Clorox Company (CLX) — Q2 2015 Earnings Call Transcript

Good day, ladies and gentlemen and welcome to The Clorox Company Second Quarter Fiscal Year 2015 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks we will conduct a question-and-answer session. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Steve Austenfeld, Vice President of Investor Relations for The Clorox Company. Mr. Austenfeld, you may begin your conference. Great, thank you. Welcome, everyone and thank you for joining Clorox's second quarter conference call. On the call with me today are Benno Dorer, Clorox's Chief Executive Officer; and Steve Robb, our Chief Financial Officer. We're broadcasting this call over the Internet, and a replay of the call will be available for seven days at our website, thecloroxcompany.com. Let me remind you that on today's call, we will refer to certain non-GAAP financial measures, including, but not limited to, free cash flow, EBIT margin, debt-to-EBITDA, and economic profit. Management believes that providing insights on these measures enables investors to better understand and analyze our ongoing results of operations. Reconciliation with the most directly comparable financial measures, determined in accordance with GAAP, can be found in today’s press release, this webcast's prepared remarks or supplemental information available in the Financial Results area of our website as well as in our filings with the SEC. In particular, it may be helpful to refer to tables located at the end of today’s earnings release. Please recognize that today’s discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans. Please review our most recent 10-K filing with the SEC and our other SEC filings for a description of important factors that could cause results or outcomes to differ materially from management's expectations and plans. The Company undertakes no obligation to publicly update or revise any forward-looking statements. Now turning to our prepared remarks. I'll cover highlights of our second quarter business performance by segment. Steve Robb will then address our financial results and financial outlook for fiscal year '15. And finally, Benno will wrap-up our prepared remarks as well as open it up for Q&A. Consistent with today’s press release all of our commentary today is on a continuing operations basis, unless otherwise stated. Turning to our top-line results. In the second quarter, volume was up 4%, and sales grew 3%, including the impact of three points of unfavorable foreign currencies with the largest impact coming from Argentina. Excluding the impact of foreign currencies, sales grew 6%. Our growth reflects higher volume as well as a nearly two point benefit from price increases. Importantly, our sales results reflect strong performance across all U.S. segments and international on a currency neutral basis. In Q2, our U.S. 13-week market shares decreased one-tenth of a point versus the year-ago quarter. The slight decline in the quarter reflected continued intense competitive activity in our Cat Litter and Brita businesses. Inversely, we saw market share improvements in our Laundry business with Clorox Liquid Bleach and Clorox 2 Stain Fighter & Color Booster at two-year highs. The Homecare category also continues to strengthen. For eight consecutive months we've grown market share in this business with strong second-quarter gains in Clorox Disinfecting Wipes leading the way. Burt's Bees also grew market share in the quarter with very strong gains in face and lip care. Looking at our U.S. categories, they were up just over a point in the second quarter. A nice improvement following the half-point gain we saw in Q1. We're continuing to invest to improve our category trends and strengthening our market shares remains a top priority. With that, I will review our second-quarter results by segment. In our Cleaning segment, Q2 volume and sales each increased 3% behind strong results in our Professional Products and Homecare businesses. Our Professional Products business delivered 21% volume growth and 19% sales growth behind double-digit shipment gains in Professional Cleaning and Healthcare along with a solid gain in Food volume. While concerns about Ebola and Enterovirus had limited impact on our Retail business which I will discuss in a moment, healthcare institutions did respond with significant purchases of cleaning and disinfecting products contributing to top-line growth for the quarter. Volumes of strong sales in Q2 we anticipate some slowdown in Professional Products in Q3 as these concerns have now abated. In Homecare which is our largest U.S. business unit, sales increased behind strong execution on several merchandising events, along with distribution gains for our Toilet Cleaners. The solid volume in sales growth more than offset a distribution loss on Clorox Disinfecting Wipes at a major club customer last calendar year, a loss that we've now anniversaried beginning this month. In the near-term, we don't anticipate getting distribution back at this customer. For perspective, our focus is on profitable growth for Clorox and Category Health, not growth at any cost. We believe we have the right strategy in place to drive our business and category growth in a profitable manner. In particular, we continue to believe there is opportunity for increased household penetration in the wipes category, particularly as we launch meaningful innovation. For example, we recently launched several new products including our wipe with Micro-Scrubbers that is consumer-preferred versus those currently in the market, as well as new Clorox Triple Action Dust Wipes that allow consumers to dust an entire room with one extra large wipe that picks up dust, hair and allergens such as pet dandruff. Importantly, as part of our strategy to expand wipes usage around the home, we also introduced Clorox ScrubSingles kitchen pads, which come preloaded with Clorox cleaner and are meant to be tossed after use, thereby eliminating one of the most germ-laden items in households, the reusable sponge. There is a version of ScrubSingles for use in bathrooms as well. As we shared with you before, Clorox remains the clear leader in the wipes category, with market shares near 50% in tracked channels, more than twice that of the nearest branded player, and share trends have continued to improve. Early in the quarter, we did see an uptick in wipe shipments heading into the cold and flu season behind consumer concerns regarding Ebola. But heightened consumer demand moderated quickly as reported cases dwindled. With the flu season just now getting into full swing, we will be monitoring consumption and using regional flu data to work with retailers to help target disinfecting wipe shipments where they are needed most. In our laundry business, sales declined due to decreased Clorox Bleach volume as a result of category softness compared to strong category growth in the prior year. From a market share standpoint, our investment in this brand and focus on value are paying off as December marked the fourth consecutive quarter of market share growth on Clorox Bleach. Looking ahead, due to increases for input costs to our Bleach business, we're in the process of implementing a 7% average price increase effective February 1st. In our Household segment, we delivered 3% volume growth and 5% sales growth. The segment’s top-line results were driven by strong performance in our Glad and Cat Litter businesses. Our Bags and Wraps business grew volume 3% driven by innovation behind our Hawaiian Aloha Scent as well as new Gain Scented Trash Bags through our partnership with Procter & Gamble. Sales on Glad were up double-digits behind price increases taken in 2014. Even in the face of intense competition, Cat Litter volume and sales increased behind distribution growth of our new Fresh Step Extreme Lightweight product. We continue to invest aggressively in innovation and communicating our value proposition versus the competition, particularly focusing on excellent clumping and odor control, such as with our new Eliminate Odor for 10 Days campaign that was launched in the second quarter. Keeping in mind that Q2 is a relatively small quarter for our Charcoal business, sales and volume declined following double-digit growth in the first quarter as retailers transitioned to our new and improved Kingsford Charcoal product that launched in January in advance of the 2015 growing season. In our lifestyle segment, volume grew by a strong 5% and sales increased 4%. These results were driven by very strong double-digit volume and sales growth on Burt's Bees largely due to innovation in lip and face care products. In particular, our new lip crayons and new Vanilla Bean and Wild Cherry lip balm flavors grew strongly in the quarter supported by our first-ever Burt's Bees television advertising. Our Facial Towelette business and skin brightening products were also very strong in the quarter. Turning to our Food business, sales grew versus the year-ago quarter behind higher volume for bottled and dry Hidden Valley products. Finally, the segment’s positive results in Burt's Bees and Food were partially offset by lower sales and shipments of our water filtration products primarily due to consumption declines on pour-through filters. As previously communicated, we started shipping an improved Brita filter in August that is faster and easier to change than competitive filters. In November, we began shipping improved pitchers, with our focus on innovation we’re optimistic that our Water Filtration business will have a stronger second half of the fiscal year. Turning to International, volume was up 5% behind strong operating performance and volume growth in nearly all regions. However, sales declined 2% due to the impact of unfavorable foreign exchange rates. If you exclude the impact of foreign currencies, sales for International grew 11%. With oil and other commodity prices having fallen, capital investment in some countries has moderated resulting in slowing economic growth in some of our key markets such as Chile and Peru. Strategically, we remain committed to growing profitably in our international markets and continue to take steps to overcome macroeconomic trends such as negative foreign currencies, high inflation, and slowing GDP growth. In particular, we continue to carefully assess spending across our International division and implement price increases to mitigate the macro headwinds. Looking at the balance of fiscal year 2015, as noted in this morning’s earnings release, we’ve increased our sales growth outlook for the full year to be about 1%. The revised sales outlook takes into account the strength in the first half along with an updated outlook for the second half of the year. As I discussed, we anticipate some slowdown in Q3 in Professional Products following very strong Q2 shipments impacted by Ebola and Enterovirus concerns that have now greatly abated. In addition, we now anticipate stronger foreign exchange headwinds along with higher trade spending to support our categories and grow market shares, as well as defend against reduced prices by competitors following the decline in import costs. Now I’ll turn it over to Steve Robb to provide more detail on our Q2 performance and our outlook for fiscal year 2015.

