Clorox Company (CLX) — Q2 2020 Earnings Call Transcript

Thanks, Sharon. Welcome, everyone, and thanks for joining us today. On the call with me today are Benno Dorer, our Chairman and CEO; and Kevin Jacobsen, our CFO. We're broadcasting this call over the Internet, and a replay of the call will be available for seven days on our website thecloroxcompany.com. On today's call, we may refer to certain non-GAAP financial measures, including but not limited to free cash flow, EBIT margin, debt to EBITDA, organic sales growth, 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 on our website as well as in our SEC filings. In particular, it may be helpful to refer to tables located at the end of today's earnings release. Please also 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 disclaimers in our quarterly earnings release. 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 start by covering our top line commentary, discussing highlights in each of our segments. Kevin will then address our financial results as well as the outlook for fiscal year 2020. Finally, Benno will offer his perspective, and we'll close with Q&A. For the total company, Q2 sales decreased 2%. These results are on top of solid sales growth in the year-ago period. Organic sales were flat. I'll now go through our results by segment. In our Cleaning segment, Q2 sales were flat for the quarter as gains in Professional Products and Home Care were offset by a decline in laundry. In Home Care, sales were up behind strong volume growth across a number of product lines, including Clorox disinfecting wipes, Clorox toilet bowl cleaners, and Clorox Scentiva, particularly in non-tracked channels. Our Scentiva innovation platform continues to show robust growth, even three years after its initial launch. We remain focused on driving superior consumer value through innovations, like our Scentiva Wet Mopping Cloth, which are doing well and continue to build distribution. A new scent across the platform, Tahitian Grapefruit, will start shipping this month. Additionally, we were pleased to deliver record second quarter shipment growth of Clorox disinfecting wipes. However, our shares in this category continue to be down as a result of higher competitive merchandising activities, and we expect these activities to continue in the back half of the fiscal year. We're increasing our investments to support the long-term health of our brand. We're doing this in two ways. First, we're strengthening our merchandising plans with higher trade investments. And second, we're increasing our marketing investments behind Clorox compostable cleaning wipes, which have had a positive early reception from both retailers and consumers. Laundry sales were down for the quarter, driven primarily by distribution losses among select retailers, which continued from last quarter. We expect improvement going forward as we start rolling out a full line of compacted bleach products this month. Our plans this fiscal year also include a new laundry sanitizing innovation platform, which started shipping towards the end of 2019. We're supporting this innovation through strong marketing investments to drive awareness and trial. Lastly, within the cleaning segment, Professional Products continued this momentum and delivered another quarter of robust sales growth, with broad-based growth across all channels and product line supported by innovation. Turning to the Household segment, Q2 sales were down 8% with declines in all businesses. In Bags and Wraps, Q2 sales were down due to ongoing distribution losses in select portions of the portfolio and increased competitive activity. While we continue to make progress and have seen sequential improvement in both volumes and sales, we've seen a further increase in competitive activity, consistent with what we've seen in past periods when there was a pullback in resin prices, even on a temporary basis. We expect these competitive price reductions and higher promotional activities to continue in the back half for fiscal year. With a keen focus on consumer value, we're further increasing our investments in Glad and coupling that with a number of innovations to drive long-term profitable growth for our brand and the category. As expected, grilling sales were down double digits this quarter. While consumption was strong, it was more than offset by lower shipments, and we finished working through high retail inventory from a weak 2019 grilling season and efforts that started in Q1. We expect to return to normal retail inventory levels as we enter the new grilling season. As a reminder, Q2 is a relatively small quarter for this business representing about 10% of annual shipments. Going forward, we remain focused on executing our strategy in three areas. One, enhancing the consumer experience; two, implementing the right trade and pricing structure; and three, investing in innovation including our core charcoal products and alternative fuels such as pellets. As noted in our press release, we've changed the name of this strategic business unit from Charcoal to Grilling to reflect our broadest strategic view of the category. In RenewLife, which represents about 1% of total company sales, sales declined by double-digits due to the continued category and competitive headwinds. However, we're encouraged by the early signs of progress we are seeing with two of our three biggest customers now showing growth. As a reminder, a full brand re-launch will occur in the first half of FY 21. Finally, our Cat Litter business was down slightly due to higher trade spending and lapping strong double-digit sales growth in the year-ago quarter which benefited from price increases. The Fresh Step Clean Paws innovation platform, which saw a double-digit increase in shipment this quarter, continues to show promise and we're backing this momentum in the back half. In our Lifestyle segment, sales grew 4%, reflecting volume growth across all businesses. Burt's Bees delivered a record quarter of sales, driven by continued strength in its core categories of Lip Care and Face Care. In Lip Care, Burt's Bees achieved market leadership status in 2019 as the number one overall lip balm in the United States for the first time ever over a 52-week period. Burt's Bees lip balm has grown shares for 20 consecutive quarters for five years in a row. This success was fueled by a strong pipeline of innovation such as the watermelon-enhanced flavors. In Face Care, Masks, the restaged sensitive skin care line and pore cleansers all had double-digit consumption growth. Food sales were up again this quarter supported by a higher merchandising level, driving strong shipments of Hidden Valley Ranch products. On the innovation side, our Ready-to-Eat Dips platform is expanding to include French onion, Fiesta Ranch, and deluxe cheese and Ranch dips. And while a new Hidden Valley Ranch Secret Sauce line, which was launched in January, is continuing to help unlock new Hidden Valley Ranch eating occasions. Hidden Valley Ranch extended its streak of share growth to 20 quarters. Brita sales were up strongly behind higher shipments of our premium filtering bottles and Long Last filters and water filtration systems. New products, including large capacity plastic and stainless steel bottles, are expected to enhance the filtering water bottle innovation platform even further, building on consistent volume growth in Brita that now dates back more than a year. Finally, sales for Nutranext were down slightly this quarter, reflecting a double-digit decrease in our non-strategic brands, partially offset by solid growth in our strategic brands. We are encouraged by the success of our strategic brands, which was fueled by higher demand creation investments, and we’re increasing those investments further to drive additional awareness and trial in these emerging and fast-growing categories. The decrease in the non-strategic part of this portfolio was driven mainly by our decision to continue rationalizing the lower margin part of this business that came as part of the acquisition. Lastly, turning to International. Sales were down 2% for the quarter, reflecting 8 points of foreign currency headwinds, mainly from Argentina, partially offset by the benefits of price increases. Organic sales in the segment grew 6% consistent with our IGNITE Strategy that aims to improve profitability in international. We're continuing to invest selectively in profitable markets and growth platforms to keep yielding returns on businesses like Burt's Bees, Cat Litter, and the Clorox equity. Now, let me turn it over to Kevin who will discuss our Q2 financial performance and our updated outlook for FY ‘20.

