The Clorox Company (CLX) Q3 2012 Earnings Report, Transcript and Summary

Good day, everyone, ladies and gentlemen, and welcome to The Clorox Company Third Quarter Fiscal Year 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, you may begin your conference.

Thank you. Welcome, everyone, and thank you for joining Clorox's Third Quarter Conference Call. On the call with me today are Don Knauss, Clorox's Chairman and CEO; Larry Peiros, our Executive Vice President and Chief Operating Officer; 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 on 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 and debt-to-EBITDA. 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 information. 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. Today, Larry will start with a discussion of our volume and sales results. Steve will then follow with a review of our financial performance in the quarter, our updated outlook for fiscal year '12, as well as our initial outlook for fiscal year '13. Finally, before turning to Q&A, Don will close, noting a few key focus areas for the company as we head into next fiscal year. With that, let me turn it over to Larry.

Thanks, and hello to everybody on the call. As Steve said, I'm going to focus my comments on market share, volume and sales and provide perspective on what drove our top line results. Overall, our third quarter top line performance was very strong, benefiting from strong organic sales, as well as the impact of our recent acquisitions. We delivered volume growth of 4% and sales growth of 7%. Even without the acquisitions, volume was up a solid 2% and sales grew a very strong 6%, with sales outpacing volume due to price increases across most of the portfolio. We saw sales growth in all 4 business segments and almost every individual business unit. Our new product innovation program continues to have record levels, and our integrated marketing plans continue to deliver. In particular, strong merchandising activity contributed to our top line results this quarter as several key retailers chose Clorox brands to drive store traffic in their overall sales. We feel great about the quarter and the progress we are making in driving top line growth in what remains a challenging environment. In our U.S. business, our all-outlet market share reached a record high. We're up about 0.5 a share point over the past 52 weeks to a 28% share. Moreover, we gained or helped share in every one of our reported U.S. categories. These share results reinforce the strength of our brands, especially given the large number of recent price increases. The other good news is that our U.S. categories are getting healthier as pricing takes hold and the economy recovers. Overall category consumption on an all-outlet basis was flat for the past 52 weeks versus a decline of about 2% just a year ago. Our Cleaning segment, which includes our Home Care, Laundry and Away From Home businesses, delivered a very strong quarter, with volume up 7% and sales up 10%. Excluding the 2 recent acquisitions in our Away From Home business, segment sales were up 5%. All 3 business units in this segment saw sales growth in the quarter, driven by price increases and innovation. Home Care grew sales and share behind a double-digit volume increase on Clorox Disinfecting Wipes, gains in several other Home Care brands, as well as innovations like our Clorox Bleach Foamer spray and Liquid-Plumr Double Impact drain cleaner. On our Laundry business, we grew sales and increased our 52-week all-outlet market share for the second straight quarter. Our focus on attracting new users with our new Bleachable Moments marketing plan appears to be getting some early traction. We also saw growth behind the launch of new Clorox Bleach Gel, a thicker formula and a precision pour spout bottle for use in high-efficiency washing machines. Finally, our Away From Home business delivered strong organic growth through expanded distribution in health care channels and several new products designed for the professional market. The 2 Away From Home acquisitions, which closed on December 31, Aplicare and HealthLink, are on track with our integration efforts. In our Household segment, which includes Bags and Wraps, Charcoal and Cat Litter, volume grew 2% and sales grew 6%. Glad delivered solid increases in volume and sales on trash bags, driven by heavy merchandising on Glad OdorShield with Febreze. Glad food storage products also registered strong gains behind increased merchandising and some new items in our GladWare line. Charcoal were up high single digits, driven by warm weather triggering a strong start to the grilling season. Cat Litter volume and sales in Q3 were equal to the year ago quarter. Fresh Step saw solid sales growth, driven by merchandising behind our new Fresh Step Extreme, but gains were largely offset by declines in Scoop Away due to lower merchandising versus a year ago. On an all-outlet basis, Cat Litter reached a record-level market share, up about 2 share points over the past 52-week period. In our Lifestyle segment, which includes Food Products, Water Filtration and Natural Personal Care, volume grew 4% and sales grew 10%. All 3 business units in this segment grew both volume and sales. Sales were up strongly in our Food business behind the impact of price increases, shipment gains in dry salad dressing and pipeline shipments of new bottled salad dressing flavors. Brita grew sales and volume at double-digit rates behind the continued success of the Brita Bottle. We have already launched a variety of new bottles in different colors and will continue to innovate against this platform in the future. Finally, our Burt's Bees business had a solid quarter, driven by growth from new products in the U.S. and gains in International. Gud, our new natural personal care brand, continues to track to expectations in the early going. In our International segment, volume was up 1% and sales were up 4%. In Latin America, our largest international region, volume was up and sales grew mid-single digits, a solid result despite double-digit volume declines in Venezuela resulting from the Venezuelan government's recently implemented price control law. Volume was down slightly in Canada, Australia, New Zealand, but was more than offset by volume growth in other parts of the world. Our International segment share results continue to be mixed, with 52-week shares equal to year ago in Latin American and down in Canada and Australia. Category dollar sales growth remained quite strong in Latin America, with slower growth in other global markets. Overall, we feel very good about our top line results this quarter. We're pleased that our price increases continue to play out as anticipated, contributing to sales growth for our brands and our categories. Our record U.S. share reflects that we are doing the right thing to grow our brands in a very tough environment. Based on our sales performance year-to-date, we now expect our fiscal '12 sales to be about 4% for the full year. This reflects very solid top line performance in Q4 versus our strongest quarter in that fiscal year. We also believe that the unseasonably warm weather in Q3 may have pulled some Q4 Charcoal volume into Q3. Looking forward, our sales outlook for fiscal '13 is 2% to 4%, reflecting continued momentum supported by further innovation across our brands but moderated by uncertainty in some International markets and a tougher comparison to strong fiscal '12 sales growth. With that, I'll turn it over to Steve.

