Clorox Company (CLX) — Q1 2015 Earnings Call Transcript

Great. Welcome, everyone, and thank you for joining Clorox's first-quarter Conference call. On the call with me today are Don Knauss, Clorox's Chairman and CEO; Benno Dorer, Clorox's CEO-elect; 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 7 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 highlights of our first-quarter business performance by segment. Steve Robb will then address our financial results and financial outlook for fiscal year '15. And finally, Don and Benno will close with their perspectives, followed by Q&A. As we said in today's press release, results from Clorox Venezuela are now included in discontinued operations for both the current and year-ago quarters. All of our commentary today is on a continuing operations basis unless otherwise stated. For more detail on our past results from continuing operations, please see the additional schedules included in the press release we issued this morning. So turning to our top-line results. In Q1, volume was up 1%, and sales grew 1%, including the impact of unfavorable foreign currencies. On a currency-neutral basis, sales grew nearly 3%. Our growth reflects the benefit of price increases taken mostly in international markets and higher volume as well as a price increase on our Glad business taken earlier in the calendar year. These results were partially offset by unfavorable foreign currencies, primarily from Argentina, as well as higher trade spending. Steve will provide more details on sales drivers in a moment. In the first quarter, our U.S. 13-week market shares decreased 0.2 points versus the year-ago quarter, reflecting continued intense competitive activity in our Cat Litter and Brita businesses. The slight decline in the quarter was an improvement from the prior quarter, driven by solid market share gains in several categories, including Kingsford charcoal, Laundry, and our Home Care business. This positive trend has continued as the latest data as of mid-October reflected our first total company share gain in more than a year. Looking at our categories, they were up 0.5 points in the first quarter, a nice improvement versus the decline in the prior quarter. However, this still remains below historical category growth rates, and sustained category growth has been difficult to achieve. Continuing to invest to improve our category trends and market shares remains our top priority. With that, I'll review our first-quarter results by segment. In our Cleaning segment, Q1 volume decreased 1%, and sales were down 2% due to lower shipments of Home Care and Laundry products. In Home Care, which is our largest U.S. business unit, sales decreased modestly primarily due to a distribution loss of Clorox Disinfecting Wipes at a major club customer earlier this calendar year. At many other customers, wipes are performing very well. In response to the intensely competitive environment on wipes, we've increased 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 innovation with a number of new wipes products. In the last 2 quarters alone, we've launched 4 new variants of wipes, including those for glass, bathroom cleaning, heavy-duty cleaning, as well as a larger-sized wipe. 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. Looking ahead, in October, we've seen an uptick in sales of disinfecting products related to strong back-to-school execution and the start of the cold-and-flu season as well as recent concerns over enterovirus and Ebola. However, it's too soon to tell if this will have an ongoing impact on consumer use in the coming quarters. We are prepared to meet a potential increase in demand if needed. Don will talk more in a few minutes about consumer concerns regarding the spread of infection, including Ebola. In our Laundry business, Clorox Bleach lost volume as it lapped 11% volume growth in the year-ago quarter due to the earlier introduction of our concentrated formula. From a market share standpoint, our investment in this brand and our focus on value are paying off as September marked the third consecutive quarter of market share growth on Clorox Bleach. In our Household segment, we delivered a strong 4% volume growth and 5% sales growth. The segment's top-line results were driven by strong performance in our Charcoal and Bags and Wraps businesses. The Charcoal business grew volume 16% due to promotions and consumption behind the Labor Day holiday and outstanding execution at retail. In Bags and Wraps, volume and sales were up behind solid category growth and incremental merchandising and distribution gains on Glad OdorShield trash bags, which delivered all-time record shipments behind great consumer acceptance of some of our new scents. These results were partially offset by lower shipments of Glad base trash bags behind a shift to premium trash bags. Turning to Cat Litter, volume was flat, and sales and share decreased as a result of continued intense competitive pressure. In response, we're investing more aggressively in innovation and on communicating our value proposition versus the competition, particularly focusing on excellent clumping and odor control. While it's only been recently launched, we are optimistic about the recent introduction of our Fresh Step Extreme lightweight products. In our Lifestyle segment, volume was flat, and sales decreased 1%. These results reflected lower shipments of Hidden Valley salad dressing and Brita products. In August, we started shipping an improved Brita filter that is faster and easier to change than competitive filters. We plan to continue introducing innovation that differentiates Brita from the competition, and we are optimistic that our Water Filtration business will return to growth in the second half of the fiscal year. Partially offsetting these decreases were double-digit volume and sales growth on Burt's Bees products, largely due to innovation in lip and face care products. In particular, our new lip crayons, new lip balm flavors, vanilla bean, wild cherry, and our face palette products were all very strong in the quarter. Turning to International, volume was up 5% behind solid market share performance, but sales were flat, reflecting unfavorable foreign currency exchange rates, primarily in Argentina. On a currency-neutral basis, sales for International grew a strong 10%. While we expect modestly slower growth in some countries to continue, our market shares remain generally healthy across our international markets, and we're seeing improvement in most core countries and categories. With the exception of Argentina, we're continuing to invest in demand-building initiatives and innovation to support category growth. Looking at the balance of fiscal year 2015, we remain committed to growing our categories and market shares through strong brand investment and clearly demonstrating the value that our products provide consumers across the 3 Ds. We continue to anticipate sales to be about flat or to grow in the range of 1% to 3% on a currency-neutral basis. Now I'll turn it over to Steve Robb to provide more detail on our Q1 performance and our outlook for fiscal year '15.

