The Clorox Company's CEO Hosts Analyst Day (Transcript)

Oct. 3.13 | About: The Clorox (CLX)

The Clorox Company (NYSE:CLX)

Analyst Day Conference

October 03, 2013 12:00 pm ET


Donald R. Knauss - Chairman, Chief Executive Officer and Chairman of Executive Committee

Benno Dorer - Executive Vice President and Chief Operating Officer of Cleaning, International & Corporate Strategy

George C. Roeth - Executive Vice President and Chief Operating Officer of Household & Lifestyle

Dawn Willoughby

Dawn C. Willoughby - Senior Vice President and General Manager of Cleaning Division

Jon M. Balousek - Senior Vice President and General Manager of Speciality Division

Grant J. LaMontagne - Senior Vice President of Professional Products Division

Stephen M. Robb - Chief Financial Officer and Senior Vice President

Wayne L. Delker - Chief Innovation Officer and Senior Vice President


Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Lauren R. Lieberman - Barclays Capital, Research Division

Wendy Nicholson - Citigroup Inc, Research Division

Javier Escalante - Consumer Edge Research, LLC

William Schmitz - Deutsche Bank AG, Research Division

Constance Marie Maneaty - BMO Capital Markets U.S.

Donald R. Knauss

Good morning, everybody, and welcome to our new innovation center out here, and we really appreciate you folks making the effort to get out here. I know a lot of you are, obviously, from the East Coast. And hopefully, some of you are going to get a chance to enjoy this great Bay Area weather over the weekend. But I think we got a very different and exciting day for you today, something that you don't typically see in one of these analyst presentations with all the capabilities you'll see later this afternoon. But let me take you through what the agenda looks like for today. So from 9 to noon, and we've got a break in the middle of this, we'll go through the presentation. And then we'll have lunch outside here between the 2 buildings. We've got a little barbecue set up for you. I'll be serving, so please come to my station. And then we've got the R&D interactive session, which I think you'll find really interesting. We've got 6 different stations. Four of them are U.S. Retail oriented. One is a hospital room, which we'll then take you through what we're doing with Professional Products in the Healthcare area, and then one is Burt's Bees -- a Burt's Bees stop that shows you what we're doing internationally with Burt's Bees now that we're in over 40 countries with Burt's Bees. We'll go through that. We'll get you back to the hotel around 4:30 or so. The buses will leave here 3:30.

In your packets, there is a Wi-Fi connection. This the whole campus is Wi-Fi enabled. So if you have any issues with that, just ask some of the folks in the back. There are also, as we go to lunch and after the interactive session, if you need a room for a few minutes, there are some meeting rooms we can put you in as well. So let me -- then, we got the dinner social tonight at the Aquarium.

This is the morning agenda. So I'll take you through a little bit of a history lesson on Centennial, just a few slides to update you. Now that we turned 100 in May, obviously, Linda and I were talking about this earlier. It was may of '07 when we were in New York and took you through the Centennial Strategy. Obviously, we've had updates along the way like May of last year, but this obviously, is the kickoff of the 2020 strategy. Those 3 enterprise choices you see listed up there, we're going to go through those in depth this morning and then show you how those cascade into our 3 businesses: U.S. Retail, PPD and then International. And then as I said, we'll take you through the innovation at the end of this presentation. Wayne will set up what we're going to do for the afternoon. So with that, we also have 15 of our senior leaders, who are not representing. They're peppered out throughout the room here today. So basically, you've got the entire executive committee and the strategy group for the company here all day, and they'll be there this evening as well. They've, of course, all been instructed heavily in Reg -- RFD, so -- but you've got a good chance to meet with the senior leadership of the company today.

Safe Harbor statement, I think I don't have to dwell on this. Obviously, we're going to show you a lot of historical facts, but we are obviously putting projections out. And that was the F-14 that just flew over.

So let me -- before we show you a little bit of a video on Centennial, I thought given that we did conclude our first 100 years in May, there are some interest things we dug out of the archive that I thought you'd be interested in. So let's go ahead and roll that -- roll the video.


Donald R. Knauss

rest of the presenters. Centennial, we thought was extremely successful. I'll show the report card we built for ourselves around Centennial. The strategy for 2020, we think it keeps us with the ability to stay in the top third. If you look at the last 5 years, we were in the top third of our financial peer set, and I'll show you that data in a second. And we'll get, obviously, very heavily into these 3 enterprise choices that we're making. And then innovation is going to be the key to this thing as we move forward, and that's why we wanted to lead this presentation into your ability to see the capabilities that have been built out here.

So on the Centennial Strategy, the mission has not changed. Those 2 objectives around maximizing EP and then building big-share brands in mid-sized categories, no different there. The company stays on that mission and those objectives. And those 4 strategies, we first showed you those in May of '07. Now obviously, the strategic imperatives and the tactics around those strategies have evolved, but those 4 broad strokes, 4 broad choices remain in place.

If you think about the process we went through in Centennial, this is the same process we're using for 2020. These are the 4 questions we ask ourselves: Have the goals and aspirations changed? Are -- is the participation strategy changing in terms of where we play by category, by channel, by country? How do we win? What are the capabilities we're really focused on to enable us to win going forward? And that's why this $50 million investment in this facility has been so important to build out those capabilities. And then how do we configure the business in terms of the structure and processes we use? So let me take you through a little bit of a report card on each of those coming out of Centennial. So the goal and aspiration there was to maximize economic profit across channels and countries and categories. And you can see since '08 is the base year, we've grown EP at about a 6% compounded growth rate. The recession, we were in the high singles but the recessionary periods, especially FY '09 and '10, obviously, slowed that down. But we've picked EP, and I think a lot of you, we've been through this why EP, we believe, is the best single metric or true north with the company. It's the only financial metric we could find that had the 3 components of a P&L component, which is obviously, net income; a balance sheet component, which is how much capital did you deploy to get that income; and then a capital market component, which is what's the cost of that capital. I think there's not another company -- there's not any company out there that can't recognize the fact that they've got a return above their cost of capital. We think that's the most robust measure. And we've kept our annual incentive half EP and our long-term incentive 100% economic profit. And we think that's what really will continue to drive our decisions and choices as we move forward into 2020.

If you look at where to play, we have reshaped the portfolio. Obviously, the acquisition of Burt's Bees in the fall of '07, that was 6 years ago. This month, we acquired Burt's, getting rid of the Auto Care business, Armor All and STP, a couple of years back and then of course, what we're doing to reshape the healthcare side of PPD or Professional Products with Caltech, Aplicare and HealthLink. And we'll show you the progress we're making there. And I think that's one of the true growth engines of the company going forward, and we'll show you that.

If you think about how to win, it really is the 3D model and focusing innovation not just on new products and new packages, but on Desire, which is how you communicate with the consumer; Decide, how you interact with customers at retail, whether they're in a brick setting or on a click setting; and then of course, Delight, which was we really anchored ourselves in product superiority 6.5 years ago, trying to drive these 60-40 wins. And we'll show you an update on that. And of course, cost savings is a big component of what we do. We've averaged at about 150 basis points a year over the last 7 or 8 years.

So how to win looks good. How to configure, we really created this SBU or strategic business unit structure, put the P&L ownership down closer to the business 6.5 years ago. We continue that configuration today. And they have that P&L ownership. We've also, I think, done a better job in the last 3 years of integrating International into our core functions of marketing, sales, R&D and product supply. So there's much more of a global look at the company today. And of course, the SAP investment now is up and running in the 12 countries in Latin America. That's gone extremely well, and that bodes well for our ability to grow margins in International given the insight that gives us around things like working capital, for example.

So if you look at the bottom line, if you will, all right, that's nice. What happened with results? If look at top line growth, this is the CAGR, about 2.5% CAGR. Obviously, the last 2 years, it's been about 4%, slowed down in '10 and '11 as everybody did when we went through the tough part of the -- coming out of the recession. If you look at earnings per share based on that base period, 10% compounded growth rate on earnings per share, which we feel, obviously, pretty good about. And then when -- and when you add our dividend to that of north of 3% during that time, you're looking at 13% TSRs, which we think is one of the reasons we drove into the top tertile, which I'll share you in a second. And then our ROIC, I think a number of you noted -- I know, Ali, in your latest writeup, you noted that the ROIC has been best in class for quite a while. We still think there's room to move it, but clearly, this is done -- we've done a good job for our investors on return on invested capital with a peer average of about 15%.

When you look at the shareholder returns, this is the 5-year period, so this is fiscal year '09 starting with July of '08 through the latest of June 30 of '13, 88% return. You can see 29% of that 88% came from dividend. We've more than doubled the dividend in the last 6.5 years, and you could see the peer set in the S&P 500. So we obviously feel good about our ability to get real returns into our -- to our shareholders despite pretty tough economic times.

So that's a bit of a report card. When you think about as we go forward into 2020, we showed you this graphic in May of last year in New York that this is what we call our Rosetta Stone if you will. And in terms of understanding this business, U.S. Retail, about 75% of our business, that's the top and bottom line engine of this company. Professional Products is obviously a fast-growing adjacency. And then International, we still believe that we've got a strong International business in most of our countries. We obviously have challenges in Venezuela and Argentina. We're going to take you through what we're doing there. In fact, I was with Benno and James Foster, our Head of Product Supply. We were down in Argentina, Peru and Colombia last week, and we'll give you a little bit more of a current report out on how it's going in those countries.

While you can see with -- we expect to get 1.5 to 2.5 points of growth out of the U.S. Retail business. If we're growing that business at 2% to 3% compounded, we don't think that's an unrealistic goal at all with the categories flattish to up 1%. Professional Products, this is an engine that's on fire. It's a little engine, but it's contributing 15% to 20% of our growth over the last year, so we think that 10% to 15% growth rate is certainly something that we will continue to drive us going forward. And then International at 5% to 7% growth, we feel good about that going forward. So that gets us into that 3% to 5% range. And of course, the EBIT margin improvement is what we're focused on as well, 25 to 50 bps year-after-year.

When you look at the environment -- before I hand it off to Benno, start getting into the 3 enterprise choices that we've made, when you look at the environment we're operating in today versus where we were 6 years ago, obviously, we've got categories that are stable. They're recovering slowly but certainly not on fire, fairly mature in this country, growing at 0.5% to 1%. Technology, obviously, with folks with mobile devices now, a much more empowered consumer; and then the multi-cultural consumer base. I mean, if you think about California today, California is 60% people of color. So already, this country is really exploding that way, and that's a trend we are certainly focused on capitalizing on.

If you think about the 4 consumer megatrends we talked to you in New York about 4 years ago, 3 of these 4 are the same words you saw 6.5 years ago: health and wellness for us, which is stop the spread of infection; sustainability, which led to the acquisition of Burt's and the reshaping of Brita; and also the reshaping of how we run the company. Affordability, obviously, was critically important. Fragmentation is new language. That used to be called multi-cultural. And what we've discovered certainly over the last year is not just the fragmentation on the consumer basis, fragmentation on a number of fronts. And we think about it this way. We've got these demographic clusters, obviously, in this country. We've got greater economic bifurcation going on. We've got a top 10% there doing quite well. We've got another 80% to 90% that are living, a lot of times, paycheck to paycheck or certainly struggling with any really wage increase. We've got retail fragmentation like I've never seen in my career of 33 years with hard discounters coming in, people who are focused primarily on private label like Trader Joe's, which don't impact us much today, but who knows when you look out 5 or 10 years? And then the explosion of media that people are bombarded with, so a very different world out there than we obviously saw 6.5 years ago.

From a customer standpoint, the consolidation continues. We've seen that, obviously, in Canada just recently with the sale of the Safeway division in Canada, emerging e-commerce. For, CPG, it's obviously not a huge issue right now, but for Burt's Bees, for example, it's 10% of that brand in this country is going through e-commerce. So it's a capability that we're really focused on.

Cost, commodities are certainly more benign in the last 18 to 24 months than they've been, but the volatility is still there. I mean, no one expected oil to be trading at $109 and $108. And certainly, our forecast for this year was $90 to $100. Now it's come back a little bit, but we're going to continue to see that volatility. We're also seeing a lot more inflation in wages and benefits particularly in the international markets where you have high-inflation economies like Argentina and Venezuela. And then lastly, countries, we're still staying on the strategy we talked to you about 1.5 years ago, which is we are focused on those countries where we have scale. And Benno will take you through the 3 clusters of how we organize that International business, but we are not focused on the BRICs. Challenging environment in key Latin American countries. We'll go into some depth on Venezuela and Argentina. And then the FX headwind that all of us are contending with, not just, obviously, Clorox, but it certainly impacts other companies even to a greater extent. But we'll talk to you about how we're trying to offset that.

So with that, let me turn it over to Benno, and we'll get into those 3 enterprise choices we talked about.

Benno Dorer

Thank you, Don, and good morning. So here are the 2020 strategy choices. That starts with goals and aspirations. Fundamentally, goals and aspirations will not change. We want to continue to stay in the top tertile in terms of TSR. We also want to continue to do that by driving EP growth. Don talked to you about how important EP is for this company, and we will still run the company based on EP. We have 5 fundamental aspirations or goals, and 4 of them are financial in nature. And those of you who followed the company for a while will recognize these because they will not change. Why? Because we think that they'll continue to be sufficient to deliver that top tertile in TSR. And that's a 3% to 5% in sales growth. That's a 25 to 50 bps in EBIT margin growth. That is to maximize EP in a very systematic way across customers, channels and categories and to keep supporting a healthy dividend growth. And Steve is going to talk to you later about what that means.

But then there's one non-financial goal, which is very important though, and that's growing market share. Market share performance has been a hallmark of this company over the last few years. It has enabled us to weather the economic downturn very well. But we also know that, in particular, in 2 businesses, more recently we've had challenges as far as market share is concerned. What you should know is this company is very committed to growing market share. We're very committed to correcting the issues that we have, and we'll talk to you about that today but also very committed to growing market share the right way and in a way that's consistent with driving EP.

So in where to play, the choice is, first and foremost to keep the base healthy but then to grow into adjacencies, adjacencies in terms of categories, in terms of channels and in terms of countries. And what that means specifically is that, first of all, we have to continue to focus very strongly on U.S. Retail business. That's the majority of our business by 80%. That's our home base, and we have to keep that strong. In International, 9 months into the job, I can tell you that we will also focus on existing markets where we have scale and where we have strong brands. And I'm convinced that we have very strong growth potential in that, and we do not need BRIC to achieve our aspirations. And then also the healthy base, we want to continue to grow into 2 adjacencies that are working very well for us and they will continue to be important for us in the future, and that's Burt's Bees here in the U.S. as well as internationally, and that's the professional healthcare business, which you'll hear about today. But then beyond that, we think there's additional opportunities in the enhanced wellness or health and wellness space. It's where -- what the company was founded on 100 years ago, and we think we have tremendous opportunity to keep growing in this space based on strong brands and capabilities.

