Clorox Company (CLX) — Q2 2018 Earnings Call Transcript

Thanks, Evan. Welcome, everyone and thank you for joining us. On the call with me today are Benno Dorer, Clorox' Chairman and CEO; 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. Reconciliations 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 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. I would also direct you to read the forward-looking disclaimer in our quarterly earnings release, particularly as it relates to the impact of tax legislation. 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. With that, I’ll cover our Q2 business performance, discussing highlights in each of our segments. Steve will then address our financial results, as well as updated financial outlook for the year. Finally, Benno will close with his perspective followed by Q&A. For the total company, Q2 volume and sales each grew 1%, reflecting nearly a point of negative impact from the sale of Aplicare in August 2017. This is on top of very strong growth in the year-ago quarter when volume increased 8% and sales grew 5%. In addition, sales were reduced by about 1 point from the combined impact of retailer inventory adjustment and lower shipments due to transportation carrier capacity constraints, both of which happened late in the quarter. Importantly, though, we saw tracked channel consumption tracking well ahead of shipments late in the quarter and we do not expect a meaningful impact in the year from these events. I will now return to results by segment. In our Cleaning segment, Q2 volume grew 2% where sales grew 1%. We’re pleased with these results, recognizing that for the segment, it includes about 2 points of negative impact from the sale of Aplicare and that we are lapping double-digit volume growth in the year-ago quarter. Cleaning segment topline was led by Home Care, where volume and sales each grew by mid single-digit on top of double-digit volume growth and high-single-digit sales growth in the year-ago quarter. Growth in Home Care, which is our largest business unit, continues to reflect broad-based strength across The Clorox equity portfolio. This reflects yet another quarterly record for shipments of Clorox Disinfecting Wipes behind double-digit growth in the club channel, as well as from shipments of new Clorox Scentiva products. Consistent with these results, Home Care delivered its 14th consecutive quarter of market share gains. In our Laundry business, volume grew modestly on flat sales, following Q1 when retailers stock up for hurricane-related purchases. Recognizing this, we’re pleased to see continued share gains in Clorox Liquid Bleach behind growth in our premium Clorox Splash-less Bleach, as well as the launch of new Clorox Performance Bleach with Cloromax. Lastly within the Cleaning segment, our Professional Products volume and sales declined driven by the sale of Aplicare. However, the balance of our Professional Products business continues to perform strongly. Turning to Household, Q2 volume was flat and sales decreased 3%, compared with a 12% sales increase in the year-ago quarter, with gains in RenewLife more than offset by declines in other businesses. Starting with our Glad Bags and Wraps business, volume and sales declined mainly due to lower volume in the club channel, partially offset by continued strong growth in e-commerce. At the same time, we saw all-time record shipments of our premium OdorShield offerings, reflecting our focus on driving profitable growth in this higher margin segment. On the innovation front, we just started shipping new ForceFlex Plus advanced protection trash bag, our best trash bags yet, which features a reinforced bottom, leak guard technology, superior strength and guaranteed seven-day odor control. In our Charcoal business, volume and sales declined, following a double-digit increase in the year-ago quarter. Now as a reminder, Q2 is a relatively small quarter for this business, representing less than 10% of the annual shipment. As we head toward growing season in the second half of this fiscal year, we’re launching a new partnership with Major League Baseball, as well as new advertising. As a result, we continue to feel good about our plans for this business. Cat Litter volume and sales declined, driven partly by lower merchandising in the pet channel and a late in the quarter retailer inventory adjustment. We view these two factors as transitory and do not anticipate them to have meaningful impact on our plan for the full year. The business continues to have strong momentum behind our Fresh Step with Febreze innovation, resulting in a fifth consecutive quarter of market share growth. We’re building on this momentum by launching Fresh Step Clean Paws Low Tracking Litter to address the biggest unmet consumer need in this category behind an exciting new and advanced technology. Finally, turning to RenewLife, volume and sales each grew by double digits and we’re especially excited about the strong progress we’ve made in the e-commerce channel, which is now a significant portion of this business. In our Lifestyle segment, volume and sales each increased 3%. Our Brita business volume and sales each grew by double digits, driven by strong club merchandising, as well as by our Stream pitcher and Long Last filter innovation. We’re pleased with the positive impact our product innovation had in the first half of the fiscal year and remain focused on the long-term health of this business, as we continue to invest in brand building and innovation. Burt’s Bees delivered volume and sales growth in Q2, largely due to all-time record shipments of lip care products, behind strong consumption and distribution gain. While still early, we continue to be excited about the rollout of our new cosmetics line. To conclude Lifestyle segment, food volume and sales declined, partly due to lower shipments of KC Masterpiece barbecue sauce, as well as a late in the quarter retailer inventory adjustment. Positively, overall, Hidden Valley consumptions remained healthy and the franchise continues to deliver share gains for the 12th consecutive quarter. Finally, turning to International, volume was flat, while sales grew 4%, mainly reflecting the benefits of pricing. We continue to focus on our Go Lean strategy to drive margin improvement in our International business, while selectively investing in Burt’s Bees, RenewLife, Laundry and Home Care. Now, I’ll turn it over to Steve, who will provide more information on our Q2 performance and discuss our updated outlook for the fiscal year.