Thank you, Lisah, and thank you everyone for joining us today. I'm pleased with the progress we've made in Q2 as we delivered sequential improvement and organic sales, our fifth consecutive quarter of gross margin expansion and another quarter of strong cash flow. I'm also encouraged by our continued progress in Bags and Wraps and Grilling business units and expect to see continued sequential improvement in these businesses in the back half of the fiscal year. As you saw in our press release, I've updated our outlook which I'll discuss in a moment. Turning to our second quarter results, sales decreased 2%, reflecting 2 points of unfavorable foreign currency headwinds. On an organic sales basis, second quarter sales were flat. Gross margin for the quarter increased 40 basis points to 44.1% compared to 43.7% for the year-ago quarter. Second quarter gross margin included the benefit of a 150 basis points from cost savings and a 100 basis points from pricing. These factors were partially offset by 90 basis points of higher trade spending and 80 basis points of higher manufacturing and logistics costs. Second quarter gross margin also reflected ongoing cost durability and commodities partially offset by the impact from foreign currency headwinds. Selling and administrative expenses as a percentage of sales came in slightly higher at 14.5% compared to 14.3% in the year-ago quarter due to reduced operating leverage. Year-over-year selling administrative spending for the quarter was relatively flat. Advertising and sales motion investment levels of a percentage of sales came in at about 10% of sales, about equal to the year-ago quarter, with spending in our U.S. retail business coming in at 11% of sales. Our second quarter effective tax rate was 21% compared to about 19% in the year-ago quarter. Net of all these factors, we delivered diluted net earnings per share of $46 versus $40 in the year-ago quarter, an increase of 4%. Turning to year-to-date cash flow. Net cash flow provided by operations for the last six months of the fiscal year came in at $498 million versus $449 million in the year-ago period, an increase of 11%. The year-over-year increase was primarily due to lower working capital, partially offset by the timing of payments. Now we'll turn to our fiscal year 2020 outlook. As we mentioned in our press release, we've confirmed our fiscal year sales outlook of a decrease of low single digits, down 1%. We are now projecting lower devaluations of the Argentine peso, which we expect to be offset by increased competitive activity in the bags and wraps and wipes categories, partially driven by resin cost deflation. Our fiscal year organic sales outlook now assumes a range of about flat to 2% growth. Embedded in the organic sales assumption is a more cautious near-term view of our back half sales expectations for bags and wraps, reflecting increased competitive activity. Importantly, we continue to expect our grilling business to return to growth in the second half of the fiscal year. As a reminder, we've previously assumed devaluation of the Argentine peso at about 50% and now our expectation is closer to 40% devaluation over the course of the fiscal year. Turning to gross margin, we now expect fiscal year gross margin to be up slightly, reflecting our expectations for ongoing cost favorability and commodities and a slightly lower impact from foreign currencies. These factors are expected to be partially offset by a lower price benefit in the back half, as we have now last the majority of our fiscal year '19 pricing actions. Our fiscal year gross margin also reflects higher trade promotion spending to address increased competitive activity in select categories. In addition, our fiscal year gross margin outlook continues to anticipate additional supply investments to support long-term value creation, including the rollout of Clorox liquid bleach compaction beginning this quarter. We now expect fiscal year advertising and sales promotion investment levels to be slightly above 10% of sales, reflecting increased investments in support of a robust innovation pipeline in the back half of the fiscal year. We also continue to expect selling and administrative expenses to come in about 14% of sales. We now expect fiscal year EBIT margin to be about flat. Our outlook continues to anticipate our fiscal year tax rate to be in a range of 22% to 23%. Net of all these factors, we now expect fiscal year 2020 diluted EPS to be in the range of $610 to $625 which ranges the lowering of our range by $0.05. Before I turn it over to Benno, I'd like to reinforce that I'm pleased with the progress we continue to make on our business. We delivered our fifth consecutive quarter of gross margin expansion with strong contributions from our cost savings program. We also delivered another quarter of strong cash flow. Importantly, we remain on track to return to organic sales growth in the back half of the fiscal year. Looking ahead, I continue to believe Clorox is taking to results that are more in line with our long-term financial goals, as we continue to focus on executing our IGNITE strategy to drive long-term shareholder value. And with that, I'll turn it over to Benno.

