clorox (clx) earnings report: q2 2015 conference call...

CompanyName:CloroxCoCompanyTicker:CLXSector:ConsumerGoods

Industry:ConsumerDurablesEventDescription:Q22015EarningsCall

©2014TheStreet,Inc.AllRightsReserved Page1of 21

Clorox(CLX)EarningsReport:Q22015ConferenceCallTranscriptThefollowingCloroxconferencecalltookplaceonFebruary4,2015,01:30PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

SteveAustenfeld;TheCloroxCompany;VP-IRSteveRobb;TheCloroxCompany;EVP,CFOBennoDorer;TheCloroxCompany;CEO

OtherPart icipants

JohnFaucher;JPMorganChase;AnalystChrisFerrara;WellsFargoSecurities;AnalystOliviaTong;BankofAmericaMerrillLynch;AnalystStevePowers;UBS;AnalystAliDibadj;SanfordBernstein;AnalystJoeAltobello;RaymondJames;AnalystWendyNicholson;CitiResearch;AnalystMichaelSteib;CreditSuisse;AnalystConnieManeaty;BMOCapitalMarkets;AnalystBillSchmitz;DeutscheBank;AnalystErinLash;Morningstar;AnalystLaurenLieberman;BarclaysCapital;AnalystJavierEscalante;ConsumerEdgeResearch;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

Goodday,ladiesandgentlemenandwelcometoTheCloroxCompany'ssecond-quarterfiscalyear2015earningsreleaseconferencecall.

(OperatorInstructions).

Asareminder,thiscallisbeingrecorded.Iwouldnowliketointroduceyourhostfortoday'sconference,Mr.SteveAustenfeld,VicePresidentofInvestorRelationsforTheCloroxCompany.Mr.Austenfeld,youmaybeginyourconference.

SteveAustenfeld(VP-IR):

Great,thankyou.Welcome,everyoneandthankyouforjoiningClorox'ssecond-quarterconferencecall.OnthecallwithmetodayareBennoDorer,Clorox'sChiefExecutiveOfficerandSteveRobb,ourChiefFinancialOfficer.WearebroadcastingthiscallovertheInternetandareplayofthecallwillbeavailableforsevendaysatourWebsite,TheCloroxCompany.com.

Letmeremindyouthatontoday'scallwewillrefertocertainnon-GAAPfinancialmeasures,includingbutnotlimitedtofreecashflow,EBITmargin,debttoEBITDAandeconomicprofit.Managementbelievesthat




providinginsightsonthesemeasuresenablesinvestorstobetterunderstandandanalyzeourongoingresultsofoperations.ReconciliationwiththemostdirectlycomparablefinancialmeasuresdeterminedinaccordancewithGAAPcanbefoundintoday'spressrelease,thiswebcast'spreparedremarksorsupplementalinformationavailableinthefinancialresultsareaofourWebsite,aswellasinourfilingswiththeSEC.Inparticular,itmaybehelpfultorefertotableslocatedattheendoftoday'searningsrelease.

Pleaserecognizethattoday'sdiscussioncontainsforward-lookingstatements.Actualresultsoroutcomescoulddiffermateriallyfrommanagement'sexpectationsandplans.Pleasereviewourmostrecent10-KfilingwiththeSECandourotherSECfilingsforadescriptionofimportantfactorsthatcouldcauseresultsoroutcomestodiffermateriallyfrommanagement'sexpectationsandplans.TheCompanyundertakesnoobligationtopubliclyupdateorreviseanyforward-lookingstatements.

Nowturningtoourpreparedremarks,Iwillcoverhighlightsofoursecond-quarterbusinessperformancebysegment.SteveRobbwillthenaddressourfinancialresultsandfinancialoutlookforfiscalyear2015andfinallyBennowillwrapupourpreparedremarks,aswellasopenitupforQ&A.Consistentwithtoday'spressrelease,allofourcommentarytodayisonacontinuingoperationsbasisunlessotherwisestated.

Turningtoourtop-lineresults,inthesecondquarter,volumewasup4%andsalesgrew3%,includingtheimpactof3pointsofunfavorableforeigncurrencieswiththelargestimpactcomingfromArgentina.Excludingtheimpactofforeigncurrencies,salesgrew6%.Ourgrowthreflectshighervolume,aswellasanearly2pointbenefitfrompriceincreases.Importantly,oursalesresultsreflectstrongperformanceacrossallUSsegmentsandinternationalonacurrency-neutralbasis.

InQ2,ourUS13-weekmarketsharesdecreased1/10ofapointversustheyear-agoquarter.TheslightdeclineinthequarterreflectedcontinuedintensecompetitiveactivityinourcatlitterandBritabusinesses.Conversely,wesawmarketshareimprovementsinourlaundrybusinesswithCloroxLiquidBleachandClorox2StainFighterandColorBoosterattwo-yearhighs.

Thehomecarecategoryalsocontinuestostrengthen.Foreightconsecutivemonths,wehavegrownmarketshareinthisbusinesswithstrongsecond-quartergainsinCloroxdisinfectingwipesleadingtheway.Burt'sBeesalsogrewmarketshareinthequarterwithverystronggainsinfaceandlipcare.

LookingatourUScategories,theywereupjustoverapointinthesecondquarter,aniceimprovementfollowingthehalfpointgainwesawinQ1.Wearecontinuingtoinvesttoimproveourcategorytrendsandstrengtheningourmarketsharesremainsatoppriority.

Withthat,I' llreviewoursecond-quarterresultsbysegment.Inourcleaningsegment,Q2volumeinsaleseachincreased3%behindstrongresultsinourprofessionalproductsandhomecarebusinesses.Ourprofessionalproductsbusinessdelivered21%volumegrowthand19%salesgrowthbehinddouble-digitshipmentgainsinprofessionalcleaningandhealthcare,alongwithasolidgaininfoodvolume.

WhileconcernsaboutEbolaandEnterovirushadlimitedimpactonourretailbusiness,whichIwilldiscussinamoment,healthcareinstitutionsdidrespondwithsignificantpurchasesofcleaninganddisinfectingproductscontributingtotop-linegrowthforthequarter.FollowingsuchstrongsalesinQ2,weanticipatesomeslowdowninprofessionalproductsinQ3astheseconcernshavenowabated.

Inhomecare,whichisourlargestUSbusinessunit,salesincreasedbehindstrongexecutiononseveralmerchandisingevents,alongwithdistributiongainsforourtoiletcleaners.ThissolidvolumeandsalesgrowthmorethanoffsetadistributionlossonCloroxdisinfectingwipesatamajorclubcustomerlastcalendaryear,alossthatwehavenowanniversariedbeginningthismonth.

Inthenearterm,wedon'tanticipategettingdistributionbackatthiscustomer.Forperspective,ourfocusisonprofitablegrowthforCloroxandcategoryhealth,notgrowthatanycost.Webelievewehavetherightstrategy




inplacetodriveourbusinessandcategorygrowthinaprofitablemanner.Inparticular,wecontinuetobelievethereisopportunityforincreasedhouseholdpenetrationinthewipescategory,particularlyaswelaunchmeaningfulinnovation.

Forexample,werecentlylaunchedseveralnewproducts,includingawipewithmicroscrubbers,thatisconsumer-preferredversusthosecurrentlyinmarket,aswellasnewCloroxtripleactiondustwipesthatallowconsumerstodustanentireroomwithoneextralargewipethatpicksupdust,hairandallergenssuchaspetdander.

Importantly,aspartofourstrategytoexpandwipesusagearoundthehome,wealsointroducedCloroxScrubSinglesKitchenPads,whichcomepreloadedwithCloroxcleanerandaremeanttobetossedafterusetherebyeliminatingoneofthemostgerm-ladenitemsinhouseholds,thereusablesponge.There'saversionofScrubSinglesforuseinbathroomsaswell.

Aswe'vesharedwithyoubefore,Cloroxremainstheclearleaderinthewipescategorywithmarketsharesnear50%intrackedchannels,morethantwicethatofthenearestbrandedplayerandsharetrendshavecontinuedtoimprove.Earlyinthequarter,wedidseeanuptickinwipeshipmentsheadingintothecoldandfluseasonbehindconsumerconcernsregardingEbola,butheightenedconsumerdemandmoderatedquicklyasreportedcasesdwindled.

Withthefluseasonjustnowgettingintofullswing,wewillbemonitoringconsumptionandusingregionalfludatatoworkwithretailerstohelptargetdisinfectingwipeshipmentswheretheyareneededmost.

