CLX
#Thanks, Bonnie.
So as we said, Renew Life is ahead of expectations for the fiscal year.
That's to ---+ not just for earnings per share, which we've had mentioned earlier, but also in terms of sales and margins.
The integration certainly is well on track.
And like you commented on, we're getting distribution wins with major retailers.
We expect that to continue and that was our hypothesis when we bought this business that this would be such a good fit with our capabilities in so many ways starting with distribution.
And just to name a few, in Food we got distribution wins with Albertsons Safeway, a major food retailer.
In Drug, we are seeing distribution expansion with Rite Aid, and in Mass we are seeing major wins with Walmart, so it's really across the board, which tells us that our capabilities are very relevant in this area.
And we'll begin supporting these wins with a brand-new marketing campaign later in the fiscal year that we are excited about.
And we're starting to ramp up innovations in the fiscal year back half and certainly expect more to come.
So we feel good about the acquisition and it's an example of how we want to operate.
We want to keep the core of the business healthy while putting our cash to work if the right opportunity comes along.
So the category ---+ of course, commenting on your competitive remark, continues to be growing very nicely and it's a very fragmented category still at this point so we think that this is going to continue.
But you know the tide is certainly increasing so right now I look at competition in this category and at advertising in this category as a real positive thing because awareness and trial behind these categories in the grand scheme of things compared to the other categories that we are in is very low.
So this is a good thing.
Hopefully ---+ obviously also, we expect that, as we think about the competitive environment, at some point, probably not in the next few years, but at some point, there will be more consolidation in this category because it is very fragmented.
And our hypothesis is, as we typically do well and other categories, that once this consolidation happens that our Company and our brand is going to be a winner.
But at this point competition is good because it raises awareness and trial.
And at some point it will be more cannibalistic and there will be winners and losers and we will do our part so we can be winners.
When you look at the ---+ if you look at our web attachment, you will see that the All Other category, which includes mix, was actually ---+ it was nice.
It was about flat this quarter.
I guess the two things that are worth calling out, first is the incremental distribution of disinfecting wipes at Costco.
It is a great piece of business and we're very happy to have it, but there is a bit of a negative drag on that.
We will be anniversary-ing that as we go into the fourth quarter, so that's in the number.
But it is being offset by the business mix.
We were just seeing some of our higher-margin businesses were growing a bit better in the quarter and as a result it of kind of washed that out.
I think you are going to see variability in that line item, of gross margin as we move through the quarters, but on balance we certainly feel good about the results for Q2.
The best way, <UNK> ---+ we'd love to look at this as household penetration and the household penetration over the last year on this business is up almost 20%.
So you know I'd look at that as a clear signal that, as anticipated, what the club distribution improvement has done is expand the reach of this category.
And I will remind everybody that the total Wipes category household penetration is still only at about 50% and the way we look at this is that there's plenty of room to grow.
So even though, as <UNK> mentioned, it is a little bit of a negative mix hit that will cycle through in Q4, this is a very good thing for us in the long term.
And it helps increase the reach in a category that's hot and that we expect to continue to do well even as we will anniversary the distribution win at Costco.
Let me start there and then <UNK> can comment on margins.
As you would expect, so while we don't necessarily comment on all businesses and the presence online but businesses that skew younger and businesses that from a logistics point of view are a little advantaged, like disinfecting wipes, Brita, Burt's Bees, also Renew Life, they are doing very well.
But also businesses that have somewhat of a regular purchase pattern, like Glad trash bags, as <UNK> <UNK> commented on early on, have done extremely well.
So we are seeing strength on this business across the board with businesses that skew younger, like Burt's Bees and Brita, perhaps leading the way.
As a nice little sound bite on this, Amazon.com on Brita is now our number four customer.
So it tells you that, that is a business that is doing particularly well and perhaps where the performance in tracked channels that you are all following is not telling the whole story of how that business is really doing.
And then <UNK> can perhaps take your point on margins and household.
Just turning to the Household segment, I would say actually, broadly defined by the way, we saw some nice margin expansion in a couple of our businesses including Charcoal and Litter.
The one business I would point to is our Glad business.
Now again, we feel great about the strategy to trade consumers up to the more premium segment, which as a reminder is margin accretive to the Company.
But the margins were down in the Glad business.
Part of this is just a reflection of the firming up of commodity cost but I think the larger component is really the competitive activity that we've talked about for some time in that category and the step up in investment.
So I would say overall, you know the business is healthy, our strategy to drive premium-ization in the category is working, but there's a lot of competitive intensity and spending around that and that's really what impacted margins this quarter.
That is a good question, <UNK>.
Really what you are looking at over the very long term is inflationary pressures.
Keep in mind, we operate many countries around the world that are experiencing much higher rates of inflation than the US.
