecting.

In terms of how we manage that business, I would say that we continue to manage this pretty tightly because of the inflationary environment and because of the fact that it is under price controls, albeit we've been able to take pricing in that market. I think we feel good about the Argentina business today. It's certainly a challenging situation that we're going to need to work through. But I don't think the technical default is a real issue at this point for us.

As far as hyper inflationary accounting that's really not a determination we would make as a company. That's something that would be determined by the regulatory bodies. And if in fact that happens, obviously some of the costs instead of flowing through equity would flow through earnings. That is not built into the outlook at this point. And I think we just have to wait and see what happens in Argentina over the next one to two years.

Great. That's helpful. Thank you.

Lauren Lieberman, Barclays.

Just a question about -- I know bleach shares are up but I was curious about, there's been some more activity overall in bleach, like with Tide launching an Oxy product and so on. Just if you've seen any traction at all from some others trying to impinge on the core properties of bleach?

Yes, it's interesting. If you go back the last three years, Lauren, we probably had the strongest growth on bleach as a category in the last 25 years. FY12 was $105, FY13 $107, FY13 $104. In the last two years the volume's been at a $106, so we're starting to see it slow a bit.

These other activities we're seeing, these things are typically in the 2 to 1 share range. So they're really not having much impact. And, in fact, a lot of times they're not even shelved in the bleach category in the store. So, we're not seeing a material impact yet on it.

The other thing we're doing, and you're going to see this, we'll be launching a thick bleach for cleaning soon, we're starting to see more and more people use bleach as a cleaning agent. Which is good news for us, I think, and for the category because you use more bleach when you use it as a cleaning agent. Because laundry, when you look at the trends in laundry, in general, the loads are going down. And the use of pods, et cetera.

I think laundry is certainly the most relevant piece of bleach usage. But we're starting to see cleaning pick up and that's where we're going to focus. But we haven't seen a lot of impact yet from these, I'd call them, on the tangent items.

Yes. And how long do you think does a retailer typically give that sort of product to get a meaningful share before it really becomes irrelevant? Is it a full year?

I think often times, you get about six months. It depends on when the modular's are reset. But most of the retailers will do a half-year check to see if the thing has got the unit movement to stay on shelf. I think if you're on the bubble, so to speak, you're very hard pressed today to get a year to stay on the shelf.

Okay, great. All right. That's it. That's all I have left. Thank you so much.

Linda Bolton-Weiser, B. Riley.

Just going back to your commentary on Venezuela, unless I'm misreading your comments, it sounds like you are considering as a possible option just completely exiting the market. If that's not right, what would make you consider that as an option? Would it just be a continuation of the losses there?

And also, some would argue that when you exited Brazil many years ago, that that was actually not the right choice. So maybe you could just -- Venezuela, of course, is a different situation entirely -- but maybe you could just talk a little bit more about what surrounds the decision if you were to exit. Thanks.

I think, Linda, that when we say all options I think we have to mean all options. As you said, Venezuela seems to be a bit of a unique case here. And I do think the government, the Venezuelan government, understands this, that Clorox is uniquely disadvantaged given that they've kept about two-thirds of our portfolio under price control.

It is a nonsustainable situation. We've had very, we believe, constructive dialogue with the government over the last six months, in particular. And as I said, we thought we had pricing committed in early June. We're still waiting for those price increases to be published.

But given the situation we're in, that option has to be on the table, unfortunately. We've been in Venezuela for decades. And as the government has said, they want businesses to make a fair profit. That's all we want to do, is make a fair profit. And that hasn't been the case for the last 18 months. So, it's an option that has to be on the table.

Okay. Thank you.

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

Thanks, everyone. I know it's been a busy earnings day. We certainly appreciate you hanging in there on a Friday with us. And we look forward to talking to you at Halloween next time. Thanks, everyone.

This concludes today's conference. Thank you for your participation.