Inourlaundrybusiness,salesdeclinedduetodecreasedCloroxbleachvolumeasaresultofcategorysoftnesscomparedtostrongcategorygrowthintheprioryear.Fromamarketsharestandpoint,ourinvestmentinthisbrandandfocusonvaluearepayingoffasDecembermarkedthefourthconsecutivequarterofmarketsharegrowthonCloroxbleach.Lookingahead,duetoincreasesforinputcostsforourbleachbusiness,we'reintheprocessofimplementinga7%averagepriceincreaseeffectiveFebruary1.

Inourhouseholdsegment,wedelivered3%volumegrowthand5%salesgrowth.Thesegment'stop-lineresultsweredrivenbystrongperformanceinourGladandCatlitterbusinesses.Ourbagsandwrapsbusinessgrewvolume3%drivenbyinnovationbehindtheHawaiianAlohascent,aswellasnewGain-scentedtrashbagsthroughourpartnershipwithProcter&Gamble.SalesonGladwereupdoubledigitsbehindpriceincreasestakenin2014.

Eveninthefaceofintensecompetition,catlittervolumeandsalesincreasedbehinddistributiongrowthofournewFreshStepExtremelightweightproduct.Wearecontinuingtoinvestaggressivelyininnovationandcommunicatingourvaluepropositionversusthecompetition,particularlyfocusingonexcellentclumpingandodorcontrolsuchaswithournewEliminateOdorfor10Dayscampaignthatwaslaunchedinthesecondquarter.

KeepinginmindthatQ2isarelativelysmallquarterforourcharcoalbusiness,salesandvolumedeclinedfollowingdouble-digitgrowthinthefirstquarterasretailerstransitionedtoournewandimprovedKingsfordCharcoalproductthatlaunchedinJanuaryinadvanceofthe2015grillingseason.

Inourlifestylesegment,volumegrewastrong5%andsalesincreased4%.Theseresultsweredrivenbyverystrongdouble-digitvolumeandsalesgrowthonBurt'sBees,largelyduetoinnovationinlipandfacecareproducts.Inparticular,ournewlipcrayonsandnewvanillabeanandwildcherrylipbalmflavorsgrewstronglyinthequartersupportedbyourfirsteverBurt'sBeestelevisionadvertising.

Ourfacialtowelettebusinessandskinbrighteningproductswerealsoverystronginthequarter.

Turningtoourfoodbusiness,salesgrewversustheyear-agoquarterbehindhighervolumeforbottledand




dryHiddenValleyproducts.Finally,thesegment'spositiveresultsonBurt'sBeesandfoodwerepartiallyoffsetbylowersalesandshipmentsofwaterfiltrationproducts,primarilyduetoconsumptiondeclinesonpour-throughfilters.

Aspreviouslycommunicated,westartedshippinganimprovedBritafilterinAugustthatisfasterandeasiertochangethancompetitivefilters.InNovember,webeganshippingimprovedpitchers.Withourfocusoninnovation,weareoptimisticthatourwaterfiltrationbusinesswillhaveastrongersecondhalfofthefiscalyear.

Turningtointernational,volumewasup5%behindstrongoperatingperformanceandvolumegrowthinnearlyallregions.However,salesdeclined2%duetotheimpactofunfavorableforeignexchangerates.Ifyouexcludetheimpactofforeigncurrencies,salesforinternationalgrew11%.Withoilandothercommoditypriceshavingfallen,capitalinvestmentinsomecountrieshasmoderatedresultinginslowingeconomicgrowthinsomeofourkeymarketssuchasChileandPeru.

Strategically,weremaincommittedtogrowingprofitablyinourinternationalmarketsandcontinuetotakestepstoovercomemacroeconomictrendssuchasnegativeforeigncurrencies,highinflationandslowingGDPgrowth.Inparticular,wecontinuetocarefullyassessspendingacrossourinternationaldivisionandimplementpriceincreasestomitigatethemacroheadwinds.

Lookingatthebalanceoffiscalyear2015,asnotedinthismorning'searningsrelease,wehaveincreasedoursalesgrowthoutlookforthefullyeartobeabout1%.Therevisedsalesoutlooktakesintoaccountthestrengthofthefirsthalf,alongwithanupdatedoutlookforthesecondhalfoftheyear.AsIdiscussed,weanticipatesomeslowdowninQ3inprofessionalproductsfollowingverystrongQ2shipmentsinpartrelatedtoEbolaandEnterovirusconcernsthathavenowgreatlyabated.

Inaddition,wenowanticipatestrongerforeignexchangeheadwinds,alongwithhighertradespendingtosupportourcategoriesandgrowmarketshares,aswellasdefendagainstreducedpricesbycompetitorsfollowingthedeclineinimportcosts.NowIwillturnitovertoSteveRobbtoprovidemoredetailonourQ2performanceandouroutlookforfiscalyear2015.

SteveRobb(EVP,CFO):

Thanks,Steveandwelcome,everyone.Wearepleasedtohavedeliveredastrongsecondquarterandasolidfirsthalfforfiscal2015.Inadditiontostrongsalesgrowthinthequarter,wedeliveredanotherquarterofverygoodearningsgrowth.Asyousawinourpressrelease,wehaveraisedourfiscalyearoutlookforsalesandearningspersharetoreflectoursolidfirst-halfresults.

Inoursecondquarter,salesgrew3%reflecting4pointsofvolumegrowthand2pointsfrompricing,partiallyoffsetby3pointsofunfavorableforeigncurrencies.Onacurrency-neutralbasis,salesgrewnearly6%.Ourtop-lineresultscameinbetterthanexpecteddrivenbystrengthinourGlad,professionalproductsandBurt'sBeesbusinesses.

Grossmarginforthequarterincreased10basispointsto42.5%reflecting130basispointsofcostsavingsand100basispointsofpricing,largelyoffsetby90basispointsofhighercommoditycosts,aswellas90basispointsofhighermanufacturingandlogisticscostsreflectingcontinuedinflationarypressuresininternational.

Andaswe'vepreviouslycommunicated,wecontinuetoseesignificantcostpressuresinthelogisticsandtransportationmarketduetothetightsupplyoftrucksandrailcars.

Sellingandadministrativeexpensewaslowerinthesecondquarterat14.2%ofsalescomparedto15%ofsalesintheyear-agoquarterwhentheCompanymadeincrementalinvestmentstochangeITservice




providers.Costsavingsalsocontributedtolowersellingandadministrativeexpenses.

Advertisingandsalespromotioninvestmentforthequarterwasmorethan9%ofsalesreflectingcontinuedstrongsupportbehindourbrands,particularlytodrivetrialofnewproducts.Notably,ourUSretailadvertisingspendwasabout11%ofsales.

Oureffectivetaxrateof34.9%wasalmostapointlowerversusyearago,butinlinewithourfull-yearprojections.Outofallofthesefactors,wedelivereddilutedearningspersharefromcontinuingoperationsof$0.97,an8%increaseversustheyear-agoquarter.

Fiscalyear-to-datefreecashflowwas$207millioncomparedwith$159millionintheyear-agoperiod.Theincreasewasdrivenbyloweremployeeincentivecompensationpayments,lowertaxpaymentsandtheinitialfundingoftheCompany'snonqualifieddeferredcompensationplanlastyear.Thesefactorswerepartiallyoffsetby$25millioninpaymentstosettleinterestratehedgesrelatedtotheCompany'sissuanceoflong-termdebt,theexpenseofwhichwillbeamortizedovertheten-yearlifeofthedebt.

InDecemberof2014,weissued$500millioninseniornotesincreasingtheCompany'squarter-endcashbalancewithproceedssubsequentlyusedtopaydownaportionofthenotesthatmaturedonJanuary15ofthisyear.Forfiscalyear2015,wecontinuetoanticipatefreecashflowasapercentageofnetsalestobeabout10%ofsales.

NowIwillturntoourfiscalyear2015outlook.AsStevementioned,ourfiscalyearsalesoutlooknowanticipatesalesgrowthofabout1%reflectingsolidfirst-halfsalesresults,productinnovationandthebenefitofpricing.Oursalesoutlookalsonowanticipatesanevengreaterimpactofunfavorableforeignexchangeratesintherangeof2%to3%.

Inaddition,fiscalyearsalesareanticipatedtobeimpactedbyslowinginternationaleconomies,aswellashigherfull-yeartradepromotionspendingaswecontinuetoinvestinourbusinessanddrivetrialofnewproducts.(Inaudible)areexpectedtomorethanoffsethighermanufacturingandlogisticscosts.