Hello, everyone, and thank you, Kevin. Here are my three key messages for the second quarter. First, while our top line performance is not yet where it needs to be, I'm pleased with the progress we're making on our business, which is evident in our Q2 results. As I look at the results of our overall portfolio in the quarter, I do feel good about the growth we saw in a number of Clorox branded products in our homecare business, even as I fully expect stronger growth in the wipes category in the future. I'm also pleased about the broad-based strength in our Professional Products business. In Lifestyle, Burt's Bees continued its strong top line momentum with record quarterly sales, and we saw sustained strength in our food business behind increased merchandising support, and also in water filtration behind innovation. And once again, our team in International continues to deliver very good results in currency neutral terms behind strong execution of our pricing initiatives. I'm also pleased to have delivered our fifth consecutive quarter of gross margin expansion supported by our strong cost savings program. Importantly, we are continuing our focus on improving our bags and wraps and grilling businesses. On our grilling business, we're pleased to see solid consumption growth and we feel good about retailer reception to our go-to-market plans for the 2020 grilling season. Now that we're finished working through retail inventory from the year-ago season, we continue to expect this business to grow in the second half. Now, as Kevin mentioned, we've taken a somewhat more cautious near-term view about the bags and wraps business, given our expectations for continued increased competitive activity. Moving forward on that, we are focused on driving superior consumer value. We'll do this with a consistent stream of unique innovations, leveraging our superior capabilities and technology and consumer insights backed by category-leading advertising investments. We believe these focus areas will allow us to sustain a competitive advantage and help engage retailers leading to strong in-store positions. As I look at the other parts of our portfolio, generally, I feel good about our backup plans, which affects our expectation for improved sales behind strong innovation and marketing plans, as well as progress on the distribution front. This brings me to my next message, which is that we have strong consumer and retail plans for the second half of the fiscal year, fueled by increased investments that reflect confidence in our innovation program. Bringing value to our consumers and retailers is the key to returning to growth. Our second half plans emphasize this and we're executing with a strong sense of urgency, yet also in the right way. Our relentless focus on strengthening the value proposition of our brands through meaningful innovation continues with a strong pipeline of new products in the back half, including the compaction of Clorox liquid bleach as well as the introduction of Clorox compostable cleaning wipes, Clorox fabric sanitizers, Kingsford grilling pellets and several innovations in Bags and Wraps, Food and Natural Personal Care. As you saw in our press release, we're leaning harder into supporting awareness and trial behind these new products, with plans to increase year-over-year advertising spending in the second half of the fiscal year. And of course, we'll continue to invest behind the momentum and significant upside opportunity in ongoing innovation platforms such as Clorox Scentiva, Fresh Step Clean Paws, Brita filtering water bottles, and Hidden Valley Ready-to-Eat Dips. As I mentioned last quarter, we expect that our retailer engagement and the strength of our innovation programs will contribute to better back half results. I'm very encouraged by the strong retail receptions to our innovation so far, which is part of why we're stepping up our advertising investments. And finally, I'm pleased about our progress to improve distribution trends moving forward. We will provide another update in Q3 once results are in market, but I feel good about the constructive conversations with retailers overall, putting us in a position to earn meaningful net distribution gains across our portfolio in 2020. And for my last message, I'd like to reinforce that I have confidence that our IGNITE strategy will guide us in our ongoing pursuit of delivering long-term shareholder value. The focus of IGNITE is to innovate across the entire Clorox value chain to earn people's enduring loyalty to our leading brands. We are innovating how we build brands and are on track to begin implementing purpose on all major U.S. brands by the end of this fiscal year, which should significantly boost marketing ROI over time. We are innovating shopping experiences and making good progress, engaging customers in strategies to grow their businesses through new and frictionless experiences that can help eliminate shopping barriers in our categories. We are innovating how we work by continuing to invest in digitizing our supply chain to drive productivity and we remain focused on achieving our new higher annual cost savings target of about 175 basis points. And finally, we are driving our ESG commitments to create value for all our stakeholders. As we invest in major sustainability-driven product innovations in the second half, we also are accelerating our goal of achieving 100% renewable electricity in the U.S. and Canada through 2021, full years ahead of our original goal. We continue to view ESG as fundamental to long-term value creation and I'm pleased with our progress to integrate ESG even further in our business strategy. Operator, you may now open up the line for questions.