Thanks, Steve, and welcome, everyone. Before I discuss our first-quarter results, let me echo Steve's comments regarding our recast financials. Unless otherwise noted, all of my commentary today is for continuing operations, with the results of Clorox Venezuela now reclassified to discontinued operations in the current and year-ago quarters. We're pleased to have started the year with a solid quarter. Sales came in a bit better than we expected due to stronger shipments of charcoal and slightly improved market share. This contributed to the company delivering diluted earnings per share from continuing operations of $1.10 versus $1.05 in the year-ago quarter for an increase of 5%. In our first quarter, sales grew 1%, reflecting the benefit of nearly 2 points from pricing and more than 1 point of volume growth. This was offset by about 2 points of negative foreign currency impact, primarily from Argentina and nearly 1 point of higher trade promotion spending. On a currency-neutral basis, sales grew nearly 3%. Gross margin for the quarter declined 70 basis points to 42.8% compared to 43.5% in the year-ago quarter. The biggest factors contributing to the gross margin decline were about 170 basis points of higher manufacturing and logistics costs reflecting inflationary pressures internationally, particularly from Argentina, and higher trade spending. Commodity cost increases, primarily for resin, contributed another 40 basis points to the decline. Now although oil prices have declined recently, resin, our largest commodity purchase, continues to see higher prices due to tight supply. Partially offsetting these impacts were the benefits of about 120 basis points of cost savings and about 90 basis points of pricing. Selling and administrative expense was lower in the first quarter at 13.3% of sales versus 14.4% of sales in the year-ago quarter. In the prior year quarter, the company made incremental investments to change IT service providers and to upgrade our Burt's Bees systems and processes. In the current quarter, cost savings and a one-time change in the company's long-term disability plan to make it more consistent with the marketplace also contributed to the lower selling and administrative expense. Advertising and sales promotion came in at 9% of sales, reflecting continued strong support behind our brands. In addition, our U.S. Retail advertising was nearly 10% of sales. In total, demand-building investment, including trade and advertising expense, increased $16 million versus the year-ago quarter. The increase was primarily due to increased merchandising behind Clorox Disinfecting Wipes and other disinfecting products and the litter business. Our effective tax rate of 33.7% was lower by about 0.5 point in the quarter versus the year ago. Net of all of these factors, we delivered diluted earnings per share from continuing operations of $1.10, a 5% increase versus the year-ago quarter. Free cash flow for the quarter was $205 million or 15.2% of sales compared with $157 million in the year-ago quarter or about 11.7% of sales. The increase in free cash flow is primarily due to reduced employee incentive compensation payments, reflecting significantly lower year-over-year payouts and somewhat higher tax payments in the year-ago quarter. In fiscal '15, we continue to anticipate free cash flow as a percentage of sales to be about 10%. Now we'll turn to our fiscal year 2015 outlook on a continuing operations basis. First, let me clarify the impact to our fiscal '15 outlook from reclassifying Venezuela to discontinued operations. From a sales standpoint, exiting Venezuela has only a small benefit to the sales outlook since current year sales were not expected to be significantly different than prior year sales. Our initial outlook had assumed significant and ongoing price increases would partially offset the impact of currency devaluations. We are, therefore, not changing our sales growth outlook. From a profit standpoint, our previous outlook had anticipated only a modest loss in Venezuela in fiscal '15 as anticipated price increases were expected to significantly reduce the loss. Therefore, reclassifying Clorox Venezuela to discontinued operations does not have a significant impact on our EPS outlook. With that, let me provide details of our fiscal '15 continuing operations outlook. We continue to anticipate sales to be about flat as the benefits of innovation and pricing are expected to be offset by the continuing headwinds of category softness and about 2 points of negative foreign currency as the strong U.S. dollar is having a significant impact across most markets and in particular, in Argentina, where we continue to anticipate double-digit currency devaluations. On a currency-neutral basis, we continue to anticipate sales growth of 1% to 3% as previously communicated. Turning to margin. We continue to anticipate gross margin to be up slightly for the fiscal year as the benefit of cost savings and pricing will be mostly offset by higher manufacturing and logistics costs as well as higher commodity costs, especially resin. In response, we are taking a 6% price increase on our Glad business in November, which is cost justified. We continue to anticipate selling and administrative expense at about 14% of sales and advertising at about 9% of sales. We now anticipate EBIT margin will be about flat versus the prior year, a change versus the prior outlook which had assumed 25 to 50 basis points of expansion. This change in outlook is primarily due to somewhat higher resin prices and the reclassification of Venezuela to discontinued operations. For perspective, exiting Venezuela and recasting the historical results improved our fiscal '14 EBIT margin from continuing operations by 60 basis points to 17.8% versus 17.2% previously reported. Our fiscal '15 tax rate is now assumed to be slightly more favorable than before, likely closer to 34% versus the prior outlook for 34% to 35%. Net of all of these factors, we continue to anticipate diluted earnings per share from continuing operations to be in the range of $4.35 to $4.50, with a slightly lower EBIT margin outlook to offset by the tax rate. Looking forward, the U.S. environment remains intensely competitive, and we are committed to accelerating top line growth through product innovation and stepped-up investments in our demand-building programs. We will also continue to lean in harder on our strong cost savings programs and drive efficiencies to increase productivity. And with that, I will turn it over to Don.