Giventhesignificantdeclineinoilprices,wenowanticipatelowerresinpricesinthesecondhalfandcommoditycostsareexpectedtobeaboutflatforthefullyear.Forfiscalyear2015,wecontinuetoanticipatesellingandadministrativeexpensesatabout14%ofsales.EBITmarginisexpectedtobeaboutflatasincrementaldemand(Inaudible)expansion.Wecontinuetoanticipateourfiscal2015taxratetobeabout34%andnetofallofthesefactors,wehaveraisedourfiscalyearoutlookfordilutedearningspersharefromcontinuingoperationsto$4.40to$4.55.

Aswelookaheadtofiscalyear2016,weanticipatethebenefitsfromcontinuingcommoditysoftnesstobepartiallyoffsetbycontinuedincreasesinlogisticscosts.Also,aswehavedonehistorically,wemayuseaportionoftheresin-relatedsavingstoaddresspotentialcompetitivepricecuts.We'llalsocloselytrackheadwindsininternationalmarkets,includingforeigncurrencydeclinesandslowingeconomies.

BeforeIturnitovertoBenno,Ididwanttoletyouknowthatmovingforwardwewillprovidenextyear'sfiscalyearoutlookstartingwithfiscal2016duringourQ4earningscall,whichtakesplaceinAugust.Thischangeallowsustoprovideyouwithanoutlookbasedonafullyearofactualsandputsusmoreinlinewiththetimingofourpeergroups'outlookannouncements.Iamhappytoaddressanyquestionsyoumighthaveonthisprocesschange,butIwantedtomakeyouawareofthispriortotheQ3earningsreleaseinMay.

Andwiththat,IwillturnitovertoBenno.

BennoDorer(CEO):

Thankyou,Steveandhello,everyone.It'sgreattobejoiningyouonmyfirstcallasClorox'sCEOgiventhestrongsecondquarterwejustcompleted.Thisquarter'sperformancefollowsaverysolidQ1anditalso




speakstothecommitmenttothe2020strategyandourfocusoncontinuitywiththeleadershiptransition.Thatcontinuityofpurposeisevidentinourcontinuedemphasisoncategoryandoverallmarketshareimprovement,profitablydrivinggrowthandstrongertop-lineperformanceandcreatingshareholdervalue.

Nowclearlyasweheadintothesecondhalf,wearefacinganumberofchallenges,includingcontinuedsoftnessinseveralcategories,worseningforeignexchangeheadwindsandslowingeconomiesinmanyinternationalmarkets.Ibelievewearetakingtherightstepstosupportourbrandswithincreasedinvestmentswhiledrivingmarginimprovementtogrowprofitablyinthisdifficultenvironment.

AsIdiscussedwithyouonlastquarter'scall,thedefiningopportunityforCloroxisacceleratingprofitablegrowth.Lookingahead,we'releaningintofourkeyelementsofour2020strategythatIbelievedrivethegreatestvalue.Theseareasofemphasis,whichwearecallingstrategyaccelerators,willdrivedecisionsaroundwherewewillinvestmoreheavily,again,withtheintenttodriveprofitablegrowth.AndIwouldliketotakeafewminutestointroducethesetoyoutodayandatananalystmeetingweplanonhostinglaterthisyear,wewilldelvemoredeeplyintohowweareactivatingthem.

Thefirstareaofemphasisisacceleratingportfoliomomentum.Inotherwords,leveragingtailwindstogeneratemoregrowthfromourportfolioandinvestingmoreheavilyagainstthosebrandsandcategoriesthathaveastronger[right]togrow.Thesecondisaccelerating3Dtechnologytransformation,whichaimstoaddressincreasingconsumerfragmentation,ashiftinhowtoday'sconsumersshopandbuytheirproductsandhowwemustengagewiththemtowinthebattleforthephysicalandvirtualshoppingcart.

Thethirdareaofemphasisisacceleratinginnovation.Nowthisisn'tjustaboutproductinnovation,it'saboutinnovationinsalesandmarketing,aswellasproductsupply.Reallyanythingthathastodowithourdemandcreationmodelbuiltaroundthe3Dsofdesire,decideanddelight.Innovationinalltheseareasdrivescategorygrowthandwearecommittedtodrivingmoreofthat.

Finally,wewanttoaccelerateourgrowthculturewhileatthesametimemaintainingourtraditionofoperationalexcellence.WewanttodialupourstrongCloroxculturetohaveanevenmoredeeplyingrainedgrowthmindset.Istronglybelievethesefourareasofemphasisarewhatweneedtodrivegrowthwhiledoingsoprofitably.AndIlookforwardtosharingmoreaboutthemwithyouovertime.

Nowwiththat,let'sopenituptoyourquestions.

QUESTIONS&ANSWERS

Operator:

(OperatorInstructions).JohnFaucher,JPMorgan.

JohnFaucher(Analyst-JPMorganChase):

Yes,thankyou.Goodafternoon,everyoneandBenno,congrats.Wanttotalkalittlebitaboutthepricingthatyoutalkedabout,andIthinkyousaiditisgoingtocomeinonFebruary1.Couldyougiveusalittlemoreofanidea--andIapologizeifImissedthis--whereyouareseeingthatpricinggoingthroughsortofdomesticversusinternational?

Andthengivenallthenewsaboutrawmaterialdeflation,etc.,howyouforeseecompetitiveresponseonthispricingbecausewe'veseenalotoftalkaboutupticksandpromotionalspendinggoingforward,sodoyoufeelcomfortablethatthepricingisinanditistheretostay?Thanks.

BennoDorer(CEO):

Ithinkwhatyouarereferencingisthe7%priceincreaseonbleach,whichisdomestic--liquidbleach.We




haveaprofitablegrowthfocus,asyouknow,andreallythesecostsarefullyjustified.Weareseeingcostinflationinseveralareas,whetherthatistransportation,logistics,corrugates,wages,benefitsandthesearecoststhatnotjustCloroxsees,butthesearecoststhatarevisibleandoccurringtoourcompetitorsinprivatelabelaswell.

Iwouldliketoremindyouthatwearepricingtoalong-termcostadvantageandnottoapeak.Andagain,thesearefullycost-justified.Wedohaveastrongtrackrecordinpricing.Sooverthelast10years,95%ofourpricingincreaseshavestuck.Theyarebasedonverystronganalyticsaswellandweareintheprocessoftalkingtoourretailersaswespeak.

Sobasedonthatstrongtrackrecordandthecostjustification,weareconfidentthatthispriceincreasewillbesuccessful.Atthesametime,we'llalwaysmonitorwhatwillhappeninthemarketplace,whatwillhappenwithcompetitionandwearecertainlyalsowillingtospendbackifneededtodefendthebusiness.

JohnFaucher(Analyst-JPMorganChase):

Thankyou.

Operator:

ChrisFerrara,WellsFargo

ChrisFerrara (Analyst-WellsFargoSecurities):

Thanks.Iguess,Benno,canyoutalkalittlebitabout,Iguess,thepointoneofthefourpointsthatyou'resayingyouwereleadinginto,Iguess,isacceleratingportfoliomomentum.Canyoutalkalittlebitabouthowitisdifferent,likewhatthatmightentail?Notnecessarilyspecifics,butjustgenerallywhatisdifferentaboutthatfromwhathasbeengoingonthelastfewyears.

BennoDorer(CEO):

Yes,Chris,IthinkwhatthiswillbeaboutisreallyidentifyingthebusinessesthathavethestrongesttailwindsandensuringthatwehavetherightinvestmentsbehindthemandIthinkthegrowthofBurt'sBeesinthelastquarterisperhapsagoodexampleofwhatthiswilllooklike.WehaveforthefirsttimelaunchedaTVadvertisingcampaignbecausewerealizedthattheawarenessbehindthebrandreallyhasalotofupsideonthebasebusinesseventhoughthebrandhasbeenaroundfor20yearsandthathasbeenleadingtoreallyniceresultsonthebasebusiness.

Weareleaningintotheinvestmentsbehindtheinnovationsmorestronglyandwe'vereallyseenhowlip,butalsofaceinnovationhasyieldedreallyniceresultslastquarter.Andfinally,weareworkingwithretailerstomakesurewehavetherightin-storesupportoutthere.Soreallyitishelpingusunderstandwherethosetailwindsare,investinginthosetailwindsbehindaportfoliolikeBurt'sBeesandlikecertainareasinhomecareandlikefoodenhancersandusingthattodrivegrowth,butgrowththerightway.