Thanks, Steve and welcome everyone. Well we’re pleased to have delivered a second quarter and a solid first half for fiscal ’15. In addition to strong sales growth in the quarter, we delivered another quarter of very good earnings growth. As you saw in our press release, we’ve raised our fiscal year outlook for sales and earnings per share to reflect our solid first half results. In our second quarter, sales grew 3% reflecting four points of volume growth and two points from pricing, partially offset by three points of unfavorable foreign currencies. On a currency neutral basis, sales grew nearly 6%. Our top-line results came in better than expected driven by strength in our Glad, Professional Products and Burt’s Bees businesses. Gross margin for the quarter increased 10 basis points to 42.5% reflecting 130 basis points of cost savings and 100 basis points of pricing largely offset by 90 basis points of higher commodity costs as well as 90 basis points of higher manufacturing and logistics cost reflecting continued inflationary pressures in International. And as we previously communicated, we continue to see significant cost pressures in the logistics and transportation market due to the tight supply of trucks and railcars. Selling and administrative expense was lower in the second quarter at 14.2% of sales compared to 15% of sales in the year-ago quarter when the Company made incremental investments to change IT service providers. Cost savings also contributed to lower selling and administrative expenses. Advertising and sales promotion investment for the quarter was more than 9% of sales reflecting continued strong support behind our brands particularly to drive trial of new products. Notably, our U.S. retail advertising spend was about 11% of sales. Our effective tax rate of 34.9% was almost a point lower versus the year-ago, but in line with our full year projections. Net of all these factors, we delivered diluted earnings per share from continuing operations of $0.97, an 8% increase versus the year-ago quarter. Fiscal year-to-date free cash flow was 207 million compared with 159 million in the year-ago period. The increase was driven by lower employee incentive compensation payments, lower tax payments and the initial funding of the Company’s non-qualified deferred compensation plan last year. These factors were partially offset by 25 million in payments to settle interest rate hedges related to the Company’s issuance of long-term debt, the expense of which will be amortized over the 10-year life of the debt. In December of 2014, we issued 500 million in senior notes increasing the Company’s quarter-end cash balance with proceeds subsequently used to pay down a portion of the notes that matured on January 15th of this year. For fiscal 2015, we expect free cash flow to be approximately 10% of net sales. Regarding our fiscal year 2015 outlook, we now project sales growth of about 1%, supported by solid sales results in the first half, product innovation, and price increases. However, we also now foresee a more significant effect from unfavorable foreign exchange rates, estimated at 2% to 3%. Additionally, our fiscal year sales are anticipated to be influenced by slowing international economies and increased trade promotion spending as we continue to invest in our business and encourage trials of new products. Despite these challenges, we expect costs associated with manufacturing and logistics to be offset. With the notable drop in oil prices, we foresee lower resin prices in the second half, and overall commodity costs are expected to remain stable for the full year. For the fiscal year 2015, we expect selling and administrative expenses to be around 14% of sales. We anticipate the EBIT margin to remain stable due to incremental demand expansion. Our projected tax rate for fiscal 2015 is around 34%. Taking these factors into account, we have increased our forecast for diluted earnings per share from continuing operations to a range of $4.40 to $4.55. Looking ahead to fiscal year 2016, we believe the advantages from ongoing commodity softness will be somewhat counterbalanced by rising logistics costs. As we have traditionally done, we may utilize some of the savings from resin-related costs to manage potential competitive price reductions. We will also closely track headwinds in international markets, including foreign currency declines and slowing economies. Now before I turn it over to Benno, I did want to let you know that moving forward we will provide next year’s fiscal year outlook starting with fiscal 2016 during our Q4 earnings call, which takes place in August. This change allows us to provide you with an outlook based on a full year of actuals and puts us more in line with the timing of our peer group’s outlook announcements. I am happy to address any questions you might have on this process change, but I want to make you aware of this prior to the Q3 earnings release in May. And with that I will turn it over to Benno.