So next up is how to win, and how to win is going to be about increasing our brand investments behind superior products and behind more targeted 3D plans. There are 3 components to this. The first is an increase in our brand investment by 1 point of sales over time. And again, I'll talk to you about this in a little bit. The second component is that we'll continue to invest behind 60-40 wins, blind-test wins. We want 60 out of 100 consumers when testing our product blind against the nearest and best competitor to prefer our product. That's the lifeblood of our company, and fundamentally, we don't compete on price. We compete on value, and superior products is the backbone to that. And then we'll continue to want to drive 3-plus points of incremental sales from innovation. And then the last component of this how-to-win choice is to create multi-target demand plans, to move from single-target to multi-target demand plans enabled by 3 things: first of all, more customized insights; second, by digital technology; and third, by a more flexible supply chain. I'll get into this a little bit in more detail.

And then as we think about the configuration choice, that's about funding growth by reducing waste in our work, in our products and our supply chain. And we'll introduce the concept of Agile Enterprise to you today that takes a page from the playbook of world-class manufacturing or lean manufacturing where we will take this to everything we do to expand it across the entire enterprise and will simplify work and will eliminate work that's not value added to the consumer. Second, we reduce exposure to energy-driven inflation. Over time, one thing's sure, and that's energy costs or energy-driven costs will go up. The best way to mitigate that is to reduce our exposure to those costs, and we'll do that very aggressively. And then finally, we'll reduce S&A to 14% or lower frankly. We've historically been there. We can get back to that, and we're convinced that we have strong plans in place to be able to do that, yes?

So these are our 2020 strategic choices. The mission, as you see, has not changed. It's worked for us for 100 years, and we'll stay the same company. Also, the identity and the objective for us as a company will not change. We want to be a top-performing CPG company, and we want to be the best at building strong brands in economically advantaged categories. But then we'll have 4 strategies. Three of each, we'll go into today. We will not go into the people strategy, even though that's probably the most important strategy for us among them all because our most important assets are people, but we'll talk about this these 3 strategies today. I'll take the first one, and then my co and partner in crime, George Roeth, will lead you to the second and third one. And the first one, of course, is to increase our brand investment behind superior products and more targeted 3D plans. Let's get into it.

There are 3 key messages that I have. First, is that our 3D capabilities will evolve to address this issue of fragmentation on the consumer and customer side. Don talked about this. The way we have to do this is to create more targeted 3D plans with a few important enablers. But then we want to support that over time with an increase in demand spend by 1 point, especially as we invest in adjacencies that'll be necessary to keep both the base healthy, as well as invest in new areas. And then we'll continue to focus on 60-40 but with a little twist, and I'll talk about what that twist will be.

So we started talking about the 3Ds with Centennial. 3Ds, of course, standing for Desire, Decide and Delight, the 3 all-important moments of truth, 3 at and post purchase. And we've made tremendous progress over the centennial period in all of these. In Desire, we've built a really world-class digital capability. We've increased our non-traditional spend from about 10% of our total marketing spend to 45%, and we've won multiple industry awards showing that we're being recognized for the work we do externally. On the Decide side, we've won a lot of category captaincies with many of our major customers during the centennial period, also because we've invested very heavily in value-added services. And on top, we started to experiment with e-commerce, and now we're growing that actually quite remarkably. And then on Delight side, I talked about 60-40 wins, and also the growth from innovation, of course, has accelerated over time, and we feel really good about that.

Said that, what was a pretty linear, predictable and brand-controlled consumer journey to loyalty where you could show an ad, 30 seconds ad, you might support with an FSI or a coupon, which leads to a purchase and then maybe you get post purchase, some loyalty programs, and that leads to loyalty. That was 1980s and '90s. Of course, the world today is very different. And the new path to consumer loyalty is a lot less linear, is involving a lot more channels, is heavily digitally influenced and brands, frankly, are much less in control.

So it will come as no surprise that our 3D capabilities have to evolve to address this changing environment. First, as we think about goals, today, we have very good ROI metrics, but they're sort of insular. We have separate advertising sales promotion and trade promotion ROI measurements. In the future, we'll be able to go for total demand creation ROI, which will help us optimize our spend across all of these tools. In where to play, we'll move from single consumer targets to multiple consumer targets, from retail channel focus to retailer-specific focus. And then in how to win, we feel good about our 9% to 10% of sales spending that we have in advertising and self promotion, but over time, we want to increase the investments. 60-40 will continue to be important, but then we'll move from single-target 3D plans to multiple-target 3D plans. And over the next few minutes, I'd love to spend some time to talk about these 3 how-to-win choices in more detail.

First, the increase in demand spend over time. Again, we feel good about the current spend, but over time with investments in adjacent growth, we want to add 1 point. This will be gradual. We'll step into this, but we're committed to doing that. Importantly, this will be total brand investment, so not just advertising and sales promotion, it can also be trade promotion. It can be lower pricing. It can be innovation. And this will be heavily a by-business choice depending on where the ROI lies, which will differ by business, yes? But a total demand spend increase by 1 point over time, funded through cost savings and margin-accretive innovation is our first choice.

Second, superior products. In 2004, about 7% of our portfolio had a 60-40 win. Today, it's above 50%. So the question, of course, is, so how far can we go? How high is high? We're committed to driving more 60-40 wins, but the way we'll do this is based on a very disciplined portfolio segmentation based on market economics and based on growth potential. We will support the brands with 60-40 that have better growth potential and that operate in markets with very attractive market economics. 60-40 focus will be there. What that looks like, here's an example on Home Care, which, of course, is one of our portfolio businesses, where you'll see brands that are in this upper right-hand box like Pine-Sol, like Liquid Plumr and like Clorox Disinfecting Wipes. They will be heavily supported with 60-40 innovation because they meet the criteria that I've talked about. Other brands in example might be Tilex does not and will therefore see less 60-40 work. Why? Because this is the way to maximize ROI and to spend our resources effectively and efficiently, also as we will devote resources to expand into adjacent spaces.

The third choice are more targeted 3D plans with 3 key enablers: insights, digital technology and a flexible supply chain. Let's take these in turn and start with insights. Here's an example, Clorox Liquid Bleach. For a long period of time, we were focused on heavy users. Well, that makes sense, right? You get a lot of bang for the buck, but the world is getting more fragmented. So we've added Hispanic, and now we're also adding millennials. But the important thing here is this is not a one-size, fits-all plan. We have different objectives. We employ different media, and the communication is on different insights as well. In particular with millennials who often don't know about bleach, we need to talk to them about bleach differently. And what we need to do is spark interest into the category through Clorox. And here's an example. Of course, how we have to talk to millennials is in a way that engages them, in context and with context -- with content that they're interested in. And millennials, of course, one thing that they're interested in is dating, and there's no better dating show on TV than The Bachelorette. Anybody know The Bachelorette? Come on, you guys know The Bachelorette. I know you do. So it's a great show for us because it's: a, very popular; b, it attracts millennials as a target; and c, there are a lot of, let's just say, weird or awkward moments that, in our terms, we call them Bleachable Moments. So these are moments that you'd really like to bleach away, yes? So very popular show, and what we've actually done for this show is we've created a customized commercial that only runs in context of this show, and I'd like to show it to you.


Benno Dorer

It is an integrated program around this and what's really hot these days is so-called second screen mobile apps. And a very popular and a much growing mobile app is called Viggle. So essentially what happens is you watch TV and then while you watch TV, you log into Viggle and you can chat with other people who watch the show, and you can also be exposed to branded content like promotional offers. So we are engaging with people on Viggle during the show, and we're letting them vote for their favorite Bleachable Moments within the show. But then also after the season, we're letting them vote for their favorite Bleachable Moment during the entire season that will then be unveiled at the infamous Guys Tell All show, which is typically the last show where all the dirty laundry is coming out. Viggle, very popular. We've received a response rate that's about 5x of what typically brands get, and it really shows how engaging with the right content in the right way with millennials can be very successful even, you might say, for a brand like Clorox Bleach.

The second enabler for more targeted 3D plans is digital technology. And the principle that we're pursuing here is called "Always On". So wherever the consumer is on her shopping path, we are going to be there with dedicated engagement managers. So if she's looking for Disinfecting Wipes, so searching Disinfecting Wipes on, we have an opportunity to deliver a custom ad. If she's on Facebook chatting with friends or being exposed to a product on Facebook, we are there with her. We can send her, through, to buy our products. If she's on a retailer app like Safeway, we can engage with her. Even in-store, we will engage with her. We are "Always On". We're always there with her. And here's an example on a brand, expanding brand that we successfully launched about 1.5 years ago called the Clorox Fraganzia. Targeted for -- to the Hispanic consumer, as you can imagine, it's therefore very important to have very tailored, very targeted marketing plans. And with help from our partners at Google and together with our customer target, we designed a program that allows us to target consumers who live within 5 mile's radius of a Hispanic-designated target store. And then if you live there, if you're Hispanic and if you engage in content either on your favorite website or on a mobile app, we can send you an online coupon. So that's geo-targeting and an example of our capabilities as they evolve with digital technology. It's also an example of how this location here in the Bay Area, can be a real competitive advantage for Clorox. Because, of course, the Bay Area is the hotspot worldwide for digital capabilities, stone throw away. So for us it's easy to engage in partnerships with companies like Google, Facebook, Yahoo! and the like, and we're very heavily engaged in doing that and we think it can be a real competitive advantage for us.

I'd be remised to talk about digital technology without at least spending a few words on e-commerce. E-commerce of course, as we think about the total business, the fastest-growing channel not surprisingly. It is also a focus area for Clorox. We got to do it the right way though. And for us what that means is we have to focus on brands that are logistically advantaged, and that are higher in price points. And those are brands like Burt's Bees, Brita, certain Clorox products like Wipes and Toilet Bowl Cleaners and Glad trash bags. Makes less sense, right at this point at least, to engage on Clorox Bleach or on Fresh Step or on Kingsford charcoal. Said that though, we have a pretty nice business on this and we're feeling really bullish about our capabilities. Today, e-commerce accounts for about 1.5 of our sales, even though, as Don said earlier, on some brands like Burt's Bees, that percentage is much higher, but it's specifically 10%. But we think this can be about $200 million by 2020. Frankly, it's hard to say, hard to predict because this environment is changing so quickly, but what we do know is that there is potential. And right we think it can account for about 0.25 of a point of sales growth during this new strategy period for the company.

Last enabler, flexible supply chain. What's a flexible supply chain? A flexible supply chain is end-to-end integrated with our suppliers and our customers, where we get realtime information on demand from our customers, which enables, in turn, real time demand planning. It's a supply chain that has a changed infrastructure that allows for much more manufacturing flexibility and, therefore, much faster response time to customer requests, and because we ship what we make, also a much lower inventory. It's also not a supply chain that happens just within Clorox, but it's heavily integrated with third-party partners for efficiency and effectiveness. All in the name of more customization and better service to our customers and consumers. And at the end of the day, what we want to do is we want to make it easy and want to do this at reasonable cost to say yes to customization to address customer fragmentation. So whether that's a customized Liquid-Plumr display for grocery that gives us a secondary placement in-store that otherwise we wouldn't get, whether that's a customized Disinfecting Wipes SKU for Sam's Club that gives us a merchandising event that we otherwise wouldn't get, or whether that's a customized red Brita pitcher for Target that gives us incremental assortments that otherwise we wouldn't get, a flexible supply chain that's more flexible than it is today will enable all that.

So that it is in summary, for the first strategic choice with the key messages, that our 3D capabilities will evolve in a significant way to address this opportunity of fragmentation. It will evolve beyond an increase in demand spend by 1 point over time. But one thing will not evolve and that's the dedication and the commitment to 60/40 wins as the backbone for this company also in the future, yes? So with that, I'll turn it over to George who will cover the second strategic enterprise storage -- choice. George, there you go.

George C. Roeth

Good morning, everybody. Benno did a -- actually, going up there. There we go. Benno did a fabulous job of explaining our first key strategic choice, and I'm going to be focusing on the next 2. Some of our key choices around where to play, as well as how we're going to fund our growth going forward. And the first piece I'm going to focus on is about keeping the base healthy and growing the profitable new categories, channels and countries. Now each of the business unit heads are going to be coming up a little bit later and talking about their specific business in U.S. Retail, International and Professional Products, so I'm going to focus the first part of this on extending into new profitable new categories, channels and countries.

Now the key messages I would have you take away are we are going to expand our where-to-play choices. And we are going to grow into profitable new categories, channels and countries. And our adjacency criteria for doing that is: we're going to have a strong right to win, we're going to leverage the core, we're going to take advantage of consumer tailwinds, and we're going to be more margin accretive as we evolve the portfolio. And the key areas of focus for Clorox are going to be stopping the spread of infection, both in Professional Products and in Retail, as well as driving Burt's Bees aggressively internationally.

Now the backdrop for all this and our desire to expand our where-to-play choices is, frankly, the sluggish U.S. Retail category growth. Our categories have grown historically in the 1% to 2% kind of range, matter of fact went into decline in the midst of the great recession, and more recently, have leveled out about -- growing about 0.5 to 1 point. So we need to expand our where-to-play choices to grow the business more aggressively over time. And I'm going to use Stop the Spread of Infection as an example of how we think about that across multiple vectors.

We take our core capabilities and we're like, "How can extend those into new channels?" And our extension into Professional Products in the health care realm, which Grant's going to talk to you a little bit about later, is a great example of that. We're going to look at different business models. For example, partnerships in order to get us into areas we haven't been, less enable to get into our own. We're going to look at new technologies, for example, low-odor disinfecting products. Consumers, Benno talked to you about millennials. Well, their cleaning behaviors are changing. How do we adapt to those cleaning behavior changes with easier, more on-to-go products? Geographies. For example, we've taken our Professional Products business into Canada. Are there additional countries where we can extend into. And finally, in terms of categories, our Wipes business, for example, can get into a number of different categories and segments because of mainly for ease of cleaning. And we've seen recently, we're going to be launching Clorox Bathroom Wipes to do just that. So this is an example of how we think about extending into adjacencies.

When we think about adjacency criteria for Clorox, again, it's going to be around strong right to win, leveraging the core, and those are 2 very much interrelated issues, taking advantage of consumer tailwinds, which Don talked about upfront, health and wellness being a key focus for the company, as well as being margin accretive as we evolve our portfolio. Now there's a number of different ways that we can enter new adjacencies. We do it through mergers and acquisitions. HealthLink's a great example of that, an acquisition we made in the Professional Products realm. We're going to leverage partnerships. An example of that, a perfect one, is our partnership with KIK to get into the pool and spa business. And then we'll have organic introductions as well. So Burt's, our Natural Personal Care business, launching a new brand to go after new targets. gud is an example of that. So M&A, partnerships and organics are going to be all 3 approaches we use to get into new adjacencies.

Now as I think about Clorox's focus in adjacencies, I think about channels, categories and countries, and either are key areas of focus. In terms of channels, we talked a lot about Stopping the Spread of Infection, and leveraging our core capabilities in the Professional Products and medical field. And Grant's going be to talking about that in great length later this morning. In terms of category, if we step back, we have a number of #1 and #2 brands that can get into new categories and segments. And the key area of focus for us has been around health and wellness. We think it about as in you, on you, around you. There's lots of opportunities to leverage our brands and capabilities to drive a healthy home. A simple example of that is there are 12 million people today providing care for loved ones at home, and that's going to grow to over 20 million. How can we leverage our professional and medical products for in-home use to meet some of those needs consumers are facing. This is one of many opportunities where we think we can drive the healthy home and extend our businesses.