Gotit.Iappreciateit.Andjustonanearterm,youguysmentionedacoupleoftimesthatyouarefacingincreasingtailwindsfromeconomiesaroundtheworld,butIguessthatsortofleavesoutyourbiggesteconomywherethingslookalittlebetterandyourcategorygrowthrateisgettingbetter.Soasyoulookforward,doyouthinkgenerallyyourcategorygrowthrategloballyacrosstheportfolioisgettingbetterorworse?Isuspectbetter,right?

BennoDorer(CEO):

Well,ifyoulookatourlargestmarketinternationally,Chris,LatinAmerica,weactuallyareexperiencinga



©2014TheStreet,Inc.AllRightsReserved Page8 of 21

slowdownincategories,whichevenaffectssomeofourstrongergrowthmarketslikePeruandChileandothermarkets,ofcourse,likeArgentinaandCanadahavebeenmorestableforawhile.

SoIwouldsaythegeneraltrendthatwearewatchingverycarefullyininternationalisaslowdowneconomicallyinourcategories.Ourmarketshareininternationalisgrowingandasyouhaveseenan11%salesincreaseinlocaldollarsisnothingtosneezeat.Butthat'saheadwindthatwearewatchingverycarefully.


I'msorry.ImeanbyyourbiggesteconomyImeanttheUS,whichhasbeengettingbetter,right?

BennoDorer(CEO):

IntheUS,whatweareseeingis--certainly,inthesecondquarter,wehaveseenaslightuptick.Allcategoriesgrewalittleover1%andthatisuphalfapointfrompreviousquarters,sothatisgood.AndifyouthinkaboutwhatishappeninghereintheUS,youseeindicationsofanincreasingconsumerconfidence.TheUniversityofMichiganjustissuedtheirConsumerSentimentIndex.Itishighestsince2004,Ibelieve.Thereishopethatthereperhapswillbehigherconsumerspendduetoloweroilprices,sothosearegoodthings.

Atthesametime,householdformationisstilllowerthanithistoricallyhasbeen.Thejobsthatarecreatedstillpaylessthanthejobsthatwerelostduringtherecessionandtherestillisthisbifurcationinsocietywherethebottomhalfisn'treallydoingwell.

Sothere'sputsandtakes.Iwouldsaywearecautiouslyoptimistic.Ourexpectationsrightnowstillarebasedonflattolowsingledigitcategorygrowthandforus,wefocusonwhatwecancontrolandthat'sinvestingininnovation.WehaveastronginnovationplanalsogoingoutinQ3ofthisfiscalyearthatweareinvestingbehindandwehavetalkedtoyouinthepastaboutincreasingourdemandspendby1pointofnetsales.Overtime,thatiscalledforbyourstrategyandwearecertainlyleaningintothat,afocusondeliveringbettervaluethancompetitorsinprivatelabel.

Sowefeellikewearedoingwhatwecandotodrivecategorygrowth,butIwouldliketoletthisplayoutinthemarketplaceforaquarterortwo.It'sreallytooearlytocallitapositivetrend.


Thankyou.

Operator:

OliviaTong,BankofAmericaMerrillLynch.

OliviaTong(Analyst-BankofAmericaMerrillLynch):

Wantedtoaskyouaquestionaboutcompetitioninyourcleaningcategories,particularlyasoneofyourmaincompetitorsisnotdomiciledintheUS.WehaveseeninourchannelchecksalotmoredealswithLysol,buytwogetonefree,thosekindsofthings.

Sojustcuriousonyourtakeoncompetitioninyourcleaningcategories,particularlyasoneofyourmaincompetitorsdoeshavealittlebitofatailwindfromnotbeingintheUS.Thanks.

BennoDorer(CEO):

Yes,socompetitioninparticularinhomecare,Olivia,hasalwaysbeenprettystrongandthosetypesofdeals




thatyoudescribed,theyarereallynothingnew.Theyoccurrelativelyfrequentlyandthat'spartofwhywearesayingthatinvestingmoreindemandspendingistherightthingtodo.

Iwillsaythoughthatforusthebiggestcategorythatwearecompetingwiththeminiswipes,perhaps,andifyoulookattheshareresultsonwipes,wearereallyupstronglyinwipesandwefeellikeforustherightthingtodoisfocusonconsumerfundamentals,focusondemandspendingthatdrivesourbrandequities,onstronginnovationandcertainlyinwipes,wehaveaverystronginnovationprogramandfocusingonpointingouttotheconsumerthatwearedeliveringsuperiorvalue.

That'sreallyworkinginthemarketplace.That'swhatwewillbefocusedonandthat'snottosaythatwewon'trespondappropriatelyifwefeellikethereisverystrongtradepromotiongoingoninthecategory.Wewilldefendourmarketshares,butIthinkwe'vealwayssaidthatourfocusisonearningmarketshare,notbuyingmarketshareandonwipesinparticularthatisplayingoutquitenicelyatthispoint.

SoIwouldsaythecompetitivedynamicsinhomecarearestrongastheyalwayshavebeen,butIwouldn'tcallthemelevatedatthispoint.


Gotit.Thanks.AndthenonGlad,itdoesn'tsoundlikeyousawanypushbackonyourpricingandinterestinglyitsoundslikevolumeincreasedwhileyoutookpricing,whichdoesn'ttypicallyhappen.Sowastheresometimingissue?Wasthereabigpre-buyaheadofpricemovesorhaveyoujustmanagedtoincreasevolumewhilealsotakingonpriceaswell?

BennoDorer(CEO):

IwouldsaythebiggestthingonGlad,Olivia,isthatwehavecertainlyleanedintothepriceincreaseandmerchandisinghasbeenverystronglastquarter.ButalsoourinnovationonGladisreallyworkingwellandinfact,inQ3,wearebackingthisupwithaninnovationthatwefeelverystrongaboutandthatisinpartnershipwithP&G,wearelaunchinggladwithGainscents.

TheGainscentisonethatplayedwellasascentendorsementacrossvariouscategoriesandwefeellikethisisanotheropportunityforustosupportourstrategyofdifferentiatingourtrashbagsandencouragingtradeupbydeliveringsomethingthatisuniqueandveryhardforourcompetitorstoreplicate.

Soinanutshell,reallystrongmerchandisingbutinparticularverystrongconsumeracceptanceinthispremiumtrashsegmentbehindourinnovationandasaresult,youhavealsoseenourmarketshareinthispremiumtrashsegmentupquitenicely.


Great.Thanks,Benno.

Operator:

StevePowers,UBS.

StevePowers (Analyst-UBS):

Iguessjustfirstonthecommodityfront,Steve,entertainmealittlebitandthinkaboutaworldwhereweareatsub$60oilfortheforeseeablefuture.Iknowitisearly,butwhatdoesCOGSdeflationrealisticallylooklikeinfiscal2016?Isitnegative2%,3%,5%?

Andyoumentionedpotentialoffsetsintermsoflogisticscostsgoingupandpricingpromotionalinvestmentsprobablyalsogoingupinthatworld.ButIjustwonderifyoucouldgiveussomeguardrailsaswethink




furtheroutintermsofhowyouarethinkingaboutthebusinessespreparingyourfiscal2016budgetinggivenwhereoilistoday.

SteveRobb(EVP,CFO):

Yes.It'sagoodquestionandtheshortanswerisitishardtoknow.AcoupleofthingsIwouldpointout.Obviouslyoilhasmoveddownprettysignificantlyoverthelast90days.Itisnotclearhowlongitwillstaydownattheselevels,soIthinkaswestartlookingatourfiscal2016planning,wewillhavetotakeahardlookathowlongwillthesepricesreallystayattoday'slevel.Ithinkcertainlyforthenextsixmonthsorsoweexpectthemtobedepressed.Beyondthat,Ithinkitremainstobeseen.

AcoupleofotherthingsIwouldpointoutabouttheresinmarket.ThesupplydemandbalancestillremainsfairlytighthereintheUSandsoresinpriceshaveyettocomedown.Actually,inthefirsthalfofourfiscalyear,resinpricingwasup.Wedoanticipateitwillgodowninthesecondhalf,butthat'smainlybeingdrivenbylowerpricesoverseasandthat'screatingsomedownwardpressurehereintheUS.Soit'sgood,butIwouldjusttemperexpectationsabittosayitisnotjustenergyprices,itisalsothesupplydemandbalance.

Andthenfinally,asyouthinkofresin,whichisthelargestcommoditythatwebuy,keepinmindhistoricallyinthiscategorywhenyouhaveseenalargemovedownwardinresinpricing,morethanhalfofthathasbeenspentbackinthecategoryandthat'scertainlywhatweareanticipating.