Thank you, Steve and hello everyone. It’s great to be joining you on my first call as Clorox’s CEO given the strong second quarter we just completed. This quarter’s performance follows a very solid Q1 and it also speaks to the commitment to the 2020 strategy and our focus on continuity with the leadership transition. That continuity of purpose is evidenced in our continued emphasis on category and overall market share improvement, profitably driving growth and stronger top-line performance and creating shareholder value. Now clearly as we head into the second half, we are facing a number of challenges, including continuous softness in several categories, worsening foreign exchange headwinds, and slowing economies in many international markets. I believe we are taking the right steps to support our brands with increased investments, while driving margin improvement to grow profitably in this difficult environment. And as I discussed with you on last quarter’s call, the refining opportunity for Clorox is accelerating profitable growth. And looking ahead we are leaning into four key elements of our 2020 strategy that I believe drive the greatest value. These areas of emphasis, which we are calling strategy accelerators, will drive decisions around where we will invest more heavily. Again with intent to drive profitable growth. I would like to take a few minutes to introduce these to you today. And at an Analyst Meeting we plan on hosting later this year, we will delve more deeply into how we are activating them. The first area of emphasis is accelerating portfolio momentum. In other words, leveraging tailwinds to generate more growth from our portfolio and investing more heavily against those brands and categories that have a stronger right to grow. The second is accelerating 3D technology transformation, which aims to address increasing consumer fragmentation, the shift in how today’s consumers shop and buy their products, and how we must engage with them to win the battle for the physical and virtual shopping carts. The third area of emphasis is accelerating innovation. Now this isn’t just about product innovation, it’s about innovation in sales and marketing as well as product supply. Really anything that has to do with our demand creation model built around the three Ds of desire, decide, and delight. Innovation in all these areas drives category growth, and we are committed to driving more of that. Finally we want to accelerate our growth culture while at the same time maintaining our tradition of operational excellence. We want to dial-up our strong Clorox culture to have an even more deeply ingrained growth mindset. I strongly believe these four areas of emphasis are what we need to drive growth, while doing so profitably. And I look forward to sharing more about them with you over time. Now with that let’s open it up to your questions.

I want to discuss the pricing you mentioned, which is set to take effect on February 1st. Could you provide more insight on how this pricing will vary between domestic and international markets? Additionally, considering the recent news about raw material deflation, how do you anticipate the competitive response to this pricing? We've heard a lot about increases in promotional spending coming up, so are you confident that this pricing will remain stable? Thank you.

I think what you’re referring to is the 7% price increase on bleach which is domestic liquid bleach. We have a profitable growth focus as you know and really these costs are fully justified. We’re seeing cost inflation in several areas whether that’s transportation, logistics, corrugated materials, wages benefits, and these are costs that not just Clorox sees but these are costs that are visible and occurring to our competitors in private label as well. I would like to remind you that we’re pricing to a long-term cost advantage and not to a peak and again these are fully cost justified. We do have a strong track record in pricing so over the last 10 years, 95% of our pricing increases has stuck; they are based on the analytics as well. And we’re in the process of talking to our retailers as we speak, so based on that strong track record and the cost justification, we are confident that this price increase will be successful. At the same time, we’ll always monitor what will happen in the marketplace, what will happen with competition and we’re certainly also willing to spend back if needed to defend the business.

I guess, Benno, can you talk a little bit about, I guess, the point one of the four points that you're saying you were leaning into, I guess, is accelerating portfolio momentum. Can you talk a little bit about how it is different, like what that might entail? Not necessarily specifics, but just generally what is different about that from what has been going on the last few years?