So what you're looking at is a combination of US domestic inflation as well as international inflation.
I think that's the largest part of it.
Now more recently, you've seen that number increase beyond the historical trend and that's because we've made some choices to make incremental investments to support our cost savings programs to support margin accretive innovation.
To support capacity expansion behind some of our faster growing businesses.
I think as you look into the next couple of quarters, at least our plans call for the number to come down a bit.
But to be clear the inflation will continue.
And I think the best way to get after that is to keep doing what we're doing, which is drive the cost savings, tightly control our selling and administrative expenses as a percentage of sales, take pricing where it makes sense and where it is cost justified.
And as we've said for some time, if we can control the controllables I think over the long term we'll do well on margins.
Let me start with your first question.
And let's be clear, we did not know about the impairment charges.
I had mentioned in my opening comments, this is related to some communication activity that occurred in mid-December, okay.
And in terms of how we are offsetting this, again something I opened up in my comments, there's three things I would point you to.
The first is just the strength of our base business.
I'm very pleased that we've grown 4% in incremental sales growth in the first six months of the year, that is actually about 6% on a currency-neutral basis.
Our Renew Life acquisition than <UNK> commented on is actually doing quite well.
And while it is early days, we are running ahead of our first year expectations and that is it certainly going to help.
And then finally, as a part of our International Go Lean efforts, not only are we starting to get traction on our margins, but as you know, we want to not just improve margins on that business but we want to drive economic profit.
And one of the best ways to do that is to take a hard look at your asset base and make sure you are the highest value owner.
And so as a part of that, in the third quarter I am pleased that we're selling some real estate.
And not only will that generate some nice cash flows for our shareholders, <UNK>, but that will also throw off a one-time gain of about $0.05.
So those are three things that I would point out that are a bit different than our previous outlook, and overall I think we feel pretty good about the performance of the quarter and year.
<UNK>, I think you asked about e-commerce.
It is now north of 3% of total Company sales and it's going at a 30% clip.
So well on track.
Let me clarify my comments on Charcoal.
You know it was up nicely on the quarter but it's off-season, okay.
So it was helped with the margin within the segments, I think that was the question.
But I don't want to overemphasize the impact that Charcoal was having on the quarter.
As it relates to the margin drivers, obviously we are feeling I really good about the volume growth.
Of course included in that volume growth, we do have our disinfecting wipes distribution at Costco, which generates more volume than sales just because it's a lower price point, but is still a very attractive business.
Renew Life is also included in that.
But I would again just reference you to the web attachments where I think we do a very nice job of really detailing out all the puts and takes on margins.
And then, <UNK>, longer-term on Charcoal, yes, there are tailwinds and we are taking advantage of them.
One thing we are seeing is that millennials are getting into grilling and they love charcoal.
So right now the sale of charcoal grills is actually up.
So remember about five years ago, charcoal grilling was supposed to be dead and it was all going to be about gas grilling and that trend pretty much has reversed.
So that we think that creates a natural tailwind.
People love grilling.
Increasingly, people love grilling year-round.
You mentioned Super Bowl and there are certainly certain states around the country where, weatherwise, charcoal grilling is very feasible year-round.
And we're taking advantage of that trend, for instance with partnerships that we have with the NFL and ESPN, but also other things that we're doing with retailers to encourage impulse purchases pretty much year-round, even though as <UNK> said, Q2 is a smaller quarter.
But as we now start to get into the season again, in the spring we certainly feel good about the plans that we have in place with retailers to continue to leverage that tailwind that we have in the category.
Well, only for perspective, let me take the first part of that.
Renew Life contributed about two points to growth for the Company in the second quarter, so if that helps you do the math.
I would just say longer term, we continue to feel good about the 3% to 5% top-line sales growth.
The biggest challenge, as you well know, over the last year or two has been currency headwinds.
Now we do anticipate those are going to be maybe a bit less than what we have been seeing, time will tell.
And if that's the case, then I think you should see the sales growth for the Company as long as we continue to deliver good momentum, which we believe we can.
I think we can be solidly into 3% to 5% over the long term
So you have a lot in there.
Let me try this, <UNK>, starting with the S&A, as we have said I think for some time, we anticipate getting that below 14% for the full year.
I think we're making good progress against that.
As you look at the latter part of this fiscal year, particularly in the fourth quarter, we've got two things, as I mentioned earlier, that are going to work for us.
First is just ongoing cost savings and productivity.
And then the second is going to be more normalized levels of incentive-based compensation, which were elevated last year because we had a fabulous year and I think everybody felt very good about those numbers.
So those are the reasons we believe SG&A is likely to continue to come down.
For absolute clarity, the other things that I would point to, particularly in the second half, is again about a $0.05 gain associated with the sale of some real estate in International.