Soinshort,it'salwaysbettertohaveatailwindthanaheadwind,butIthinkatthispointwearecautiouslyoptimisticonhowthatmightplaythroughinfiscal2016.


Okay.I' llleavethatthere.ButIguess,Benno,maybefromatop-lineperspective,asyousay,thescannerdatahascertainlybeenpickingupandlookedabitbetter,whichisapositive,butnotnearlytotheextentthatweseeinyourreportednumbersthisquarter.

SohowmuchoftheQ2strengthisreallyattributablejusttotimingofsell-inversussell-out?Doyouthinkchannelinventoriesareokaybecauseyoudoseemtobepointingtowardsadecelerationinthesecondhalfthatgoesbeyondtheprofessionalandinternationaldynamicsthatyoumentioned?

BennoDorer(CEO):

Yes,thefirstthingIwouldsayiskeepinmindthatthepublishedsharedatadoesn'tcapturetheentireuniverse.Wefeelgoodabouttheinventoriesthatareoutthere.Thereisnothingunusualinhere.Thetwoareaswearecertainlywatchingis--oneisinprofessionalproductswherewedidseethatEbolaconcernshadsomeimpactonthatbusinessthatmayleadtodestockinginQ3.Thatwouldbemyexpectation.

Andthenwipes,certainlywipeshasbeenupverystronglyintrackedchannels.Wedon'tthinkthatEbolahadabigimpactastheconcernsfadedawayreallyquickly,butthefluseasoncertainlyhasbeenandisverystrong,soweneedtowaitandseetounderstandwhetherthatflowsthroughtoconsumerconsumption,butotherthanthatnothingparticular.Inventoriesarewheretheyneedtobe.


Okay,thanks.

Operator:

AliDibadj,Bernstein.

AliDibadj(Analyst-SanfordBernstein):




Sowantedtogobackto,Steve,Ithinkyourcommentaboutmorethanhalfofthecommoditybenefitsarespentbackandwehavecertainlyseenthatbefore,closerto60%,maybetwo-thirdsisspentback.SoIguessIamscratchingmyheadstillalittlebitaroundthepriceincreasesthataretheoreticallyjustifiedonthebleachproductsandonwrapsinparticular.

AndIworrythatyouareaskingfortroubleinsomesensebecauseweseethespotmarketinresins,USorabroad,itiscomingdown.Itwilllikelycomedownandhelpyouguysout,butalsohelpyourcompetitors.I'mjusttryingtofigureoutwhyyoutookthatpriceincreaseandagainifyou'renotjustaskingforapricegapexpansionlikeyouhavegottenbeforeinthesecategoriesandstartgettinghurtfrom[ashare]alloveragain.

SteveRobb(EVP,CFO):

SoAli,letmetakethatquestion.Afewthoughts.Firstofall,thepriceincreasesarecost-justified.Iwouldjustpointoutwhenyoulookatthetotalsupplychainwhetherit'slaborinflation,healthcarecosts,transportationcostsinparticularorevenalltheotherrawmaterialsets,thosehaveallbeenmovingup,sowetrytoprice,asBennosaid,tothelong-termaveragecost,soIthinkwefeelboththebleachincrease,aswellasGladisacost-justifiedpriceincrease.

NowasitrelatestoGlad,asyouknow,theresinmarket--itactuallytendstogoupprettyquickandcomesdownslowhasbeenthehistory,buttherehasbeenalong-standingissuewhereifpricesstarttocomedowninthespotmarketforresin,sometimesyou'llseeastepupinmerchandisingactivity.

Well,thatiscertainlywhatweareplanningforanditiscertainlybakedintotheoutlookandourexpectations,butIthinkwehavegotalongtrackrecordofmanagingtheupsanddownsofresinpricingwiththeGladbusinessquitesuccessfully.

Sowehaveseenthestorybefore.Wemanagedthroughthelong-termcostsandIthinkwefeelprettygoodaboutthedecisionswehavetakenandifconditionsaredifferentthanwethink,wewillmanagethroughit.


Okay,okay,that'shelpful.Idowanttogobackalittlebittotheleanin,Iguess,onportfolioandtrytogetyoursenseofhowcomfortableyouarewithbagsandwraps,professionalandBurt'sreallyleadingtheday.

Andontheonehand,itisgreatbecauseit'sdiversificationfromyour,quote/unquote,historicalbusinessorcorebusiness,buthowdowethinkaboutthatgoingforwardandwhatarewegoingtohearaboutfromyourcoreandunderlyingbusinesses?

Andifyoucantackle--asyoutalkaboutportfolio--theroleofinternationalbecause,ofcourse,themaintargetwe'vebeenhearingaboutforalittlewhileintermsofinternationalisimprovingthemarginsthere.AndIgetit;itistoughtotellwithcurrencies.Asbestaswecantell,themarginsarestillgoingdownornotgettingthatmuchbetter.

SoIamtryingtounderstandhowthatfitsinyourportfolio?DoesCloroxneedtobeaninternationalcompany?Doesitneedtotrytogrowthatbusinessorshoulditjustnot?Sobothcategoryportfolio,Iguessandalsointernationalandgeographicportfoliotoo,please.

BennoDorer(CEO):

Yes,so,oncategoryfirst,asyouknow,ifItakeastepback,weareveryfocusedondrivingthecorebusiness.Ifyoulookatthethreebusinessesthatyoureferenced,Ali,thatgrewlastquarter,twoofthemreallyhavebeengrowingstronglyforalongtimeandwehavealwayspointedoutthosetwobusinesses,professionalandBurt'sBees,asgrowthareasandlikeIsaid,weareleaningintoinvestmentsandthoseinvestmentsareshowinggoodreturns.




Glad,Iprobablywouldn'texpectgrowthratesthatwe'veseeninthelastquarteronGladonaconsistentbasisgoingforward,butifIreallylookatunderlyinggrowthdrivers,that'sinnovation.Thebusinesseswherewe'vehadstronginnovation,theyhavegrownandasyouknow,weareveryfocusedongrowingourbusinessbehindinnovationandlikeIsaid,wehaveaverystronginnovationprogramouttherealsoforthefiscalyearbackhalf.

Sowearegrowing,wearegoingtherightwayandimportantly,ifyoulookacrossthesegments,wearegrowinginallsegmentssoIfeelgoodabouthowmuchwearefocusedonthecoreandwhichbusinessesaregrowingandIcertainlywouldexpecthomecarealsogoingforwardtocontributemore.AsStevesaid,wehavejustnowafewdaysagocycledthroughadistributionlosswithamajorclubcustomer,sothatthewipesgrowththatweareseeingintrackedchannelshopefullywillbevisiblealsoinshipmentsaswecomparethemversusayearago.

Oninternational,Ithinkwhatwehavesaidininternationalisthatwhatwedowanttodoisgrowmoreprofitably.Weareexpecting5%to7%insalesgrowth,butwewanttoturnaroundourmargins.InternationalhasaroleinClorox.Weareexecutingthefundamentalswell,butIwillalsoremindeverybodythatwearenottryingtotransformtheCompanyintomoreofaglobalplayer.Itis20%ofourportfolioandifIprojectonforwardto2020,Idon'texpectthatnumbertobesignificantlyhigher.

CertainlyasyouthinkaboutthechallengesthatweareseeingfromaninflationpointofviewandinFX,Ithinkwhatitwillmeanisthatwewillbemorefocusedthaneverontheactivitiesonthemarginenhancementside,whetherthatispricing,whetherthatismarginaccretiveinnovation,applyingthestrongcostsavingfocusthatwehaveintheUSandinternational,orthisgoesbacktotheacceleratorthatImentioned,movingtheportfoliotowardsmoreprofitablecategories.ThatreallyIthinkwillbecomemoreofafocusgoingforward.

Howcanwemoveourportfoliotowardsthecategoriesthataremoreprofitableandlessperhapsvolatile?Burt'sBeesisagoodexampleandthencertainlycountriesthataremoreeconomicallystableandattractivelikePeruandlikeColombia,inandfranklyoutsideofLatinAmerica.Sointernationalhasarole,butwewillbeverymindfultomakesurethatwegrow,butgrowprofitably.


Thanks.Iappreciatethat.IfIcansneakinjustonequickoneaboutthecostsavingsanditlookslikeatleastinQ1,Q2versuslastyearthepaceofitslowedalittlebit.Justallayourfearsaboutthat,ifyouwouldplease,ornot.