Yes, Chris. I think what this will be about is really identifying the businesses that have the strongest tailwinds and ensuring that we have the right investments behind them. And I think the growth of Burt’s Bees in the last quarter is perhaps a good example of what this will look like. We have for the first time launched a TV advertising campaign because we realized that the awareness behind the brand really has a lot of upside on the base business even though the brand has been around for 20 years and that’s been leading to really nice results on the base business. We are leaning into the investments behind innovations more strongly and we’ve really seen how lip but also face innovation has yielded really nice results last quarter. And finally we’re working with retailers to make sure we have the right in-store support out there, so really it is helping us understand where those tailwinds are, investing in those tailwinds behind the portfolio like Burt’s Bees and like certain areas in Homecare and like food enhancers and using that to drive growth but growth the right way.

And just I guess on a near-term, you guys mentioned a couple of times that you are facing increasing tailwinds from economies around the world, but I guess that sort of leaves out your biggest economy where things look a little better and your category growth rate is getting better. So as you look forward, do you think generally your category growth rate globally across the portfolio is getting better or worse? I suspect that, right?

Well, if you look at our largest market internationally, Chris, Latin America, we actually are experiencing a slowdown in categories which even affects some of our strong growth markets like Peru and Chile and other markets, of course like Argentina and Canada have been more stable for a while, so I would say the general trend that we’re watching very carefully and International is a slowdown economically in our categories. Now our market share in International is growing and as you’ve seen an 11% sales increase in local dollars is nothing to sneeze at, but that’s a headwind that we’re watching very carefully.

And I am sorry I meant by your bigger economy I meant the U.S. which has been getting better, right?

Yes, in the U.S., what we’re seeing is certainly in the second quarter we’ve seen a slight uptick. Our categories grew a little over 1% and that’s up 0.5 a point from previous quarter, so that’s good. And if you think about what’s happening here in the U.S., you see indications of increasing consumer confidence—the University of Michigan just issued their consumer sentiment index at its highest since 2004. I believe there is hope that there perhaps will be higher consumer spends due to lower oil prices. So those are good things at the same time household formation is still lower than it historically has been. The jobs that are created still pay less than the jobs that were lost during the recession and there still is this bifurcation in society where the bottom half isn’t really doing well. So there is puts and takes I would say we’re cautiously optimistic. Our expectation right now still are based on flat to low single-digit category growth and for us, we focus on what we can control and that’s investing in innovation we have a strong innovation plan also going out in Q3 of this fiscal year that we're investing behind and we talked to you in the past about increasing our demand spend by one point of net sales. Over time that’s called for by our strategy and we’re certainly leaning into that focus on delivering better value than competitors and private label. So we feel like we're doing what we can do to drive category growth but I would like to let this play out in the marketplace for a quarter or two it's really too early to call it a positive trend.

Wanted to ask you a question about competition in your cleaning categories, particularly as one of your main competitors is not domiciled in the U.S., we have seen in our channel checks a lot more deals with Lysol, buy two get one free, those kinds of things, so just curious on your take on competition in your cleaning categories, particularly as one of your main competitors does have a little bit of a tailwind from not being in the U.S.? Thanks.

Yes, so competition in particular homecare, Olivia, has always been pretty strong and those types of deals that you described they are really nothing new, they occur relatively frequently and that’s part of why we're saying that investing more in demand spending is the right thing to do. I will say though that for us the biggest category that we're competing with them in is wipes perhaps and if you look at the share results on wipes we're really up strongly in wipes and we feel like for us the right thing to do is focus on consumer fundamentals, focus on demand spending that drives our brand equities on strong innovation and certainly in wipes we have a very strong innovation program and focusing on pointing out to the consumer that we're delivering superior value. That’s really working in the marketplace that’s what we'll be focused on and that’s not to say that we won't respond appropriately if we feel like there is very strong trade promotion going on in the category we will defend our market shares. But I think we've always said that our focus is on earning market share and not buying market share and on wipes in particular that’s playing out quite nicely at this point. So I would say the competitive dynamics in homecare are strong as they always have been. But I wouldn’t call them elevated at this point.

And then on Glad, it doesn't sound like you saw any pushback on your pricing and interestingly it sounds like volume increased while you took pricing, which doesn't typically happen. So was there some timing issue? Was there a big pre-buy ahead of price moves or have you just managed to increase volume while also taking on price as well?

I would say the biggest thing on Glad, Olivia, is that we have certainly leaned into the price increase and merchandising has been very strong last quarter. But also our innovation on Glad is really working well and in fact in Q3 we're backing this up with an innovation that we feel very strong about and that is in partnership with P&G we're launching Glad with a Gain scent; the Gain scent is one that has played well as a scent endorsement across various categories and we feel like this is another opportunity for us to support our strategy of differentiating our trash bags and encouraging trade-up by delivering something that’s unique and very hard for our competitors to replicate. So in a nutshell really strong merchandising but in particular very strong consumer acceptance in this premium trash segments behind our innovations and as a result you've also seen our market share in this premium trash segment up quite nicely.

I guess just first on the commodity front, Steve, entertain me a little bit and think about a world where we are at sub $60 oil for the foreseeable future. I know it is early, but what does COGS deflation realistically look like in fiscal 2016? Is it negative 2%, 3%, 5%? And you mentioned potential offsets in terms of logistics costs going up and pricing promotional investments probably also going up in that world. But I just wonder if you could give us some guardrails as we think further out in terms of how you are thinking about the businesses preparing your fiscal 2016 budgeting given where oil is today?