Well, thanks, Lisah. And we’re certainly pleased with our first half sales growth of 2%. Importantly, we are on track to deliver our full year sales outlook of 1% to 3%. Our brands are performing well and we feel good about the promising innovation in the second half. As we mentioned in our press release, we are facing elevated cost from commodities, and the tightening logistics market, which certainly impacted the second quarter and will continue through the balance of the fiscal year pressuring earnings. We believe we’re taking the right actions to address these cost headwinds and build margin over the long-term. Importantly, we are very pleased with these significant expected benefits from Tax Reform. I’ll take a moment to comment on what we’re seeing as a result of Tax Reform before taking you through our second quarter results. As you know, Tax Reform brings significant changes, including the reduction of the U.S. corporate federal income tax rate from 35% to 21%, the adoption of a modified territorial approach to taxation of foreign earnings and the elimination of certain tax benefits such as the domestic manufacturing deduction. The tax law is extensive and quite complex, and we’re still working through all of its impacts, including updates for any changes to congressional, administrative or other policies, guidance or interpretations of the law. Now based on our current understanding of the tax law, we recorded approximately $81 million of tax benefits in the second quarter or an increase of $0.61 to earnings per share, which is the main driver for our second quarter effective tax rate of a minus 3% versus 34% in the year ago period. There are several aspects to Tax Reform that impacted our second quarter tax rate and these include a $60 million benefit from the revaluation of our net federal deferred tax liability, $28 million of benefit to our current fiscal year taxable income from the reduction of the U.S. corporate federal income tax rate, these were partially offset by a $7 million one-time transition tax on accumulated foreign earnings net of applicable foreign tax credits. Looking forward, for fiscal year 2018, based on our current understanding and analysis, we estimate our effective tax rate to be in the range of 23% to 24%. Directionally, over the long-term, our tax rate is estimated to be in the mid-20s range. Bottomline, a lower tax rate moving forward is expected to significantly benefit our earnings and cash flows. As a result, we’ll continue discussions with our Board of Directors on how best to deploy the increasing cash to enhance shareholder value, consistent with our cash allocation priorities, including growing our business and returning excess cash to shareholders. For more information, please refer to our 10-Q filing, which will be available later today. Now I’ll take you through our financial results for the second quarter. Second quarter sales grew 1% on top of 5% in the year ago quarter, which includes about 1 point of volume growth and about 0.5 point of pricing, partially offset by over 1 point of unfavorable mix, reflecting strong club channel shipments. As a reminder, second quarter sales were negatively impacted by nearly 1 point from the Aplicare divestiture and about 1 point of combined impact from retail inventory adjustments and carrier supply constraints. Much of this volume is expected to ship in the third quarter. As I mentioned on our last earnings call, we expected gross margin to be under significant pressure in the quarter and it came in at 43%, a decrease of 170 basis points versus a year ago. These included 110 basis points of higher commodity costs, reflecting the hurricane-related pressures we discussed last quarter, as well as 90 basis points of higher logistics costs, driven in part by a further tightening of the transportation market. Importantly, consistent with our strategy, we invested about $8 million or 60 basis points in the future growth and cost savings programs. Second quarter gross margin also includes a benefit of 170 basis points from strong cost savings. Selling and administrative expenses were essentially flat versus year ago, and our advertising and sales promotion expenses increased $12 million versus the year ago quarter to about 10% of sales largely to support product innovation. Net of all of these factors, we delivered diluted earnings per share from continuing operations of $1.77, which includes the $0.61 of benefit from Tax Reform, earnings per share also reflects a reduction of $0.07 related to the incremental consumer demand building investments. Turning to fiscal year-to-date cash flow, net cash provided by continuing operations was $322 million versus $271 million in the year ago period, driven by lower employee incentive compensation payments. As we mentioned in our press release, Tax Reform had no impact on cash flows in the second quarter. Turning to our fiscal year 2018 outlook, as I mentioned, we continue to anticipate fiscal year sales growth to be between 1% and 3%. This includes about 3 points of incremental sales growth from our robust innovation programs, partially offset by nearly 1 point of negative impact from the Aplicare sale. Gross margin for the full year is now expected to be down modestly, reflecting even higher cost pressures related to commodities and logistics versus our previous assumptions. As a reminder, our previously communicated fiscal year outlook already reflected elevated costs, including significant pressures from the recent hurricanes. As a result of our updated assumptions, we now anticipate gross margin to be down in the third and fourth quarters, although not to the extent seen in the second quarter. Turning to our fiscal year 2018 diluted earnings per share from continuing operations, as we mentioned in the press release, we now expect fiscal year diluted earnings per share to be in the range of $6.17 to $6.37, an increase of 15% to 19% versus year ago and above the previous range of $5.47 to $5.67. This updated EPS range reflects an estimated benefit of $0.70 to $0.75 from Tax Reform and our expectations for lower gross margin in the second half. We’ll be taking a close look at reducing selling and administrative expenses, and considering other planned adjustments to help address the pressures on our margins. I’ll close by saying that we believe we have the right strategy in place to work through these challenges, investing strongly in our product and brand differentiation remains our top priority to keep our value proposition sharp. In addition, driving our cost savings and productivity initiatives will also consider additional price increases to support our margins, and we’ll continue to drive our International Go Lean strategy to achieve operational efficiencies. And finally, as I mentioned earlier, as a result of Tax Reform, we are looking forward to partnering with our Board of Directors to review opportunities to deploy cash to further enhance shareholder value. Now I’ll turn it over to Benno.