SteveRobb(EVP,CFO):

Ali,Iamhappytoallayyourfears.Costsavingsinthegrossmargin,youareprobablylookingattheWebattachments,wehadabout130basispointsofcostsavingsingrossmargin.KeepinmindcostsavingshitseverylineoftheP&L.AgoodchunkofthecostsavingsthisquartercamethroughourSG&Aexpenses.

Sointotalforthequarter,wehad$27millionincostsavings,andIwouldsaywearecertainlyontracktoget150bpsofEBITmarginexpansionfromthecostsavingsprogramsthisyearandcontinuetofeelgoodaboutthepipelinegoingforward.Socostsavingsprogramisperformingquitewellforus.


Thankyou.

Operator:

JoeAltobello,RaymondJames.




JoeAltobello (Analyst-RaymondJames):

First,justwanttodrillalittlebitdeeperonthevolumenumberthisquarter.Backoftheenvelopelookslikeprofessionaladdedaboutapointtovolume,isthatcorrect?

SteveRobb(EVP,CFO):

Theprofessionalproductsbusinessintermsofvolumegrowth,no,thebusinesswasupdoubledigitsinbothvolumeandsales.


Right.Butintermsofyouroverallvolumes,itaddedaboutapointinthequarter?

SteveRobb(EVP,CFO):

Onatotalcompanybasis,that'sright.


Okay.Andthenintermsofthesecondhalf,Iunderstandwhythatwouldslow,but,Benno,youtalkedaboutyou'relappingthelostdistributioninwipes,soyouhaveeasycomparesthere.AndIthinkyouarealsolappingsomeeasiercomparesonbleachaswell.Sowouldthosetwoitemshelptooffsettheslowdowninprofessional,orthat'sprobablynotthecase?

SteveRobb(EVP,CFO):

Iwouldn'toverstatetheslowdowninprofessional.Thebusinesswasupdoubledigitsinthesecondquarter.Obviouslysomeofthatmaybeinventorythatwillgetworkedoffinthethirdquarter,but,onbalance,westillthinkprofessionalproductswillbeinthis10%to15%growth.Ithinkasyoulooktothesecondhalfofthefiscalyear--hereishowwearelookingatit.Thefull-yearoutlookfortheCompanyisforsalesgrowthofabout1%.Nowonacurrency-adjustedbasis,it'sprobablyintherangeof3%to4%.

Certainlyinthefirsthalfofthisfiscal,wewereatthehighendofthat.Wecameinatabout4%currency-neutralsalesgrowth.Aswelooktothesecondhalf,Ithinkwefeelverygoodthatweareontracktohavegoodpositivevolumegrowth.Weareverymuchontracktohavesalesgrowththatissolidfromanorganicstandpoint.

Ithinkthebigwildcardthatweareallwatchingprettycarefullyiswhathappenswithforeigncurrenciesandagain,theoutlookis2%to3%there,butwecouldbeatthemidorupperendofthatrangebasedonwherethespotratesaretoday.Butabsentthat,IthinktheorganicplansthatwehaveareperformingquitewellfortheCompany.


Okay,gotyou.AndthenintermsofBrita,youmentionedanewpitchercameoutinNovember.ThefilterscameoutinAugust,butitseemslikethatbusinesshasn'tpickedupyet.Youmentionedearlieronthecall,yousaiditwillbestrongerinthesecondhalf,butIthinkinthepastyoutalkedaboutgrowthorareturntogrowthinthesecondhalfofthatbusiness.AmIsortofsplittinghairsthere,ordoyoustillexpectgrowth?

BennoDorer(CEO):

Look,weexpectthatbusinesstodobetterinthesecondhalfandwe'vealsosaidthatonthesharefrontweexpectthattostartgrowingagainbyperhapsmiddleofthisyear.Thekeywillbeforthatinnovationtotakeholdwiththeconsumerandthekeywillbetogetbettermerchandisingplanswithretailersandtobehonest




alsosupportthatinnovationwith--thefilterinnovationwiththerighttoolstogetthepricedifferentialthatwehavecomparedtoprivatelabelintotherightplace.

Sodoweexpectabetterhalf?Don'texpectthatbusinesstogrowstronglyfortherestofthefiscalyear,butcertainlybetterthanthe--inthefirsthalfofthefiscal.


Okay,great.Thankyou.

Operator:

WendyNicholson,CitiResearch.

WendyNicholson(Analyst-CitiResearch):

Hi.JustatinylittlepointofclarificationonBrita.Howmuchofthebusinessisthepitchersandtherefillfiltersasopposedtotheon-the-goportablebusiness?

BennoDorer(CEO):

Thelargemajorityisinpitchersandfilters,Wendy.On-the-goisaniceandgrowingbusiness,butit'srelativelysmall.


Okay.BecausethereasonIask,Isortofputitinthecontextofabiggerquestionaboutthelifestylesegmentandthemarginsthere.We'veseenmarginsuphereinthefirsthalfof2015,butoverthelastfewyears,themarginsinthatsegmenthavecomedownalittlebitandyetitisstillareallyprofitablesegmentforyouandIamjustwondering,ballpark,competitioninatleasttheon-the-gosegmentforBritalookslikeit'sgoingtogetalittlebittoughernowthatNewellhasmadesomeacquisitions.ItsoundslikeyouareinvestingmoreontheadvertisinglineforBees.

Idon'tknowwhatisgoingonwithmarginsindressingsandsauces,butIguessthequestionishowconfidentareyouthatthatlifestylesegmentcansustainamargin28%andabove,ifyouwill,apretaxmargin?

SteveRobb(EVP,CFO):

Ithinkletmegoaheadandtakethat.Ithinkwefeelprettygoodaboutthemarginsinlifestyle.WhatistrueisoverthelastcoupleofyearswehavemadesomeinvestmentsandwehavemadeinvestmentsinBurt'sBeesandsystemsandprocesses.SooveraperiodoftimethatdepressedthemarginsforBurt'sBeesandthelifestylesegment.Wehavekindofcycledthroughthat.

Wearealsoinvestingmoretodrivegrowthinthatsegment,particularlyontheBurt'sBeesbusiness.Sothemarginsarefundamentallyhealthy.Ithinkwebelievewe'vegotgoodopportunitiestoexpandthemovertime,butbecausetheyaresuchhealthymarginsleaningintothegrowthsetinthatBeesbusinesscertainlyseemsrighttousandthat'swhatyouareseeing.


Gotit.Andsoevenwhenyou're--andIassumethegrossmarginsonBeesareprettygood,sotheincrementaladvertisingisnotmateriallygoingtomovetheneedleontheEBITmarginorthepretaxmarginforBees,isthatfairtosay?

SteveRobb(EVP,CFO):




Itisgoingtovaryquarterbyquarter.Wejustturnedonnationaladvertisingrecently,whichisactuallyperformingearlydays,butitlookslikeitisperformingquitewellforus.Burt'sBeesbusinesswasupstrongdoubledigitsinthesecondquarter,soithasveryhealthygrossmargins.

Soifwehaveanopportunitytoinvestabitmoreinconsumerdemand-buildinginvestmentandadvertisingtodrivethetoplinethat'sagoodinvestmentandsomethingwewilldo.IthinkagainoverthelongtermwefeellikebothgrossmarginsandEBITmarginsarejustfineforallthebusinessesinthesegmentandBurt'sBees.

BennoDorer(CEO):

AndWendy,asyouknow,wearereallyfocusedoninvestingwherewegetthehighestROIandwe'vegotverysolidanalyticstounderstandwheretheROIisbestfortheCompanyandinvestmentsinthesaidareasarebasedonwhatweknowreallyshowverysolidROI.Weareinvestingintherightareas.


Terrific.Thankyousomuch.

Operator:

MichaelSteib,CreditSuisse.

MichaelSteib(Analyst-CreditSuisse):

Steve,Iwantedtofollowuponyourcommentsregardingfreecashflowgenerationthatimprovedsignificantlyyear-on-yearinthefirsthalfandyouhavegivenussomeofthereasonsforthat.Iwonderhowmuchofthatissustainable?IsthisanewlevelofcashgenerationfortheCompany,orweretheresomeone-offsinthere?Thanks.

SteveRobb(EVP,CFO):

ThefreecashflowhasobviouslybeenverygoodforthefirsthalfofthisfiscalyearandasIindicatedinmyopeningcomments,wecontinuetobelievethatfreecashflowasapercentageofsalesshouldbeabout10%.AndIthinkoverthelongtermwehavebeenprettyconsistentlyinbothgoodandbadyearsinthis10%to12%freecashflowasapercentageofsales.