Thanks, Larry. Hello, everyone. I'm going to provide more depth on our third quarter financial results and our updated outlook for fiscal '12, as well as our preliminary outlook for fiscal '13. As Larry noted, sales were up a strong 7% in the quarter, with gains in all 4 reporting segments. Excluding the impact of the Aplicare and HealthLink acquisitions, sales growth was up 6%, driven by 5 points of pricing and 2 points from base volume growth. This was partially offset by a higher trade spending and negative mix. Third quarter gross margin decreased 180 basis points to 42.3% of sales compared with 44.1% in the year ago quarter. As expected, the biggest single factor in the gross margin decrease was inflation affecting both commodities and other supply chain costs. The other negative factor was unfavorable product and country mix. While we had very strong merchandising support from our retailers, it was often for larger value-oriented sizes, where margins are somewhat lower. Volume in the quarter also continued to shift to countries which have lower margins. On the positive side, the combined benefit of price increases and cost savings came in as expected. Turning to selling and administrative expenses, the rate of spending came in at about 15%, within the expected range. The year-over-year increase reflected higher compensation revenues and our investments in IT systems and new R&D facilities. Net of all of the factors I've discussed, we delivered earnings in continuing operations of $134 million or $1.02 diluted earnings per share. This compares with $141 million or $1.02 in the year ago quarter. Year-to-date, free cash flow from continuing operations was $214 million versus $228 million in the same period year ago. The decrease was driven by lower tax payments in the year ago period as a result of favorable tax depreciation rules and the settlement of interest rate hedging contracts related to the $300 million debt issuance in the second quarter of this fiscal year. For the full year, we anticipate free cash flow of about 9% of sales. As a reminder, we define free cash flow as cash provided by operations less capital expenditures. For the quarter, we ended with a debt-to-EBITDA ratio of 2.6:1, slightly above our targeted range of 2 to 2.5x, driven by the recent acquisitions. We continue to anticipate returning to within our targeted range by the end of the fiscal year. Next, I'll turn to our financial outlook for fiscal '12. We now anticipate sales growth of about 4% for the year, which reflects improving U.S. categories, strong year-to-date results and the benefit of recent acquisitions, which are expected to add about 0.5 point to growth this year and about a point ongoing. Turning to gross margins. We now expect a decrease in the range of 125 to 150 basis points for the full fiscal year. The decrease versus our prior outlook is being driven by year-to-date gross margin results and continued pressure in the fourth quarter due to unfavorable country mix, as well the continued shift to larger sizes. Our assumptions for commodity cost increases and other inflationary pressures remain unchanged versus our prior outlook. Our assumptions for cost savings and pricing also remain generally unchanged. Our multi-year plan for global IT systems and R&D facility investments remains on track. We continue to anticipate combined infrastructure and restructuring-related expenses in the range of $50 million to $55 million in fiscal '12. We also continue to anticipate selling and administrative expenses to be at or slightly below 15% of sales, which includes our assumptions for infrastructure investments, as well as administrative costs for the newly acquired businesses. Net of all these factors, we continue to anticipate diluted earnings per share from continuing operations in the range of $4 to $4.10 for the full fiscal year. Next, I'll turn to our outlook for fiscal '13. As Larry noted, we anticipate sales growth in the range of 2% to 4%, driven by moderate category improvement, innovation and price increases, although likely a more limited amount of pricing than we executed in fiscal '12. We expect EBIT margins will be about flat versus fiscal '12 as modest gross margin improvement will be offset by slightly higher administrative expenses due in part to the acquisitions. Within gross margin, cost savings are expected to add about 150 basis points of benefit. Commodity cost increases are anticipated to negatively impact margins by more than a point with a similar amount impacting manufacturing and logistics costs. In response, we are planning to take a modest amount of pricing, although the final amount will depend on the extent of the inflationary pressures. Within selling and administrative expense, we continue to anticipate expenses for restructuring and other related costs, including systems and facilities investments, to be in the range of $50 million to $55 million or about equal to fiscal '12. Both projects are still expected to be completed by the end of fiscal '13. Our outlook also includes a onetime gain of $0.05 to $0.07 related to real estate optimization initiatives, including the planned sale of our former R&D facility in Pleasanton, California. These gains are likely to be reflected as a part of other income. Finally, we expect a effective tax rate in fiscal '13 of approximately 34%, which will more than offset the anticipated onetime gain from our real estate initiatives. Net of all of these factors, we anticipate fiscal '13 diluted earnings per share from continuing operations in the range of $4.20 to $4.35. We also anticipate free cash flow in the range of 9% to 10% of sales in fiscal '13. Priorities for excess cash include investing in organic and inorganic growth, supporting the dividend, repurchasing shares to offset stock option dilution and possibly making open market purchases. We project capital spending in the range of $230 million to $240 million, which includes investment in systems and facilities. Separately, the company also anticipates generating additional cash flow from the proceeds of the planned real estate initiatives. With that, I'll turn it over to Don to recap, and then we'll open it up for questions.