Great, thanks. Hey, guys. Maybe first, Kevin, just a quick cleanup and clarification on Argentina. Are you getting incremental pricing in that market? And I just asked because I think your October outlook presumed you would not. I just wanted to understand what the current state was.

Yes. Hi, Steve. Good morning. Yes, we are getting pricing better from Argentina. Maybe just a little more background there. As you saw, we've updated our expectations for devaluation. We assumed 50%. We've seen the currency hold up pretty well in our second quarter, and so we revised that to 40%. But additionally, we get out pretty early with pricing in Argentina. So, we took a number of price increases in the first quarter. They are certainly benefiting the overall profitability you may have seen in our International segment.

Okay, perfect. I wanted to clarify that despite the competitive challenges, the flat organic result this quarter was slightly better than you indicated in October. Was there a specific reason for that? Considering the full year is projected to decline, does this suggest a reversal in the second half? Is it primarily due to bags, wraps, and grilling remaining weaker for a longer period than anticipated, which will require more effort, or are there other areas showing less resilience than expected? I believe it's the former, but I wanted to confirm.

Sure. So, on the first part of the question, yes. It did come in a little bit better than we anticipated. And there's really two areas. The first was FX; while it's still about a 2 point drag, that's a little bit better than we anticipated in the quarter, and then the other area was our Lifestyle segment that was really strong performance, and the performance is really broad-based. We saw every business within that segment perform quite well and exceed our expectations. And then as we look out over the full year, what I’d say the two areas that we've highlighted is, we are seeing increased competitive activity in two categories; our wipes category and our bags and wraps category. So, because of that, we will increase trade spending to defend share in those categories, and specifically, maybe the bags and wraps I'd tell you, not surprising. We've seen this before. When we see the type of resin deflation, we typically see manufacturers invest more when that occurs. And so, we're going to have to spend some money to defend there. And then, Steve, on your question on Grilling, we continue to feel very good about grilling. It's on track with our expectations for the full year. We fully expect to return that business to growth, and so that business is very much on track.