The last piece which I'm going to talk about more in detail is around country. And that's Burt's Bees International, which we think we can more aggressively drive across the Clorox geographic footprint. So I think about the opportunity for Natural Personal Care globally, it's $25 billion category globally. It's been growing and will continue to grow at double-digit rates. It's margin accretive, we love that. And we believe that we have a strong right to win. We have strong demand-creation capabilities. We have significant capabilities to develop Natural Personal Care products that Delight and we also have unique and differentiated equity to drive the business.

What I want to do is use some Asian markets as a case example of how we're going to do this, and I'm going to start with the equity. So the Burt's equity in Asia has actually played quite well, being very authentic, it's the first Natural Personal Care -- significant Natural Personal Care product in the United States; our Greater Good mission resonates well; and honey as a matter fact, in many Asian cultures is viewed as almost therapeutic or medicinal in nature. Now if you think Burt himself, he's highly differentiated, quirky, different. We definitely stand out. And what I wanted to do was give you a clip here of a documentary, it's the beginning of the documentary that was done about Burt himself. It was viewed at the Toronto International Film Festival, did quite well. It's going to be picked up and shown in a number of markets. And that will give you a sense of how we're using Burt and how Burt's plays in the International and Asian markets in this particular case. So going to share that with you.


George C. Roeth

We also have a different go-to-market model beyond the equity, which is the same globally obviously. But how we go to market's a little bit different in International, particularly the Asian markets. And where it's different is our products are more premium priced relative to competition than they are in the United States, and we go in a much more upscale retail presentation. So for example, in conjunction with our South Korean distributor, we have stand-alone stores, stores that only sell Burt's products and they're beautiful as you can see here, and I think we're going to see that on our tour as well. We also have stores within a store. So for example, within a department store, there'll be a mini Burt's store, again, very upscale retail presentation. And what that allows us to do is very -- have a very high-touch selling and very high-touch education, and it's been enormously successful. In the South Korean market, in the last 2 years, we've grown 54% and 48%, respectively. And we've taken this model around the Burt's equity and what I'll call high-touch selling and we've taken it to other countries as well. For example, in Chile, we've had even higher growth rates the last 2 years. And these 2 markets represent about 20% of our business outside of North America and we think this whole concept or platform of where you go to market is very scalable. Our ultimate aspiration to have Burt's Bees outside the United States be as big as it is in the United States, and we think that's very achievable.

So the key messages I would have you around our where-to-play choices are, we are definitely going to grow into profitable new categories, channels and countries. Our adjacency criteria for doing that are going to be around the strong right to win, leveraging the core, taking advantage of consumer tailwinds and being margin accretive. And our key areas of focus are going to be around Stop the Spread of Infection in Professional Products and Retail and driving Burt's aggressively internationally.

So I'm going to change gears and talk about how we're going to fund that growth, and this is the 4 strategic plan. We're going to fund that growth by reducing waste in our work, products and supply chain. And a message I would have you take away here is margin expansion is necessary for us to achieve our financial goals. And to achieve top -- sort of third total shareholder return. It's a strategic imperative. And our growth is going to be funded by cost savings on operating efficiencies. And I'll tell you our cost savings pipeline remains robust and agile enterprise, which I'm going to be talking about in some level of detail, is a key part of that platform and it's going to be an enabler for us to achieve our financial goals and as well drive employee engagement.

So what's the backdrop to this? Well, we face cost headwinds like everybody, significant cost headwinds in terms of the commodities, higher manufacturing, logistics costs, particularly if you look at Venezuela and Argentina recently. But cost headwinds have been with us for a long time and will be with us in the future. And Clorox has a tremendous track record of dealing with these cost headwinds. We have a very systematic and successful cost savings program at the company. As a matter of fact, over the last 10 years, we have delivered every single year 150 basis points or more of cost savings. And we're able to do that because we have a program office set up to drive it, we set very aggressive goals and we manage a multiyear pipeline activity. So we have a line of sight to what we're going to be able to deliver over time. It's a 3-year pipeline. We look at what's in discovery. So what kind of new areas can we find? What is being developed? And ultimately, what's being commercialized to bring into the marketplace? So we have a high degree of confidence of our ability to do this and a track record of being able to do it.

There are significant opportunities ahead, so we kind of thinking 3 big buckets. Kind of a meat and potatoes, blocking and tackling of buy, make, ship and product supply. We offer opportunities around world-class operations to continue to drive that, partnering, procurement, lots of opportunities in buy, make, ship; selling and admin, which I'm going to talk a little bit more in detail in a minute, so I'll come back to that; and then cost-o-vation. And for those of you who don't know the word cost-o-vation, which I think we made up, it's all around taking innovation, true innovation, and driving cost transformation on our product, while delivering a better consumer experience at the same time. And our recent compaction of Clorox Liquid Bleach is a perfect example of that. As we compacted liquid bleach, we had a 500 basis point margin improvement. We got 25% more units on the shelf, which is a win for the consumer, the customer and Clorox. We had a 23% reduction in greenhouse gases. And overall, we had a better consumer experience. That's true cost-o-vation.

And the cost-o-vation pipeline's rich. We have areas in terms of resin reduction, which is the biggest buy for the company; we have lightweighting; and we have compaction. And in many cases, these effect those energy costs that Benno was talking about earlier today. In terms of resin reduction, for those of you who don't know, we have a joint venture with Procter & Gamble. They own 20% of our Glad business. And for that, they bring to bear the technologies across their entire enterprise for our Bags and Wraps business. We make particular use of their diaper and paper technologies where they are very adept at pulling material out yet having a better product. And on the Glad business, we recently launched the base trash improvement that has a better, stronger bag with 7% less resin. And I'll just tell you, we have an array of activities over a number of years to do exactly that across the enterprise on Glad.

Light-weighting. We have a number of business at Clorox that I will say are logistics intensive. And there's an opportunity to light-weight in order to significantly reduce the cost, and we've already done a number of that -- a lot of that to date. So for example, on our Charcoal business on 2 separate occasions, we reduced the weight of the product. A matter of fact, over those 2 occasions, we pulled 17% of the weight out. Yet at the end of the day, we had a product that lights better and lasts longer, so better product with 17% less weight, better for the consumer, better for Clorox. I'll just tell you there's a number of opportunities to light-weight our logistics-intensive businesses over time.

And then compaction, I talked about compaction. There are many opportunities across the company for continued compaction, both in product and packaging. So we feel very bullish about our cost-o-vation pipeline.

Now I'm going to change gears to a new area of selling and admin expense. And frankly, Clorox has been very efficient over the years in selling and admin expense, one of the most efficient in the industry. But we think we can do better, get back to at least our historical numbers, if not our lowest set of historical numbers of 14% or below. And the key platform that we're going to use to do that is what we're calling agile enterprise, so I'm going to read the definition for you. And that's a business organization that delivers value to its stakeholders, particularly the consumer, with little or no unnecessary consumption of resources or time. And really it's derived from lean methodology, which Benno alluded to earlier today. It's about waste elimination, driving waste out of the system, it's about reducing variation, and it's about continuous improvement. And continuous improvement here is a critical element. This isn't just a one-off project. This is a mindset change for the company. We're continually going to be working on our processes, the way we do work, to drive out waste and reduce variation and pull costs out, as well as making more effective.

Now we have a track record of actually being able to do this. In our products supply organization, we've been driving the lean methodology for the last 10 years. And we've driven over cumulative $180 million savings driving lean manufacturing in our world-class operations in product supply. When we think about taking lean methodology outside of product supply, we ask ourselves 3 key questions: What is the consumer willing to pay for? Really, really, what is the consumer willing to pay for? And that's where we want to focus our energy and attention and dollars. What is necessary work the consumer's unwilling to pay for? So for example, we have to pay our taxes. Consumer doesn't care, but we have to pay them. How can we do that in the most efficient way possible? And lastly, what is work neither the consumer nor are we willing to pay for? Rework would be a classic example of that. How do we drive those costs aggressively out of the system?

Clorox has done this before. We have taken lean methodologies and applied it to non-product supply processes. We did it a number of years ago in our order to cash process. It looks at all the way from taking an order to collecting the cash. And we have significant success applying lean methodologies to this process. We improved our perfect order rate. And for those of you who don't know, the perfect order is things like did we ship on time? Did we case fill? Did we collect the money on time? It's a very challenging metric. We've improved that sixfold over the last several years, reduced our days outstanding by 1/3, reduced our deductions as a percent of sales by 2/3. And we did that by eliminating time, the orders, for example, or processes, sat waiting to be handed off from 1 person to another, getting work to things like error or rework. And by eliminating the waste in the process, we were able to pull 26% of the headcount out. So 26% here are resources and dramatically better results. This works. And we have a rich field of opportunities. This is the tip of the iceberg where it applies in the company: on our sales and operation planning; new item set up, which looks at when you put the recipe for a product in a system and apply standard cost to it; category advisory services with our customers; as well as the forecast process, which I don't even have listed up here. There's many, many opportunities to drive agile enterprise across Clorox.

The other beauty of agile enterprise, this isn't just a cost savings or financial exercise. It's going to unleash our people's potential, and we have great people here at the company. We're going to streamline and simplify work for them. We're going to fix problems right the first time, and that's going to drive employee engagement, which is going to make us faster and better speed to market and more competitive. And we're going to focus on truly only what the customer and the consumer value.

The other big change is we're going to drive this broadly and systematically just like our cost savings platform. We're going to be proactive, so we're going to set aggressive goals. It's going to be mandatory. So everybody plays. This isn't just a product supply thing. It's going to be holistic and cross functional, so we're going to look at end-to-end processes not things in silos. And it's going to be institutionalized, so we're going to have a program office, we're going to set aggressive goals and we're going to manage a multiyear pipeline.

So the key messages around funding the growth is margin expansion is necessary and it's critical for us achieving our financial goals. We're going to do that. The growth is going to be funded by cost savings and operating efficiencies, and our cost savings pipeline is robust and we have a 3-year line of sight at a minimum, so we're able to do. And the key new element of that is going to be the agile enterprise, which is going to drive us toward our financial goals, as well as drive employee engagement.

So I want to come back to the first driver that I talked about, which is on where-to-play choices going to grow, and that's keeping the base healthy and growing the profitable new categories, channels and countries. And what we're going to do next is have each of the business unit heads and come up and talk about their particular areas, and how they're going to accomplish this. The growth rate that Don led you to that give us comfort that we're grow in the 3% to 5%. So Dawn Willoughby in Cleaning, and John Ballistic in Specialty will come up and talk about U.S. Retail. Grant LaMontagne will come up and talk about our Professional Products business, as well as Benno will return and talk about our International business.

So with that, said, I think we're going to take a break. I guess let's turn it over to somebody who's going to give you the logistics of the break. Okay, what time is it now, Don?

Donald R. Knauss

8-minute break, we'll be back at 10:15. For those of you who did not get an investor folder, well, you can pick them up in the back of the room. Thank you.


Unknown Executive

Please take your seats, we're going to get started again. Please take your seats, we're going to get started in a few seconds. For anyone who hasn't received the package, just raise your hand and we'll bring one over to you.

Dawn Willoughby

Okay, we're going to go ahead and get started here. As George mentioned, this next section is around talking about how we are going to keep the base healthy as we move into our 2020 strategy. I'll specifically be talking about the U.S. business. So I'll be talking about the U.S. Retail business, specifically the Cleaning division, our Home Care and Laundry segment, where we'll look to deliver 2 to 3 points of annual growth. So the 3 key messages that I have for you today. First, and foremost, the Cleaning business has been a strong economic profit driver for the company. But having said that, we've seen some recent share challenges. So I'll share with you in FY '14 what we're going to turn this around by leveraging our enhanced 3D capability that Benno spoke to you about. The 2 examples that I'll share, one is on our Clorox Liquid Bleach business and the other is on our Clorox Disinfecting Wipes business.

So before we do that, you saw the video this morning that Clorox is celebrating our centennial year this year in 2013, an honor that most companies don't get to achieve. So what we didn't talk about was what got us here. So specifically, it's our brand building capability that we've had throughout the years coupled with our innovation. So we've taken Clorox from liquid bleach in an amber glass bottle into many categories across laundry as well as home care very successfully, and built out this megabrand. So not only did we build a megabrand, but we did so profitably. So if you look over the last 5 years of our Centennial Strategy, we've grown our economic profit by 9% compound annual growth rate. So pretty impressive, not only on building a big business but doing so profitably.

One of the key drivers of that, as you saw from George with our cost-o-vation around the bleach compaction, he mentioned gross margin basis points improvement. So 500 gross margin basis points, which is terrific from a bottom line perspective. But what we didn't spend a lot of time on is the fact that this compaction has also grown the top line pretty significantly. And for 2 key drivers, one of them, as we compacted, consumers are willing to now buy larger sizes. So with those larger sizes, obviously, we're growing our dollar sales. The second area, and this is one of our intensively compacted, was to improve the consumer experience by right dosing. So consumers, and even particularly those with HE washing machines, didn't even have enough space in their washing machines to dose correctly. So with compaction, we're allowing people to right-dose, again growing sales for our business very successful, not only from a consumer perspective but also top and bottom line for Clorox.

But having said that, the question is how high is high? I think most of you are aware that we've lost some share this past year in the liquid bleach business. You can see that with the light blue bars. So we should have been growing even better top line and gaining more profitability from that conversion as well. So I'll share with you what we're doing to get back to that cadence of solid share growth on our bleach business.

First and foremost, our key learning. This is not just a one-trick pony. It's not just what we do with retailers or what we do with consumers. It's a fully integrated 3D plan. Second, value remains key in this environment. This is not new news to you, but we've really believed the need to reinforce this. And then lastly, we'll use our innovations to differentiate Clorox versus private labels. So as you saw with Benno, he outlined how we're focusing on millennials using our Bleachable Moments campaign. Bleachable Moments is also highly successful with heavy users in Hispanic. But we are reframing and targeting a new message to our heavy users in Hispanic with the objective of choosing Clorox over private labels. It's a full 3D campaign that we're launching in conjunction with Bleachable Moments. It's got -- we'll have value copy, at point of Decide, so in-store, one of the important elements for us is to get back to our national merchandising cadence on bleach. So we are a traffic driver for retailers. We get merchandise quite often. Most retailers run 8 events a year. The challenge we have during bleach compaction is we had a regional rollout. And as we did that, some of our national retailers had a challenge merchandising us at all. And so we lost merchandising that we typically get. Private labels, not merchandised so much. They weren't hurt during the time frame. So getting back to the national merchandising cadence is a core focus of ours. And we'll also get stronger, harder-hitting on our messaging about our superiority in store. And lastly, I'll share with you 2 new innovations that we're pretty excited about to differentiate Clorox versus other options.

So I'll go ahead here and share with you the copy of our value campaign. This actually just started airing on Monday. And our intent here is to be very hard-hitting on the value that Clorox offers versus alternatives.


Dawn Willoughby

So Hispanic consumers can share this message from a trusted source at Clorox, you could whiten twice as many loads. We'll have a message at shelf. And then we have a captive audience in laundromat. So in geo-targeted areas, areas with high Hispanics, we'll be running a campaign. We actually already are running this campaign, reinforcing the value that Clorox bleach offers versus alternatives.