Thank you, Steve, and hello, everyone. Let me share with you my three key messages for today’s call. First, we feel good about our first half results, execution and business fundamentals. We grew Q2 sales 1% on top of 5% in the year ago quarter, including the full impact of the Aplicare sale and the impacts from late quarter retailer inventory adjustments and transportation constraints. Now importantly with first half sales growth of 2%, we remain on track with a 1% to 3% sales growth target for the fiscal year. We were pleased to see tracked channel conception tracking ahead of shipments late in the quarter, and more recently, it appears that shipments delayed by carrier constraints have shifted into January. Importantly, execution and business fundamentals remain strong, and we continue to win with consumers and customers as evidenced by the following; year-over-year Household penetration, a critical metric continues to grow. On a 52-week basis at the end of the calendar year, 77% of our brand portfolio is growing or stable Household penetration, up from 46% just four years ago. The majority of our portfolio is also seen by consumers as providing better value, supported by our strong innovation programs and this is critical in an environment where value is king. And finally, we have strong execution on pricing in the U.S. and international. Second, we’re staying the course in our strategy, as we manage through a tougher cost environment. We remain committed to keep our business fundamentally strong and healthy, which remains job one in the face of higher cost environment in the U.S. We will keep playing offense and we will continue to do that by investing in differentiated products and brands, and with a solid innovation pipeline that aims to deliver 3 points of incremental sales growth in fiscal year ‘18. We will launch several meaningful margin-accretive innovations in the back half of the year, including the extension of our successful Clorox Scentiva platform into the Bathroom and Toilet Cleaning categories, as well as the rollout of Fresh Step Clean Paws Low Track Cat Litter and Glad trash bags with leak guard to innovations that address the biggest unmet needs in their respective categories with significant new technologies. With strong e-commerce sales and solid returns on investment for marketing, we are investing in demand creation focused on innovation and digital marketing to engage consumers online, and we are stepping up our focus on cost reduction and margin improvements. We’re investing to lower the cost of our infrastructure and enable for us to grow such our new Atlanta West facility, which expands our self-manufactured Home Care capacity. We continue leading into waste reduction across our business to support margin expansion, including with our Go Lean strategy for international. And we’re evaluating additional options to support margin improvement, including price increases, given the commodity cost environment. Third, Tax Reform is a significant and sustained benefit for Clorox shareholders. Our commitment to shareholder value creation is as strong as ever. Our priorities for uses of cash are business growth, including targeted M&A and returning excess cash to shareholders, and consistent with those priorities, we are actively progressing discussions with the Board to put Tax Reform benefits to work for shareholders in an expedient manner. So, in summary, while there are some near-term cost challenges for Clorox and others across our industry, we’re pleased with our first half results and we’re excited by the opportunities Tax Reform benefits bring to our business and to our shareholders. We continue to have confidence in the competitiveness of our 2020 Strategy and we’re optimistic about our ability to deliver growth that’s profitable, sustainable and responsible, as we aim to create shareholder value over the long-term. I’d like to touch on one final and important topic before we go to Q&A, and that’s our CFO transition. As you saw in our press release, Steve Robb has made the decision to retire after 29 years with the company. I know how much of you have enjoyed your interactions with him the past nearly seven years he served as our CFO. He’s led Clorox through a strong period of financial performance and during his tenure as CFO, Clorox total shareholder return has climbed 165%, ahead of the S&P 500 and well ahead of the 117% TSR growth for our peer group. We’ve been fortunate to have such a strong leader on The Clorox team these many years. I’ll admit that I’ll personally miss Steve and I am incredibly grateful to have been able to work alongside such an exemplary leader and good friend over so many years. I am equally pleased that Steve in the company’s commitment to leadership development and succession planning has enabled us to appoint such a capable and experienced leader as Kevin Jacobsen as our next CFO. Kevin has been with Clorox for 22 years and has held leadership positions across the company in finance. He’s been actively and deeply involved in the day-to-day finance operations of the company and has worked closely with Steve and the executive team to shape and develop the company’s financial and capital market strategies. He will join us on the call next quarter. We anticipate nothing less than a smooth transition and continuity. And I am pleased to Steve will stay on after March 31st in an advisory capacity through the end of the fiscal year. And with that, here’s Steve to say a few parting words before we go to Q&A.

Thanks, Benno. Well, listen, it has certainly been my greatest privilege to have served as The Clorox Chief Financial Officer since 2011. And importantly, after 29 terrific years at the company, what I appreciate most are the relationships I’ve established with so many people from different areas of our business, and of course, our Board of Directors and exceptional management team. I also very much enjoyed the many discussions I’ve had with you and the rest of the investment community over the years. I’ve always appreciated your insights, questions and certainly your candor. At the end of March, I’ll be pleased to head over the reins to Kevin Jacobsen, a tremendous leader and a friend, who is supported by an outstanding finance organization. Clorox has the right strategy, as well as talented and passionate people who are always committed to doing the right thing for our shareholders and I leave feeling very good about the company’s future. Thank you everyone.

Thank you, Steve. And we’ll now open it up for your questions.

Thanks and congrats, Steve. We’ll miss you. I’m feeling a bit lonely since there used to be three Steves on this call, and now I’m the only one. We enjoy working with Lisah and look forward to collaborating with Kevin. We’ve discussed net realized pricing trends on these calls for some time, highlighting the challenges the industry is encountering in maintaining pricing amid stiff competition and pressure from retailers. This quarter, we see that reflected in our results, with realized price mix down about 3% in the core Cleaning and Household segments, which impacts gross margin trends due to rising input costs. Looking ahead, what is the updated outlook on input cost trends in your forecast, and how confident are you that pricing will hold if input and transportation inflation increases again? This seems to be a recurring challenge we face in these discussions.