Thanks, Steve, and hello, everyone. Obviously, we're very pleased to deliver the highest year-over-year quarterly growth in 3 years and built on the top line growth trend we've seen throughout the year, which, I think, as you know now, has delivered 5% year-to-date sales growth. Our strong top line performance and record-high U.S. market share, I think, does really speak to our strong execution and the power inherent in our brands. I think one of the really rewarding things about the quarter is we continued to see retailers choosing our brands to generate traffic and return our mutual categories to growth, resulting in distribution gains and some increased merchandising as we noted for the third quarter in particular. At the same time, we continue to see commodity cost increases, general inflationary factors and mix challenges pressuring our margins, as Steve just talked about. And we have an intense focus on this to improve margins over time. Now turning to FY '13 and the outlook we provided today, I believe we have strong plans in place to deliver our top line margin and EPS targets for fiscal year '13. And as we look ahead to that year, I'd like to just reiterate to you the focus we have on 3 things in particular. First, building our brands and categories through this continued 3D execution that we do, I think, extremely well, including another strong stream of innovation in providing customer capabilities that our retail partners really value. And just as a side note again, our innovation should reach an all-time high this year, north of 3% growth, so we continue to build on that pipeline. Second, building our margins with a real focus on cost and optimizing product and channel mix, which will be a real focus as we move into '13. And then lastly, completing our IT systems and R&D facility improvements to help drive cost savings and growth over the long term. So we're certainly optimistic about our plans. We're confident in our ability to execute those plans and drive long-term shareholder value. With that, why don't we open up the lines for your questions.

[Operator Instructions] And our first question comes from Wendy Nicholson with Citi Research.

Question has to do with the outlook for 2013 and the guidance for sort of flat EBIT growth. And I guess that's a little disappointing just particularly in the context of the restructuring charges that you've taken kind of annually regularly, and it just doesn't seem that there are real savings dropping to the bottom line. So I guess, number one, is that just sort of a one-off thing in 2013 and you hope that, that expands or accelerates as we go forward into 2014? Because the real question is, how is the growth algorithm going to work? We're sort of stuck in this mid-single digit earnings growth rate range, and I'm wondering when we're going to sort of tick back up into the high single digits.

Wendy, this is Steve Robb. Let me take a portion of this. First of all, let me start with margin. And the big thing to recognize next year is that our EBIT margin is expected to be flat. Now first, turning to the gross margins, our gross margin, we are expecting modest improvement in gross margin next year. And the reason that we are optimistic that we're going to see margins begin to stabilize and improve as we go into next year is because, first, we've got the benefits of the pricing that we've taken, which has gone extremely well. In fact, pricing has probably gone better than we expected, and we're continuing to build all-outlet market share. We're continuing to target cost savings of about 150 basis points each year. And also, we're pretty optimistic on our ability to deliver innovation that will be margin accretive over time. Now when you take those 3 factors and then you look at commodity cost, which are expected to go up next year, along with other inflationary pressures, they're going to go up but they're going to go up less than we saw this year, so they're going to be increasing, call it, 2% to 3% versus the 3% to 4% we had this year. And when you net all of that together, we believe we're going to get modest gross margin improvement. Now that said, we are making incremental investments in the infrastructure that we've been talking about, so SG&A is expected to be slightly higher than this fiscal year. And when you net it, we're looking at flat EBIT margins. I think longer term, as we look forward, we would expect that improving gross margins, anniversary-ing some of these infrastructure investments will enable us to begin to build the EBIT margin, so that what you'll start to see is that the earnings growth will begin to grow faster than the sales growth more consistent with what we've seen in earlier years.

But if you're already anticipating the commodity costs are going up and you feel like you've been successful with the price increases you've taken, I guess -- I mean we're looking at a year that is more than 12 months out, right? And so I guess I'm just surprised between selling Auto and making the higher-margin acquisitions and all of that, it sort of surprises me that you can't manage the business better, take the price increases faster, shift the mix of commodities, I don't know what -- shift the mix of the business. Because flat EBIT margins kind of year in and year out, I mean, we're pretty far off the peak EBIT margins. I'm just surprised that we're not recovering faster.

Yes, well, we are continuing to focus on, number one, focusing on that gross margin and getting it to recover. And again, I think, as we've indicated, we do expect that gross margin will begin to increase modestly next year, although it's going to take some time. And certainly, it is taking longer to rebuild the margins than we had originally anticipated. Again, I would just echo that as we work through these infrastructure investments and start to anniversary that into fiscal '14, we would expect that those EBIT margins will begin to increase again, and you'll start to see that flow through.

Wendy, this is Don. I do feel good about the way we've managed the pricing and the cost savings, frankly. I think to have reached an all-time high market share when you've taken 400 basis points of pricing, I think it says that we're managing these brands very well. I do think, obviously, in addition to the commodity increases we've seen this year and other inflation, I think in the third quarter, in particular, which I don't think is a trend, is the mix issue that we had to confront with some fairly very successful merchandising that we didn't anticipate it growing in the large sizes as fast as it did. We certainly see that moderating as we go into the fourth quarter into fiscal '13, so I think we'll continue to see some benefit there. But I think we've managed the pricing on these brands extremely well.