Yes, it's a good question and the short answer is it's hard to know. A couple of things I would point out, obviously oil has moved down pretty significantly over the last 90 days. It’s not clear how long it will stay down at these levels. So I think as we start looking at our fiscal '16 planning we'll have to take a hard look at how long will these prices really stay at today's level. I think certainly for the next six months or so we expect them to be depressed beyond that I think it remains to be seen. A couple of other things I would point out about the resin market: the supply-demand balance still remains fairly tight here in the U.S. and so resin prices have yet to come down actually in the first half of our fiscal year resin pricing was up. We do anticipate it'll go down in the second half, but that's mainly being driven by lower prices overseas and that's creating some downward pressure here in the U.S. so it's good but I would just temper expectations a bit to say it's not just energy prices it's also the supply-demand balance. And then finally as you think of resin which is the largest commodity that we buy, keep in mind that historically in this category when you have seen a large move downward in resin pricing more than half of that has been spent back in the category and that's certainly what we're anticipating. So in short it’s always better to have a tailwind than a headwind, but I think at this point we're cautiously optimistic on how that might play through in fiscal '16.

Okay. I'll leave that there. But I guess, Benno, maybe from a top-line perspective, as you say, the scanner data has certainly been picking up and looked a bit better, which is a positive, but not nearly to the extent that we see in your reported numbers this quarter. So how much of the Q2 strength is really attributable just to timing of sell-in versus sell-out? Do you think channel inventories are okay because you do seem to be pointing towards a deceleration in the second half that goes beyond the professional and international dynamics that you mentioned?

Yes, the first thing I'd say is keep in mind that the public share data doesn’t capture the entire universe. We feel good about the inventories that are out there there's nothing unusual in here. The two areas we're certainly watching are one is in Professional Products where we did see that Ebola concerns had some impact on that business that may lead to destocking in Q3 that'd be my expectation and then wipes certainly wipes have been up very strongly in that track channel. We don’t think that Ebola had a big impact as the concerns faded away really quickly but the flu season certainly has been and is very strong, so we need to wait and see to understand whether that flows through to consumer consumption but other than that nothing particular inventories are where they need to be.

So wanted to go back to, Steve, I think your comment about more than half of the commodity benefits are spent back and we have certainly seen that before, closer to 60%, maybe two-thirds is spent back. So I guess I am scratching my head still a little bit around the price increases that are theoretically justified on the bleach products and on wraps in particular. And I worry that you are asking for trouble in some sense because we see the spot market in resins, U.S. or abroad, it is coming down. It will likely come down and help you guys out, but also help your competitors. I'm just trying to figure out why you took that price increase and again if you're not just asking for a price gap expansion like you have gotten before in these categories and start getting hurt from a share all over again?

So Ali let me take that question. A few thoughts, first of all the price increases are cost justified. I mean I would just point out when you look at the total supply chain whether it's labor inflation, healthcare cost, transportation cost, in particular or even all the other raw material sets, those have all been moving up, so we try to price as Benno said to the long-term average cost. So I think we feel both the bleach increase as well Glad is a cost justified price increase. Now as it relates to Glad as you know the resin market it actually tends to go up pretty quick and come down slow. It has been the history, but there's been a longstanding issue where if prices start to come down in the spot market for resin sometimes you'll see a step up in merchandising activity. Well that's certainly what we're planning for and it’s certainly baked into the outlook and our expectations but I think we've done a long track record of managing the ups and downs of resin pricing with the Glad business quite successfully. So we have seen this story before we managed during the long-term cost and I think we feel pretty good about the decisions we have taken and if conditions are different than we think we'll manage through it.

I would like to return to the discussion about the portfolio and get your perspective on how comfortable you are with the bags and wraps category, particularly with professional and Burt's leading the charge. On one hand, this offers diversification from your historical core business, but how do we view this moving forward? What insights can we expect regarding your core and underlying businesses? Additionally, could you address the role of international in your portfolio? We've been hearing about the focus on improving margins internationally, yet it seems challenging with currency fluctuations. It appears that margins are still declining or not improving significantly. I'm trying to grasp how this fits into your overall strategy. Does Clorox need to expand its international presence, or should it reconsider growing that segment? Please address both the category portfolio as well as the international and geographic portfolio.

Yes, so on category first I mean as you know if I take a step back we're very focused on driving the core business, right? If you look at the three businesses that you referenced, Ali, that grew last quarter, two of them really have been growing strongly for a long time and we've always pointed out those two businesses, Professional and Burt's Bees, as growth areas and like I said we're leaning into investments and those investments are showing good returns. Glad, I mean I probably wouldn't expect the growth rates that we've seen in the last quarter on Glad on a consistent basis going forward. But if I really look at underlying growth drivers, that's innovation—the businesses where we had strong innovation they have grown. And as you know we're very focused on growing our business behind innovation and like I said we have a very strong innovation program out there also for the fiscal year back half. So we're growing, we're growing the right way and importantly if you look across the segments we're growing in all segments. So I feel good about how much we're focused on the core and which businesses are growing and I certainly would expect homecare also going forward to contribute more as Steve said we have just now a few days ago cycled through distribution loss with a major club customer, so that's the wipes growth that we're seeing in tracked channels hopefully will be visible also in shipments as we compare them versus year ago. On International, I think what we said in International is that what we do want to do is grow more profitably. We're expecting a 5% to 7% in sales growth but we want to turn around our margins. International has a role in Clorox, we're executing the fundamentals well but I will also remind everybody that we're not trying to transform the Company into more of a global player, it's 20% of our portfolio and if I project forward to 2020, I don't expect that number to be significantly higher. Certainly as you think about the challenges that we're seeing from an inflation point of view and FX I think what it will mean is that we will be more focused than ever on the activities on the margin enhancement side, whether that's pricing, whether that is margin accretive innovation, applying the strong cost savings focus that we have in the U.S. and International or this goes back to the accelerator that I mentioned, moving the portfolio towards more profitable categories that really I think will become more of a focus going forward. How can we move our portfolio towards the categories that are more profitable and less perhaps volatile—Burt's Bees is a good example—and then certainly countries that are more economically stable and attractive like Peru and like Colombia, in and frankly also outside of Latin America. So International has a role but we will be very mindful to make sure that we grow but grow profitably.