Thank you, Steve. Hello, everyone. Happy Halloween. I'm glad to report that the fiscal year has started well despite a challenging environment, aided in part by a strong summer barbecue season in our Charcoal business. It's also worth mentioning that we are seeing better market share trends in various categories due to our increased demand-building investments and innovation. You might have noticed this in the first quarter. Recently, there have been questions about whether concerns over enterovirus and Ebola have significantly affected the sales of disinfecting products. In the first quarter, we did not see any substantial impact from Ebola, as our Cleaning division's sales were down 2% as previously mentioned. However, some disinfecting products were influenced by our heightened efforts during the back-to-school period and the onset of the cold-and-flu season. Specifically, the wipes category increased by 9% in this quarter, and we outperformed that growth by gaining nearly a share point. In the latest four weeks of data ending October 19, we have observed a continued rise in purchases of disinfecting products due to consumer concerns about infection spread. The wipes category in that timeframe is up in the mid-teens, and our growth rate exceeds that, allowing us to gain market share. As Steve noted, it’s still early to determine if these concerns will have a lasting effect on consumer usage and product consumption in the upcoming quarters. We will continue to monitor the situation. Our solutions, such as Clorox Regular-Bleach and Disinfecting Wipes, meet the CDC's current criteria for hospital use and align with our health and wellness strategy to help prevent infection spread. Through our Stop the Spread of Infection campaign, we aim to educate consumers on effective ways to protect against diseases. For instance, we've shared information about enterovirus and Ebola on our website, including the CDC's disease prevention recommendations, as well as a list of our disinfecting products that adhere to CDC guidelines. We believe consumers are well-informed. In line with our company values and our commitment to helping in times of crisis, we are collaborating with governmental and non-governmental organizations to meet pressing needs both domestically and internationally. Recently, we donated thousands of bottles of Clorox Bleach to West Africa, where it is desperately needed for disinfecting safety equipment and sanitizing health facilities. We believe our contributions will aid health workers who are crucial in managing the epidemic. We are also working with USAID to evaluate ongoing needs in the region and are prepared to provide further assistance as necessary. These initiatives make me proud to have led this company for the past eight years. I've valued our quarterly discussions, and today marks my 33rd earnings call. Your insights have pushed us to improve, for which we are all thankful. I'm pleased to continue as Executive Chairman of the Board and couldn't be happier with the appointment of Benno Dorer as the next CEO. Many of you may know Benno and are familiar with his experience and strategic abilities. We've collaborated closely during my eight years here, and I can attest to his broad perspective and extensive domestic and international experience at Clorox and Procter & Gamble. He has a strong track record of delivering results and driving change, and he shares my approach to leadership, which balances a focus on execution with core values. I am confident he will be an excellent leader for Clorox. Alongside Benno, we have a fantastic executive team, including Steve Austenfeld, CFO Steve Robb, and Co-Chief Operating Officers Dawn Willoughby and Nick Vlahos, all of whom are strong internal candidates. We have a robust leadership bench in this company, and it’s a privilege to have served such a great organization and the dedicated people within it. Now, I will hand it over to Benno, and we will conclude and begin the Q&A.