And our next question comes from Tim Conder with Wells Fargo Securities.

A couple of pieces here. Could you give a little bit more detail what's driving the tax rate guidance? You said, clearly, that that's going to offset some of the things looking into 2013 to a degree. So if you could give a little bit of detail there? And then the Charcoal, do you think -- you mentioned that you thought you could have seen some pull forward here in the fiscal third quarter. I guess, why do you believe that versus maybe that you would maybe be picking up a turn at retail and then still have the full benefits as you head into the summer months?

Let me start off and answer your tax question, and maybe I'll ask Larry to address Charcoal. Turning to the tax, historically, our tax rate for Clorox usually runs in the range of 34% to 35%. Now for fiscal '12, the tax rate is anticipated to be about 32% to 33%, so it's actually a bit lower than what we've historically seen. And the reason for that is we've had some onetime tax settlements that have given us some benefits this fiscal year. So as we look to fiscal '13 and we project a tax rate of about 34%, we would just say that that's basically returning to more of a normalized tax rate for the company as opposed to something unusual.

To respond to your question on Charcoal, Charcoal quarterly volume is always hard for us to project because there is obviously always weather factors and a lot of merchandising factors. Typically, we smooth out over the course of a year but the quarterly estimates have a fairly wide error range. I think what we're seeing in our Charcoal business in Q3 is not only the obvious benefit of great weather but we did have -- in particular, one retailer that did some early merchandising of Charcoal at a very hot price, very large sizes, that sold a lot of Charcoal. And so what we're trying to sort out, how much of that is replacement of Charcoal that might be purchased at a later date, how much is Charcoal that may be used more because people have more in their homes. So -- and going through all those variables is hard. But we're thinking, between the good weather and some pretty heavy merchandising in Q3, there may have been some pull forward.

Okay, okay. One other, if I may. A little bit more detail on the manufacturing and logistics cost pressures. I know it's probably a little bit of fuel in the logistics. But when do you anticipate those, especially on the manufacturing side, maybe getting some leverage off of those?

We've continued to see inflationary pressures on manufacturing and logistics. To your point, it includes things like diesel fuel, which, I think, everybody is aware has run up pretty strongly. It also includes just things like wage inflation, particularly in our international markets. Health care costs have been increasing. It's all of those things, and we do expect that will continue as we go into next year. And we are fully anticipating that and building plans that anticipate it and making sure that the pricing and other actions that we work to recover those costs.

And we will hear next from Chris Ferrara with Bank of America.

Guys, I wanted to talk a little bit more about the mix drivers you said. And I think, Don, you started to say that you expect it to subside. But I guess, moving to larger pack sizes isn't something new. I guess, what drove it this quarter? Why did retailers use you guys more for foot traffic drivers and why did you see this mix? I guess, could you just give a little more color around the dynamics of what happened this quarter?

Yes, let me start, then I'll ask Larry and Steve to jump in. Chris, I think -- first of all, I think everyone -- we should probably keep one quarter in perspective here. If you go back to last quarter, we had a 20 basis points contraction in gross margin and virtually no mix impact. We have traditionally had in the January, February, March quarter some interesting and unique merchandising events of fairly large scale. We had those again in this quarter and they did extremely well, with double-digit growth coming off of some of these merchandising events. So it really drove into larger sizes, twin packs, triple packs, things like that. So that -- as I said, Chris, that traditionally has happened in the January, February, March quarter. If you look at -- as we head into the fourth quarter this fiscal year and then into the first half of fiscal '13, we don't tend to have those same like -- same type of merchandising events concentrated in one quarter. So I think it is a bit of an aberration. What we'll do about that, obviously, is continue to look at -- as we take pricing, look at the pricing curves across channels and across product sizes. So we continue to sharpen our look at that and our analytics on that. But I wouldn't get this -- I wouldn't take this quarter and say it is a predictor of what's coming because we usually have this in this quarter. And again, I'd go back to last quarter when it didn't manifest itself at all.

So the only thing I'd add is, this is obviously kind of a mixed blessing. On one hand, we're selling a heck of a lot of product. These are big merchandising events. Big retailers are looking to our brands to drive store traffic in a big way. We're exceeding our objectives behind this promotion. So on one hand, you feel great about getting your products in more hands, more consumers' hands. On the other hand, it does change the mix a bit, and we do tend to sell a lot more large sizes when we have these big events. It is far more pronounced in Q3 than it is in any other quarter.

That helps. And I guess, just following up on that. Because it was such a big driver of mix -- I mean, if we'd expect a lot of this mix to subside simply because you don't have the same level of this nature of promotion in Q4, I mean, wouldn't that make you feel substantially better about gross margin? And I guess, a related follow-up on the top line. Do you get to give back on sales? I mean, is that a big part of the sales deceleration that this quarter was padded by, to your point, a lot of these very, very successful in -- successful to an unanticipated degree promotions that you had out there?

Well, I think -- go ahead, Steve.