Yeah. Thanks, Steve. Let me lead off on this. So, first, our outlook for commodity costs. Just to ground everyone, as I said in my opening comments, we anticipate that gross margin for the full year will be down modestly, included in that is about 1 point of commodity cost headwinds, that’s our best estimate at this point. Now keep in mind, as I indicated on the previous earnings call that includes about $20 million of hurricane-related costs. Those certainly impacted our second quarter. I fully expect it will impact the third quarter, placing downward pressure on margins. But we do anticipate that over time, as we move through the fiscal year that should begin to dissipate. So some of the commodity costs, I think, are probably real and permanent. I think some of them related to the hurricane will likely dissipate. So what are we doing about it? Well, the first thing is, it’s always about growth, profitable growth throughout renovation and we’re certainly feeling very good about our innovation programs and how that’s delivering for the company. The second has been cost savings. As I indicated, we did make some incremental investments in the second quarter to support our cost savings and growth initiatives, and I think, we feel very good about our three-year pipeline of cost savings initiatives. And then, finally, after doing those things, if we need to we’re not afraid to take pricing. We took it on Disinfecting Wipes, it’s still early days, but I will tell you, I think, it’s going well and we feel like we’ve got the strength and health in our brands, that if we need to take pricing to protect margins and continue investing back in the businesses, we’ll do that. So, I think, we remain confident that over the very long-term that we’ve got opportunities to continue to build margin.

Yeah. Steve, this is Benno. Perhaps, one additional comment related to the ability to take pricing, which certainly seems to be an underlying part of your question. As Steve said, as cost continues to rise, we’ll continue to assess additional pricing in the U.S. and international. And notably, we think that our innovation and strong marketing investments put us in a good position to do so. I’d love to share with you some information that I have about price sensitivities, perhaps, as a way to build your confidence and make sure that you can share mine, price sensitivities on our brands today are lower than they were three years ago. And just a reminder, lower is better, over the last two years, price sensitivities decreased by 8%, whereas, importantly, on competitive brands they were up 7%. So that’s a 15 point swing. That’s pretty remarkable, and then, of course, as a result of the fact that we have brands that offer better value that we have invested in the business and that we have innovation. Importantly, also our price sensitivities in absolute are about 25% lower than those of competitors in this space. So when we look at major CPG brands in our and related categories, we compare ours against those and we’re seeing significant benefit again, and that’s of course, because the majority of our brands are seen as better value. So we have a strong track record executing price increases, obviously, we need to make sure that price increases should reassess them are cost justified. But we will certainly take a hard look and think that our brand certainly wants us being cautiously optimistic about taking pricing even in this environment than our Q2 pricing actions certainly has furthered that confidence.

Okay. And just to be clear, the price sensitivities that you’re talking, is that just a measure of elasticity that you look at, what is that exactly?

Yeah. That’s hard data. Those are price elasticities.

Okay.

Certainly. As the quarter came to a close, we faced some challenges with carriers, which was a struggle seen across various industries. Consequently, we had orders that did not get shipped due to difficulties in securing drivers. We are actively taking steps to prevent this from recurring, although the tight transportation market may present ongoing challenges. Overall, we anticipate that most, if not all, of that volume will return in the third quarter. Based on our current insights, we do not foresee any significant impact on the full year, though we will need to get through the third quarter to confirm this. Regarding the tax rate, we expect the full year effective tax rate to be approximately 23% to 24%. There will be notable fluctuations across the quarters due to a considerable one-time gain or adjustment we experienced in the second quarter, as well as the adjustments made to the first half's tax rate in the same period. As we progress into the latter half of the year, these differences will become more apparent, and you can likely project them accordingly. I encourage you to focus on the full year tax rate, which is based on our current understanding of a complex tax environment, and some variability is to be expected. Historically, we have maintained an effective tax rate in the low to mid-30s, but moving forward, we believe it will drop to the mid-20s. This represents a significant reduction, particularly since over 80% of our sales occur in the U.S. Compared to many other companies, we expect to benefit disproportionately, which will enhance earnings and significantly increase our cash flow generation in the upcoming quarters and years. As Benno mentioned, this is why we are working with the Board to explore ways to enhance shareholder value in light of these changes.

Hey, folks. Jason here but you can call me John if you so choose. Okay. Good afternoon and thank you for the question. One quick clarifying question, the press release you mentioned sort of modest gross margin compression for the year, but in the prepared remarks talking about compression both the third and fourth quarters. I can’t walk away thinking maybe your definition of modest is a bit different than mine. So can you quantify that, what does modest mean?

Jason, I almost want to ask you how you define modest, but let me share our perspective on gross margin for the year. Acknowledging the current volatility in transportation and commodity markets, we expect gross margin to decrease modestly for the full year, likely by less than one percentage point. Specifically, in the third quarter, we anticipate hurricane-related costs will significantly pressure margins, although we believe the decline in third quarter gross margin will be smaller than what you saw in the second quarter. Looking ahead to the fourth quarter, based on what we know, we expect gross margin to decrease slightly, not significantly, as we manage those hurricane-related costs. Additionally, we have been making substantial investments in our supply chain to achieve future cost savings, and as we enter the second half of the fiscal year, the impact of these investments will be less visible. This doesn’t mean we’re not still investing for the long term; it’s just a matter of how these investments unfold throughout the year.

Okay. That’s helpful. Thank you. And then I want to zoom in a little bit more on Glad. You mentioned the price increase you took and I think it was Waste business that sounds like it’s going okay. Can you talk about the traction you’re getting where you took some corrective actions on Glad and I believe when you took those corrective actions, you sort of referenced setting the portfolio up from pricing architecture perspective for success on the next wave of innovation you are bringing. Maybe I missed it, but I didn’t hear any comments on the next wave of innovation, can you give us any more color on what’s coming down the pipeline there? Thank you.