If I can sneak in just one quick one about the cost savings and it looks like at least in Q1, Q2 versus last year the pace of it slowed a little bit. Just allay our fears about that, if you would please, or not?

Ali, I am happy to allay your fears. Cost savings in the gross margin you are probably looking at the web attachments we had about 130 basis points of cost savings in gross margin. Keep in mind cost savings hits every line of the P&L. A good chunk of the cost savings this quarter came through our SG&A expenses. So in total for the quarter we had 27 million in cost savings and I would say we're certainly on track to get 150 basis points of EBIT margin expansion from the cost savings programs this year and continue to feel good about the pipeline going forward. So our cost savings program is performing quite well for us.

First, just want to drill a little bit deeper on the volume number this quarter. Back of the envelope looks like Professional added about a point to volume, is that correct?

The Professional Products business in terms of volume growth, no, the business was up double-digit in both volume and sales.

Right, but in terms of your overall volumes it added about a point in the quarter?

That's right, sorry.

Okay. And then in terms of the second half, I understand why that would slow, but, Benno, you talked about you're lapping the lost distribution in wipes, so you have easy compares there. And I think you are also lapping some easier compares on bleach as well. So would those two items help to offset the slowdown in professional, or that's probably not the case?

I wouldn't overstate the slowdown in Professional. I mean the business was up double-digits in the second quarter obviously some of that may be inventory that will get worked off in the third quarter but on balance we still think Professional Products would be in this 10% to 15% growth. I think as you look to the second half of the fiscal year here is how we're looking at it. The full year outlook for the Company is for sales growth of about 1%. Now on a currency adjusted basis it's probably in the range of 3% to 4%. Certainly in the first half of this fiscal we were at the higher end of that we came in at about 4% currency neutral sales growth. As we look to the second half I think we feel very good that we're on track to have good positive volume growth, we're much on track to have sales growth that's solid from an organic standpoint. I think the big wildcard that we're all watching pretty carefully is what happens with foreign currencies and again the outlook is 2% to 3% there but we could be at the mid or upper-end of that range kind of based on where the spot rates are today. But absent that, I think the organic plans that we have are performing quite well for the Company.

And then in terms of Brita, you mentioned a new pitcher came out in November. The filters came out in August, but it seems like that business hasn't picked up yet. You mentioned earlier on the call, you said it will be stronger in the second half, but I think in the past you talked about growth or a return to growth in the second half of that business. Am I sort of splitting hairs there, or do you still expect growth?

Yes, so look I mean we expect that business to do better in the second half and we’ve also said that on the share fronts we expect that to start growing again by perhaps middle of this year. The key will be for that innovation to take hold with consumer and the key will be to get better merchandising plans with retailers and to be honest also support that innovation with the filter innovation with the right tools to get the price differential that we have compared to private labeled into the right place. So do expect a better half, don’t expect that business to grow strongly for the rest of the fiscal year but certainly better than in the first half of the fiscal.

Just a tiny little point of clarification on Brita, how much of the business is the pitchers and the refill filters as opposed to the on-the-go portable business?

The large majority is in pitchers and filters, Wendy, on-the-go is a nice and growing business but it’s relatively small.

Okay. Because the reason I asked, I sort of put it in the context of a bigger question about the Lifestyle segment and the margins there. We've seen margins up here in the first half of 2015, but over the last few years, the margins in that segment have come down a little bit and yet it is still a really profitable segment for you and I am just wondering, ballpark, competition in at least the on-the-go segment for Brita looks like it's going to get a little bit tougher now that Newell has made some acquisitions. It sounds like you are investing more on the advertising line for Bees. I don't know what is going on with margins in dressings and sauces, but I guess the question is how confident are you that that Lifestyle segment can sustain a margin 28% and above, if you will, a pre-tax margin?

I think let me go ahead and take that. I think we feel pretty good about the margins of Lifestyle. What’s true is over the last couple of years we’ve made some investments and we have made investments in Burt’s Bees and systems and processes so for a period of time that depressed the margins for Burt’s Bees and Lifestyle segment we kind of cycled through that. We’re also investing more to drive growth in that segment particularly on the Burt’s Bees business. So the margins are fundamentally healthy; I think we believe we’ve got good opportunities to expand them over time. But because they are such healthy margins, leaning into the growth side of that Bees business certainly seems to right us and that’s what you are saying.

Even though I believe the gross margins on Bees are quite strong, the additional advertising isn't likely to significantly affect the EBIT margin or the pre-tax margin for Bees. Would you agree with that?

It’s going to vary quarter-by-quarter. We just turned on national advertising recently which is actually performing early days but it looks like it’s performing quite well for us. Burt’s Bees business was up strong double-digits in the second quarter so it has very healthy gross margins. So if we have an opportunity to invest a bit more in consumer demand building investment in advertising to drive the top-line that’s a good investment and something we’ll do. I think again over the long-term we feel like both gross margins and EBIT margins are just fine for all the businesses and segment and Burt’s Bees.