Let me try the part of the gross margin piece, and then I'll turn it over to Don for the sales. On the gross margin, just a little more color on the quarter. We had about 140 basis point drag on gross margins tied to mix. 2/3 of that is what Larry and Don just spoke to, which came out of our U.S. business, and about 1/3 was country mix coming out of our International business, driven in part by Venezuela. If we look into, certainly the fourth quarter, we would expect the country mix is going to continue. But over time, that's going to get built into the base and it would start to dissipate. Some of the size mix is just a long-term trend as consumers trade up to larger value-oriented sizes. And to Don's point, we just need to take a look at pricing and other actions to address it. However, the piece that’s related to merchandising that was so significant in the quarter, we just don't project that going forward. So mix will continue to be a drag on margins going forward but not at the levels that you're seeing in the third quarter.

Yes. I think, Chris, if you look at what we're thinking about for the fourth quarter, we obviously see margins while contracting nowhere near at the level we saw in this quarter, 180 dropping significantly into the 100 basis point range for next quarter and then, as Steve talked about, some modest increases in gross margin as we go forward. So I think, as I said, we'll continue to do 3 things here to really get ahead of this thing as we head into fiscal '13. One is we'll continue to drive the cost savings hard. Second, we'll really take a hard look at the pricing curves as we always do, and I think that's one of the reasons we've been successful with the pricing we've taken. And then third, you'll continue to see from us even more margin accretive innovation, and we'll continue to push that. If you look at just the last quarter, what's really helped, the Bleach Gel is off to a decent start; Liquid-Plumr Double Impact; Brita on-the-go bottle with new colors, new iterations. All those things are margin accretive to the company. And then obviously Burt's innovation is accretive to the company. So we'll continue to push those 3 things hard.

The other obvious negative factor is Venezuela, and we're certainly not blaming our results on Venezuela. But Venezuela did have a material impact on the Latin America business. We had significant volume losses as the whole regulatory environment sorts itself out. And over time, I think that will -- that impact may dissipate a bit.

And we will go next to Ali Dibadj with Bernstein. Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division: Wanted to get underneath a little bit more of the top line expectations going forward and particularly around pricing. I think you guys mentioned earlier that they do expect some pricing to help you out next fiscal as well. But as you look at the, what do you call it, the pricing action sheet, I guess, you call it, all of it is -- there's very little new pricing. Right? So a lot of it was taken in August as we remember, some more recently. So what does that mean, I guess, in the context of what you were describing a little while ago? Does that mean you do anticipate taking a lot more pricing very much in line with the commodity expectations you're seeing or is it the pullback on some of the trade spend you've done more recently or something else?

So I think we do have obviously a pricing plan for next year. I would say it's not the same rate as it has been in fiscal '12, but we also have some carryover for fiscal -- from fiscal '12. So there's pricing we took in the second half of fiscal '12 that obviously will continue to impact FY '13. We also have some additional pricing actions that hadn't been announced this year that will impact fiscal '13. And in addition to that, we have some pricing actions that we'll take next year. So there is a fair amount of pricing but not at the level of what we're seeing this year. Trade spending is also an area. Trade spending is obviously both for building merchandising, as well as, to some extent, a pricing action. And we're also working rigorously in trying to reduce our trade spending next fiscal year, and that will be part of the overall margin equation. Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division: And so from the top line guidance for next year, it's very evenly split between volume and price mix? Is that how we should think about it?

I think the way you should think about it, if you just step back, our outlook is 2% to 4% sales growth next year. It assumes that stepping back, our categories are going to be flat to up modestly. We are targeting about 3 points of innovation, which is kind of at the high end of the 2% to 3% range but certainly reflects the strength of what we've seen in innovation. We do expect pricing. But pricing, mix and these factors could add a point or take away a point depending on how things play out as we go through the year. And we'll have to get farther into the year before we can figure it out.

Ali, I would just clarify as well that the pricing document you're referencing, which is posted on our website, that only captures pricing actions that have been announced or actually implemented. So building off Larry's comments, I think as we go through the fiscal year, assuming we take those pricing actions, you'll begin to see those show up on that document. Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division: Got you. No, I understood it's historical. Okay. And then the other thing is the success you've had with some of these sounds like promotions or merchandising events that you've [indiscernible] focused on the retailers. Why do you expect those to be left prevalent going forward? I mean, my experience -- our experience is when the retailers see something that actually drives traffic, they're going to come back to the well often. I mean, in some sense, you're in a position it looks like to drive that traffic. So how come that's a good thing and why do you think it -- actually it declined going forward?

Yes, again, these things are mixed blessings. And on one hand, we really like the volume that they generate. I think we continue to see -- to work to improve our offerings so that the margin hit is not quite as acute either by kind of sizing, restructuring the sizing of products or as we take price increases across certain brands and we try and lessen the discount curve, that the large sizes are a little bit less of a margin hit than they would be otherwise. So we're continuously working basically to improve the mix in terms of our pricing, in terms of our offering structural packaging or sizing, offering to improve that. But I do expect that large-size migration will continue over time, and we'll just have to deal with it.

And I think one of the other outliers in this quarter, Ali, was also the amount of charcoal that was moved in early because of the weather. No one obviously can predict the weather. It was a bit of an aberration this year how much of -- how improved the weather was. And of course, with daylight savings time, moving into early March, we got a lot of significant merchandising support. We hope certainly that, that merchandising support there and on the other brands continues, but that's in the base now too. So I think that's another point that you have to look at. Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And just last potentially quick one, is the product geographic mix. You've already addressed it but just some clarity on why you actually think that, that becomes less of an issue going forward. I mean, do you expect that growth rates, for example, between geographies to start matching up a little bit or what is it that drives that? And maybe as a sub-part of that, is any of that Away From Home?