Hello, everyone, and thank you, Don. I very much appreciate your words, and I look forward to taking over the reins of the company next month. I'm deeply honored and excited. As everyone on the call knows, Don has just done a tremendous job leading Clorox. During his tenure, he led the company through a successful Centennial Strategy and went on to lay the groundwork for the future by establishing the company's 2020 Strategy. He does leave big shoes to fill, and I'm excited to be working with the executive team and leaders across the company to build on the strategy Don has led over 8 years. Now with Don staying on as Executive Chairman, we'll be able to make this transition seamless for the Clorox organization and the benefit of all of our stakeholders. There is no better time to be CEO at Clorox. Our people are second to none, and I believe our focus on big-share brands in midsized categories, countries, and channels is the right one for us. As I've been sharing with folks in the past 6 weeks or so, this transition has a lot to do with continuity, no extreme right or left turns. I believe we're on the right path with the 2020 Strategy. At the same time, the defining issue for Clorox is accelerating profitable growth, so we're leaning into this strategy and accelerating the key elements that I believe drive the greatest value. First, we will increase our investment in demand-building programs to reinforce the value proposition of our brands, to reinvigorate our categories, and to profitably grow market share. Now that means, first and foremost, creating values for consumers by delivering superior, innovative products that delight them and ensuring our communications make clear why our products are the ones to choose. Second, we will grow into profitable new categories and channels through innovation, partnerships, and acquisitions. And third, we will remove waste in our work, products, and supply chain to create organizational capacity and to fund growth. Underpinning all of these will be a continued focus on our people. As CEO, my job is to keep Clorox people focused on our 2020 Strategy and empower them to deliver results in a way that's consistent with our values as a company. With strong plans in place for the current fiscal year and a 2020 Strategy that sets clear objectives and focuses everyone on value creation, I am very optimistic about the future and firmly believe we have what it takes to succeed. In the interim, of course, it's about hitting our fiscal year annual goals, which is why I'm pleased we're off to a solid start this fiscal year. And with that, I'll ask the operator to open up the line for Q&A.

I would like to address the perception that the U.S. economy is improving. If consumer activity picks up, can you discuss your marketing position compared to your competitors and your share of voice to consistently capitalize on this? Additionally, I would like to follow up on the pricing issue. You mentioned pressure in the resin market. Will you be able to pass these costs onto consumers, and do you need stronger consumer spending to manage some of that pricing?

Yes, John, in the U.S., we've noticed some improvement with a 0.5 growth rate this quarter compared to the previous one. The University of Michigan's consumer confidence index shows that consumers are becoming less cautious. However, a significant portion of households still earn below $35,000 a year, and their wages are stagnant, which makes us cautious. That's why we're increasing our marketing spending to support our brands. This quarter, we increased our demand spending by about 5%, and I expect this trend to continue throughout the year. Much of this spending will focus on innovations like Fresh Step lightweight litter and boosting merchandising for disinfecting products as we enter the cold and flu season. Looking ahead, we have more innovations launching in January across our major brands, positioning us well as consumer confidence improves. Additionally, we're expanding our range of LOOP products aimed at low-income households, including a new $0.99 Clorox Bleach product that will likely be featured primarily in the dollar channel. We believe that focusing on LOOP products and increasing our innovation spending will strengthen our position in the market.

Okay. Don, if I could just follow up. Do you think you're spending enough after making these adjustments, considering some of the decreases we've witnessed in brand support over the past few years? I appreciate that you're increasing your spending, but is it sufficient to maintain the appropriate share of voice?

Yes, I believe so. If you examine the spending in the U.S. this quarter, we allocated nearly 10% to advertising and consumer promotion. We're aiming to keep pushing in that direction. In the categories where we compete with private label, specifically bleach, charcoal, and trash bags, we have a complete share of voice in bleach, a complete share of voice in charcoal, and nearly a full branded share of voice in trash bags. Overall, I think we're in a strong position.

John, this is Steve. Let me weigh in on your second question, which has to do with resin prices. It's interesting, as we've all seen, energy prices have really traded off pretty sharply over the last couple of months, but the resin market has actually been climbing steadily higher. It's pretty tight supply-demand balance right now. As a result of that, we have announced, effective in November, we are taking a 6% increase on our Glad business. What we typically see when we do this is you can see volume be somewhat depressed for a couple of quarters, sometimes 2 to 4 quarters, which is pretty normal, but then the consumer tends to come back. And again, Glad is a category that as resin prices move up, we tend to take pricing. It's cost justified. Takes time but the consumer adapts to it, and competitors have historically followed pretty quickly on that. So we think it's a right decision to protect our margins, and we think it'll be fine with the consumer over time.