And Wendy, as you know we’re really focused on investing where we get the highest ROI and we got very solid analytics to understand where the ROI is best for the Company and investments in the said areas are based on what we know really show very solid ROI we’re investing in the right areas.

Steve, I wanted to follow up on your comments regarding free cash flow generation that improved significantly year-on-year in the first half and you have given us some of the reasons for that. I wonder how much of that is sustainable, is this a new level of cash generation for the Company, or were there some one-offs in there? Thanks.

The free cash flow was it’s obviously been very good for the first half of this fiscal year and as I indicated in my opening comments we continue to believe that free cash flow as a percentage of sales should be about 10%. And I think over the long-term we’ve been pretty consistently in both good and bad years in this 10% to 12% free cash flow as a percentage of sales. So, one of the things that we continued to do quite well within the Company is convert sales to cash and be very disciplined in the allocation of that cash and I am personally feeling very good about what we’re doing in that space and have every reason to believe it will continue into the future.

As you evaluate the portfolio and focus on the investments that yield the highest returns, are there certain brands or products you would consider exiting or reducing emphasis on due to their associated costs? I'm not sure if Good is still in the mix, but what about brands like Green Works? What are your thoughts on the segments of the portfolio that may not receive significant investment going forward?

Overall Connie, we feel good about the portfolio and at the end of the day we’re applying the same capabilities across the entire portfolio whether that’s capabilities with the consumer or capabilities with customer or capabilities within the supply, and the synergies are pretty real, strong cash flow as Steve talked about, SG&A is comparatively low and ROIC is very strong. So I am very comfortable with the portfolio that we have, that isn’t to say that we will always look with the Board on an annual basis at whether there are opportunities and whether we are still the highest value owner or not? And it’s quite possible that we might be looking at some of the smaller businesses. But in general very comfortable with the portfolio and don’t feel the need to do anything different. We want to grow bigger rather than smaller. And I think what we said is that we are interested in bolt-on acquisitions to the tune of $25 million to $100 million in areas that are growth areas for us, and that are margin accretive on strategy, fit with our capabilities and that ideally are U.S. centric. So we are looking in whether that is health and wellness, or natural personal care or food enhancers and see if we can add, and that’s really the mindset that we are in, while we will always be focused on growing the core business first. We think that there are places that we can play, that we are not playing in yet. And that’s really our priority.

Can you just talk about the strategy accelerator process and what that means for the algorithm in terms of that 9%, 10% of sales in advertising and maybe the long-term growth rate? So do things change or is it zero-sum where you will move money out of places where it is less well spent and put into places where there might be better growth drivers? And then I have a follow-up, please?

Bill, as you think about the accelerators, they have really spotlights on our strategy 2020. So I think it’s very consistent with what we said during the leadership transition that we are not expecting the strategies to change, but what we are focused on is doubling down on choices that strategy 2020 calls for. So I expect that the financial algorithm that we are after with strategy 2020 will be the same. Advertising sales promotion which I think is what you referenced, Bill, the idea of investing another point in our brands that will remain the same. So these are really ways for us to fully accomplish our 2020 strategy financial objectives, as opposed to a departure from them.

Okay. And then would you change any of the incentive compensation metrics around the strategy accelerators, so like the broader Company incentive compensation metrics?

We haven’t decided yet, that’s early. But I don’t see why our compensation metrics would be wrong even in this context. Again these are just ways for us to emphasize aspects of the strategy that we have really started to put in place about 16 months ago. So they are not a radical departure. So I don’t expect that but we will always revisit that over time also with the Board.

To follow up on the initial question raised by Faucher, it appears that the increased promotional spending in the first half of the year is consistent among the companies that have reported so far. This seems somewhat coincidental, leading me to wonder if this trend is driven by competition or if retailers are already requesting rebates. The Nielsen data indicates that the percentage of ACV on deal is actually declining rather than increasing.

I think as Benno had indicated I don’t think the competitive landscape has changed that much over the last couple of months. What I would say is it’s higher than it’s been historically so it’s a very intense competitive environment here in the U.S. As companies have taken some of their focus off, somebody’s emerging markets and have focused back on the U.S. But I wouldn’t say that broadly it’s more competitive than we saw say three or six months ago. All of that said, the one trend that we are watching very carefully is this resin price which again if it starts to move lower which is what we anticipate, historically what we have seen is a good percentage of that has been spent back into the category. But absent that, and I think the landscape remains as intensely competitive as we talked to you three and six months ago.

Got you, so none of it’s driven by retailers asking for more money back?

No, we haven’t seen that.

Building off an earlier question, I was wondering if you could speak to just the priorities for cash given the significant amount of free cash flow that you have been generating?

Yes, the priorities are completely consistent with what we have been saying for many years now. We will support organic growth as Benno talked about keeping the core healthy. It’s certainly working for us and it’s something we are going to continue to do. We are interested obviously in M&A activity. If we can get businesses with 25 million to 100 million in sales that are margin accretive and have some tailwinds we are interested in that. As we’ve talked in the previous call, we feel very good about our debt-to-EBITDA, at the end of first quarter it was about 1.9; it’s elevated as I indicated in the second quarter, but that’s because we prefunded some debt but we certainly have dry powder. I think what you should expect going forward is we will obviously keep the dividend healthy but if cash starts to build up and we don’t have a use for it either for M&A or to support core growth probably in the form of share repurchases at some point will lean back into that to-date we’ve been doing just some modest share buybacks earlier this fiscal year, but we haven’t done much and we’ve been more focused on refunding of the debt to date.