I'm sorry, Ali, can you clarify the question again?

Yes, I can't hear the first part of your question, Ali. Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division: Oh, I apologize. The product and geographic mix that you said earlier on to one of the other questions would be less of an issue going forward because it gets into the base. Is that driven by a belief that the growth rate of the geographies or the products will match up going forward and, if so, why? And then the last thing I tacked on right at the end is, how much of that, if any, was driven by Away From Home on the product side?

So Ali, let me try to answer both pieces of the question. So first, we're talking country mix. Okay? That was the piece that we were referencing earlier. And I think, as we talked in the second quarter call, we're mentioning again our business in Venezuela has been down double digits. We're starting to see that in the second quarter of this fiscal. We've seen it again in the third quarter. At a certain point, it just becomes in the run rate of the business, and it's in the base. So as you think of country mix, certainly, as we look at Q4, in early '13, it’ll continue to be a drag. But after a certain point, the consumer will adjust to the new lower pricing, will adjust to the new pricing. It will be reflected in the base, and that was the comment there. As far as the Away From Home business, I don't think we made any comments on that and that's certainly not having a negative impact on our business.

I think just to be clear on Venezuela, one of the reasons we think it obviously will start to improve is the new pricing protocols went in place April 1. There's obviously been a lot of working through those regulations during the month of April. The stickering of products actually started yesterday, May 1, so we're finally getting the new pricing on the shelf. So clearly, consumers -- first of all, retailers, and then consumers have really been out of the market, and that's why we saw such a dramatic volume shortfall in the quarter.

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

Sorry for getting again into this mix issue. Because, as far as I know, it is the largest swing that you have at least in 8 years. So that's why I am pretty interested in it. And certainly, you have flat country but -- country mix, but it's only 50% of your sales are in -- outside North America. So the issue is more about the package mix it seems like. And I would like to understand better from what you said, is this really package mix or trade spending? Because it seems like as if you are moving volume through larger packaging, it's basically canceling out all the pricing that you're also trying to take. So to what extent is either this should be trade spending and, therefore, we shouldn't be seeing this 250 basis points in pricing in terms of the accounting of your gross margin drivers or this is really that the pricing architecture of your packaging is so slanted toward discounting volumes that this is a distortion that, as Ali said, we are going to continue seeing going forward then?

So let me try and clarify and trade spending was up slightly in the quarter, but the rate of spending was not materially different than it was a year ago. So this is not a big trade issue, this is really more of a larger size issue. And quite frankly, we have some retailers, particularly in Charcoal, they're spending a lot of their own money to get consumers in their stores. I mean, the best example would be in the home hardware channel where you see -- this is out in the public space, you see very large retailers discounting Charcoal very heavily. That's not discounting that we're paying for, that's discounting that they're doing on their own to bring people into their stores to buy drill sets and other things that have much higher price points. So it really is more of a large size phenomenon. It's not us spending a lot more in terms of trade spending or certainly not us spending disproportionately by channel or by customer.

Does it mean that your -- the pricing architecture, that basically the volume discount that you're giving to the larger package needs to be corrected because you are basically canceling out the price increases that you're taking?

So we're separating out the impact of mix versus pricing. Right? So if you looked at our gross margin results, you'll see a positive impact from pricing. And then separate from that, you'll see a mix impact.

Precisely.

We're categorizing them differently, so we are getting a distinct benefit from pricing apart from the mix issue.

But precisely. Because the negative mix is such, could it be that you should be taking prices up also in the larger packages so that you don't create this huge incentive that cancel out whatever you're trying to do with the price increases?

Javier, I think you're making too much out of one quarter and inferring that, that is the pricing protocol that incurs on these brands. If that were true the last quarter, we would have seen the same kind of trend. I think this is unique to the January, February, March quarter and the merchandising events. A lot of it is twin pack charcoal, for example. That really accelerated in the quarter because of the warm weather. Some of it is double and triple pack on Clorox Disinfecting Wipes. Those pricing curves have been adjusted over time. It's more about the strength and uniqueness in some of the merchandising events that went on in January, February, March. It's not really about something systemic with the pricing curves on the brands or it would have manifested itself in the other quarters as well.

But the change that you did in gross margin for fiscal 2012 is all attributable to the swing in the third quarter or you are also lowering your internal plan for the fourth quarter gross margin? Because basically, you also -- you basically said, pricing is better than expected. Commodities are trending exactly as they -- as you forecasted. So basically, that gross margin starts going down again versus your own forecast. So basically, is the delta in forecast for the gross margin purely attributable to the third quarter or also the fourth quarter gross margin are worse than you thought it would be back in January when you provided guidance?

So Javier, this is Steve Robb. Let me see if I can clarify. We have, as you mentioned, lowered our gross margin outlook for the full year to 125 to 150 basis points of decline. It really reflects 2 things. One, fiscal year to date, the compression we've seen in gross margin, driven in part by the third quarter gross margin and mix issues that we've already articulated. But it's also negative country mix for reasons that we've previously discussed that will come through in the fourth quarter. So we are lowering the fourth quarter gross margin. At one point, we thought it would be flat to up somewhat. Now we believe the fourth quarter gross margin will be down and, for the full year, will be down 125 to 150 basis points.

And we will go next to Connie Maneaty with BMO.

Could you give us just some clarity on how much the IT spending is weighing on margins in your International segment?