Well, I think what's interesting, John, if you look at the data in the quarter, if you look at trash, the category was up almost 4.5%, and our share traded off about 0.4 share point. If you look at the September data, the category was up 5%, and we were up in shares 0.3 share point. So it seems like, if that's that same pattern playing out, that after a few months of absorption, consumers will come back, and that's what we're seeing in the data.

Yes. So you've mentioned the category acceleration in the quarter, better share trends, new innovation, and all that signals a basis for optimism on the top line, I think. And then on the bottom line, the exit from Venezuela, the $0.05 disability plan benefit this quarter should help as well. So just given all that, just trying to understand the maintenance of your full-year guidance. Is that just more conservatism early in the year? Or are there things on the horizon that are offsetting some of those more positive trends so far?

Well, I think, as you say, we're certainly off to a good start on the year, and we feel very good about the plans we have in fiscal '15 and how we're executing against it. But I think it's important to note we're 90 days into this year, and we are going to have to continue to watch what happens with foreign currencies, commodity costs and how the consumer holds up as we go through the holiday season and get into the back half of this fiscal year. So I think we need more time to see how some of these things unfold as we move through the year. But at this point, we certainly feel like we're off to a good start and feel very good about the outlook that we have out there.

Okay. And then separate question on Venezuela, if I could. As you think about that exit, is that, at this point, a fairly cut-and-dry exercise, meaning that you have a clear blueprint to follow and that you've got line of sight to the end point? Or are there key unknowns, risks that we should be aware of that might alter the expected P&L impacts or cash costs over the course of that exercise?

Yes. And as you saw in our press release, and I guess I would echo, we continue to believe that the after-tax cost of the exit will be about $70 million to $80 million. Now a large portion of that will fall in fiscal '15. Some of that will obviously continue onwards. But I would say we have a plan. We've executed the plan, I think, very well. But it's obviously a tough situation, and there are unknowns. So I think we're going to need to continue executing the plan that we have and moving through it. But at this point, we think the after-tax cost of $70 million to $80 million and the cash cost on an after-tax basis of $5 million to $10 million, these numbers feel right to us.

I think that the after-tax cost is something to really focus on, in the $5 million to $10 million range. I think that as you look at FY '16 and '17, we expect very minimal impact from that. We're in the process now, we have been in an expedited sales process on the assets in Venezuela. We'll see how that plays out over the next coming weeks.

You talked earlier about improving U.S. macros and how they're looking a touch better. But I'm just kind of curious, how much do you think your improved performance is a function of better macros and people's willingness to trade up perhaps versus the business-building initiatives that you guys have done?

It's noteworthy that a survey released this morning indicated we were the only large company to experience an increase in consumer satisfaction over the past year. Our focus on blind wins, outstanding products, and excellent in-store execution regarding assortment, merchandising, pricing, and shelving is clearly paying off. The fact that we're starting to see share gains for the first time in a year, with October showing similar trends to September, reflects the team's strong execution in the field and our strategic focus on the three key areas. I feel optimistic about the remainder of the year, especially with the next wave of innovation coming in January and the strong execution I've observed in the first quarter. Considering the sales from the second half of the year, where we experienced a negative 2% in sales while being positive in the first half, these factors—solid innovation, heightened brand support spending, and effective in-store execution—coupled with easier comparisons as we proceed into the latter half of the year, highlight the team's efforts. While external tailwinds certainly assist, we always prefer to navigate with the current rather than against it.

And Olivia, this is Benno. I'd also be cautious to call it a trend just yet. I think we've had quarters in the past where we've seen improvement, and then that was followed by a disappointment. So I'd love to wait another quarter or 2 until we call it a trend. I'm still cautious about this, and we're still focusing on what we can control, which is predominantly emphasizing the value of our brands, increasing our investments to drive market share, and making sure that we execute our innovation with excellence. So I share the optimism, but I'd also say we want to remain cautious as far as the consumer is concerned. It remains a very challenging environment.

Yes. I think as Steve said and Benno said, I think we've got a quarter under our belts. There are headwinds out there in terms of currency and certainly, commodities, to some extent. So we're cautiously optimistic is probably the best way to put it.

Got it. Understood. To follow up, in Household, that certainly exceeded my expectations. I'm curious about the sustainability of those gains. Clearly, new distribution in Bags and Wraps likely means at least three more quarters of benefit, but what about Charcoal? Were you surprised by how strong Charcoal was?