I was wondering if you could discuss the extent to which you have been utilizing digital advertising compared to traditional methods, how effective it has been, how you are measuring the returns, and your outlook for that in the future.

Yes, digital right now is a little over 30% of our overall advertising sales promotion spend. That is as we understand the leading level in our industry and it’s also up quite significantly over the last few years and again it’s really based on a solid understanding of ROIs and the ROIs that we’re getting in this space are really attractive. So we expect that shift to perhaps continue. That said, there is always going to be space for TV, TV continues to be a very effective driver of in particular awareness, especially around innovations and like I said we feel good about our innovation program for the rest of fiscal year. But for us we call this what we need to be as always on. We need to be where the consumer is no matter where she is in her purchase cycle and digital and social media is particularly suitable to help us accomplish that. So digital plays a very strong role and I expect that to keep going.

I just have a quick follow-up on the promotional environment question. I'm still unclear about the commentary regarding an increase in trade promotion for the latter half of the year compared to prior expectations. I would have thought that if resin prices decrease, you would be monitoring it, which seems more relevant to fiscal year 2016 than the next six months. Any additional insight on this would be appreciated.

Yes, to clarify I think as I indicated in my opening comments, the increase in trades for promotional spending is a full year number. I mean it’s likely we will spend a bit more in the second half but it’s mainly a full year comment. I think what’s important is we’re agnostic on whether it’s trade or advertising, what we’re looking for is the highest returns and what resonates the most with the consumers, so whether that’s advertising, freight promotion or other things. We will be investing more we’re trying to get to this one point at the incremental demand building investment as a percentage of sales over time and so we’re going to spend more I think is probably the key takeaway, but you will see it fall in different lines of the P&L at different times.

And Lauren, adding to Steve’s point, a significant portion of trade promotion also is going against innovations really to make sure that we drive strong merchandising and trial out of the gate for those.

And then my second question was just actually on the professional products business. I think you have been clear on watching for any kind of destock in the third quarter, but I was just curious if you think that the recent phase of worries around Ebola and Enterovirus, has that perhaps pushed some of the cleaning standards and protocols and making changes higher on the priority list of some of the healthcare service industry than it was previously? Like could this be a sort of watershed event in terms of raising the profile of what you are trying to do?

I mean we certainly haven’t seen that Lauren and I think the cleaning protocols have been in place and what hospitals have been doing is just apply a cleaning protocols and make sure that they’re prepared for a potential increase in use or around our products to coincide with these cleaning protocols. So do we expect heightened awareness and does it help us? I have a dialogue with hospitals going forward around these and what our products can deliver, we hope so, but we certainly haven’t seen that in Q2 and we’ll have to see how it plays out. But clearly we think that this is a growth category and that’s why we’re investing in it.

I have a question regarding the U.S. market, which was mentioned earlier in the call. I would like to get more clarification on the growth there. I understand that the hospital segment likely contributed some growth, but that still indicates that retail sales in non-tracked channels likely increased by more than 10%. Can you share which specific brands or retail formats are experiencing this growth? Are you discovering new points of distribution that contribute to this level of growth, and to what extent were there one-time promotions, aside from the one mentioned related to Ebola? Thank you.

Javier, let me lead off on this. I would characterize the growth as broad-based. I think we had some very good promotions that were in place that have been planned like cold and flu and leaning into those. But I wouldn’t point to any single thing other than in the Professional space we had strong double-digit growth and some of that is probably hospitals building up inventory out of the concerns for Ebola. I think the U.S. growth was amazingly broad-based and we have talked Professional Products, we have talked Glad, we have talked Burt’s Bees which was up and mostly the other businesses had a very solid quarter. So I think it was a clean set of numbers and there is not anyone thing I can point to. And even from a retailer standpoint it's again not any specific channel; I think it was just across the board it was solid healthy growth for the Company.

Yes, for me Javier, I would really say that the two things I would point to that led to this broad-based growth as Steve said are one innovation and two the increase in demand spend and even on businesses that perhaps benefited from flu that’s based on long-term planning with retailers and we saw just very strong merchandised execution behind long planned events that certainly benefited from somewhat, but it's really been about innovation and increase in demand spend and there is nothing funky about this growth at all.

The cost pressures that led to the price increase in bleach seem to be pretty generic and not really limited to bleach, so healthcare costs, wage inflation, logistics, all of that. So should we expect price increases then in a broader part of your portfolio going forward?

Connie, I think what we said, the inflationary pressures are obviously pretty real and the increases that we previously mentioned are the kinds that tend not to reverse themselves. I think most of the pricing we've taken to date has really been focused on the International markets where we're dealing with much higher rates of inflation. You'll continue to see us lean into that. On the U.S. side, again where it’s cost justified and pricing to a long-term average cost we will continue to take pricing as Benno noted we've got a very long track record of doing this and balancing it with value. I will say going forward that one thing that has worked for us that we want to continue is trying to marry up pricing with innovation because I think if you can bring those two things together it translates into good value for the consumer here itself and it tends to do much better. So short answer is we're not afraid to take pricing in the U.S. when it’s cost justified; we would like to avoid it when we can and certainly marry it up with innovation. But we feel like the recent price increases we have taken are the right ones for the long-term.

And to build on Steve's point, and I think you mentioned it Steve, so we will remain focused on value. Value, of course, is a function of pricing but also investing in our brands and also having innovation out there and delivering superior products—all that won't change.

Yes, thanks everyone. To sum up, I feel very good about the second quarter and what was really a solid first half performance. And I have confidence in our plans for the balance of the year. And I certainly look forward to speaking with you again on our next call in May.