As we get to our innovation, this is all about how do we continue to drive differentiation versus private label. So in fiscal year '13 -- actually in June, so about 4 months ago, we launched 2 new scented Splash-Less SKUs. This is the fastest-growing segment in the bleach category. Clorox is the only one making Splash-Less bleach. And what this does is allow more control, so still liquid bleach but it allows more control for the consumer. We also upgraded our entire scented lineup, and that might seem like, okay, ho-hum. But what -- it's really tough on bleach. So we're taking our fragrance know-how, coupled with our sodium hypochlorite know-how, to improve the fragrances overall. If you open up a bottle of our Clorox liquid bleach and smell that versus anything else on the marketplace, it's a remarkable difference. And so, again, differentiating what we can offer versus what else is in the marketplace.

The next innovation that I'll share with you is coming out in fiscal year '14, and we're pretty excited about it from the aspect that we believe it will expand the bleach category. Today, as we think about history and today as we know it, bleach is used for white clothes. So back in the late '50s or early '60s in The Fonz era, where everybody wore a white shirt, that actually works quite well. Today, where people are looking for customization, more folks are having white -- mostly white but with design. And so we're launching a product called Clorox Smart Bleach. And what this does is a technology that works on white and mostly white. So it will allow that expanded usage into mostly white loads. There's 2 SKUs that we'll be launching here in the back half of the year. So we're excited about it from the aspect of we want to continue to bring differentiated -- new to the marketplace that grows the category. And again, something that we believe our technology offers us to bring to market where competitors will have a really hard time following.

So with that, I'll go ahead and move it over to our Clorox Disinfecting Wipes business and share with you an example of how we'll leverage our targeted 3D capability to build this business overall. So a pretty important business to us in terms of the overall growth. In fiscal year '13, we finished up 7%. It's actually what's higher than the category growth rate. So for last fiscal year, we grew share overall. We have had a track record of doing this. When we grow, the category grows. It's much to do about bringing wipes to new occasions. You can see we've declined here, the blue bars down over the last 2 or 3 bars there as well as the category growth has stagnated. For us, we need to get back to that, drive Clorox growth as well as category growth, and I'll share with you how we're going to do that.

The key learnings are the same as liquid bleach. It's not a one-trick pony. It's a full 3D plan. Value remains key and our innovations will differentiate Clorox versus any competitors. Our campaign is focused on existing users and Hispanic. And broadly, we are focused on using Clorox Wipes for more occasions. That's what's grown the category, as people use these wipes on very specific circumstances, we're broadening those out to more surfaces and occasions.

So I'll share review our national campaign. This has been on a while. We have several vignettes here. But again, this is about bringing wipes to more surfaces. So I'll just go ahead and roll the commercial.


Dawn Willoughby

Enforcing our message in a humorous way here that Clorox disinfecting is a quick clean and it can be used, in this example, on wood. So our national campaign also encompasses geo-targeting, a capability that Benno highlighted when he talked about our Clorox Fraganzia business. We are also looking geo-targeting as it relates to the flu. So last year, if you think back, gosh, October -- the November, December timeframe, across the U.S., we were pretty hard hit by a flu. It didn't hit everywhere at the same time. So typically I think we've listened to the CDC, or Center for Disease Control, to understand kind of where the flu is hitting and what the risks are and how bad we think this is going to be for the total U.S. But what we've done is engage our always-on capability, so listen to what's going on in terms of search and/or on Twitter, et cetera, and gathering up areas that the flu conversation spikes. This gives us a lead in terms of what markets are being impacted by the flu. And you can see in this example California, heavy hit; Texas, New York, it looks like there as well. So we could see what areas really are hit hard. And what we do is we take our retailers' sales data and inventory levels and determine do we have enough product in those areas that are getting hard hit by the flu. And so, this talks about our flexible supply chain of being able to be very targeted in getting the products in store. It's a pretty comprehensive program for us and quite successful. We plan to continue to build this out with more and more retailers. Not only helps consumers with a solution of how do we disinfect if a flu is starting in their area, but also assist in retailer auto stock and obviously grows our sales.

So I'm going to shift gears here from our national campaign, and that was 2 examples with our TV copy and what we're doing with flu, but we are also launching a value campaign, very similar to what you saw in the liquids bleach business on our Disinfecting Wipes business. And so, I'll share with you the copy. We also, at point of Decide, will increase our investment in merchandising. And this has much to do with lapping the flu from last year. This is not big discount merchandising, this is more frequency. Getting the product out in front of the consumer more often. We'll get hard-hitting on our disinfecting message as well as continue to differentiate with innovation. So I'll share with you the value copy that started airing this week.


Dawn C. Willoughby

Wipes business, where we're talking to consumers about why Clorox. We are not stopping with just TV. We use our influencer campaign, so TODAY Show, Good Morning America, Facebook, Twitter, to talk about Clorox disinfects twice as much as the other brand, digital and then also at point of purchase, outlining why Clorox is the better value versus the alternative.

So as we look to differentiate with innovation, we launched in the first half of this fiscal year, so July timeframe, our on-the-go wipes. And so if you think about occasions for disinfecting, people use wipes all across their homes. But where we really need disinfecting is more outside of the home, that's where the growth really exists. So if you brought your kid to a soccer game and you have lunch at the picnic table there, probably not so clean, but there's no convenient solutions to disinfect. Or I know many of you flew out here, and if anybody put their tray table down, you're probably not too happy about what that looks like, so an opportunity again to disinfect on the go. People don't carry canisters around and put them in their briefcases, so these flat packs provide that solution to disinfect on the go. Again, the intent here is to bring wipes to more surfaces or soils or occasions [ph].

And as we look to the back half, we'll be broadening out beyond just Disinfecting Wipes. But we know wipes, and we're getting into the glass wipes business. This will start shipping in Q3. We're also getting into the bath wipes business, so wipes specifically designed for soap scum. As we think about the glass wipe here, consumers have 2 needs as it relates to glass cleaning: one is streak-free; and the other is lint-free, streaking and linting. This wipe hits on that consumer needs. It's better than glass cleaner with a paper towel. So a pretty great execution. We know wipes, we feel like we can bring wipes to even more occasions. And again, this will be launching here shortly.

So to end, I'll leave you with the Cleaning division has been a profitable growth driver for the company. And as we move forward, we'll leverage our enhanced 3D capability to not only drive growth but also share.

So with that, I'll go ahead and turn it over to Jon Balousek, my counterpart.

Jon M. Balousek

Thanks, Dawn. I'm Jon Balousek, Head of our Lifestyle and Household segments. And I will spend about the next 10 minutes talking a little bit about the portfolio but then getting more in-depth into the Glad business, and specifically the Glad success story because I think it highlights not only the progress we've made on the business so far but illustrates some of the things we'll be using as we move forward into the 2020 time period.

So 4 key messages. First, the Lifestyle and Household businesses have performed well over this centennial period, and we're well positioned as we move forward. Second, Glad has been a very strong contributor to our economic profit growth as a company, despite the significant commodities inflations -- inflation we've seen. This has been driven by 3 things: our focus on superior products and differentiated products enabled by the Procter & Gamble joint venture; driving a more robust 3D demand-creation program; and maintaining our very disciplined approach from a pricing and cost management perspective. As we all know, we're exposing Glad to the resin market to a good degree. And then finally, looking forward, the future does continue to look bright on the Glad business, and I'll share with you a little bit of how we look going forward.

So very quickly from a portfolio perspective, we're well positioned across all our major businesses in these 2 segments, and a couple of highlights I'd point out: first, Glad is -- continues to be the #1 brand in trash player in the market, and we continue to grow market share there; second, Kingsford continues to maintain a very dominant position, we're up about a 70% market share in the charcoal category, very good position for us; and third, Hidden Valley, which took over the #1 spot in salad dressing a couple years ago, also continues to grow its market share. So really, across all of the businesses, we're well positioned within the portfolio.

So basically, the balance of my time focus on Glad and the turnaround that we've seen in the last 7 or 8 years. So we go back in time to when we purchased the business in 1999, there was a long-term consistent share decline. And this was driven by really 2 things: there was very little differentiation in this category, so the products have become largely commoditized; and second, the demand-creation program was just simply not very robust under the previous ownership. So we are dealing with a tough situation. And for the first couple of years, as we were learning the business, that decline continued. But really, in 2001 and since, we've seen dramatic share growth on this business. So we were down to the low, about 25.5% or 26% market share in the trash market, and we're now up in the 33%, 34% range, so plus 7 or 8 points in this market. And we're plus about a 0.7 share points in the last 52 weeks, so very dramatic share growth.

Beyond that, we've been a strong economic profit contributor to the company, and there were 3 key parts to that: first, we've been able to differentiate the products, and I'll talk a little bit about that, and price up for superior products; second, as I mentioned, we've put in place a very disciplined approach to pricing and cost management; and third, we exited a pretty significantly unprofitable business.

So just quickly explain this chart, on the left-hand side, you have our fiscal year '08 economic profit. The width of the bars are the size of the business. The height of the bars are the economic profit. Okay? So in fiscal year '08, our economic profit margin on the Glad business was 3%, significantly below the company average, which was at 7%. Fast forward now to fiscal year '13, which we just ended, and the economic profit margin for the Glad business is about 7%, so dramatic growth, and that's darn near close to the company average. So we feel very good about the progress, from an economic profit standpoint, that we've made. And a couple key things I'd point, as I did just a second ago: the trash business, we've been able to differentiate those products and priced up, which has grown our economic profit margin very well on that business; our wraps economic profit has also increased; and we exited this custom brands business, which is a significant drain on our economic profit, that was our private label business, so we exited that business. So very good growth; in fact, more than doubled our EP margin over the timeframe.

So how are we able to do this? And it really goes back to the strategy. So back in 2004, we put a new strategy in place. The whole focus was we needed to differentiate products, create superior products, and price up for the superior products that we were develop -- that we were going to develop. And there were 3 prongs to this: one, we need to maintain -- or actually, increase the brand equity health through an increased demand-building and more robust demand-building effort; two, we had to deliver on product superiority and innovation; and three, focus on pricing and cost management as it relates the resin market.

Now as George mentioned, we have our Procter & Gamble joint venture, which was a key enabler to this strategy, so Procter & Gamble bringing R&D, end products, supply, technology to the table. We bring our brand, of course, and our sales and marketing capability. And it's been a nice marriage that really enable this entire strategy.

We'll go into each of these for a couple of slides here, and I'm going to focus, first, on the demand-creation program, which really increased the brand equity and increased the strength of the brand. And you've seen this model before: Desire, Decide and Delight, so I'll just go one by one through here. And we'll, first, talk about Desire. So what I'd like to show you first is our -- the advertising we're currently running. And what this does is it capitalizes on the insight. The consumers not only do care about superior products in trash. If you have a trash bag that leaks or punctures, and it spills all over the floor -- I've got a 13-year-old, and I'm always -- I'm making sure I use Glad, so he doesn't tear the bag as he's walking out, right? So that's important. But it's also important that consumers are worried about what they're throwing into the landfill, and that includes the resin that is in the trash bag itself. So George talked earlier about cost-evasion, and we've been able to develop products that not only are superior products but take resin out, and it's important to consumers. So let's take a look.


We also have a pretty robust digital effort. And just another example that digital is here to stay, in the '90s, we started with gambling and books, and now we've moved down to consumers actually interacting with the trash category digitally. So in this case, we've partnered with Sam's Club, as we recently launched a new item in the Sam's Club store. We took over their home page, provided them with digital content, our own video content, long-form advertising that they put on their homepage to drive promotion of our product. We also, from a mobile perspective, are able to serve geo-targeted banners to folks that are in and around the vicinity of a Sam's Club store are they're surfing the Internet. And then of course, even Sam's Club has a Facebook page. They have about 2 million likers last time I looked, and we were able to integrate with their Facebook page and drive promotion of our products through consumers who interact with their Facebook. So continued focus digitally as well.

From a Decide standpoint or in-store, I want to highlight one recent example, and it relates to packaging. And if you think about it, this is really a win for consumers, customers and Clorox. So a couple years ago, some customers came to us and they said, "hey, we're looking for increased efficiency of our shelf space in a number of categories, the trash category is one of them." And instead of our idea -- their idea, instead of shelving the package horizontally, they want to flip it vertically, which will free up shelf space, provide the opportunity to get more SKUs on shelf that they could use to drive their own metrics. So we had a choice to make, and what we decided to do is we took our horizontal package, and we simply created another side that was able to be shelved vertically and read vertically. So now customers have the choice to either shelve it horizontally or vertically, which is a win for them. Consumers, of course, can read it either way. But importantly, for us, instead of creating a new SKU that we had to manage in our own supply chain, that we had to extend to the right customer, and so on and so forth, we kept the same SKU, one SKU that's just can be shelved either way. So I think that's an example of flexible supply chain and quick-moving supply chain on our side that was a win for us, customers and for our consumers.

So I'm going to focus on the second part of the strategy we put in place, and this, to me, is the real heart of the strategy, and this was our focus on superior products and innovation. As I mentioned, we really felt like we needed to differentiate our products so that we could tier up pricing and develop and increase our margins as we did that. So we had a goal of creating not only a better bag, but we wanted to use the same or less resin. And we've been on a good, consistent journey, and we believe there's more room to go in doing this.

So in 2005, we launched our ForceFlex, which is our first premium item, our ForceFlex line, which turned out to be a big winner for us. In 2006, we actually tiered up again, from a pricing perspective, as we launched ForceFlex with OdorShield, so this was our scented ForceFlex line. Consumers who are looking for a scented trash bag, this was for them. In 2009, we continued our partnership with Procter & Gamble, have licensed their Febreze trademark to support the credibility of our odor and scent credentials. And then in 2012, George mentioned, we went back to our base product and took about 7% of the resin out while improving the product performance. So very good journey, and we believe there's more to go here. The result, our premium trash segment now represent about 70% of our total trash portfolio sales, so really, from 0 to 70% in the last 6 or 7 or 8 years. So really good performance here, and we believe that continues to be a competitive advantage for us going forward.

And then lastly, as I mentioned and we all know, we're exposed to the resin market in Glad, perhaps, more so than almost any other business. So we needed -- we need to continue to have a disciplined approach in this area, and there are 3 legs to this stool. First is, over the last few years, we've largely recapitalized our manufacturing platform, which enables us to run the machines more quickly and lower our cost over time. It also enables us access to technologies that we weren't -- we didn't have access to before, and that improves our performance, allows us to improve our performance, but take resin out as well. Second, pricing is important, and we've been very successful in taking price increases that are supported by increases in the resin market. In fact, we've taken 6 price increases in about the past 10 years. And we believe we have very good capability to continue to do this to deal with resin increases. We have very good analytic capability and very good sales execution capability, and I think we've proven that over the last 10 years. And then finally, as George mentioned, we have a very successful cost savings track record across the entire enterprise. Glad is no different. We continue to focus on non-value-added costs that we can take out of our supply chain, out of our buy-make-and-ship piece of product supply, and that generates significant cost savings on this business. So very disciplined cost and pricing management, and that will continue as well.