Yeah. Jason, thanks. First of all, on the pricing action, as you remember correctly, we said that we’re going to take down pricing at about 40% of the Glad trash portfolio, which is the part of our portfolio that is used by consumers to enter innovation, so that was of strategic importance. We look at that price decrease as to-date the successful and if you look at share results, what you can see over the most recent weeks is that the Glad trash business has returned to share growth. So, for what it’s worth, that is something that we wanted to see and is happening, and an indicator of success. We did comment earlier on innovation on Glad trash that’s being launched right now. It’s our best trash bag yet that we call Glad ForceFlex Plus with advanced protection and if you think about Glad ForceFlex, it’s the strongest bag in the category and consumer preferred, because it has a unique combination of strength and odor control. But the biggest unmet consumer need to-date was leakage protection, you pour food remnants, other things, plastic cups into trash bags, there’s still liquid in it and then that liquid can leak. This is the first trash bag of its kind that addresses that consumer need and gives consumers leakage protection, and it’s another example of a significant innovation, what we look at as game changing innovation, margin accretive game changing innovation, mind you coming out of our Glad joint venture. So pricing and innovation on Glad is a one-two punch, as anticipated and we look forward to seeing this rollout in the market right now, and have every indication that this is going to be another successful innovation on this business.

Hi. Good afternoon. Thanks for taking my question. And I wanted to kind of go narrowing into the commentary about M&A or uses of cash that you added on the prepared remarks, and also in the press release. So I was just wondering what would be the kind of areas that you’re looking for that would make sense in terms of like areas that you want to explore. In the past you have mentioned some of the Lifestyle, which you were successful with RenewLife or could we think about something bigger and more transformational? And Steve, we wish you all the best in the new phase of your life. Thank you.

Thank you, Andrea. I appreciate that. I want to share my perspective. We’re really enthusiastic about Tax Reform. From an investment standpoint, U.S. assets such as infrastructure projects, cost-saving initiatives, and M&A are significantly more appealing now than they were before the reform passed last December. This is primarily due to the 14-point reduction in the U.S. federal tax rate, which increases cash flow from these projects. I’m confident that we will continue to invest in our brands and businesses and maintain our cost-saving efforts. We intend to uphold our disciplined approach. As always, we will search for strong investment opportunities, with our focus on M&A remaining steady. We prefer U.S.-based businesses now more than ever, especially those that benefit from advantageous trends, enhance margins, and are asset-light in areas where we see potential for growth and shareholder value. None of this has changed. Additionally, as we accumulate excess cash, as previously communicated to our investors and Board, we plan to initiate the process of returning excess cash to shareholders. Tax Reform further supports this initiative and likely increases the cash available for distribution. Our cash allocation priorities are as follows: first is to support our operations, second is the dividend—which we have increased for over 40 years—followed by managing debt. We are targeting a debt-to-EBITDA ratio between 2% and 2.5%, and we are currently at about 1.7% to 1.8%. Last quarter, it was 1.8%. We feel optimistic about that alongside share repurchases. Therefore, as both Benno and I have highlighted, our focus will remain on investing for organic and inorganic growth while also finding ways to return cash to our shareholders.

Thank you. Could you elaborate on the SG&A savings you mentioned as a strategy to manage costs? Considering your increased investments in E&P, are you exploring ways to streamline your processes? What exactly does the SG&A saving program entail?

Yeah. Well, we have taken a very disciplined approach for many years to SG&A management. I think before many companies were doing zero based budgeting we had been focusing on this. What we do is we apply our cost savings methodologies to SG& A as a way of taking out cost that the consumer doesn’t value or they don’t benefit the company and its shareholders in some way and I think we’ve had a nice track record of really bringing that number down below 14%. I just think in this difficult cost environment, we are going to take a look at discretionary expenditures where you can always make choices and whether to spend or not, where it’s not going to hurt the brands, it’s not going to hurt the company or our people. So it will be a continuation of what we’ve been doing, but we’re probably going to lean in a bit harder to that to see how we can mitigate some of the near-term inflationary pressures certainly from these hurricanes. So it’s what any good disciplined company I think we tried to do in a situation where you’re facing some near-term cost challenges.

Hi, everyone. I have a question regarding the $14 million in additional demand-driven investments mentioned for this quarter to support product innovation. I'm looking for more clarity on how this money was allocated and whether this is a one-time investment or if you plan to increase investment levels moving forward. Additionally, historically, when you've ramped up demand-building investments, what has been the typical delay between the spending and the resulting growth in revenue?

Thank you, Bonnie. First, I want to clarify that the $14 million we discussed is not related to Tax Reform, and it does not indicate a need for increased spending on our part. As you know, we have already increased our spending over the past three years in a strategic manner, and that approach has served us well. Recently, we've stated that we are generally satisfied with our advertising, sales promotion, and demand spending, and based on our current assessments, we do not see the need to increase it further. I view the $14 million compared to last year as planned investments that align with our innovation efforts. This fiscal year, we have mentioned that advertising and sales promotion spending will fluctuate by quarter, but we are not raising our total annual estimate or projections for future years at this time. We are content with the demand investment we have made, and most of those dollars have been directed toward innovation to enhance speed to shelf and brand awareness, which comes with a time lag. This won't necessarily translate to an immediate sales increase in the first quarter; rather, we should consider this investment as one that will pay off in the latter half of the year as it focuses on building brand equity and awareness for our new innovations, including Burt’s Bees, Clorox, Scentiva, and the Fresh Step platform, which are areas where we see positive results and want to continue supporting with advertising and promotions. Lastly, as I mentioned earlier, we will maintain an offensive strategy. We are confident in our approach and in our ability to connect with consumers and customers. When opportunities arise, like last quarter, we will invest in advertising, sales promotions, and initiatives that will result in future cost savings. Our management approach is centered on the overall year and long-term success, not just meeting quarterly expectations, and these $14 million are part of that strategy.

Okay. That’s really helpful. And I know you’ve mentioned in the past that your focus on the investments is towards the faster growing categories, and one, that you highlighted this morning again is Burt’s Bees, sounds like it’s doing really well and you highlighted lipsticks. So any more color there and how that’s working? And then could you touch on international opportunities and where you’re at with that for Burt’s Bees? Thank you.