Yes. The -- it is affecting it. I think we've talked about this before. Our International segment profitability was down about 49%. If you just step back and look at that, there's really 3 big things: first, is the investments we're making in systems and infrastructure. There's probably about 25% of that. There's about 25% of that, that is probably related to Venezuela and some of the unfavorable country mix. The balance is just incremental investments that we're making in the business to drive demand growth, as well as other inflationary pressures.

Okay. I think you also mentioned that internationally, you were growing in lower-margin countries. Which would those be? I mean, Canada, New Zealand and Australia, I think you said your share was down.

Yes, I think we pointed to country mix. And again, I think the biggest single contributor to the unfavorable country mix is the expansion of the price control laws and how that's impacting us in Venezuela.

Okay. So with your prices in Venezuela down but inflation still running about 25%, what do you estimate the either margin impact or EPS impact will be going forward?

Yes, I don't think we're going to provide the EPS outlook. Let me say this, just to keep this in balance. Venezuela, obviously, is an important business for us and certainly for our International business. But it represents less than 2% of our sales and something less than that in terms of the profit to the business. So obviously, it's had a modest drag on the top line growth for International. The margins are being compressed, and they will continue to be compressed for a few more quarters as we work through the pricing. And certainly, that will drag on next year's earnings per share, but it's not the biggest factor of all of the things that we're looking at.

And we will hear next from Lauren Lieberman with Barclays.

So first, I really sort of don't want to talk about mix anymore, but I do recall mix being a negative surprise in each of the last 2 quarters from a combination, in fact, of country mix and pack size. So I would think that part of the looking forward is that you do start to lap some of this shift towards higher -- towards, sorry, larger sizes, as well as the geographic piece. So this quarter was outsized, but this is not a new phenomenon just looking back at my notes from the last 6 months of Clorox calls. Correct?

That's correct. This is not a new phenomenon. We fully expect that mix will continue to be a drag on margins as the consumer continues to shift to larger sizes, channel mix, things we've discussed. The things that we think will get better over time is the country mix, as we've talked and as Don had mentioned and Larry has talked to. The promotional aspect in the third quarter, we just wouldn't ask people to project it forward. So we do expect mix to be negative but certainly not at the levels that we saw in the third quarter.

Okay. Great. And then as I recall also in the first quarter of 2012, Charcoal, the result, sort of similar, like big retailer co-promotions in the first quarter. So you also have that as a comparison when we get into fiscal '13, so it's kind of 2 quarters of big Charcoal numbers.

Yes. That's correct, Lauren.

Then just focusing on a different segment, Lifestyle. So pricing -- price mix was very positive, much more than we had expected. So can you talk a little bit about that. Is kind of 6% pricing the run rate we should be thinking of? Was there some favorable mix in there? And then in terms of gud, I just wanted to refresh my memory if it was on store shelves, if that was December or if it came in this quarter and where you stand kind of on distribution and then also retail takeaway?

Okay. Lauren, just to clarify, the 6-point delta between volume and sales, probably around 4 points of that was pricing. The rest was a combination of favorable mix and favorable trade.

Okay. Great.

Larry, do you want to talk to gud?

So gud was on the store shelves last quarter. We're feeling very good about the progress relative to our expectations. So it's a solid incremental additive in our Burt's Bees line. And thus far, we're tracking with our objectives. We did get some early distribution in one of the big retailers. Some of the other retailers picked it up a little bit later in the quarter, but we are pretty close to what we think our regional level of distribution should be.

Lauren, I don't know if you saw, this is an aside, but one of the things we're using to try and leverage gud as well, last week, SELF Magazine did a survey and they evaluated 1,300 beauty care products. About half a dozen of them were showcased on The View last week. gud shampoo and gud conditioner won independently in that survey, so they were like 2 of the 6 or 8 products profiled on The View last week. So we're leveraging that. But clearly, these products are starting to resonate with people.

Okay. Great. And just on that -- the split between price and then mix and positive trade. Just thinking forward, so the -- are the mix and positive trade something we should be thinking about as continuing for Lifestyle or really focus more on the pricing piece and how that flows through future quarters?

Lauren, the impact wasn't so great as to -- I wouldn't describe it as a big swing factor going forward. I think mix in that segment will probably trend a little bit more favorably because you've got a lot of positive innovation coming out in those businesses. Don mentioned Brita. gud certainly helps, and we've got a number of new items coming out in the Food business as well. But the swing wasn't that dramatic to where I would focus on it too greatly.

Okay, great. And then also on the acquisition, so it was about $22 million in the quarter kind of backing into it. Is that a good run rate to be using forward?

We think that it will contribute about 0.5 point to growth this fiscal year, fiscal '12. For fiscal '13, it's about a point of growth for the company. And just speaking to the acquisitions, what we would say is, well, it's early days. Certainly, the businesses are performing well and meeting our expectations. The integration is also going well, and so early signs are very positive.

Right, great. And then just really final, was -- can you guys share how much of the IT and R&D spending investment happened this quarter?

I don't think we're releasing that level of specificity. What I would say is that we are still very much on track with both of those projects and anticipate spending $50 million to $55 million on the year, but probably on the low end of that this fiscal year. And our spending is trending consistent with what you would expect to see this far through the fiscal year.

And we will go next to Bill Schmitz with Deutsche Bank.