So big share of growth, very significant economic profit growth on this business, so we feel like we've very successfully been able to trade consumers up, and we'll continue this strategy. Strong mid-digit -- mid-single-digit sales growth in the last couple years; I've mentioned the market share growth, plus 7 or 8 points; double-digit profit growth; premium segment, about 70% of our portfolio; and we're up about 0.7 share point in the last year, so we feel very good about that.

Looking ahead, we think there's more runway here. We can continue to strengthen our odor platform. So really, we play largely in the middle kind of 1/3 of the scent spectrum, but the light -- but there are many consumers who want a more lightly scented product or want a more heavily scented product, similar to the candle categories or the air care categories, and we have room to go there. We'll continue to manage our cost inflation. And I think George talked earlier, we continue to believe that we can take resin -- continue to take resin out and create superior products at the same time.

So we feel very good about that. As I mentioned, just as a reminder of the key messages, we're well positioned in the Lifestyle and Household businesses to continue to grow. Glad has been a very strong contributor, as I mentioned. We'll continue to focus on superior products and drive the equity through a superior -- through an enhanced 3D program. And the future looks bright, really, as we continue to go forward. So that's the Glad story. We're quite proud of it. And I'm going to turn it over to Grant LaMontagne to talk about our Professional Products business.

Grant J. LaMontagne

Good morning. I am Grant LaMontagne, and I -- I'm hear to talk with you about our Professional Products business. It is one of our most-exciting and fastest-growing adjacencies here at Clorox. The Professional Products business represents about 5% of our portfolio, and we believe during this performance period that we're going to grow this business between 10% and 15% on a compounded basis. And we believe it'll contribute about a point of growth to the overall Clorox growth during the period.

So there's 4 key messages I'd like you to walk away with today. The first has to do with our mission. Clorox's mission is to make everyday life a little bit better every day. In our business, we take it up a level, and that level has to do with saving lives by preventing healthcare-acquired infections. The second message I want you to take away is that there are some significant tailwinds in this space to support the growth of our business. I actually think they're gale force winds, and we'll talk a little bit more about that. Third, we have a differentiated right to win in this space. And finally, as you'll see this afternoon in the investments we've made in technology in our center, we have unsurpassed technology and capability in these areas.

So as we look at our overall Professional Products business, in FY '17, we expect this business to be about $500 million, of which the Healthcare business is going to contribute about $300 million of that. But as I look in the rearview mirror and I look back to 2007, we're a very small portion of the overall portfolio on Healthcare, we're about 2% of the business. Today, we're about 45% of the overall business, and that's with a compounded annual growth rate of about 7% on the balance of the business. We expect in 2017 that the Healthcare business will be about 60% of our Healthcare portfolio -- excuse me, of our overall Professional Products portfolio.

So let's talk about these strong tailwinds that are going to support our growth in the business. The first has to do with HAIs themselves. HAIs are secret killer in this country. Each one of us in this room has only 1 degree of separation from knowing somebody who has had an HAI probably. So 1 in 20 people who enters a medical facility walk out with an infection. That's 1.7 million infections on an annual basis. And 99,000 people in America die every year as a result of a hospital-acquired infection. That's the same as a 747 crashing every day of the year. But yet this is a silent killer in our country. And it accounts for $46 billion in costs in our healthcare system that can be mitigated or eliminated through the use of different protocols and products.

The second tailwind we have is this aging population. The population in 2020 for 65 and above will grow by 50%. In 2050, that population will double. Life expectancy is growing out to 76 years of age. These people require more care, they require more procedures. These categories are going to grow. Whether it be surface disinfecting or skin antisepsis, they're going to grow at a rapid rate. And that doesn't include the fact that there are 35 million Americans who don't use the healthcare system that will be brought into the healthcare system through the Affordable Care Act, so really, really strong tailwinds in the aging population area.

And then finally, we look at the tailwinds as a result of the government. Well, with 46 -- $45 billion in costs that can be mitigated, the government put's the foot down. No longer will Medicare reimburse facilities for the costs associated with the healthcare-acquired infection. Facility has to bear that cost themselves. A C. diff infection costs as much as $30,000 to solve. So it's going to hit these facilities on the bottom line. They're very, very focused on trying to get people like us into the facilities to help them solve these problems. You also have transparency coming in these facilities, where each of you, if you're going to a facility, could actually find out what the infection rates are in these facilities. We are having facilities call us and saying to us, "please, come help us solve these problems because there is transparency, and we have to stay in business because the consumer will have a choice." So there is incredible regulatory pressure coming to solve the problem, $46 billion in costs that can be mitigated. Those are the strong tailwinds.

Why does Clorox have a differentiated right to win in this space? Three reasons: our technologies, our equities and our capabilities. The whole is greater than the sum of the parts here. It's when you put them together that you end up with the right to win. Now any one of these provides that right to win. It's the fact that you integrate these together and that you can win in this space, first, with technologies. We're very fortunate that we have Clorox sodium hypochlorite. It is the only product known to man that will kill every single virus. We're working aggressive on non-bleach technology that will allow you to kill products on surfaces that you may not be able to use bleach on, like soft surfaces. And then we're working on sterility. Sterility will become the norm in the use of skin antisepsis in the future.

You take our equities, Clorox, 100-year-old heritage, known for disinfecting. The thing that I think is most important in the area of equities is trust. People trust us. I have a dream that someday, you'll walk into a facility, and it will say on a plaque out inside that facility, "This facility is -- you're protected through the use of Clorox products in this facility."

And then Desire, Decide and Delight. This is a very rational space when people make choices. There's not a lot of emotion that goes into an acute care nurse determining what's going to be used to clean that space. It comes down to science, it comes down to claims. Those science and claims, the EPA and the FDA are very aggressive about what's said on those products. Their product has to work, okay? It's not like I'm going to have this emotional attachment to this product because I like it. It doesn't work that way. And so we start in PPD, in the Professional Products area, with our science and our claims. Then we take our world-class marketing capability to be able to communicate that to the end users, and we reach out in a Decide basis through the organization to execute.

So Clorox has differentiated right to win. What's the reason to believe that we can win in this space? It is a combination of our technologies, equities and our capabilities.

So what is the universe like? The truth is the universe is about $9.6 billion in terms of -- if we were to compete in all of these spaces, today, we're really only focused in 2 areas: we're focused on categories; we're focused on channels. The categories are surface cleaning and skin antisepsis, pre-surgical treatments. Over in the channels, we're focused on acute care, we're focused on dental, we're focused on long-term care. Those 2 areas account for about $1.9 billion of the universe today.

So what are our priorities? Our priorities in healthcare are fourfold. First of all, this is the base business. It's our fastest-growing business. It is also our most profitable business. And the 4 things we're focused on is lead by owning the C. diff infection, we'll talk a little bit more about this; penetrate non-bleach surfaces in places like the operating room with non-bleach products like hydrogen peroxide; third is soft surfaces; and then finally, win with sterility.

Let's go a little bit deeper here in terms of our base business priorities. C. diff, you all hear about it, it's the most dangerous pathogen, it's the most difficult pathogen to kill. Lots of times, you associate this pathogen with the operating room, with the emergency room, with the intensive care unit. The truth is that pathogen lives in the entire facility. And the way you can help control infection rates in that facility is through the use of Clorox hypochlorite products throughout the entire facility, from the waiting room to the patient room, the entire facility. So there is incredible opportunity for us to expand the usage of this product in the facility.

We then go to non-bleach technology. The operating room, we turn people in the operating -- speed is critical. This product, hydrogen peroxide kills in 30 to 60 seconds, and it can be used on most surfaces that bleach can't be used on, a big opportunity in the operating room.

But a massive opportunity for us is the breakthrough in soft surfaces. One of the most dangerous places in the hospital is the patient screen in the room. The nurse comes in and she pulls that curtain around. What did she bring into the room on her hand that she left on -- pathogen-wise, on that screen? We've just got EPA approval for our hydrogen peroxide to kill pathogens on soft surfaces. They do not wash those screens daily. So we believe, as hospitals get more focused on protocols and product usage, that that's a huge opportunity for growth for us.

And then finally, sterility. We're not just talking about creating sterility outside the package, but the product inside needs to be sterile. That's not always the case. At Clorox, with our skin antisepsis products, we're going one step further to guarantee the sterility of the products and that, that product has no chance to be contaminated. So we believe on a base business that that's one of the key opportunities on a short-term basis.

So where do we go? I want you to think that what we're trying to do is to build our portfolio of products, and then what we want to do is look for white space. So where is the white space for us to expand our penetration in Healthcare? It's in places like dental offices, long-term care units. And then we want to enter product adjacencies that allow us to create scale to the entire -- into the entire line.

And so I just want to take you through one, the dental channel. Dental channel's -- there's a lot of money in this channel. There's 100,000 dental offices in America. They are 4x more profitable than 200,000 physician offices. Why is this a great place for us to win? It's a great place to win because there's a lot of saliva, there's a lot of blood, there's a lot of money, okay? And dentists are looking for ways that they can ensure that that's a safe space.

And so we made the HealthLink acquisition a few years ago. What that did is it provides us the nexus into the distributors and into the dental channel. And then what we want to do is take our surface disinfecting business and put it with the HealthLink business and expand the bag into that channel. So we're very, very optimistic, and we're very excited about an opportunity like the dental channel.

So what's my path? What's Clorox's path to $300 million? Our path is, is that we're going to grow our base, our most profitable business, both the surface and disinfection business, and then organically expand through product and category adjacencies. And what that leaves me with is about $60 million, about the same size as the Aplicare and the HealthLink acquisitions, that need to come from inorganic activity between now and 2017. And we feel that there's a lot of opportunity out there in the space for those bolt-on acquisitions that make sense from a development standpoint.

So my key messages. We got a problem in America. We were at CDC -- we were at the APEC [ph] conference in Southern Florida. We sat down with the CDC. They said, we are looking for somebody to take up the flag. We are looking for somebody to lead the industry, from a thought development and from an execution and a technology standpoint, on C. diff. We believe that the actual business, that the actual end users are looking for Clorox to take up that flag.

Strong tailwinds, I think they're gale force winds when you look at what's going on and the pressure that's coming to bear on solving these issues. A differentiated right to win, taking Clorox's marketing capability along with our technology capability and then our capability to build out. What I'm trying to do is put more in the bag in terms of bigger portfolio, to more white space, and adding people aggressively to support that business. And so finally, you're going to see this afternoon -- hopefully, you get all the chance to go to the operating -- excuse me, the hospital room in the tech center, get an opportunity to see some of the uses of these products and why we feel so good about the growth opportunities here.

Thank you for your time this morning, and I'm turning things over to Benno Dorer.

Benno Dorer

So overdue, I'm pumped now. Nice job, Grant. Last but not least, I want to share with you -- I'll past forward into our International business, a business I'm very excited about and the business that's done really well for us over the centennial period, growing at a high single-digit rate. It's a business that we expect to keep growing at -- okay, there you go -- that we expect to keep growing at rates accretive to the company, even though a challenging environment that I think we're all aware of in Argentina and Venezuela, near term, is going to depress that.

The key focus area here is rebuilding margins. So sometimes, people ask me, "Wouldn't you like to accelerate sales in International?" What I'm telling them is "My first priority is to make that growth much more profitable." And a key enabler is to continue to build a more global, a more efficient operating model. I'm going to talk about that in a few minutes. Importantly, also, we will do that by focusing on our current markets, both geographies, as well as categories where we have very strong brands, would apply a very disciplined portfolio management across International, with cluster-specific tactics. Because if you think about our International business, there are really 3 clusters. The first is a stable cluster. It accounts for about 35% of our International business, countries like Canada, Australia, New Zealand. The second cluster is a fast growth cluster. That is our biggest cluster as well, countries like Columbia, Peru, Chile. This cluster, in fact, over the last few years has been growing very high single digits and well ahead of the growth rate that we want for International going forward. And then, right now, we have a cluster that historically done very well, but right now is challenging 25% of the International portfolio, Venezuela and Argentina. If you think about our International business, it's done fairly well, like I said, but more recently, it's been more challenging. Sales has still been up based on strong category growth, based on country expansion, in particular, behind Burt's Bees, and also behind our 3D capabilities that are working well in International too. But FX has been a headwind that have depressed sales, and of course, also profits, and the profit development in International, frankly, hasn't been good enough and we can do much better. Beyond FX, of course, Venezuela and Argentina has depressed profits behind dynamics that are not Clorox-specific, but apply across the entire industry and then we've made some investments, investment in the future in SAP and in other infrastructure projects that set up this business for more growth and for profitability, but more recently have depressed profits.

What's our roadmap? Three elements. First, we want to grow sales in International at the 5 to 7-point cliff. Second, we want to rebuild margins. And then third, we want to apply a very disciplined, rigid portfolio management.

Let's look at these 3 in turn. Growing sales of 5% to 7%, I'm convinced we can do this with our core categories: Cleaning, Laundry, Bags and Wraps, Burt's Bees; and our core markets: Latin America, Australia/New Zealand, some Middle Eastern countries. We do not need BRIC. As you know, we look at BRIC very extensively, and we've concluded that we don't have the scale to get to sale of return anytime in the future, certainly, not in my future with the company and we're very focused on economic profit. We're very focused on shareholder return, and we've concluded that we can do much better with our existing geographies and markets.

A key enabler to growing sales of 5% to 7% is fewer bigger innovation that travels across countries faster based on scalable and customizable platforms. And here's an example. This is Clorox Power Gel, it's a product that we've launched about 1 year ago that delivers trusted bleach strength, but on top, added cleaning ingredients and it's also thicker so it's much easier to handle, and addresses the key dissatisfied that consumers have. And we've launched this products based on a Think Global/Act Global templates, with a single marketing program with a global formula that we developed in record time in only 4 months, where local teams can focus on local excellence, adaptation and trade execution, and where the benefits that this product offer allow us to price it at 2 to 3x of our basic bleach, terrific results. Within 12 months, we've been able to launch it in 14 countries, and right now, this is delivering about 1 to 2 points of growth to International. Long-term, I think it will deliver more.

Now a key enabler here are more globally agile processes and systems. I think few of you will look at Clorox as world-class order, first company to talk about when it comes to global excellence and that's true, but for me, that's an opportunity. It's not a problem. We've been growing well, even though we haven't been as advanced as some of our peers with our global processes and systems, but we're catching up very quickly, and we got the people to do it, whether that's globalizing R&D, marketing, sales or product supply or whether that's globalizing the backroom enabling that. It leads to faster innovation. It leads to reduced barriers. It leads to improved collaboration across the countries and it leads to a lot of efficiencies. This is a big opportunity for us in Clorox, and we're dedicating ourselves to it and we're making terrific progress.

The second focus area, as I said, is rebuilding margins. George talked here to you about cost-o-vation. Cost-o-vation, meaning better products that have a cost component for us and can be priced higher to the consumer, are a big advantage in International, and we're pursuing that very aggressively. Lower indirect spend is the second pillar. Indirect spend is all spend that is not directly associated with our products. We have tremendous opportunity to take that down. Pricing, we've been very aggressive, taking pricing to offset inflation, and we will continue to do that. And then finally, we have not done SAP and other investments for no reason. Now is the time when we'll be able to maximize the value capture from those. SAP, in particular, already today has led to lower working capital, but it's also led to profit improvements because now we're able to shift mix to the most profitable items based on much better visibility on what these most profitable items are. And we manage our cost portfolio with a 3-year time frame. So today, I can see into the future through fiscal year '16, and I know that we have a cost savings portfolio that's equivalent to about 150 basis points for the company or $75 million. Very aggressive cost savings portfolio that we feel very optimistic about and that will help offset the significant headwinds that we face.