We are pleased with Burt’s Bees and although cosmetics are still in the early stages, we are enthusiastic about our expansion of that line, which began in the last quarter and will continue this quarter. The rollout is phased and aligned with retailer shelf reset schedules, so we will see ongoing progress in Q3. I'm particularly excited about the impressive growth in our core lip care segment, with lip balm experiencing strong double-digit growth last quarter and gaining market share. Burt’s Bees has effectively expanded into new categories while maintaining a disciplined approach that prioritizes our core business, particularly lip balm. Internationally, we see solid opportunities, operating in over 35 countries with positive results from our innovative distribution strategies. Our recent focus has been on Asia, where we've successfully entered Mainland China through e-commerce via Alibaba’s Tmall platform, and we see continued potential there. Overall, we feel optimistic about the future of Burt’s Bees, both domestically and internationally.

Thanks. Good afternoon and I want to extend my congratulations also to Stephen and Kevin. So, best wishes to both of you. I wanted to point of clarification on the sales growth guidance. So you’re mentioning the 1% to 3% year-over-year sales growth. That includes 1 point track from Aplicare, but the FX guidance and I apologize if I missed this, it was previously a 1 point headwind but the dollar has weakened now, so that should be seemly probably flat or maybe even a little bit of a help. So I was hoping you could comment broadly on your expectations for the company from a volume and price mix perspective, has that changed at all since you last updated your guidance? And then it doesn’t sound like Benno anything has changed from a category growth perspective. You sound pretty encouraged based on what you’re seeing with the POS data, understanding there’s a little bit of a delta there between shipments and the POS late in the quarter, but maybe you could touch on that and sort of wrapped that into this answer as well? Thanks.

Yeah. Maybe I’ll start there and then Steve can answer the first part of your question. Yeah, fundamentals are pretty solid and categories are quite healthy. If you look at the tracked channels, category growth is hovering right at above 1%, that’s unchanged and in line with our expectations and actually quite healthy. And I think you all know that non-tracked channel is where the growth really is. So the growth there is stronger than 1%. So we feel good about where we are on categories. It’s too early to say what Tax Reform will bring, certainly the economy is picking up and if you look at the consumer fundamentals whether that’s consumer confidence, whether that’s unemployment, whether that’s overall consumer spend, they all look pretty good. The question now is will it translate into our categories and we’ll have to see about that. But a stable consumer environment and category environment is good for us and that’s certainly what we’re seeing right now.

And just from sales outlook standpoint, we are thinking it remains fairly unchanged, it’s consistent with what we talked about in the last quarter. We still believe we are solidly in this 1% to 3% range, of course, fiscal year-to-date we’ve got 2%, obviously, we were a little disappointed that we had the carrier transportation and other issues late in the quarter, but that volume will come back in the third quarter based on what we can see. And so I would say, generally, we’re on track, innovation at 3 points looks good, Applicare is pretty much a known you can just do the math on that. Fair enough on FX, you’ve always got some puts and takes on that. We have to see how that plays out for the rest of the year. But when I look at FX, price mix and just all that other stuff, it’s pretty been a much a wash, and again, let’s get to the next couple of quarters, but feeling confident in our sales outlook.

Thanks for the follow-up. To succinctly address Steve Powers' earlier question, do you think retailers are now more open to adjusting prices? Are we waiting for wages to rise more significantly? Logistics and fashion costs have increased, yet your peers and your margins have been steady. Have we reached a point where you believe pricing adjustments will start to occur, not just in your categories but more broadly? Thank you.

I can't really comment on what’s happening more broadly. Taking pricing is not easy these days. However, I believe that having market-leading brands, investing in brand equities, maintaining solid category growth, and ensuring strong brand performance along with innovation all suggest that we are evaluating whether it's the right move for us. We demonstrated successful pricing with Clorox Disinfecting Wipes last quarter and have done so in the past. Category growth is important for retailers, and pricing has historically played a key role in category growth, which retailers recognize. I wouldn't say it's easier today, and it's certainly not easy for everyone. However, considering our business fundamentals, we appear to be in a strong position compared to others to take action should we choose to do so.

Great. Thanks and congrats to Steve and Kevin. In terms of the discussions that you’re having with your Board about reinvesting some of that tax benefit back, where do you think your deficiencies lie, like can you give us some color into what you’re considering more advertising, more in-store, people investments to build out capabilities, things like that?

Well, again, Olivia, I guess, I would just remind everyone that one of the hallmarks of our 2020 Strategy and what we’ve done successfully over the last couple of years is we’ve significantly stepped up consumer demand building investments. You look at our fixed capital investments, that’s been stepped up to support both growth and cost savings. So I actually feel good about the investments we’ve been making. Of course, we’ll take a hard look to make sure in light of Tax Reform if there’s even more that we can be doing, but I don’t want to leave you with the impression that, because of Tax Reform that there’s going to be a significant shift there, but we’ll always take a hard look. I think the biggest opportunity is to take a hard look at excess cash generation and look for ways to get that back to our shareholders and we have plenty of capacity, both in terms of borrowing capacity, while staying disciplined within our range, as well as just cash flow capacity to invest behind the business. So we’re in a very good spot, because of the balance sheet, because of the cash flows and now Tax Reform to be able to invest for growth, as we’ve been doing, but also return cash to shareholders and those are the discussions we’re having with the Board.

Got it. Specifically regarding Cleaning, you mentioned the price changes on Glad, but what about wipes? I expected those changes to have been reflected in Q2, yet the price in Cleaning was down. Has that been implemented? What has been the competitive reaction to those actions, and do you still expect price to be a factor in that division this year?

Olivia, it’s Lisah. So CDW, Clorox Disinfecting Wipes pricing and Cleaning, this quarter is actually only about a month or so, maybe a little over a month, so we did see some lift. But more importantly though as you see the results of Clorox Disinfecting Wipes, we’re still growing double digits in some channels. So again to Benno’s point, strength of our brands here. I hope that answers your question.