Would you describe the current environment we’re in as highly volatile? The reason I ask is that there's a pretty wide delta now with only a quarter left in terms of the earnings guidance. I think it's still sort of $0.10 with 2 months to go.

Bill, this is Steve. I would also just remind folks that $0.01 of earnings per share for Clorox is about $2 million pretax. So it's actually because of the share repurchases we've done over the years that it's not that much. So there's a lot that happens. The fourth quarter is the biggest quarter of our year. And we'll have to see how it plays through. But just in absolute profit relative to the sales, it's not that large.

Okay. And you discussed that the range for '13 in the guidance is only $0.15. You know what I mean?

Sure enough.

Okay. And then just in terms of the commodity inflation, can you just talk a little bit more specifically about what commodities we should continue to watch and kind of where you're seeing the inflation? Because I know it's kind of puts and takes, but some are coming down and some are going up. And then maybe even some more color on what's driving some of that supply chain inflation that you also said, I think, was 100 basis points.

Yes, so the commodities to continue to watch, which some are coming down, by the way, that is not what we've been seeing in the commodities that we're purchasing. Generally, what we've been seeing is a slow, steady march upward in commodity costs. Resin, obviously, is one that we're going to continue to focus on and watch pretty carefully, obviously, linerboard, chemicals and some of the agricultural commodities. What we saw this year was kind of, let's call it, high-single digit commodity cost increases. I think next year, we expect it to go up but at a more moderate rate. Maybe about half that rate is what we're focused on. And again, in terms of the other inflationary pressures affecting the supply chain, diesel continues to be one that we're watching very carefully. And then just the rising cost for health care, rising cost for wage inflation, these kinds of things.

Bill, that other inflation, about 40% of that is in international markets, and most of that is due to the labor inflation in high inflationary countries just trying to keep up with salary.

Got you. That's helpful. And can I ask just one more, why do you think your categories are coming back so much faster than some of the other categories we see in the U.S.?

I think a good chunk of it, Bill, is due to innovation. I think one of the things we learned in the last 2.5 years is if you try and -- if you couple your price increases with innovation, it certainly helps. So I think if you look at our categories, there's been fairly significant innovation. If you look at the trash category, for example, that 2 years ago, 1.5 years ago, was declining 10%. Now it's up 4% or 5%. And if you look at things like OdorShield, Febreze, if you look at the Home Care category, we're starting to come back. You see Bleach Foamer, a number of innovations by us and competitors. I think a lot of it is tied to innovation.

And we'll go next to John Faucher with JPMorgan. John A. Faucher - JP Morgan Chase & Co, Research Division: I'm a little surprised that so far in, the mix issue hasn't come up here. So I have about 3 or 4 questions I'd like to ask on that.

Go for it. John A. Faucher - JP Morgan Chase & Co, Research Division: Actually, I want to talk a little bit about the longer-term outlook on the cost saves side. So you guys have talked particularly about sort of how you've got these plans sort of 3, 4 years out. And I just want to get some ideas now in terms of what your range is there because it seems like we're a couple of years into sort of this last big push. And do you think you still have that longer-term visibility on the cost saves?

Short answer is, yes. John, I think as I've mentioned to you before, if you're in this for 7 to 10 years, that we're going to run out of cost savings ideas, and we have yet to run out. This year, fiscal '12, we're still targeting to deliver $90 million to $100 million of cost savings, probably at the high end of that range this fiscal. Next year, we are very much on track to deliver 150 basis points of productivity. And again, I think what separates the program and how we look at it is we do have a 3-year pipeline in cost savings ideas, and we also look at every line of the P&L. We do not limit this to just looking at manufacturing and raw material cost. We look at every line of the P&L and challenge ourselves to be more productive. And when you look at that, you're dealing with $4 billion of addressable spend. And when you take those kinds of numbers and ask to get a couple of points of productivity, we’re changing technology as new processes come to market, we've been able to do this pretty consistently. And so at this point, certainly for fiscal '13, we feel very good about our cost savings programs and anticipate delivering about 150 basis points of productivity from that.

And over the longer term, our SAP implementation in Latin America should benefit us immensely on the cost savings side. Now that probably won't start to kick in until fiscal '14 and fiscal '15. But if we look back at how much SAP changed our U.S. business, I think we can even hit potentially more dramatic savings in Latin America given that we haven't had the kind of system capability in Latin America that we had historically in the U.S So that's a big platform of opportunity, not the only platform of opportunity in cost savings, but one big new platform over the longer term. John A. Faucher - JP Morgan Chase & Co, Research Division: And then, Steve, I guess going back to your comment there. Does that mean we should start seeing more leverage on the selling and admin line maybe as opposed to just on the -- and do we have to start figuring out the impact there as opposed to just strictly sort of a COGS standpoint?

Yes. Over the long term, you will see us focus on every line of the P&L. One of the things I think we've talked about in selling and admin is it's about 15% as a percentage of sales, certainly for this year and a similar amount next year. That is above the historical average, in part because of the infrastructure investments. But we are going to challenge ourselves over a multi-year basis to bring the selling and admin back in line with kind of the historical averages. And that’ll be through a combination of anniversary-ing some of the infrastructure investments, as well as just continuing to challenge ourselves to be productive on every single line of the P&L.

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

Well, thanks, everyone, for participating on the call, and we’ll look forward to updating you on the last quarter of the year in August. Take care.

And again, that does conclude today's call. We thank you for participating.