Thirdly, disciplined cost portfolio management. Let's talk about the stable cluster. This is a cluster where we have very strong brands. Like I said, countries like Canada and Australia, it's also a cluster though that's somewhat challenging because the retail environment is very concentrated and because category growth generally tends to be slow. Said that, our margins are very strong and attractive in these countries and are frankly growing. So aspiration here is to deliver modest sales growth, but make that sales growth much more profitable and expand our margin. And the way we're going to do that is, first, by focusing on the right to win countries and channels and categories; second, by going after margin accretive product and channel innovation; and third, by delivering a more variable cost structure that's less dependent on volume growth to deliver profit growth.

That's a stable cluster. Here comes our biggest cluster, that's the high-growth cluster. Again, a very strong portfolio in many of these markets like Chile and Colombia. In this environment, we're seeing very robust category growth. We're seeing very stable governments that are focused on driving the economy, and we're seeing very significant sales and profit growth opportunities. We execute well in these markets, but we can execute much better based on the U.S. standards. So our goal here is to aggressively drive sales growth, and the way we're going to do that is by disproportionately investing in these markets. Resources will go into these markets to maximize growth. We will focus on the big existing categories of which there are many and apply our 3D capabilities.

Lastly, the challenging cluster, Venezuela, Argentina. The irony here is that we have some of our strongest brands worldwide in these countries, but we all know these are challenged because we have high inflation. We have price controls, and always have led to declining top and bottom lines. Our position here is we will preserve these businesses and ourselves for a better future. These countries' economic development are cyclical. So it's not an if, but it's a when these will come back. We will stay in to take advantage of the upswing, certainly, now the sellers market at this point, and we will position ourselves to capitalize on the upside that will certainly come, and we will do that by, one, optimizing cash flow and be very disciplined about it. Second, by minimizing demands building spend because in several cases, even though parts of our portfolio actually are quite profitable in these markets, but in several cases, we have categories that are unprofitable and I have no interest in supporting unprofitable categories and demand spend. Third, we'll keep innovating to enable price increases. If we do that, we can get around price controls so innovation is key to shift mix towards more profitable items. And then finally, by delivering structural cost savings and essentially eliminate everything that's not necessary to survive today and to position ourselves to a better tomorrow.

So with that, personally, I'm very bullish that International will continue to be a growth business for the company, growing at that 5 to 7 cliff. And even though, we will have to weather the storm in Venezuela and Argentina, I think we can still do that. Rebuilding margin is a key focus, and we have the means and the focus to do it, and globalizing our operating model, as well as a more disciplined portfolio management for the key drivers to enable that.

That's it on the International business and I'm going to now turn it over to Steve Robb, who's going to take it home with the financial overview. Steve?

Stephen M. Robb

Thanks, Benno. So this morning, we talked about our -- some of our 2020 strategic choices, and it hopefully gave you a sneak preview into some of the exciting innovation that we've got coming up. What I'm going to do now is 2 things: first is just connect you quickly to our financial aspirations over the long-term, and then I'll take just a couple of minutes and talk little bit about the fiscal '14 outlook that we shared most recently in our earnings call in August.

So turning to our long-term aspirations. It's pretty basic. And this should feel fairly familiar to you if you've been following the company for some time. We're focused on delivering total shareholder return in the top third of our peer set, and we think we can do this by doing a few things, number one, growing sales at 3% 5% consistently over time. The second is keeping a sharp focus on rebuilding our EBIT margins back to where we think they need to be, and our goal is to add about 25 to 50 basis points of EBIT margin annually. Now as we do those 2 things, we want to keep a sharp eye on the assets so that we drive good, healthy economic profit growth over time. And that should, in turn, also enable us to throw off pretty healthy cash flows, which has been one of the hallmarks of the company and that will enable us to keep a very healthy dividend. So this is essentially the financial algorithm that we have for the company. Now as we do this, we also want to make sure that we're keeping our brand equities healthy, and that we're investing, which is why Benno talked about investing in incremental point over time in additional demand-building investment, and that should in turn help us rebuild our market shares.

So let me talk about each of these in turn quickly. First, starting with the 3% to 5% sales algorithm. It really starts with our categories. If you look back over the long period of time, in our U.S. Retail business, our categories typically grow about 1% to 2% every year. Now as you heard from Grant this morning, we would certainly expect in the healthcare side faster growth from the 1% to 2%, and in International, we would expect it to be faster, but just in balance, 1% to 2% feels about right. You combine them with 3 points of incremental sales growth from innovation, which we've got a long track record of delivering, and then you look at price, mix and foreign currency and a good year. You might get a point of tailwind in a tougher period. You might have 1 point or 2 of headwinds, but we think, on balance, this gets us to the 3% to 5%, and it still feels like the right objective for us, given our portfolio and our strategies.

We also think it's going to be important to continue to focus on driving good, solid EBIT margin expansion. I was very pleased in fiscal '13. Our EBIT margins came in at 17.3%. That was up 60 basis points versus what we saw in fiscal '12. It was certainly a big step forward to rebuilding our EBIT margins. I think, going forward, we'd like to continue to see EBIT margin expand to this range of 25 to 50 basis points, and to do that, we're going to focus on cost savings, about 150 basis points of cost savings, margin improvement that we target every year. We're going to focus on pricing to offset inflation and commodity cost increases, particularly in International markets, where you're seeing higher rates of inflation. And then we're going to have a sharp eye on our SG&A costs, which we think again, need to get back to the historical levels, which will be something below 14% of sales.

Now if we do that, we should continue to deliver very healthy cash flows for the company. Last year, fiscal '13, we threw off $777 million of operating cash from continuing operations, and that translated into free cash flow as a percentage of sales of about 10.4%. So certainly, we're throwing off a lot of cash as a company, and that's good because that gives us financial flexibility to do different things. So while being disciplined in the management of our debt, we've also over the last 10 years, been able to return a lot of money back to our shareholders, and I think we've had a long track record of being very shareholder-friendly. What this chart shows you is the number of shares we've repurchased over the last decade, and we've repurchased almost 40% of the outstanding shares. And I think, going forward, as we continue to generate healthy cash flows, you'll see us periodically reenter the share repurchase market and pick up additional shares.

I'm also pleased that during the same period, we've maintained a very healthy dividend yield. In fact, most recently, in May, we increased our dividend by 11%. As we started to build up excess cash, we thought that was a nice way to get that back to our shareholders, and our dividend yield today is actually, this morning, running at about 3.5%. So certainly, a healthy dividend yield, and we would expect ongoing the dividend to grow probably in line with operating profit, but certainly to be maintained at a healthy level.

Uses of cash, we're going to be disciplined. We're going to focus on driving growth organically. It's always better to earn growth than buy growth, and we are going to look at bolt-on acquisitions, in particular, in the areas of stopping the spread of infection, in some of the areas that you heard from Grant this morning. We're going to support the dividend, and again, that should grow in line of operating profit growth. And we're going to maintain a debt-to-EBITDA ratio that we think makes sense for this company to maintain a credit rating in this BBB+ rating. And at the end of fiscal '13, our debt-to-EBITDA ratio was about 2.1 to 1, and that's good news. We've got net paid down, and that means we've got some dry powder for bolt-on acquisitions as they come up. And then finally, again, if we have excess cash, we're focused on economic profit. If we don't have a need for it, we'll look to get that back to shareholders.

So let's talk a little bit about our fiscal '14 outlook. Now in our last earnings call, we talked about an outlook for sales growth of 2% to 4%, a couple of major assumptions. Categories would be flat to up modestly and that's certainly what we've been saying most recently, about 3 points of incremental sales growth from our innovation. And I think, hopefully, today you're getting a sense for some of the exciting innovation we have coming out in the second half of the fiscal year. So we certainly feel very good about that, and we also and built into the outlook about the point to foreign currency headwinds, and I'll talk more about that in just a minute.

For EBIT margin, we target 25 to 50 basis points of margin expansion, and it's really a combination of cost savings, some pricing, although most of that pricing is in the International market stock's inflation in the second half of the fiscal year, and then again, lowering our SG&A cost from about 14.4% in fiscal '13 to something closer to 14% this year. And if we do that, that should get you EPS in this range of 4.55 to 4.70, although we do have a somewhat higher effective tax rate because of onetime tax settlements in fiscal '13 we don't expect to reoccur. So that's the outlook. What we also communicated, however, is that we've got a couple of big challenges, and I think these are affecting everybody in the industry right now. The first is foreign currency. We've got about 1 point of foreign currency headwinds built into this plan. Since the time we came out with the outlook, as we discussed on the last earnings call, what we've seen is the U.S. dollar has really run-up pretty sharply, and it's actually stayed elevated. Part of that is driven by higher interest rates. Part of that is driven by geopolitical concerns, but for a variety reasons, that stayed elevated, and so that's something we're certainly evaluating right now. The second thing is energy cost. We think oil should be trading in this range of $90 to $100, and that's certainly what we have in the outlook. Concerns about Syria, supply disruptions in Libya, there's a lot of drivers, all of that said, oil, as you heard, this morning has certainly been trading well above the $90 to $100 range, and that's something else we're looking, and then finally, we talked about categories and some of the things we're doing.

So in our upcoming earnings call, in addition to sharing with you the Q1 results, we'll also give you an update on some of these things, the actions that we're taking and what the applications are for our fiscal '14 outlook, but these are certainly some of the things that are affecting us and others that we're watching pretty carefully.

In terms of near-term priorities, we've got a few. Number one, we are going to vigorously defend our market shares, and that means it's a combination of innovation, and we're going to be willing to invest in targeted categories, where we need to invest, to make sure that our market shares return to growth, which is where they need to be. We feel very good about our new product program and the 3 points we've broken there, and so we're going to execute that with excellence. We are going to be disciplined in terms of focusing on pricing, particularly in International markets and our cost savings programs, which we've got a long history of delivering, and as Ben will talk about, rebuilding International margins is our #1 priority in that business. That'll be clear that's going to take time, and I think we all feel good about the plans we have in place, but it certainly is not going to happen overnight, but we do feel like we've got the plans in place over the long term to rebuild those margins back where they need to be. And then finally, we're going to continue to make sure that we keep our SG&A costs under control, in fact, in line with what we've seen historically.

So in summary, what I would say is that if you look at this company over the long term, we've got a very successful track record of delivering good results in good times and in bad times, and I think that's important. Part of that starts with what we think is an advantage to portfolio, this idea of leading brands, where we have a #1 and #2 shares in mid-sized categories, has really worked well for us. We certainly have opportunities to rebuild the margins of the company both in International, as well as in our U.S. business lowering our SG&A cost. And finally, while being financially disciplined, we are committed to delivering good shareholder returns. So we think there's a lot to feel very good about, and we're certainly optimistic about the future.

And with that, I'm going to turn it over to Wayne Delker, our Chief Innovation Officer, and he's going to talk to you a little bit about innovation, and he's also going to talk to you about the tours that you're going to see in just a few minutes. So with that, I'll turn it over to Wayne.

Wayne L. Delker

Thank you, Steve. Good morning, everyone, and welcome to our new innovation center. I got to tell you, our innovation teams are absolutely thrilled that you're here. What I'd like to do cause -- we've got an exciting afternoon planned for you, and I'd like to tell you a little bit about that, where you really have an opportunity to go out and actually talk directly with the innovators in our labs and see some of the things you've read about come to life. So I think you're really going to enjoy it. What I'd like to do now is kind of frame how we think about innovation of Clorox kind of as a backdrop for your tour. Although, to tell you the truth, my colleagues have been so good at really showing the role innovation plays in their business strategies that I think they've actually already told the story for me.

There's really 3 messages I'd like for us to take away. First, is you've seen innovation is the lifeblood of Clorox. It is woven through the fabric of all those business strategies you saw, and it brings value in a lot of different ways because it's so important to us, balance is absolutely -- consistency is absolutely critical, and our pathway to consistency is balance, and by that, I mean balance across different types of innovation and also balance across the various different businesses where innovation has to serve a role. And then our third area is we've made deep investments in our people, our processes and our capabilities, which has allowed us to continue to grow our output from innovation. And before I go forward, I'd really like to actually step back into history a little bit. For those of you that have followed us over the years, you know we have a very strong track record of hitting or beating our goal of getting 2 points of growth from innovation every year. But as you look at the time period between FY '08 and FY '10, you can see our innovation output was actually dropping. In fact, in FY '10, we actually came very close to actually missing our goal for the first time since we've been collecting this data. Also, during this period of time, our categories were declining. Now I find myself caught in a little bit of a chicken and the egg paradox here. You could say our innovation output was dropping because our categories were declining. Consumers are spending less and weren't as interested in new products or you can flip that around and say, "No, it was our new products that were diminishing, which was actually a lag on our categories." Either way, it doesn't make any difference because it had to change fast, and it was a real call to action for us that we had to up our game in innovation. So really, what we focused on are these 4 areas that you see: the portfolio, our people, our process and our capabilities, and how these can actually reinforce each other and support themselves.

Let's start with our portfolio. As you've seen this morning, we really think about innovation through 4 quadrants. You -- got examples in the morning. You'll see more in the labs when we go out so I'll be really brief here. It starts with this core 3D news, 3D innovation, which is all about keeping our core healthy. We then have this commitment to product superiority. That's now about how we create loyal consumers and grow market share. Third is building new product platforms and going into adjacencies. That's all about how we accelerate growth, and finally, is this funny word we invented, called cost-o-vation, which is around how you improve a product performance and reduce cost simultaneously. This expands our margin. To kind of do a quick touch on these, 3D innovation is things we do in our existing categories. We expect all of our businesses to have a good consistent pace of innovation to keep the brands healthy, and we focus on ideas that grow categories, not just gain share, because that's important to our retailers. One of the things I'm quite proud of is if you look at our pipeline, going forward, it is very evenly dispersed across our different businesses. This is important because we know some of our businesses will miss. It's just the nature of innovation, but there will be other businesses that take up the slack. So this is a really important mechanism we use to try to become consistent. The secondary -- or here's a picture of some of our 3 innovations. For the sake of time, we're not going to go into this deeply, but you can see it does cut across all of our businesses, and as you look forward in the 2020 strategy, you'll see us innovating at about the same pace.

The next area is product superiority. As you've heard today, we set a centennial goal of having more than 50% of our volume superior. We've achieved that coming from a very humble beginning, and we're going to continue to drive those 60-40 wins, and as Benno said, in the parts of our business where we can get the greatest return on profitable growth. So more to come on that. The third is this area of cost-o-vation, and what cost-o-vation isn't, it's not taking -- it's not reducing the performance of product to cheapen them. It's about really understanding what the consumer values, leading into that, and then taking out all the other cost and improving our manufacturing processes. By doing these together, we're able to actually get the best of both worlds. We improve performance and we reduce cost. It's a significant competitive advantage. We drive profitable growth, improve the mix, and George said a few examples in Glad, Charcoal and Bleach earlier. You're going to have a chance to talk to the Charcoal guys and the Bleach folks during the lab tour.