We executed very well, particularly with our top five customers, two of whom, Home Depot and Lowe's, are not included in the syndicated data. This is why our market share remained relatively stable. However, it’s important to note that we saw a 16% increase in volume during the quarter. Looking ahead, we will continue to maintain this level of execution. Over the past couple of years, we have developed a solid strategy for Charcoal. Additionally, we are cautiously optimistic about improvements in Litter trends as we move into the next quarter and the latter half of the fiscal year. Regarding Glad, we will monitor the impact of the upcoming price increase. In the quarter, Glad's volume increased by nearly 2%, and we began to regain some market share in September. Charcoal contributed to our performance, and we have a plan in place to enhance that brand further.

Olivia, just as a reminder, Charcoal is doing quite well right now, but we are entering the smallest quarter of the year due to seasonality and the winter season. So even if it continues to perform well, at least for the next quarter, it won't have the same impact it had in the second quarter or in the first quarter, I should say.

Benno, congratulations on the new assignment, and Don, congrats on retirement.

Thank you, Jason.

I'm sure you'll stay busy. So I wanted to drill down a little bit more on the cost outlook. You're talking about elevated resin prices now. I guess the trade's talking about some of these poly reactors coming back online soon and the potential for some loosening. As you mentioned, some of the feedstock is quite down. It appears that resin markets are poised to roll over. So I guess, first, would love to get your thoughts on that. And then secondly, what does it mean for your pricing? I know, looking back in time, October '08, you took prices on Glad trash bags up 10%. 2 months later, in December, you had to roll them back, and then there were a number of rollbacks that followed that. Why would this time be different if we get the relief?

Let me start by discussing the resin market. The situation is challenging because, as you noted, feedstock prices have dropped significantly. However, we are facing a scenario where supply remains relatively tight, and demand is still strong. When these factors come together, it results in rising prices. This is something we expected as we entered the year, and we've observed another increase in resin prices that seems to be stable in the market. Thus, we anticipate that prices will continue to rise and may remain high. There might be fluctuations over time, but generally, these markets have shown a tendency to increase, stabilize for a while, and then reach new highs. That's what we are planning for. Regarding the pricing for Glad, this category typically aligns with trends in resin prices. As these prices rise, we adjust our pricing to reflect the long-term average of resin costs. If resin prices were to decrease, we may need to increase our merchandising spend at that point. However, for now, we believe prices will stay elevated, and we are adjusting our pricing strategy accordingly.

Don, we are going to miss you. You've done a great job here, and Benno we look to, certainly, hearing more from you.

Thanks, Ali.

I have a couple of questions about Venezuela. Looking at the supplementary table that outlines the adjusted figures, does the $17 million shift to losses from the discontinued section account for the devaluation? I thought the devaluation was approximately $0.13. If it does, I would like to know your thought process behind exiting Venezuela. You were the first to make this move and have taken the lead on the Venezuela situation compared to your peers. I'm interested in your outlook for Venezuela, considering the $70 million impact today and the $70 million cost to exit. Additionally, could you share your vision for Argentina, given your proactive stance on the Venezuela issue?

Let me start by sharing our thought process regarding Venezuela. We've been under price controls there for three years, and we believe that our situation was particularly challenging since about 70% of our portfolio was affected by these controls. Over that three-year period, we faced cumulative inflation exceeding 100%, in some cases reaching 200%. This situation caused our gross margins to decline from the high 30s to 40%, which previously aligned with U.S. margins, to negative figures recently. We conducted 29 meetings with the government between July 2012 and July 2014, highlighting our challenges and the urgent need for price adjustments to operate sustainably. Last year concluded with $77 million in revenue against a $23 million operating loss. While we budgeted for a smaller loss this year, the pricing increases promised in June were delayed by three months, impacting our financials each month. When the pricing finally came through in September, it was significantly lower than expected. Faced with diminishing prospects for a sustainable operation in Venezuela, particularly given the broader economic issues and falling oil prices, we had to conclude that a viable business model was not feasible. After two years and numerous discussions, it became clear that exiting Venezuela was in the best interest of our shareholders, which ultimately guided our decision.

Yes. And as you saw in our press release, and I guess I would echo, we continue to believe that the after-tax cost of the exit will be about $70 million to $80 million. Now a large portion of that will fall in fiscal '15. Some of that will obviously continue onwards. But I would say we have a plan. We've executed the plan, I think, very well. But it's obviously a tough situation, and there are unknowns. So I think we're going to need to continue executing the plan that we have and moving through it. But at this point, we think the after-tax cost of $70 million to $80 million and the cash cost on an after-tax basis of $5 million to $10 million, these numbers feel right to us.