And again, Renew Life, this is a full-year number but it had been anticipated to be $0.05 to $0.07 dilutive.
We now think it is about flat, call that about a $0.06 change.
So those are the big drivers that I would call out.
Thanks, <UNK>.
Really encouraged by the progress in International, profit up 27% in Q2.
Specifically, I would say we have talked about the bottom-line actions for a while and we dubbed that Go Lean, and the specific actions we're taking are pricing, making operations leaner, and the Australia real estate sale is just an example of that, making sure that we only spend against activities that deliver return, employing our strong cost savings machine that you are very aware of from the US also against International.
And we're seeing that now really shine through.
But also on the top line I would say there are things that we are doing that are clearly helping.
One is we're ---+ the pricing that I described also leads to sales growth.
Renew Life is working very well, in particular in Canada.
It is a very meaningful and profitable, mind you, contributor and has done extremely well since the acquisition.
Investing in higher-margin future opportunities like Burt's Bees Asia, as I am talking about shifting mix and shifting investments towards a profitable item.
We are feeling very good about the progress that we are making in Burt's Bees.
And then Laundry certainly is a quite a profitable business in International.
And we have innovation that we are driving in the Middle East and in Latin America that is quite successful so that may serve as a few examples of specific activities that lead us to be in an environment that is certainly continue to be ---+ going to continue to be volatile and full of headwinds near term.
We are quite optimistic that Q2 will be perhaps the start of somewhat of a turnaround in International and that we will see profit growth for the rest of the fiscal year and going forward.
And as we've also commented on in the past, we are optimistic about this business in the long term, as Argentina hopefully will continue to do better as the government is taking all the right actions, and that headwind turns more into hopefully a tailwind and importantly the strength of our brands and the operations that we have in International.
You know, it is a good question.
I would say, as we had planned, we stepped up the level of our trade spending in the quarter to support our brands.
Trade spending was up versus a year ago in the quarter and again that was per plan.
And I think what you will continue to see us do is invest heavily to get the trial and repeat on our innovations.
So I think you'll see that trend continue into the third quarter as well as a step up in our advertising in the third quarter, in particular.
And some of that will come out of the fourth quarter, we're just rebalancing the quarters.
I think, <UNK> ---+ this is <UNK> <UNK>.
Just building off <UNK>'s comments, I would point to two things in that All Other line that helped it not be as dilutive as it has been in recent quarters.
One is that foreign currency was not as bad on a year-over-year basis as it had been previously, so that helped.
And then secondly, the mix effect, which I think <UNK> talked about in response to an earlier question.
Whereas, we're still seeing some product mix related to some club volumes we've discussed.
We did have much more favorable business unit mix, so mix across the franchise, that helped us out there.
And since you're looking at this gross margin reconciliation page, and I appreciate you doing so and we've got a lot of questions on this.
If you just fast forward for a quarter or two and compare versus the second quarter, I think big picture, and there's always going to be movements across these different drivers, but for market movement, our prediction is it is going to start to be a little bit more dilutive.
As we've said, we think commodities are probably going to rise after having certainly been a tailwind over the last year or so.
But alternatively, the manufacturing logistics line we think will become a bit more favorable, so gross margin may still be challenged a little bit in Q3.
Q4 may look a bit better.
But that's the way I'd look at this table in terms of the major drivers on this.
In terms of what may change going forward.
I mean look ---+ if we look at sodium hypochlorite bleach, which is I think what you're referring to, <UNK>, our strategy has always been to trade up to the more profitable items and that continues to do well.
Splash-Less is very profitable and a higher-dollaring category that is doing well and you know we will continue to drive that.
And then when we talk about bleach though, I would encourage us all to continue to think about Bleach also as a product category that includes bleach-based sprays, that includes toilet bowl cleaners, those show up in Home Care.
But if you look at those, those are all growing and in part we have record highs in some of this categories and we've had record highs for several quarters in a row.
So I would argue that perhaps all the trade-up efforts that lead to higher sales and higher profits in Bleach aren't fully reflected in the Laundry category progress, but that if you look at total Laundry and Home Care together, the Bleach category is actually doing very well and our strategy in that is working.
So to your first question, <UNK>, Scentiva pipeline volume increased in Q2.
The answer is no, so not significant.
On Wipes, this was a permanent replacement of the number two player in the category.
There is always risk of distribution gains and losses in club, right.
But in general, we have done well and we don't expect to lose that business again because the business is doing very well in Costco and elsewhere.
And as a reminder, the business, while we expand the distribution in club, also continue to do very well in food, drug, mass.
In fact the business for the most part was up double digits in food, drug, mass, as we expanded distribution in club.
And that just tells you that fundamentally the programs that we have to increase household penetration with strong marketing, with innovation and certainly with a little bit of trade promotion to counter the competitive activity as they lost distribution in club is working very well and we continue to be optimistic about the prospects in Wipes.