And then last is our focus on new platforms and adjacencies. We've talked about this here I just -- some successes that we've had. Today in the labs, you're going to talk to the folks that are doing the geographic expansion of Burt's, the people that developed the new technologies that's going into what's an absolute breakthrough improvement in performance in our Cat Litter, and also the folks that Grant referred to in Health Care that's really driving that really important business. So it's really pulling all of these things together that makes it successful. Now what I'd like to do is I'd like to shift gears a little bit and talk about our people because, for me, this is the single most important thing in how we innovate. We knew we have good people so what we focused on is creating an environment where they could be their best and their fastest at creating these innovations, and it came down to creating a culture of inclusion.

The first element of that is diversity, and you may find that a strange thing to be talking about in innovation, but what we found is innovation doesn't occur by the lone genius, sitting there, waiting for a breakthrough. It occurs by different people with different backgrounds, bringing together ideas that are different, and what's essentially a coalition to create new from something that's currently -- from something that exists. The second element of this is really making sure we have an organization that can get ideas from anywhere. What you see here is the inverted pyramid. Don is really a champion of this concept for the company, and in its simplest terms, it's taking then what is the hierarchal pyramid with the leaders at the top, and it's turning it upside down, and realizing that the most important people for us are the innovators that are at the frontline that actually make these innovations. Our role as leaders is to make them successful. There's a lot of benefit that, that's brought to Clorox at large. But in innovation, the most important thing it's done is create an environment where good ideas can come from anywhere and anybody. It's not you're role in the organization, it's not your level in the organization, it's anybody, and we create a marketplace of ideas, where ideas are judged by their merits. And we had some of our best ideas coming from very unlikely sources within the company.

Now I'd like to talk about process. There's probably been more written about the innovation process than any other thing in the world, except perhaps how to get rich on Wall Street. And if you read that literature, you hear things, like product funnels and stage gates, and monthly callers, DFS [ph], QSD [ph], and this goes on and on and on and gets really complicated, and to be candid, we use some of those ourselves. But we took a step back and said, what does it really take to be successful in innovation? And we came up with actually what's a relatively simple process that revolves around our commitment to insights that you heard my business colleagues talk about because for me, this is the single most important thing in how we innovate. We knew we have good people. So what we focused on is creating an environment where they could be their best and their fastest in creating these innovations, and it came down to creating a culture of inclusion.

The first element of that is diversity and you may find that a strange thing to be talking about at innovation. But what we found is innovation doesn't occur by the loan genius sitting there, waiting there for a breakthrough. It occurs by different people with different backgrounds, bringing together ideas that are different, and what's essentially a collision to create new from something that's currently -- from something that exists.

The second element of this is really making sure we have an organization that can get ideas from anywhere. What you see here is the inverted pyramid. Don is really the champion to this concept for the company, and in its simplest terms, it's taking there what is the hierarchal pyramid with the leaders at the top, and it's turning it upside down and realizing that the most important people for us are the innovators that are at the frontline that actually make these innovations. Our role as leaders is to make them successful.

There's a lot of benefit that, that's brought to the Clorox at large. But in innovation, the single most important thing it's done is create an environment where good ideas can come from anywhere and anybody. It's not your role in the organization, it's not your level in the organization, it's anybody and we create a marketplace of ideas where ideas are judged by their merits, and we had some of our best ideas coming from very unlikely sources within the company.

Now, I'd like to talk about process. There's probably been more written about the innovation process than any other thing in the world, except perhaps how to get rich on Wall Street. And if you read that literature, you hear things like product funnels and stage gates and Monte Carlos, DFS, QFD and it just goes on and on and on, it gets really complicated. And to be candid, we use some of those ourselves. But we took a step back and said, "What does it really take to be successful in innovation?" And we came up with actually what's a relatively simple process that revolves around our commitment to insights that you heard my business colleagues talk about earlier. Let's take a look at that.

It starts with a problem, clearly defining the problem. You heard Grant talk about saving thousands of lives by reducing hospital-acquired infections. Don talked about, wouldn't it be great if we could take the power of bleach and removing stains, but use it on white garments that had color accents. Jon wanted trash bags that never leak, but it put less plastic in the landfill. Those are really important problems for us to be solving, but it's not enough. We have to couple that with deep consumer insights and -- I should say, customer insights, as well.

I never talk about these, nor do I ever give examples because we view these as the crown jewels of our innovation. But what I will tell you is a way to think about this is think of it as a lens that you look through to see the problem in a different way than your competition. By looking at the problem differently, it leads us to what are unique solutions.

But even these, too, as important as they are, are worthless until you bring it along with advanced technology that can actually solve the problem. We represent these as a circle because in practice, we actually toggle from the 3 of them in pursuit of a true solution that delights the consumer because at the end of the day, this is how we win.

Okay. Now having built the process, I will talk a little bit about the capabilities. Now I will surprise you that we changed and improved a lot of things as we've been on this journey. But the 3 I want to focus on are very important and I picked them because you're going to see them when you go out into the laboratories.

The first is a commitment to science. Now we realized we couldn't do everything, so we picked 5 areas that you see on your slide where we really went deep and aspired to be world-class. But what's really important is we can take these science pillars and by combining them together in unique ways, create technology platforms that really is what -- is the foundation for our product development.

Grant talked about antimicrobial, so I'll pick on that. You can see our antimicrobial technology is the combination of microbiology, oxidation chemistry, colloidal chemistry and material science, and we can bring these sciences together in a variety of ways. The 4 platforms that I'm showing you are the ones you're going to see in the lab.

Our second major area of investment is in networks. First, building internal networks, which is its lowest level is cross-functional teams because that makes us faster and better innovators. But also, we've developed an enterprise-wide system called Innovent, which is a network inside where anybody in the company, no matter where you are in the world or what your job, can put an idea up and it can become and acted upon.

But we also have to couple those with external networks, and you know we've done a lot of this over the years. And here, you can see our partnership network and we look at a variety of different places for partners, having over 50 of these active now. And it's really the coupling of this external network which brings in capability with our internal networks, that's the secret sauce.

And then finally and last but not least is the investment in the infrastructure, and you're sitting right in the middle of it. Now those of you that are here are going to actually go out and see it. But for those of you on the web, I thought I'd show some pictures. Here's some picture of our foods pilot plant, here's our Brita test station where we would test water and then here is where that inevitably ends, which is nicknamed our Throne Room where we test our toilet products. Joking aside, what this is about is bringing together the capability we need for development, rigorous performing testing under realistic conditions and scale of capability to develop manufacturing process under one roof.

We've also designed the center to be very open. You can see that as you walk around. Most of our employees are mobile. They have no assigned space, that includes me. We find that very conducive to really connecting folks together. It also creates a very informal environment, which is good for information flow and fast decision making and had the benefit that it actually are current. The new innovation center is about 30% smaller than the previous one because this is more efficient, which saves us a little bit of money.

So what's this worth? Well, here's the money slide. I continued what I showed you earlier. Over the last 2 to 3 years, we've been improving our innovation. We're now over 3 points and as a result, we've actually, as you've many times today, increased our target to 3 points or greater to continue to propel us into 2020.

So in conclusion, I think you've seen today innovation is our lifeblood. Balance and consistency is absolutely important. And at the end of the day, it's our people and the processes and the capabilities we give them, that it's our right to win.

So with that, I'm going to set up the afternoon, which is, if I can get this flicker to work -- we've organized 6 stops for you, organized by the Rosetta Stone that Don talked about earlier, 4 in retail, 1 in professional, 1 in international. We'll ask that you gather promptly in the courtyard after lunch at 12:45. We're going to split you up to groups. You will have a guide, take you out. Please stay with your group. And finally, please no photography or video. We are actually -- the labs are open and not shut down, so there's real work going on, so I'm sure you'll respect our confidentiality.

So with that, I'd like to bring Don up to bring us to a close.

Donald R. Knauss

Thank you, Wayne. Before we go to Q&A, I would like to show you one slide. We didn't talk about the first strategy, and Wayne finished on our people being our biggest competitive advantage.

I did want to show you one slide, which is the engagement scores that we track in this company. We run this global engagement tracking every year. You can see, in 2007, I just joined the company, and I think there was a lot of confusion about what direction the company was going to take. Engagement was okay, but it's certainly at a 71%, it was not stellar in terms of a global database. You can see, last year, we hit 87%. You can see the global database. This is over 75 companies that track in this organization we use. That puts us in the top 10% of this global database. So we think you'll see it when you go out there, I think, in these 6 stations today.

We've got a very highly engaged workforce. And we really measure that engagement in 2 ways: Discretionary effort and an attempt to stay. That's how we kind of track this. So our people, when they come in on Monday morning, they're really putting the effort in and do they intend to stay or are they taking calls from headhunters every other day, and we don't see that. So we've got a highly engaged workforce, which I think is ultimately our best competitive advantage.

And when you think about what the group just took you through, we do think Centennial did a fine job for our investors. And I think you've got a sense from the 2020 work here, from -- when you look at the business unit information they gave you today, from what Dawn talked about on bleach and wipes, where we certainly had share challenges in the recent past, we're committed, as everyone I said, to regaining that market share. I think you've seen across the 3Ds strong innovation on the Cleaning business, a lot of that just starting to hit this month. You'll see a lot more in January as we get to the next wave of new products as you've seen that.

If you think about what Jon talked about on Lifestyle and Household, I think the same 3D innovation across that, and of course, what Grant talked about on PPD and Benno on International, that same 3D focus on innovation to get focused on gaining market share back to certainly robust in the company.

So with that, this last point of innovation being the key driver, as I said, you'll get a real strong sense of the world-class capabilities we think we've got that will manifest themselves going forward. So with that, why don't we go ahead and just turn the lights up, we can open it up to Q&A. We've got about 20, 25 minutes or so for Q&A.

Just as a housekeeping note, if -- as you go on these tours, when you walked in the front door, there's a coat check there. Any heavy bags, your computers, handbags, whatever you want to leave, we'll lock it up. There'll be somebody there so it will be safe if you don't want to carry it with you. You can do that as you file out for lunch at noon. Well, as I said, we're going to eat out here in the patio area until about 12:45. The group number that you're going to go with, there are 6 different groups, it's on your badge, so just -- we'll just line up by group.

But with that, why don't we bring some chairs up? I'll ask George and Benno and Steve, Wayne to come on up.

Question-and-Answer Session

Donald R. Knauss

I'm falling off the edge. That wouldn't be good.

Unknown Executive

[indiscernible] a little bit.

Donald R. Knauss

We've got a couple of mics, okay? If you want to -- if you've got a question, Lisa's got a mic back here. I think we have 2 mics, right?

Unknown Executive


Donald R. Knauss

So if you've got a question -- if you could wait until you get a mic so the folks on the webcast could hear the question, that would help. Yes. Ali, I want you to go ahead first, then we'll get to Lauren right after you. Can we get probably a mic?

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Okay. So a couple of questions. One is kind of unintended outcome of one of the trucks you put out there, which is where you showed that the Glad business EP improved from 3% to 7% in the past 5 years. The overall company moved from 7% to 8%. So I'm trying to understand a little bit more, kind of quick back in the envelope, your EP improvement was basically all Glad for the past 5 years. So I'm trying to get a better understanding of kind of the other businesses. Are there any that went down from EP perspective? And what should we expect going forward because a 1 point move all coming from Glad doesn't really pretend well going forward? I figure out that...

Donald R. Knauss

One comment before Steve launches in. I think if you look at the compound growth rate, of course, that margin percentage is of a much larger revenue base, too. So we've added over $1 billion in revenue, so the 8% margin is off a higher revenue base and a higher profit base, and there was a 6% compounding of EP in dollars, but Steve...

Stephen M. Robb

Yes. I think the 2 things that I would call out, number one is that you are looking at EP margin. You want to be a little bit careful with that one. The second is a lot of our U.S. retail businesses have seen consistent steady improvement in economic profits. So I don't want people to be left with the impression that this is all driven by Glad. That will be the wrong impression to take away what is true. And I think you've seen this in our numbers is International, over the last 18 months, has been significantly challenged, particularly because of the Venezuela, Argentina inflation price controls. So that's a business where economic profit has come down fairly sharply and it's probably masking some of the benefits that we're seeing. All of that said, last year, we delivered solid economic profit growth. And again, most of our U.S. retail businesses are doing quite well right now.

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Okay. It's actually quite -- that's actually kind of quite helpful. The other question I had...

Donald R. Knauss

Can you turn the mic back on?

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Okay. That's helpful. So the other I had is as you're moving more and more to adjacencies, whether it be pushing Hidden Valley or going up against Kraft, whether it be going into any category that you may step into right now, you're going after a different competitive set than you're used to. Are you capable of doing that? Sometimes, if you look at Green Works, you've seen that being difficult for you going up to kind of the big kahuna competitors out there. So looking to the comps, if they [ph] can do that and good in other categories just going forward.

Donald R. Knauss

George, why don't you answer that?

George C. Roeth

Yes. I mean, I would go back to we're going to look to do it where we have a strong right to win and we can leverage our core capabilities. So 2 examples you just referred to, on Hidden Valley, we've, for -- we just launched the Pasta Salads business. It's niche, it's because it's in cold Pasta Salads that I guess [ph], frankly, our competitors have been sleeping those categories, have not paid a lot of attention to them. Those type of categories tend to be more important to us, so more focused on much light salad dressing. Kraft's a much bigger company, yet are laser focused in salad dressings, particularly in ranch in the early years, gave us advantages. So we make sure we have a core right to win. And that the good -- the other example I would give you, again, we're launching a natural personal care. We're not launching into regular personal care in the mainstream aisles. We're in natural personal care where we're the dominant brand with Burt's. We're typically are category advisers and control the shelf to some extent and are able to nurture brand like the competition cannot.

Benno Dorer

Yes, maybe 1 or 2 things to add. There'll be failures, right, so -- and we can't expect that the success rate will be 100%. But if we didn't have confidence in our ability to get into adjacencies, we'll still be a bleach company. We have, in fact, done this very well over the last, not just 10 years, but 25 years to grow our portfolio that's, today, very diverse. We think that and our capabilities play extremely well in many more categories, as long as we stay disciplined, and George mentioned the 4 criteria that will apply.

Donald R. Knauss

Yes. Lauren, why don't you go next and we'll...

Lauren R. Lieberman - Barclays Capital, Research Division

Okay. Great. First, I just want to ask about this agility discussion and how that fits in with CCEM. Like is it sort of the next flow of cost savings will now be named agility, is it kind of one and the same or is it an incremental program?

George C. Roeth

Subset. So we're still going to have our classic cuts -- CCEM. We're going to continue to drive cost savings and by making shift and in procurement and then cost evasion. This is another element. What we're saying is, "Hey, we're going to put a greater emphasis on S&A than we have more recently." We're still very disciplined as a company. Matter of fact, if you look, there's relative competition, we're quite good, but we think we can get a lot better. And there's a rich field of opportunity there. So it's part of CCCM (sic) [CCEM] and we'll be sequenced for those activities as well.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay. Because the way I think about it, it's still like a target of 150 basis points in savings from whatever it's called. It's helping us understand kind of the next reason [ph] on what continues that visibility.