Okay. And if I could, maybe for Benno, in addition to the promotional investment, you're also as you discussed stepping up the A&P investments, my guess is that that's targeted at different businesses than the promotional spend. So, can you confirm that? And then I guess what's really motivating the uptick? Is it just that you have more funds given the FX environment? So you feel like you have the flexibility to spend or is there something you've seen that's giving you more confidence in the ROI now versus three months ago? Thanks.

Steve, the step up in investments really reflects our confidence in our plans. That's the sole motivation. It certainly does include a strong retailer reception to our innovations. Also in a few cases, strong initial consumption results out of the gate on some of the innovations that we launched in January, which includes compostable wipes. So, you know, we are leaning into this innovation to lean into the momentum that we all see, and of course, three months ago, six months ago, we would have said that we're taking a more realistic view of our spending given that we're still cycling through distribution losses, and now of course in the back half we are lapping those distribution losses. We expect, given the productive discussions that we have with retailers, solid results on the distribution front. So, it's really driven by the confidence that we have in our plans. The spending will go into innovations that we launched in the back half, but also innovations from previous years, and I mentioned some like Clorox Scentiva, which is still showing robust growth, Clean Paws and Fresh Step, which grew double-digits last quarter, Brita Filtering Bottles, which is showing nice continued progress, ready-to-eat dips on Hidden Valley which we're supporting with more innovation going to the back half. We feel really strongly and encouraged about all the back half plans, and we're not afraid to invest behind it. A question that maybe could come up in the context of it that is maybe worthy of addressing upfront is do we expect the change in our mid-term outlook on how much we will spend in advertising and sales promotion, the answer to that is no. This is really an increase that is really related to the back half of this fiscal year. We certainly commented in the past that we think that an average level of about 10% of sales per fiscal year is the right level, and we continue to believe that.

So, Benno, just a very straightforward question. Wanted to understand, the back-half sales is a relatively wide range and just wanted to understand based off your retail conversations would seem like they went well, what takes us to the low end versus the high end, whether it's the distribution clarity or maybe the consumer pull through and responsiveness to some of the innovation? Thank you.

Yes, it's a combination, Steve. First of all, I have to mention that there are six months left in the fiscal year. Several factors can influence the range. For one, competitive activity is unpredictable. We have noted that in two categories, the promotional and merchandising environment has increased, which tends to make those categories more sensitive to spending. The resin environment is currently more favorable, so we cannot fully predict competitive actions, but they can significantly impact distribution outcomes. We have some information about distribution results, but not everything. We also have insights into retailers' decisions regarding our brands, but not about competitors' brands, which is still forthcoming. Additionally, the situation with coronavirus and seasonal illnesses has not influenced Q2, and so far, we haven't noticed an increase, but it remains a rapidly changing situation. We are preparing to supply our customers and healthcare institutions with products if needed to help consumers deal with the virus. These three factors are crucial and could drive us toward the lower or higher end of the range. Overall, we believe that the midpoint of the range suggests around a 3% sales growth in the second half on average, which aligns with our ongoing expectations. Since we are investing in initiatives with long-term benefits that enhance our brand equity, we think these investments position us well for a solid fiscal year '21.

Hi, thank you. I understand you have a question.

Andrea, you're breaking up quite a bit. Hey, operator maybe we move onto the next question and try to have Andrea call back.

Hi, good afternoon. A couple of quick ones. First thing, Kevin, maybe just to clarify the trade spending in the quarter, I think you said it was 90 basis points of gross margin pressure but if my memory is correct, I think it was 180 basis points in the first quarter. So is that just a timing issue? I would have expected higher spending this quarter as you try to regain distribution etc., etc. and see more gross margin pressure from that, but curious if there's any commentary on that.

Yes, hi Wendy, good afternoon. You're correct in recalling that it was 90 basis points this quarter; last quarter, it was a 180 basis point impact on the margin. The main difference from the first quarter is a decrease in investment in charcoal as we move through the peak of the season, as Lisah noted in her remarks. Q2 is a relatively minor quarter for us, so we've scaled back our investment in the category. Additionally, we are focused on trade spending to address higher retail inventories after a poor season in 2019, ensuring we're prepared for a strong season in 2020. We have been investing in trade for this business in both Q1 and, to a lesser extent, Q2, and we believe we are well-positioned as we approach the 2020 season with our retail inventories aligned for a much stronger performance.