It should normalize, <UNK>.
Certainly, again Wipes in Costco, that is a significant driver.
If you look at volume versus sales or net sales ratio across the segments, you can certainly see that the spread between volume and sales is most explicit in Cleaning.
And I would point to Wipes as a significant driver there.
And as <UNK> mentioned earlier, we are going to cycle through that in Q4, so that for FY18 that mix headwind will go away.
You know, I'm not get into that fine detail but what I can tell you is this, is we fully expect that our selling and administrative expenses are going to be down on the year.
Now you can go look at the first half, fiscal year-to-date, look at the math and then kind of run it.
We would typically true up some of those accruals in the fourth quarter, so you might have more benefit in the fourth quarter than the third quarter, but nonetheless I think you are going to see those numbers in the second half in total come down year over year, and that will be a nice contributor to EBIT margin and should get the S&A line down below 14% of sales.
That's certainly what the plan calls for and what we're executing against.
As we have said for some time, we'll periodically go into the market to offset dilution.
We did a little bit this quarter, there was not a lot because, quite frankly, we're not seeing much option exercise activity over the last quarter so there just hasn't been as much dilution to offset.
I think on a go-forward basis, if you look at the Company today, our debt to EBITDA on a gross basis is sitting at about a 2.1%, so we are at the low end of the range.
And as I mentioned in my opening comments, we're throwing off a lot of cash so I think over the next year or two it is likely, if we start to build up excess cash, in partnership with the Board, we'll have to look at either additional inorganic growth opportunities, which we'll continue to look for, obviously, or some way of returning money back to our shareholders.
But what we will try to avoid, because it's not good for our shareholders or economic profit, is building up cash that we just don't need.
Like I said earlier, we expect this category to continue to grow and we expect our brand to do ---+ to continue to lead the sales growth in the category so there's some things that we're lapping and certainly the Costco distribution win is one.
But I will remind everybody that sales, also in food, drug, mass, and certainly other non-tracked channels, is up quite nicely.
And I think you've heard us talk about Scentiva as the latest innovation that's been received by customers very favorably to date.
We'll continue to support the business with innovation.
We'll continue to support the innovation ---+ the business with strong marketing programs.
And you know this is a business that continues to have a tailwind.
Like I said earlier, household penetration in the total category hovers right at around 50%.
And we look at that as glass half empty and think we have a lot more to go, given that household penetration and several of the other home care categories is significantly higher.
And the reality is that the Wipes product form is beginning to be the most preferred product form by consumers and we're leveraging that tailwind.
So expecting continued solid growth in the category even post-Q4.
If you think back about the conversations that we've had with you and investors over the last year or two, we've always said that, on the two businesses where we think we can do better, Litter and Brita, we want to turn those around but we want to do it the right way, meaning profitably and in ways that are sustainable.
And certainly Litter ---+ in Litter we have done exactly that.
And we have also said that in Brita it would take time until we have innovation and the time is now.
So we will invest in the back half quite significantly behind a strong innovation plan which has two components.
First of all what we call Brita Stream Pitchers, which by the way as Stephen Curry on the packaging which pops at shelf really nicely.
These pitchers address a barrier in the category and that's convenience.
You can filter as you pour and it makes the filter experience much faster.
You can filter water about 10 times as fast as with traditional filters in the category, so great design.
Very contemporary and upbeat and filter-as-you-pour.
So feel good about that.
And then second, as you mentioned long last filter, they last three times as long and are going to specifically target those consumers who you know are not replacing their filters as consistently perhaps as we would like them to.
The filter also removes lead 99%, so we can make that claim.
And it's a much better value compared to branded and also, on a relative term, private-label filters in the marketplace.
So that of course addresses value as something that has held us back in share a little bit over the last few years in the category and we expect that the two innovations together, in addressing two major opportunities in convenience and value are ---+ should do quite well.
On top we have a new ad campaign, again featuring Stephen Curry, the NBA's MVP, that was very well received in pre-market testing and that will go out in the spring.
So as a result, clearly, we want this business to do better.
It is doing much better in non-tracked channels than it is in track channels but we are feeling positive about the plans based on innovations, both product as well as in other areas and the support that we get from retailers behind those.
I missed out on that.
It does not fit with the Stream Pitchers.
That is a separate filter.
But it does fit with all the other pitchers that we sell.
Why don't we take a question from one last caller.
Thank you.
In closing, we are very pleased with our results for Q2 and the fiscal year to date.
And that of course reflects continued investments in support of our 2020 strategy.
Our strategy is working and we're staying the course with our focus on accelerating profitable and sustainable growth.
So thanks again for joining us today and we will see you all at CAGNY.
Bye, everyone.