Thanks. Good morning, guys. So first question I guess for Steve. Just curious if there’s any thought given to sticking out year and calling it an even 30 at Clorox?

Well, keep in mind, it’s been more than 29 years and I am going to stay on as Benno said, as an adviser to this company that I love so much at the end. So I’ll be getting pretty close to that 30-year mark.

Hopefully you get a watch at 30-year mark. And here is my question, I guess, first, did you actually quantify the impact from delayed shipments and the retailer inventory reductions in the quarter?

Yeah. We certainly did that in our opening comments. Our best estimate, of course, this is a little bit challenging to measure, but we think it’s about 1 point to sales growth and so if you think of where the sales came in for the quarter, if you’re looking at the way the quarter was unfolding, we were very much on track to have about an incremental point versus what we reported, but because of some of the retailer inventory adjustments, as well as the transportation challenges, that point never happened, but we think optimistically is likely to occur in the third quarter, so no impact on the full year.

Yeah. Joe, first of all, Steve reassured me that his 29 years felt more like 30. So, I think, we’ve got that covered. We think that some of it will come back, but not all of it will come back. But, clearly, our brands turn fast and turn routinely. So, typically when inventories get too low, there is an upward adjustment. We think we’re seeing some of it come back, but perhaps, not all of it, but as Steve said, there is not going to be material for the fiscal year and in the grand scheme of things, it’s end of quarter noise, which is unfortunate but a reality, but for the total fiscal year, will be a no factor.

Hi, guys. So I had a few questions. One was just around EBIT margin, trying to help us quantify how much it actually would be down. So gross margin clearly not going to be positive. I do wonder, maybe you can help as you answer the question talk about the supplier constraints. I mean, how do you do that? How do you release that constraint unless you pay more, I guess, so I wonder whether the gross margin pressure is even greater, so I don’t know how gross margin, obviously, is going to be negative. And on the SG&A, it’s down modestly, so down 10 basis points roughly, I don’t know if that’s modest or another word, but that’s down a little bit, and you’re already below the 14% level, so I don’t know if there’s more room to grow. So, I guess, EBIT margin, couple of quarters ago, you said it’s going to be up, flat and I am just trying to get a sense of how you think about it? How much it should be down given the pressures on gross margin and SG&A, as well as you’re going to advertise a little bit more it sounds like at least in the investment business?

So, Ali, this is Steve. You have a couple of questions, and I’ll try to address each one. First, regarding logistics, you've raised an important issue. The logistics market is becoming tighter. Essentially, there isn't enough equipment or, more critically, enough people to transport loads on certain routes. Our team is very aware of this challenge, which is prevalent across the industry, not just at Clorox. This situation is likely to drive logistics costs higher, and we've factored that into our outlook. This is one reason why gross margins are expected to decline modestly. However, we are actively collaborating with our partners to ensure we have both the equipment and personnel available when needed to fulfill our orders. While there will certainly be challenges, we believe we have accurately accounted for the additional costs in our outlook and are adjusting our operational plans to maintain the level of execution we've consistently achieved over the years. Regarding SG&A expenses, I would highlight two main points. First, there’s a general approach to cost management, the kind typically adopted when facing short-term financial pressures. Secondly, incentive compensation will likely be slightly lower because, given the increased cost pressures, our gross margin and EBIT margin will not meet our expectations, naturally affecting our earnings. This will also contribute to a slight reduction in SG&A this year. As for EBIT margin, I want to reiterate our conversation about gross margin. I believe that it is expected to decline modestly, perhaps even lower than previously anticipated for this year. In the long term, we are fully committed to expanding both gross margin and EBIT margin by 25 to 50 basis points. However, this year presents challenges due to rising commodity costs, hurricanes, and a tougher logistics environment. That’s why we continue to make long-term investments in innovation, growth, and cost-saving measures.

Okay. So EBIT margin in line with gross margin, modestly down is how you would think about it?

Yeah. I haven’t provided outlook for that, Ali, as you can see, but I’ll let you do the math. But if you just again, take our 1% to 3% sales gross margin…

Yeah.

... modestly.

Okay. So then on the 1% to 3% sales, I want to zero in on the negative 3% in Household this quarter aligned with a zero volume as well. I mean the price reductions in the Bags and Wraps was relatively downplayed, I would say, certainly last quarter in our own questioning, but even at the Analyst Day, start off with just one SKU at the Analyst Day and then it was well maybe something else given competitive pressures. And I just wonder whether there’s relief coming or is it just going to spread in terms of pricing, given some of the commentary from before has shifted to where we are today? So more comfort there and I get the market share point, Benno, you raised a second ago, we are okay, market share finally. But what does mean from pricing and competitive pricing as well in that market for that segments specifically?

Yeah. Ali, first of all, on the Glad price increase I want to confirm that there was no change midway to our plans. So and there was nothing related to increasing competitive pressures? So plan price increase on about 40% of the volume, that’s what we did to enable innovation. We executed that well, shares coming back, so we feel good about that. And now, of course, innovation is going to hit in this quarter and we feel great about that. So we feel good about Glad overall. I’d look at the Household segment and I’d just stare at a 12% growth last year and 3% decline on a 12% growth, even though you never want to see segment sales decline. The net of it over two years is still positive and then if I double click on the business, we just talk Glad and Glad is a very important business for us and we feel good about where we are. Litter was affected by said retailer inventory adjustments, but of course, we feel good about the growing shares in litter and the category growth in litter, and now importantly, also significant innovation that’s going to come out this quarter, which is our best tested innovation that we’ve ever had on this business. So we’ve been on a run in litter and we think we can keep going. Charcoal was down, yes, but again, off of a double-digit increase last year and also in a quarter that’s by far the slowest mover given the winter season in that category and RenewLife is up double digits, doing particularly well in e-commerce, for prospective, a year ago, e-commerce on that business was 4% of sales. This last quarter, it was 20% of sales, which shows you that our continued efforts to invest and be a leader in e-commerce are bearing fruit and in 2018 we will be able to add innovation to that business. We are launching a line of non-GMO and organic probiotics, the first of its kind on RenewLife and we’re also launching a kids line for all kids development stages, which is an important consumer need and something we’re excited about. So if I look at the individual businesses and how I feel in the Household segment, I can’t help but feel good and optimistic.