Got it, got it. That makes sense. On the bleach compaction that I think you said were shipping this month. What's your expectation for competition? Do you think they follow the same degree of compaction? Do you think there's going to be incremental promotion? How much of a price increase are you embedding? Maybe if you could just talk a little bit more about that, that would be great.

Yes, Wendy. So compaction is starting this month as you rightly said, and will take until the end of the fiscal year. There is no pricing, it's a straight conversion. Typically with initiation of retailers, we see a whole category move. So of course we have yet to see that because that's really well outside our control. But if this compaction wave mirrors previous compaction waves, then what we're typically seeing is the whole category move because this really is an initiative that's certainly good for all the manufacturers, it's good for retailers, it's good for the category. It's also good for the planet. So it's a win-win-win and there really isn't a reason for the category not to move. Consumers of course are getting a more convenient product, and again, there is no performance trade-off for consumers either. So we are optimistic that this will be an initiative that will see the whole category move, and we'll provide an update, after Q3.

Got it. Fair enough. My last question is about trash bags. In the Nielsen data we reviewed today, which doesn't capture the entire picture, you mentioned an increase in competitive activity in the bags category. Specifically regarding trash bags, it appears that private label is leading in promotions, yet their market shares are not growing. Could you provide your perspective on where these promotions are originating? How do you view the broader market dynamics, and are you more concerned about the competition from branded products or private labels? Thanks.

Yes, really varies by category, Wendy. On the Glad side, we see what you see that if I take us back a few months ago, what we said is that we are spending in trades to address price gaps that really works. We saw price gaps move down, and we saw a significant increase in momentum on our business. What we've seen more recently in a more benign resin environment is that, in particular from private label, we are seeing more activity and we see price gaps increase again. Now we also see what I think you hinted at, and that is, that that's really not working for the category. The category trends are softer. We've always commented that people are not buying more trash bags if they're cheaper, and that's pretty much how it's playing out. And what that really does is give us optimism that in the long run, rational behavior will prevail and that we're going to see a continued balance in the category that will allow premium brands to grow behind innovation and delivering value that consumers see as superior, and that's certainly our focus in this category.

Thank you for taking me back. I apologize for my earlier comments. I wanted to revisit the organic growth cadence for the second half. I understand you mentioned regaining distribution in trash to one large customer. Should we expect more progress in the fourth quarter related to what you discussed with Wendy? Also, regarding gross margin, can you clarify the gross margin bridge? Kevin mentioned improvements in commodities for the second half, and I understand these will be lapped by the fourth quarter. Can you confirm if you have a more positive outlook on commodities than previously? Thank you.

Sure. Hi, Andrea. It's Kevin, and I can address both of your questions. Regarding organic growth, we expect to see continued sequential improvement as the year progresses. In Q1, organic growth declined by about 2%, but it was flat in the most recent quarter. If we consider our organic sales outlook, we anticipate a growth of about 3% in the latter half of the year, and I expect this upward trend to continue. The benefits from distribution will likely have a more significant effect in Q4 than in Q3, which aligns with our anticipated progress. As for our organic sales goal for the year, which is between 0% and 2%, I am less focused on the average for the entire year and more on the momentum we are generating as we approach fiscal year '21. I am optimistic about the progress we’re making and where we expect to end up in Q4 as we transition into '21. Concerning gross margins and the commodity environment, aside from resin, commodities are generally behaving as we anticipated, showing slight inflation that aligns with broader economic trends. This remains consistent with our expectations. However, while we anticipated a deflationary trend for resin, we observed a larger movement in the second quarter than we expected. I still predict it will decrease in the second half of the year, but not as significantly as we hoped. Typically, manufacturers undergo planned maintenance in the spring, which can exert some upward pressure. Additionally, we must consider the impact of the coronavirus, which is likely reducing overall global productivity. We'll need to monitor how this affects global resin demand. For now, I expect the resin situation to remain favorable, but not to the extent we experienced in the first half.

Great, thanks. I wanted to revisit distribution. Benno, you mentioned that we have positioned ourselves well to regain distribution. Could you provide some insight into how much visibility you currently have regarding both the traditional reset timeline for this quarter and the outlook for Q4?