I think that the after-tax cost is something to really focus on, in the $5 million to $10 million range. I think that as you look at FY '16 and '17, we expect very minimal impact from that. We're in the process now, we have been in an expedited sales process on the assets in Venezuela. We'll see how that plays out over the next coming weeks.

Can I ask one question that has three quick points on different topics? First, regarding Glad trash moving towards a more premium segment, I would have anticipated a larger price increase. You mentioned pricing, but I'm unsure if that takes price mix into account. I expected more of an increase in price mix as we transition to ForceFlex compared to traditional Glad trash. Second, can you provide more details about Hidden Valley? It appears that some shelf space has been lost during our in-store checks. I'd like to hear your thoughts on whether this is a temporary issue or a misunderstanding. Lastly, looking ahead for Glad, are the price increases aligned with the rising costs of oil and commodities related to resins? Historically, there has been a lag of about four to five months from oil prices impacting the supply chain for resins. Is that situation being considered, or is this different?

Yes. Ali, let me start with your last question first. As it relates to resin prices, here in North America, those resin prices are actually more closely aligned with natural gas ethylene, ethane. They're not directly tied to oil prices. Now oil prices can obviously influence the global market for resin pricing, and we're obviously working in global markets. But from a feedstock standpoint, oil can go down, and it's quite possible that resin prices can go up. The biggest factor driving resin prices up right now is something we've been talking about for quite some time, which is supply and demand. And I think the good news is, as you look out over the long term, several years from now, there is new capacity being built here in the U.S. that'll bring new supply to the market. But that's several years out, and therefore, as we look forward into the market, we think the supply-demand situation is going to remain fairly tight. That's likely to put some upward pressure on the floor underneath resin pricing.

Yes, regarding your question about Hidden Valley and the other brands, we haven't experienced any distribution losses in shelving for Hidden Valley. Some larger customers have reduced their inventories, which is just a temporary situation as we move past the summer merchandising period. There are no structural issues present. In fact, Hidden Valley salad dressing sales were essentially flat in September, compared to a 0.5 point decline in the overall category. We only saw a 0.1 point decrease, so it’s pretty much stable. We're also introducing innovation with products like premium dry dips, keeping the brand robust. There have been no structural changes to shelf space. With Glad, around 70% of that brand is now in premium trash bags, and we believe the decrease in base trash has slightly affected pricing. However, we expect the product mix to improve as we progress through the year, and we’ll see how the recent price increase impacts the overall pricing for the brand.

First of all, congratulations to both of you. So on the promo spend line, I think you said you had $16 million of incremental strategic spending in the quarter. Is the right way to read that is advertising was up, like, $1 million and the other $15 million was higher contra-sales promotions?

Yes, that's the way to look at it, Bill. And when you look at that $15 million, it was basically in merchandising support behind innovation and cold and flu.

Okay, got you. All right. Because the pricing was still pretty healthy, and I would have thought that, that spend would come out against...

Yes, it involved more couponing and support for merchandising displays. It wasn't primarily about temporary funding increases for shelf price reductions.

Okay, got you. And then on the Charcoal side, like, the growth was obviously pretty extraordinary. Is there anything one-off that we should be mindful as we model the first quarter of next year? Is there like a big promotion, like a fence thing at Costco or whatever that might not get repeated?

It's hard to know. I think, again, at the end of the day, we had really good plans that we put in place. We executed them extremely well, and the weather was good. And when you bring it all together, it turned out to be a very nice quarter for the Charcoal business. I think, again, over the long term, we feel good about the plans to grow that business. But obviously, lapping double-digit growth is going to be challenging as we get into the first quarter of next year.

Okay, great. And then just lastly, on the professional business, we didn't talk much about it on the call. There hasn't been deal activity there in a while. Is it just because it's taken a while to find the right assets? Are you guys kind of putting that on hold? Or kind of what's driving that?

I'm sorry, Bill, I didn't hear the first part of your question.

I'm just talking about professional. We didn't really hear a lot about it on the call, and there hasn't been a lot of deal activity there from you guys. And I know it's a pretty clear strategic priority, so I was just wondering why we haven't seen more on that front.

Yes, I think we are still focusing on the three key areas we discussed during our analyst meeting a couple of years ago: U.S. Retail, PPD, and International. We projected that PPD would grow in the range of 10% to 15%, and we don’t anticipate any change to that outlook, Bill. Although it grew at a single-digit rate this quarter due to some challenges with a claim on one of our products that we have reinstated, we expect that segment to continue to grow at a double-digit rate moving forward, so there are no concerns there. Regarding mergers and acquisitions, that remains one of our primary focus areas, particularly bolt-on M&A. We will see how that develops, but there have been no changes to our expectations for that business. Additionally, observing retail trends in October related to stopping the spread of infection, we are noticing similar behaviors in health care facilities as well.