Donald R. Knauss

That's right, because I think there's been a lot of question from a lot of folks, "Can you keep doing this? Can you keep getting this 150 basis points?" I think it really is expanding out. We've got over $4 billion of controllable costs, so we're kind of looking for 2.5 points of productivity here. It really is just broadening out, Lauren, the way we're looking at this, not just by making shift by getting into indirects, getting into SG&A again. And now, with these big investments behind us, I guess, AP in this facility, we think it's the right time to do it.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay. And then also just -- what you described on supply chain, trying to get more flexible, how far off is that? And what's the incremental cost? Or is that part of the ongoing $20 million to $30 million that's kind of baked into the P&L going forward?

George C. Roeth

Yes, I would say it's part of the $20 million -- the $30 million that we've set aside. It's ongoing in nature. We've already been doing it, doing late stage differentiation in the supply chain to get more flexibility. So this is something we've been at for multiple years. It's continuing to deliver good cost savings for us. But it's already picked up in the base of the $20 million to $30 million of restructuring and other related costs.

Donald R. Knauss

Gary, why don't we go to Wendy and then come back to Javier? Can we get Wendy and Mike?

Wendy Nicholson - Citigroup Inc, Research Division

My first question has to do with the target to raise the selling and promotional expense or advertising promotional expense by 100 basis points over time. And what is driving that decision? Because most of our other companies are talking about how advertising is becoming more efficient, and so they're hoping to get more bang to the buck and actually lower that number. Do you think you are out of whack from a share voice perspective or what's driving that?

Donald R. Knauss

Let me start and then I'll take -- kick it to George and Benno. I think what's driving it is this move, Wendy, to get into the some more adjacent spaces and driving and supporting the innovation as we go. I think there's been some question. We've always thought the 9% to 10% range is about right. And there's been some question, while you're getting the low -- on the lower end of that range, one of the reasons it is getting at the lower end of the range is because we are more efficient and the ROIs on that advertising promotion are better. The other thing is, with Venezuela and Argentina, we have cut back to below 5% in those markets, given the fact that sometimes, we couldn't even get the product to sell it. So when you look at the U.S., we're right in the middle, about 9.6% is what we spent last year. So we think that's about the right range. But as we move into these adjacencies and get more innovation going, we think we've got to crack it up a little bit while we can still preserve the legacy brands.

Benno Dorer

It's a commitment to base health, right? So what we don't want to do is follow those stallers from the base. We are very committed to keep the base healthy, but then as we expand in those categories, that investment will come in on top.

Wendy Nicholson - Citigroup Inc, Research Division

And your confidence in the payback on that, I assume, is fairly high, but you're still sort of deciding whether it's promo or on the advertising side?

Benno Dorer

Yes, very confident. And the people will make those decisions on where to spend are the general managers and they do that based on the very disciplined ROI analysis on what works best by brand. And we know that the long-term ROI on these investments is delivering positive profit, yes.

Wendy Nicholson - Citigroup Inc, Research Division

Okay. and then my...

George C. Roeth

To be clear, it may not all show up in the sales and promotional line. So it could show up in trade promotion, it could show up in innovation. There's a number of elements for that.

Wendy Nicholson - Citigroup Inc, Research Division

Got it. And then my second question is on the target margin expansion annually up to 50 basis points. Your business is very -- it varies significantly by segment in terms of the profit margin. You talked about how International is a specific focus to improve the profit margin. But it seems like if you just managed your mix more aggressively, in other words pushed on the higher-margin segment, even at the North America business, you could get margin expansion just by making choices about what you want to push on for growth. But it doesn't really sound like that's a focus. It sounds like to you're trying to grow a handful of businesses kind of irrespective of the margin they generate. Is that right, or how big a focus is mix specifically?

Stephen M. Robb

Well, I think we do have a portfolio of opportunity, and I think we've been pursuing it. Burt's Bees, one of the highest margin businesses we've got in the portfolio, it is one of the fastest growing. Hidden Valley Ranch, again, very accretive margins to this company, one of the fastest-growing businesses. So I do think that we've been enjoying that, and I think our intent is to actually continue that. That said, I think we've got real opportunities though to, again, rebuild those International margins. And so certainly, part of the EBIT margin expansion over the long term will be rebuilding International, as well as focusing on SG&A, cost savings and all of the things we've talked this morning, but mix is a part of it. We like growing -- fast-growing businesses that are margin accretive. If you...

Donald R. Knauss

I think we're very mindful of that, Wendy, the mix component. I mean, if you look at the trade up strategy on Glad, now that premium trash is 70% of our trash business, those gross margins are over 45%, so they are even accretive to the company and trash. So we're very mindful of pushing the mix side of this thing. Javier, I think you're next.

Javier Escalante - Consumer Edge Research, LLC

On the near-term challenges, I see kind of a like common denominator being the retailers, both in bleach and wipes, prior to [ph] all gaining share. So what -- I think that I understood well what you said about bleach that essentially, you said lack of merchandising. But in the case of wipes, what do you think got you out of whack versus the retailers? I see that you are trying to implement or you're going to be implementing innovation that possibly is premium pricing. But do you think that you need to adjust the pricing of the base wipes business in order to regain share?

Donald R. Knauss

Yes, I'll have Benno answer this more completely, but we haven't taken pricing on wipes in 14 years. So this is a more complex issue and it's really an amps issue. It's across assortment, merchandising, pricing and shelving. But I'll let Benno talk about the specifics to get to your question.

Benno Dorer

Yes. So what we're seeing in wipes is a more competitive environment, clearly, and how we want to react to that is not on pricing. Like I said, we compete on value, not on pricing. So the key strategies that we're employing are: One, ensuring that our merchandising strategy is right and we will invest in the right amount of merchandising going forward, not pricing, as Don said, but merchandising efficiently, that's one. Two, we will invest in desire and ensuring that people understand that the 60-40 win that we have at the consumer preference is translating into consumer acceptance. And you see in the new Valley advertising, that's going to come into play. But then third, if you think about how we've been able to grow share in the long run on this business over a prolonged period of time, we still have a steady stream of innovation, both in the core, as well as in new segments, and Don showed you 2 examples. That's how we'll drive the business and that's how we're confident that we'll get that share back. Again, the key here is we're not interested in buying share, we want to earn share, and I think our plans are designed to deliver that.

Donald R. Knauss

I think in some ways, Javier, we're a bit of a prisoner of our own success. Last October, November, December, we were driving mid-teen to high-teen growth with the flu situation we have. We hit a 60 share about 9 months ago. And I think when our competitor started looking at a 60 share, particularly the retailer brands, they said, "Well, there's something to go after here." We saw shelf position change, we saw assortment change, as Benno said, and of course, the merchandising frequency dropped. So I think we've got a pretty robust plan across assortment, merchandising, pricing and shelving to get back at it. And I think broadening into different occasions like the glass wipe, the tub and shower wipe is going to help us get back into that. So stay tuned for the second half of the fiscal.

Javier Escalante - Consumer Edge Research, LLC

And again, on the retail side, that will be my second question, and how the -- because that was -- I thought that the retailers were looking at wipes differently and pretty much, this is your assumption that, essentially, they are looking at the category with more interest because of the growth. So to what extent what we are hearing about Walmart, destocking some of -- some categories is affecting you given your exposure to Walmart? Is that something that you are seeing it is affecting the portfolio in different ways? Could you comment on that?

Donald R. Knauss

Our products in general are so fast turning that it hasn't been a material effect on us. It just -- when you're looking at bleach, you're looking at wipes, you're looking at most of our core products. They turn so quickly that inventory hasn't been much of an issue, or inventory reduction by Walmart, it's certainly hitting other categories, whether it's electronics or -- and so it hasn't been material to us. Bill? Then we'll come back.

William Schmitz - Deutsche Bank AG, Research Division

Can you quickly just take a stab at kind of what's going on with the category growth rates? Because if you look at that Nielsen data through the last almost 2.5 years, it's actually been below population growth, it's just kind of unheard of. So maybe what do you think is driving that, I mean, kind of one that kind of returns to normal? I have a couple of follow-ups.

Donald R. Knauss

You guys want to start on that?

George C. Roeth

Yes, I mean at a high level, obviously, that period you're defining includes the great recession. So there's higher unemployment, consumers' pocket books are tight, folks are living day-to-day. We hear consistently from our customers, consumers are living paycheck to paycheck. A matter of fact, they can predict when sales would peak, depending on when people get their government checks. And that hasn't like nothing is going to be rocky going forward. So I would argue, the last several years are not normative relative to what we saw prior to that. And going forward, I think it's going to be a slow sloth in terms of it ultimately showing any significant improvement. So we're planning on the kind of 1% to 2% and lately, more like 1%, as we put out the numbers that we've talked to you about today. That's part of the expectation.

Benno Dorer

The one add I'd make is that as you think about the total population there are -- as you make a double click, there are pockets of tremendous growth. So as you think about the Hispanic consumer, as you think about the [ph] menials and there are pockets of growth, so this is where the power of multiple consumer targets and creating 3D plans that go after these growth pockets comes into play, because there is growth to be had, but it may be seen underneath the surface.

Donald R. Knauss

I think, the other interesting thing, Bill, if you look at calendar year '12, our categories grew 1.5%, and we thought we were kind of back to the historical average. Now that sort of tracks with population maybe a little bit less, but kind of back to historical average. If you look at the first 6 months or so of calendar year '13, it went flattish to down 0.5%. To me, that really correlated -- that correlated with a lot more competitive intensity out there. We're seeing more trade spending, we're seeing more pushing on private label like in wipes. Well, if you're selling lower-priced items, it's going to take dollars out of the categories. So I think that has been a little bit of the dampening, too.

William Schmitz - Deutsche Bank AG, Research Division

And then do you think it's fair to yourself to have an operating margin target? Because it kind of just ebbs and flows with commodities all the time, so I feel like it almost sets an unrealistic bar because when the commodities are high, the margin misses, and the lower the commodity beats, there's a margin beat.

Stephen M. Robb

I think you do have to have an EBIT margin target. I mean, internally, we focus on gross margin and EBIT margin. And I think you got to keep that front and center so that you have profitable growth over the long term. To your point, that doesn't mean that you're not going to have variability across quarters. Of course, you are. But on a multi-year basis, well, you really need to be making sure that you're not just growing, but you're growing profitably and in a disciplined way, so that those margins stay healthy, so that you've got more fuel to put back into the business and drive growth.

Donald R. Knauss

I think the other [indiscernible]

William Schmitz - Deutsche Bank AG, Research Division

You know what I mean? Like if there are years when you have big commodity slides [ph] where it's down 50 basis points and years when they fall off a cliff and they're sub-200 basis points.

Stephen M. Robb

Yes. I think it's more in our control, but not over the long term. I certainly agree in the short term, you can have challenges come up that are going to squeeze the margins. But I think over the long term, it's our job, through cost savings, innovation and all the other things we can do, to keep those margins healthy, so again, that we have enough fuel for growth.

Donald R. Knauss

I think one of the other reasons, Bill, we are focused on the EBIT in the 2020 Strategy was a couple of things. One is we wanted to put more pressure on ourselves to get SG&A back to 14% or below, so that was one. The second one is when you look at businesses that are growing at a very fast rate like Grant's, you get into the Healthcare business, it's not the standard model we have where gross margin is so important because you don't have the typical 9% to 10% consumer and -- consumer promotion spending. So EBIT is more relevant in those businesses than gross is in some ways, so -- but it's a good governor on us. We know there's going to be some volatility.

William Schmitz - Deutsche Bank AG, Research Division

Got you. And then just the last one is your debt to EBITDA now is at 2x, which is the bottom of the range. Would it be like a one-off, let's do a big [indiscernible] repurchase or you just like kind of get back up to the sort of 2.5x over time?

Stephen M. Robb

Yes, I think -- so we're at 2.1x at the end of fiscal year, fiscal '13, so we're certainly we're at the low end of the range. I think that it gets us broad [ph] powder for bolt-on acquisitions to grow in these places that we talked about earlier. The idea of levering up in some major way to drive share repurchase is not really what we're focused on right now. Again, I think we're going to take a more disciplined approach, and we're happy to have the dry powder, well, certainly, I'm sure, and excess cash to our shareholders, but I think we feel very good the leverage and where it's in, just 2x to 2.5x, and it still is appropriate to us.

Donald R. Knauss

Yes, even at the bolt ons, we'd like to stay at the lower end of the range.

Constance Marie Maneaty - BMO Capital Markets U.S.

I have a question, I think, for Grant about the program with the hospitals and the infection protocol. So my questions are these. In the early days of the strategy, my recollection was that you worked with some lead hospitals, either the Cleveland clinic or Mayo. It's been some time since then, so I'm wondering if you can tell us what the rate of infection decline has been in those hospitals, also whether or not any of the results are published in scientific journals. And then finally, are you seeing any hospitals take your protocol and use private label products?

Grant J. LaMontagne

Okay. Thank you, Connie. First of all, I will tell you, I don't have information on infection rates in those hospitals now. I can tell you that -- for instance, there's an infection conference here in San Francisco this week. We're meeting with our advisory board, which is people from hospitals around the country, talking about how to get after the protocols in these hospitals. But right now, I don't have -- I can try and get you that information, Connie. But very clearly, these hospitals are getting more aggressive in trying to contact us to talk about how they can lower their rates. There have been some hospitals actually that have been under threat of closing, one of the most famous hospitals in the country. And they are very, very much interested because of the transparency, the infection rates to get with us. But part of our approach is through these scientific advisory panels and working with the thought leaders in the hospitals. We're working with Dr. Rotella, [ph] we're working with Dr. Gerba, infection control specialists around the country that are highly influential downstream also with the hospitals, so -- and they are very, very influential in providing the industry. These are the people you should be working with, working with the CDC. It's interesting on how you work with the CDC. You work through the CDC Foundation, it's kind of like a triangle. You can't necessarily work directly with the CDC, but you work with the Foundation. At the CDC, their senior leaders at the CDC, this year, are actually being compensated in their bonuses. They have bonuses on their ability to get after the seat of infection. So one of the things we feel good about is we're feeling energy in the industry to get somebody to really put a stake in the ground to go after these issues.

Constance Marie Maneaty - BMO Capital Markets U.S.

So do you know if hospitals -- do you have a complete protocol for the decline of infections in the hospitals? I mean, have you covered everything that's out there, or are there still areas you're working on?

Donald R. Knauss

Wayne, do you want to add something?

Wayne L. Delker

Sure. A couple of things I'll add, I would like [indiscernible] First, in terms of, particularly on the newer technologies, are those are patent protected, so that will make it hard for others to follow. In terms of the actual protocols, you will actually talk to some of the folks that are developing this out in the tours. So you're getting to see exactly what we're covering and what we're working on going forward. What we're really doing is developing technology and product lines to cut across the range of surfaces that our hospitals has to deal with, so that they really can and have an entire system that takes care of all of the difficult infections, from C. diff, which is the hardest to kill, on down [ph] in all other areas.

Donald R. Knauss

Well, why don't we -- it's a little afternoon. Why don't we break it there? We're going to be outside. We can certainly take questions outside as well from folks. But again, if you want to leave anything at the front desk, you can certainly do that, and then we'll meet -- there will be folks out here to direct you to where the lunch is. Thanks, everybody.

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