SooneofthethingsthatwecontinuetodoquitewellwithintheCompanyisconvertsalestocashandbeverydisciplinedintheallocationofthatcash.AndIampersonallyfeelingverygoodaboutwhatwearedoinginthatspaceandhaveeveryreasontobelieveitwillcontinueintothefuture.

MichaelSteib(Analyst-CreditSuisse):

Okay,thanks.

Operator:

ConnieManeaty,BMOcapitalMarkets.

ConnieManeaty(Analyst-BMOCapitalMarkets):

Asyoutakealookattheportfolioandinvestintheonesthatgiveyouthehighestreturn,aretheresomebrandsorproductsthatyouwouldlooktoexitordeemphasizebecausetheydocostmoneytorun?

AndIamthinking--Idon'tevenknowifGoodisstillaround,butthingslikeGreenWorks.Sowhatisyouropiniononthepartsoftheportfoliothatwon'tbegettingmostofthefutureinvestment?




BennoDorer(CEO):

Overall,Connie,wefeelgoodabouttheportfolioandattheendoftheday,weareapplyingthesamecapabilitiesacrosstheentireportfolio,whetherthatiscapabilitieswiththeconsumerorcapabilitieswithacustomerorcapabilitieswithinthesupplychainandthesynergiesareprettyreal;strongcashflow,asStevetalkedabout.SG&AiscomparativelylowandROICisverystrong.

SoIamverycomfortablewiththeportfoliothatwehave.Thatisn'ttosaythatwewillalwayslookwiththeBoardonanannualbasisatwhetherthereisopportunitiesandwhetherwearestillthehighestvalueownerornot.Anditisquitepossiblethatwemightbelookingatthesmaller--someofthesmallerbusinesses,butingeneralvery,verycomfortablewiththeportfolioanddon'tfeeltheneedtodoanythingdifferent.

WewanttogrowbiggerratherthansmallerandIthinkwhatwehavesaidisthatweareinterestedinbolt-onacquisitionstothetuneof$25millionto$100millioninareasthataregrowthareasforusandthataremarginaccretive,onstrategy,fitwithourcapabilitiesandthatideallyareUS-centric.

Sowearelookinginwhetherthatishealthandwellnessornaturalpersonalcareorfoodenhancersandseeifwecanaddandthat'sreallythemindsetthatwearein.Whilewewillalwaysbefocusedongrowingthecorebusinessfirst,wethinkthatthereisplacesthatwecanplaythatwearenotplayinginyetandthat'sreallyourpriority.


Thanks.Andjustafollow-up--IthinkIwillcallyoubacklater,Steve.

Operator:

BillSchmitz,DeutscheBank.

BillSchmitz (Analyst-DeutscheBank):

Canyoujusttalkaboutthestrategyacceleratorprocessandwhatthatmeansforthealgorithmintermsofthat9%,10%ofsalesinadvertisingandmaybethelong-termgrowthrate?Sodothingschangeorisitzero-sumwhereyouwillmovemoneyoutofplaceswhereitislesswellspentandputintoplaceswheretheremightbebettergrowthdriversandthenIhaveafollow-up,please?

BennoDorer(CEO):

Soasyouthinkabouttheaccelerators,thatreallyspotlightsonourstrategy2020.Itisveryconsistentwithwhatwehavesaidduringtheleadershiptransitionthatwearenotexpectingthestrategytochange,butwhatwearefocusedonisdoublingdownonchoicesthatstrategy2020calledfor.

SoIexpectthatthefinancialalgorithmthatweareafterwithstrategy2020willbethesame.Advertisingsalespromotion,whichIthinkiswhatyoureferenced,Bill,theideaofinvestinganotherpointinourbrands,thatwillremainthesame.Sothesearereallywaysforustofullyaccomplishour2020strategyfinancialobjectivesasopposedtoadeparturefromthem.


Okay.Andthenwouldyouchangeanyoftheincentivecompensationmetricsaroundthestrategyaccelerators,solikethebroaderCompanyincentivecompensationmetrics?

BennoDorer(CEO):

Wehaven'tdecidedyet.Thatisearly,butIdon'tseewhyourcompensationmetricswouldbewrongevenin




thiscontext.Again,thesearejustwaysforustoemphasizeaspectsofthestrategythatwehavereallystartedtoputinplaceabout16monthsago.Sotheyarenotaradicaldeparture,soIdon'texpectthat.ButwewillalwaysrevisitthatovertimealsowiththeBoard.


Okay,justtofollowupontheoriginalquestionthatFaucherasked,Ithinkitwasthefirstquestion,itseemslikethispromotionalspendingelevationinthefronthalfofthecalendaryearisprettyconsistentacrosstheCompaniesthatreportedsofar.It'salittlebitcoincidental,soI'mjustwondering--andobviouslyitisalsoimpactinggrossmarginbecauseofthehighergrosstonet--isthatreallycompetitive-drivenorareretailersstartingtoaskforsomemoneybackalreadybecauseifyoulookattheNielsendata,itdoesn'tseemlikethepercentageofACVondeal,it'sactuallycomingdown,itisnotgoingup?

SteveRobb(EVP,CFO):

IthinkasBennohadindicated,Idon'tthinkthecompetitivelandscapehaschangedthatmuchoverthelastcoupleofmonths.WhatIwouldsayisitishigherthanithasbeenhistorically,soit'saveryintensecompetitiveenvironmenthereintheUSascompanieshavetakensomeoftheirfocusoffsomeoftheseemergingmarketsandfocusedbackontheUS,butIwouldn'tsaythatbroadlyitismorecompetitivethanwesawsaythreeorsixmonthsago.

Allofthatsaid,theonetrendthatwearewatchingverycarefullyisthisresinprice,whichagainifitstartstomovelower,whichiswhatweanticipate,historically,whatwe'veseenisagoodpercentageofthathasbeenspentbackintothecategory.Butabsentthat,Ithinkthelandscaperemainsasintenselycompetitiveaswetalkedtoyouthreeandsixmonthsago.


Gotyou.Sononeofitisdrivenbyretailersaskingformoremoneyback?

SteveRobb(EVP,CFO):

No,wehaven'tseenthat.


Allright.Thankyousomuch.

Operator:

ErinLash,Morningstar.

ErinLash(Analyst-Morningstar):

Buildingoffanearlierquestion,Iwaswonderingifyoucouldspeaktojusttheprioritiesforcashgiventhesignificantamountoffreecashflowthatyouhavebeengenerating?

SteveRobb(EVP,CFO):

Yes,theprioritiesarecompletelyconsistentwithwhatwe'vebeensayingformanyyearsnow.Wewillsupportorganicgrowth,asBennotalkedabout,keepingthecorehealthy.Itiscertainlyworkingforusanditissomethingwearegoingtocontinuetodo.Weareinterested,obviously,inM&Aactivity.Ifwecangetbusinesseswith$25millionto$100millioninsalesthataremarginaccretiveandhavesometailwinds,weareinterestedinthat.

Aswehavetalkedinthepreviouscall,wefeelverygoodaboutourdebttoEBITDA.Attheendofthefirst



©2014TheStreet,Inc.AllRightsReserved Page18 of 21

quarter,itwasabout[1.9].Itiselevated,asIindicatedinthesecondquarter,butthatisjustbecausewehavepre-fundedsomedebt,butwecertainlyhavedrypowder.Ithinkwhatyoushouldexpectgoingforwardiswe'llobviouslykeepthedividendhealthy,butifcashstartstobuildupandwedon'thaveauseforit,eitherforM&Aortosupportcoregrowth,probablyintheformofsharerepurchasesatsomepointwewillleanbackintothat.Todate,wehavebeendoingjustsomemodestsharebuybacksearlierthisfiscalyear,butwehaven'tdonemuchandwehavebeenmorefocusedonrefundingofthedebttodate.


Gotit.Thankyou;thatisveryhelpful.Andthenwithintheadvertisingspendingline,IwaswonderingifyoucouldjusttalkaboutthedegreetowhichyouhavebeenusingdigitalIguessasa--comparedtotraditionaladvertisingmeansandhoweffectiveorhowyouaremeasuringthereturnsonthatandwhereyouseethatgoing?

BennoDorer(CEO):

Sodigitalrightnowisalittleover30%ofouroveralladvertisingsalespromotionspend.Thatis,asweunderstand,theleadinglevelinourindustryanditisalsoupquitesignificantlyoverthelastfewyearsandagain,itisreallybasedonasolidunderstandingofROIsandtheROIsthatwearegettinginthisspacearereallyattractive.