Yes. So, obviously wording carefully chosen because as always, and as all manufacturers, we have to earn distribution from retailers, right, because they have to believe that our products are value-added. Said that, two things are going on. First of all, as you remember, there are a number of distribution losses post pricing that we're now lapping in the back half. So that should play in our favor. And then realize that you'd all like a very detailed update, but the reality is not all decisions are made by retailers requiring us to be respectful here. There are of course also competitive implications because this is all sensitive and, like I said earlier, we know quite a bit of our distribution results for the back half, but not all. This will play out with implementation in Q3 and Q4. But clearly, I think as you also saw us talk about the conversations that we have, we feel good about them being constructive and productive. We have a lot of innovation. Innovation generally is effective at driving distribution, and our sales outlook for the back half wouldn't be doable without generally a more favorable environment on distribution. So I think this is probably the appropriate way for us to characterize where we are. There'll be a further update in Q3, but the fact that we are investing more in our brands is based on confidence as we've all said earlier, and certainly how we feel about the conversations that we have with retailers is an indication that we may get, should they materialize the way we think they might, we feel positive about what we'll see in that environment and then more update in Q3.

Thank you for your question regarding the bags and wraps category. With your competitor now public, we have greater insight into market dynamics. It's interesting to note the innovation they are bringing, especially with ultra-strong bags that compete directly with ForceFlex. They are facing capacity constraints, which has impacted their distribution while we have been working on regaining ours. Looking ahead, we are considering the competitive landscape and continue to focus on innovation. We are also evaluating our pricing structure to support a return to leadership in the market overall. Thank you.

Yes, Lauren, of course, we are following that closely, even though I will tell you that many of the things that you quoted were news to us. I certainly don't want to speculate about what might happen, but there are two things, perhaps are most important here. The first one is that generally publicly traded companies care about the top line and also margin growth and what that does is drive productive and rational behaviors. So we just leave it there. And second, we remain confident in our right to win in these categories, which really isn't affected by them going public. First of all, we have commented on a superior innovation capability that we continue to have with the joint venture that we maintain with Procter & Gamble. I'd just point to the more than 100 patents and patent applications that we have over the last five years, and that compares to less than 10 for the said company. And then as we think about our brand building efforts, the fact that we continue to be a leading investor in the consumer in this category, along with our commitment to superior consumer value, that's been a robust right to win for sure a decade and a half now since we've had the joint venture. And the proof will be in our continued innovation and without getting into details. All I can say is that we have a lot of confidence in not just our back half innovation on this business, and as you know, there is quite a bit, but in the long term innovation as we manage innovation with a minimum three-year timeframe. We know obviously about the innovation that we have are coming onto the business and we're pretty happy with the innovation platform that we have on Glad and we're pretty confident that we can get this business back on track once we've cycled through the well-documented issues, which we continue to characterize as short-term.

Great, thanks. Want to talk a little bit on your commentary around competition spends and why you think that about 10% is still the right number, because if competition is spending more and you feel good about your lineup, why wouldn't you look to invest more heavily over a longer-term period or is it just that you prefer to keep that flexibility in between trading support between promotion and advertising? Thanks.

Yes, Olivia, we've always said that we are open to increasing our spending if an opportunity arises, and currently, there is such an opportunity. Spending can take many forms, whether it's in advertising, sales promotion, or capital investments aimed at driving growth. Our priority will always be the long-term health of our brands. We focus on managing the business for the long-term rather than just for the quarter. I know you’re familiar with our approach at Clorox, and that remains unchanged. While we believe that overall spending in advertising and sales promotion isn't increasing, we generally prefer around 10%. The reason we are raising our spending in the second half is because we spent less than 10% in the first half as we were waiting for our innovations to launch in the second half. Additionally, since our margin situation is looking slightly more favorable, we have a bit more room to increase our spending. However, 10% has been the appropriate level for some time, and we see no reason to change that. Yes, Olivia, we've always stated that we are willing to invest more when there is an opportunity, and right now, there is indeed an opportunity. Spending is broadly defined, whether it's in advertising, sales promotion, or capital investments that promote growth. We will always prioritize the long-term health of our brands and manage this business with a long-term focus rather than just for the current quarter. All that you have come to expect from Clorox remains true. We believe that overall spending levels in advertising and sales promotion are not increasing. Generally, we prefer the 10% benchmark. The reason we are increasing it in the second half of the year is that we spent less than 10% in the first half as we were waiting for our innovations to launch later in the year. Additionally, our slightly improved margin situation provides us some flexibility to increase our spending. However, the 10% benchmark remains appropriate, and we will continue to evaluate it, but that has been the right figure for quite some time, and we see no reason to change it.