Our goal for the professional business moving forward is to achieve growth in the range of 10% to 15%, incorporating both organic growth and mergers and acquisitions. While it can be challenging to plan for various reasons, we remain committed to identifying the right M&A partners for this business. At the same time, we will maintain discipline and focus on seizing the right opportunities when they arise.

Can you share your thoughts on the early stages of the demand for disinfecting products? Wipes performed well, as you mentioned, through October, and showed decent numbers in September. How do you view the balance between consumer pantry loading and actual usage? I know it's still early in the process, but based on past experiences, do you believe that pantries are being stocked up or is this product being utilized? Additionally, are you anticipating an increase in sell-in from retailers as consumers start to pick up these products?

Well, like you said, it's really too early to say. So we're pleased with the incremental activities we've got in merchandising as a result of our planning, which was mostly around back-to-school and mostly around the flu season, and we've certainly seen an uptick. But historically, we have seen seasons where that has led to incremental consumption and also incremental household penetration. Keeping in mind that household penetration in this category is still only at about 50%, and there's ways to go. But we've also seen other seasons where it's led to a trough in the periods post the flu season. So I would say it's really, really too early to say. We are seeing an uptick in merchandising and an uptick in initial sales, but I would say it's too early to say.

Got it. That helps. Regarding the guidance, I noticed the EBIT margin is decreasing. If I understood correctly, are you saying that the reclassification of Venezuela is the main factor affecting that margin target? In other words, is the pricing you anticipate in Venezuela the reason you initially thought the EBIT margin would increase by 25 to 50? Am I understanding that correctly?

Yes. First of all, it's important to note that the absolute EBIT margin in fiscal '14 is 60 basis points higher, so we are starting from a better position. For fiscal '15, we anticipate that the EBIT margin will remain roughly flat, possibly a little above or below that. This expectation is influenced by some of the EBIT margin improvement we were hoping for from Venezuela, which we are actually going to achieve, albeit in a different manner due to our decision to exit the business. Additionally, we've experienced more pressure in resin than we had expected. However, looking at the long term, we remain confident in our cost savings program, the pricing strategies we are implementing, and the stringent controls on SG&A. All of this leads us to believe we will continue to see solid EBIT margin expansion of 25 to 50 basis points over time.

Yes, that's great. Just quickly, where did the disability help or the $0.05 in benefit flow through? Was it in COGS and SG&A, or categorized differently?

Yes, your accounting is really good. It flows through both, as a matter of fact. Some of that floated to SG&A, some of it floated to COGS. You did notice that our SG&A cost as a percentage of sales came in lower than the year ago. Part of that was because of the cost savings programs that we were driving in the company, and then a portion of that's just this one-time accrual adjustment that we needed to make in the quarter.

I was wondering if you could talk a little bit about International volume trends. It's just been so long, given the pressure from Venezuela, that we've seen kind of a 'clean number.' So would you say that this kind of mid-single-digit pace is something you see as sustainable and really what's been underlying the reported trends for a while now or not really?

Yes. Our goal for International sales growth remains at 5% to 7% year-on-year. While we are noticing some slowdown, especially in the rapidly growing Latin American markets, it is important to note that growth in these markets is still outpacing North America, making them attractive and profitable for investment. Therefore, we are maintaining our ambitions. We aim to shift investment within International from less profitable, stable markets to faster-growing regions like Chile, Peru, and Colombia, while improving our 3D plan execution to gain market share. I'm pleased with our progress, but we can achieve more. Additionally, our primary objective in International is to enhance the profitability of our growth, which we are pursuing through cost savings, leveraging the benefits of our SAP implementation in Latin America, and focusing on pricing and margin-accretive innovation. Consequently, there are no changes to our innovation strategy or our sales growth target of 5% to 7%, but we are emphasizing profitability to counteract the margin decline caused by one-time events and inflationary pressures in International.

I want to reinforce Benno's points by highlighting that we have concentrated our investments in countries like Peru, Colombia, and Mexico, which all experienced high single-digit volume growth this quarter. This is quite promising from our perspective. Additionally, Argentina saw low single-digit volume growth, but it's still positive growth, which we view positively. In the countries where we've allocated resources, we are pleased to see these encouraging trends continue.

So thanks, everyone, for joining us on today's call, and we look forward to speaking with you again when we share our second-quarter results.