I feel that in international markets, we’re not yet where we want to be. We’ve had several solid quarters, but this one was just okay. Costs remain a challenge due to ongoing inflation, and foreign exchange continues to be a headwind. We’re monitoring Argentina, which is our largest international market, and while their economic recovery is progressing, it will take more time. For our international business, we're focused on what we can control: being efficient, selectively investing in profitable growth opportunities, saving costs, and driving our business towards higher margin initiatives. However, we are navigating a very difficult macroeconomic environment, and for our international business to perform as we desire, we need that environment to improve, which we haven’t seen in Q2.

And Ali, this is Steve, if I can just build on Benno’s comments, as it relates to at least the earnings when you look at the reported decrease, just a perspective. It represents about $5 million decrease to earnings on a year-over-year basis, well over half of that was actually decisions we made in the quarter to step up consumer demand building investments and then the balance was just some of the cost pressures and investments we’re making around Go Lean. So, you have to put that in context as well. There’s going to be variability across margins and profitability in that business. But I do think we’re taking the right long-term actions to keep that moving in the right direction.

Good afternoon, Steve. I will keep this brief. I wanted to discuss the advertising budget you've set for this year. In light of the competitive environment, are you noticing any areas where you might need to adjust your advertising focus towards gross to net? Is there anything that might prevent that? With the increasing cost of inflation, do you expect to see a decline in gross to net as everyone is trying to achieve better price realizations? I would appreciate your insights on the advertising strategy for the year and its potential impact on gross margin. Thank you.

We have previously mentioned that advertising sales promotion represents about 10% of our net sales, which we believe is an appropriate figure. Taxes do not affect this, and the competitive landscape remains stable. Therefore, we are confident that this number supports our expected sales growth. Over the past three years, we've increased our trade spending, particularly to back innovation. While some of this spending was in response to heightened competition in certain categories, like Wipes, most of it was aimed at supporting product innovation, which is a positive investment. In the long run, there may be opportunities to reduce this spending. Our approach at the company has always been to analyze the effectiveness of our expenditures, learn from them, and optimize accordingly. In the coming fiscal years, we anticipate chances to enhance our return on investment from current spending or potentially even decrease it. For advertising sales promotion, barring any significant market changes, we feel it's positioned just right. While it may fluctuate quarterly, for the total fiscal year, it appears to be in the appropriate range.

Hi. Good morning. This is actually Shirley Serrao on behalf of Lauren Lieberman. Just wanted to dig a little bit deeper into some of the volume strengths in Lifestyle, I noticed double-digit volume gains in water filters, so just sort of the first positive data point we’ve seen on volumes in that category in a while. So just some details there around initiatives you pursued in the quarter and any early read on some of the innovations that have come through? Thank you.

Hey, Shirley. How are you? This is Lisah. So, Brita, as we said in the scripts, my opening remarks today, it’s really club strength that we saw, and importantly, it’s due to innovation that we have, as you know, we launched our new Stream pitcher couple of quarters ago and recently also Long Last filter innovation and both have really made a difference in the category growth, as well as our shares. So we will take one more question.

Thank you very much. Steve, Kevin, congratulations. I would like to ask two questions. First, Benno, you're familiar with the history of Glad, and I've noticed that, historically, the pace of private label price increases tends to be quite slow despite significant increases in raw material prices like resin. From your experience, how long does it typically take for higher commodity prices to impact pricing in the category? I understand you can't predict what will happen this time, but any perspective on this would be appreciated. Secondly, I've seen that flu searches on Google Trends have increased by 400% year-over-year. Historically, have flu scares like the one we're experiencing now had any significant impact on your business? This has certainly been a recurring theme in your discussions, with Steve mentioning it at CAGNY multiple times as a marketing strategy for your products. I'm curious if you're noticing any heightened interest from retailers or increased takeaway at this moment. Thank you.

On resin and pricing, first of all, we’re not in a situation where we can immediately pass through costs. There’s a time lag that depends on the expected price level of resin costs. Our pricing strategy is focused on the mid-term and is influenced by future expectations as well as current cost developments. We take into account the current elevated costs and the anticipated costs over the next six to twelve months, and we need to believe that these costs will remain elevated to justify our pricing. We implement price changes as needed, but this requires planning with our customers and takes several months. It's not something that can be done instantly; effective pricing requires lead time. Regarding the flu season, we think it might have had a minor impact in Q2, but not significantly. Disinfecting Wipes saw nearly double-digit growth in the club channel, and we also gained market share with Clorox Bleach and Clorox Clean-Up spray. There is clear strength in our disinfecting category as consumers continue to seek our products for germ elimination. However, I don’t believe the flu season had a major impact in Q2, and it’s too early to determine Q3 effects. Typically, we see peaks in flu season in November and February, and as we approach February, we remain prepared. We plan for every season with our customers as if it’s flu season and we have sufficient stock and capacity to meet any increased demand. While it’s early to gauge the full impact, we acknowledge the current elevated flu season and are ready to supply our customers and consumers as needed.