Excellent. Thank you guys for squeezing me in and I appreciate it. Two questions from me. First, a pretty simple one on compaction. You start shipping this quarter, should we expect a nice pipeline fill given the shelf holding capacity should accommodate many more bottles with the smaller size?

Not really. I don't think it's going to be very material, Jason.

That was a quick and easy one. Now, looking back, you've mentioned the distribution losses you've experienced following the price increases. I recall when you were confident about raising prices and pleased with the retailer relationships. You expressed strong conversations and support from them. However, we've seen many negative consequences since then. What changed? What did you misjudge that led to this situation? Since all this occurred, what steps have you taken to rebuild and strengthen those relationships to the point where you now feel confident about recovering distribution and achieving significant growth in the second half?

Yes, if I rewind and what really happened was that, first of all, right after we took pricing, our consumption was very strong, as you will remember. That was prior to distribution losses but what we said then is that we expect significant bumpiness and a significant bumpiness would show up, for example in distribution losses and in merchandising losses. So that's exactly what happens and as a result, I don't really see any change. So you don't find me any more or less confident on this than I was six months ago or 18 months ago. The reality is that we are playing a long game here. We are protecting our ability to grow margins in the face of cost adversity with an eye on the long term and retailers understand that, but retailers certainly also didn't consistently like that as we had anticipated. Where the case is perhaps like on Glad that where it was more pronounced than we had anticipated, I would absolutely say that that's true in parts, because as we've duly noted, like so many institutions and companies, we didn't necessarily get the resin forecast right, right? So if I look back, I would have liked to get more accuracy into our resin forecast because maybe our plan forward then would have been different and maybe distribution losses, if I speculate for a second, would have been more benign. But by and large, this is playing out exactly as we anticipated then. We've always said that we're after good growth and good growth is profitable and sustainable and responsible and we don't like the distribution and the share losses either, at the same time, we do like our margin enhancements, which allows us to invest in the momentum of our brands in the back half and that's what we're focused on.

Hey. Hello, everyone. Thanks for squeezing me in, two quick ones for me because we've covered a lot of ground. Benno, I just want to make sure I'm clear on the messaging with respect to the adequacy of the investment levels in your guidance for this year. So it sounds like the additional investment behind price and trade investment in advertising and marketing will position the Company well to get back to its normal type of algorithm back half of this year and into next year. So both top line and from an earnings perspective as best we know sort of steady state commodities, if you could confirm that. I'm just trying to handicap the risk that this is a multiyear necessity for higher investment levels, so maybe you could just comment on that. And then quickly on M&A, given some of the challenges in some of your bigger businesses, are you any less inclined near term on the M&A front, given the potential distraction and integration risk. Thank you.

Yes, I'll take M&A, and then Kevin is going to take your good question on advertising sales force levels. Not anymore or less inclined to do M&A than we always are. As we always comment, we look at many things throughout the year, certainly continue to find desired valuations to be on the higher side, and we'll continue to be disciplined. What we have said in the past is that our priority is to have a healthy core. So our focus right now is on just that, and we like the progress. Said that, for a good acquisition that is on strategy and where we feel like we can add clear value to a business, we remain open, so that there is no change to what we've talked about during our Investor Day in October.

And Kevin, on your question about investment levels, I will make a couple of comments. First is, I'm sure you can appreciate, I won't provide any outlook for fiscal year '21. We'll come back and do that at a later date. But what I would say is, as Benno mentioned, we do believe 10% about is the right investment level, sometimes a little bit more, sometimes a little bit less, but feel like that's the right level of investment long term. And we are working to get back to our IGNITE financial goals that we set back in October, if you recall, 2% to 4% top line growth. We believe we're taking the right actions to get back to those levels in the back half of the year and that certainly what we care about is that momentum going into fiscal year '21, that we get back to growing the top-line. And since they are the long-term goals, we're expanding margins, and we feel pretty good about our ability to do that.

Yes. Thank you all, and all that's left is to say is that I look forward to talking with you again in May when we discuss our Q3 results. Thank you and have a good day everyone.