SoweexpectthatshifttoperhapscontinuesothatthereisalwaysgoingtobespaceforTV.TVcontinuestobeaveryeffectivedriverof,inparticular,awareness,especiallyaroundinnovationsandlikeIsaid,wefeelgoodaboutourinnovationprogramfortherestofthefiscalyear.

But,forus,wecallthis--whatweneedtobeisalwayson.Weneedtobewheretheconsumerisnomatterwheresheisinherpurchasecycleanddigitalandsocialmediaisparticularlysuitabletohelpusaccomplishthat.SodigitalplaysaverystrongroleandIexpectthattokeepgoing.


Thankyou.

Operator:

LaurenLieberman,Barclays.

LaurenLieberman(Analyst-BarclaysCapital):

Thanks,justtwoquickthings.Onewasafollow-uponthepromotionalenvironmentquestion.IstilljustamnotsurewhythecommentaryonanincreaseintradepromotioninthebackhalfoftheyearversuspriorexpectationsbecauseIwould'vethoughtthat--youweresayingifresinpricescomedown,youwillbewatchingit,soIwouldthinkthatismoreofafiscal2016dynamicthansomethinginthenextsixmonths,soanythingyoucanaddtherewouldbegreat.

SteveRobb(EVP,CFO):

Yes,toclarify,IthinkasIindicatedinmyopeningcomments,theincreaseintradepromotionalspendingisafull-yearnumber.Itislikelywewillspendabitmoreinthesecondhalf,butitismainlyafull-yearcomment.Ithinkwhatisimportantisweareagnosticonwhetheritistradeoradvertising.

Whatwelookingforisthehighestreturnsandwhatresonatesthemostwiththeconsumer.Sowhetherthatisadvertising,tradepromotionorotherthings,wewillbeinvestingmore.We'retryingtogettothis1pointofincrementaldemandbuildinginvestmentasapercentageofsalesovertimeandsowe'regoingtospendmore,Ithink,isprobablythekeytakeaway.ButyouwillseeitfallindifferentlinesoftheP&Latdifferent




times.

BennoDorer(CEO):

AndLauren,addingtoSteve'spoint,asignificantportionoftradepromotionalsoisgoingagainsttheinnovationsreallytomakesurethatwedrivestrongmerchandisingandtrialoutofthegateforthose.


Okay,great.Andthenmysecondquestionwasjustactuallyontheprofessionalproductsbusiness.Ithinkyouhavebeenclearonwatchingforanykindofdestockinthethirdquarter,butIwasjustcuriousifyouthinkthattherecentphaseofworriesaroundEbolaandEnterovirus,hasthatperhapspushedsomeofthecleaningstandardsandprotocolsandmakingchangeshigherontheprioritylistofsomeofthehealthcareserviceindustrythanitwaspreviously?Likecouldthisbeasortofwatershedeventintermsofraisingtheprofileofwhatyouaretryingtodo?

BennoDorer(CEO):

Wecertainlyhaven'tseenthat,Lauren.Ithinkthecleaningprotocolshavebeeninplaceandwhathospitalshavebeendoingisjustapplycleaningprotocolsandmakesurethattheyarepreparedforapotentialincreaseinusearoundourproductstocoincidewiththesecleaningprotocols.

Sodoweexpectheightenedawarenessanddoesithelpushaveadialoguewithhospitalsgoingforwardaroundtheseandwhatourproductscandeliver?Wehopeso.Butwecertainlyhaven'tseenthatinQ2andwewillhavetoseehowitplaysout.Butclearlywethinkthatthisisagrowthcategoryandthat'swhyweareinvestinginit.


Okay,great.Thankyou.

Operator:

JavierEscalante,ConsumerEdgeResearch.

JavierEscalante (Analyst-ConsumerEdgeResearch):

QuestionwithregardstotheUSagainandIthinkthatitwasalludedearlierinthecall,butIwouldliketo,ifitispossible,togetmoreclarification,hastodowiththegrowthintheUS.Iknowthatthehospitalpartprobablyaddedapoint,butstillthatmeansthatgrowthinretailsalesinnon-trackedchannelsprobablygrewwellover10%.

AndIwonderwhetheryoucantelluswhichparticularbrands,orwhatkindofretailformatisgrowing--youguysarefindingnewpointsofdistributiontobepostingthatkindofgrowthandtowhatextenttherewereone-timers,promotionalone-timers,otherthantheonethatwasdescribedwhenitcametoEbola?Thankyou.

SteveRobb(EVP,CFO):

Javier,letmeleadoffonthis.Iwouldcharacterizethegrowthasbroad-based.Iwould--Ithinkwehadsomeverygoodpromotionsthatwereinplacethathadbeenplannedlikecoldandfluandleaningintothose,butIwouldn'tpointtoanysinglethingotherthanintheprofessionalspace,wehadstrongdouble-digitgrowthandsomeofthatisprobablyhospitalsbuildingupinventoryoutoftheconcernsforEbola.

ButIthinktheUSgrowthwasamazinglybroad-basedandwehavetalkedprofessionalproducts,wehavetalkedGlad,wetalkedBurt'sBees,whichwasupandmostoftheotherbusinesseshadaverysolidquarter.




SoIthinkitwasacleansetofnumbersandthereisnotanyonethingIcanpointto.Andevenfromaretailerstandpoint,itisagainnotanyspecificchannel;Ithinkitwasjustacrosstheboard.ItwassolidhealthygrowthfortheCompany.

BennoDorer(CEO):

Yes,soforme,Javier,IwouldreallysaythetwothingsIwouldpointtothatledtothisbroad-basedgrowth,asStevesaid,areone,innovationandtwo,theincreaseindemandspend.Andevenonbusinessesthatperhapsbenefitedfromflu,thatisbasedonlong-termplanningwithretailersandwesawjustverystrongmerchandiseexecutionbehindlongplannedeventsthatcertainlybenefitedfromsomewhat(Inaudible),butitisreallybeenaboutinnovationandincreasingdemandspendandthereisnothingfunkyaboutthisgrowthatall.

JavierEscalante (Analyst-ConsumerEdgeResearch):

Thankyou.

SteveRobb(EVP,CFO):

Whydon'twetakeonemorecaller?

Operator:

ConnieManeaty,BMOCapitalMarkets.


Thecostpressuresthatledtothepriceincreaseinbleachseemtobeprettygenericandnotreallylimitedtobleach.Sohealthcarecosts,wageinflation,logistics,allofthat.Soshouldweexpectpriceincreasestheninabroaderpartofyourportfoliogoingforward?

SteveRobb(EVP,CFO):

Connie,Ithinkwhatwehavesaid--theinflationarypressuresareobviouslyprettyrealandtheincreasesthatwepreviouslymentionedarethekindthattendnottoreversethemselves.Ithinkmostofthepricingwe'vetakentodatehasreallybeenfocusedontheinternationalmarketswherewearedealingwithmuchhigherratesofinflation.Youwillcontinuetoseeusleanintothat.

OntheUSside,again,whereitiscost-justifiedandwearepricingtoalong-termaveragecost,wewillcontinuetotakepricing.AsBennonoted,we'vegotaverylongtrackrecordofdoingthisandbalancingitwithvalue.Iwillsayforward-lookingthatonethingthathasworkedforusthatwewanttocontinueistryingtomarryuppricingwithinnovationbecauseIthinkifyoucanbringthosetwothingstogether,ittranslatesintogoodvaluefortheconsumer[itself]andittendstodomuchbetter.Sotheshortansweriswe'renotafraidtotakepricingintheUSwhenitiscost-justified.Wewouldliketoavoiditwhenwecanandcertainlymarryitupwithinnovation,butwefeelliketherecentpriceincreaseswe'vetakenaretherightonesforthelongterm.

BennoDorer(CEO):

AndtobuildonSteve'spointandIthinkyoumentionedthis,Steve,wewillremainfocusedonvalue.Value,ofcourse,isafunctionofpricing,butalsoinvestinginourbrandsandalsohavinginnovationoutthereanddeliveringsuperiorproducts.Allthatwon'tchange.


Great.Thankyou.




Operator:

Thisconcludesthequestion-and-answersession.Mr.Dorer,Iwouldnowliketoturntheprogrambacktoyou.

BennoDorer(CEO):

Thanks,everyone.Tosumup,Ifeelverygoodaboutthesecondquarterandwhatwasreallyasolidfirst-halfperformance.AndIhaveconfidenceinourplansforthebalanceoftheyear.AndIcertainlylookforwardtospeakingwithyouagainonournextcallinMay.

Operator:

Thatdoesconcludetoday'sconference.

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